Order on Valuation of Pledges and Loans in Ships Securing Covered Bonds and Ship Credit Bonds1)

Pursuant to Section 5, subsection 1, item 4, subsection 2, subsection 3, items 2-5, and Section 14, subsection 2, of the Act on a Ship Financing Institute, cf. Act Consolidation No. 646 of 18 May 2022, and Section 152 h, items 1-3, and Section 373, subsection 4, of the Act on Financial Business, cf. Act Consolidation No. 406 of 29 March 2022, the following is stipulated:

Chapter 1

General Provisions on Valuation

Section 1. This Order applies to the valuation of pledges and loans in ships, and construction loans for the financing of the new building or reconstruction of ships, which are granted without a pledge in the ship, as security for the issuance of covered bonds and ship credit bonds. Section 5, Chapter 2, and Chapter 3 apply only to pledges and loans in ships secured for covered bonds.

Subsection 2. For ships to be pledged, they must be:

1) Approved by the Danish Maritime Authority or classified by an recognized classification society that is a member of the International Association of Classification Societies and recognized by the European Commission, cf. Commission Decision 2007/421/EC on the repeal of Decision 96/587/EC on the publication of a list of approved organizations notified by Member States in accordance with Council Directive 94/57/EC. If a ship loses its classification or approval from the Danish Maritime Authority, it cannot be pledged for the issuance of covered bonds.

2) Registered in the Danish Ship Register, the Danish International Ship Register, or in another international ship register that provides a level of security linked to registration in the Danish Ship Register or the Danish International Ship Register.

Section 2. The Institute shall, when determining the loan, assign a reasonable cash value to the ship without regard to the ship's priority status.

Subsection 2. The valuation of the pledge security shall be based on the scope of the pledge right, cf. however Section 3, subsections 6 and 7.

Section 3. The Institute's valuation for the purpose of providing security shall lie within the estimated amount to which the ship can be sold within a sales period of at most 12 months from the valuation date in an independent transaction between an interested buyer and an interested seller under normal market conditions, where each party has acted on a well-informed basis with caution and without coercion (market value). Circumstances that dictate a particularly high price must not be included in the valuation.

Subsection 2. The Institute must, in the valuation for the purpose of providing security, take into account any risk of changes in market and structural conditions.

Subsection 3. The valuation may be determined earliest at the time the Institute issues the loan offer and latest when the Institute disburses the loan.

Subsection 4. A valuation may, after a concrete assessment, be used as the basis for valuing a sister ship.

Subsection 5. The Institute must not include the value of employment contracts in the market value during valuation.

Subsection 6. For ships registered in the Danish Ship Register or the Danish International Ship Register, the Institute may only include equipment covered by Section 47, subsection 1, of the Maritime Code and Section 54, subsection 1, of the Order on the Danish International Ship Register.

Subsection 7. For ships registered in another international ship register, cf. Section 1, subsection 2, item 2, the Institute may only include equipment corresponding to subsection 6, provided that a registered right over the ship similarly covers the equipment.

Section 4. The Institute must ensure that the valuation is carried out by a professional appraiser who is independent of the borrower, has the necessary qualifications, skills, in-depth knowledge of the relevant market, and experience to carry out a valuation of the ship type in question.

1) The Order contains provisions implementing parts of Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issuance of covered bonds and public supervision of covered bonds and amending Directive 2009/65/EC and 2014/59/EU, OJ EU 2019, No. L 328, page 29.

Subsection 2. If the valuation is carried out by an employee of the Institute, the Institute must ensure that this person meets the requirements in subsection 1 and is independent of the credit approval process.

Subsection 3. The Institute must obtain a valuation from an external appraiser who meets the requirements in subsection 1, if an internal valuation is associated with significant uncertainty due to a lack of comparable transactions within a period of one year.

Subsection 4. By external appraiser is meant a person who is independent of the lender and meets the requirements in subsection 1.

Section 5. For loans secured for the issuance of covered bonds secured by pledges in ships, the Institute may grant loans within 60 percent of the value assigned to the ship for the purpose of providing security.

Subsection 2. The maturity of the loans granted may not exceed 15 years from the date of disbursement of the loan.

Subsection 3. For construction loans, the maturity may not exceed four years calculated from the time of the first disbursement.

Subsection 4. The determination of the loan maturity shall be made taking into account the average lifespan of the ship type and the specific ship's age and condition, etc.

Subsection 5. The size and maturity of the loan are otherwise determined while observing the security considerations deemed necessary under the circumstances, including an assessment of the expected depreciation of the pledge.

Section 6. The Institute must value the loan at its nominal value for the purpose of calculating compliance with the coverage requirement, cf. Section 152 a, subsection 2, of the Act on Financial Business and Section 2 d, subsection 3, of the Act on a Ship Financing Institute.

Chapter 2

Construction Loans for New Building and Reconstruction Secured for Issuance of Covered Bonds

Section 7. Construction loans for the new building or reconstruction of ships may be granted based on the expected market value of the completed ship.

Subsection 2. The Institute may only grant construction loans, cf. subsection 1, if a guarantee is provided that the loan will be repaid or reduced if the construction is not completed by the time specified in the construction loan or if the loan cannot legally be granted at the time of completion. The guarantee must be provided by a credit institution in a country within the European Union or a country with which the Union has concluded an agreement in the financial sector.

Section 8. The Institute must require the loan to be repaid if the construction has not commenced at the latest six months after the disbursement of the loan, or if it is not demonstrated within four years from the disbursement of the loan that the construction work has been completed legally.

Section 9. The Institute may only disburse a construction loan if:

1) the Institute is in possession of building plans and information about the ship's constructional design, equipment, materials used, etc., as well as information about the expected duration of the construction period,
2) the Institute is in possession of information about the expected acquisition cost, and
3) reservations have been made and sufficient security has been provided that the loan will be repaid or reduced in the event that the construction is not completed by the time specified in the construction loan or if the loan cannot legally be granted at the time of completion.

Section 10. When the construction of the ship is completed, the Institute must assign a new value to the ship in accordance with Sections 3 and 4. The Institute must not include previous valuations of the ship in the assessment.

Chapter 3

Ongoing Monitoring of Pledges and Loans in Ships Secured for Issuance of Covered Bonds

Section 11. The Institute must value each individual ship at least once a year to ensure that the loan-to-value limit does not exceed 60 percent. The Institute must value each individual ship more frequently if special circumstances are presumed to apply, including significant changes in market conditions.

Subsection 2. The valuation shall be at market value, cf. Section 3, subsection 1.

Subsection 3. The Institute may value the ship itself or entrust the valuation to an external appraiser. The appraiser must in both cases meet the requirements of Section 4, cf. however subsection 4.

Subsection 4. In valuation according to subsection 3, the Institute may use statistical methods to monitor the ship's value and to identify which ships require a renewed valuation.

Subsection 5. The Institute must provide additional security, cf. Section 152 a, subsection 4, of the Act on Financial Business and Section 2 i, subsection 1, of the Act on a Ship Financing Institute, if changes in the market value of a valued ship result in a pledged loan no longer complying with the loan-to-value limit, cf. subsection 1.

Subsection 6. The Institute must value obligations in connection with issued covered bonds at the fair value of the obligations, cf. however subsection 7.

Subsection 7. In valuation according to subsection 6, the Institute must disregard a fall in the fair value of the obligations caused by an increased credit risk since the issuance of the bonds covered by subsection 6. Changes caused by changes in credit risk are assumed to correspond to the change in the fair value of the obligations that cannot be attributed to changes in the risk-free market rate, unless the company in the specific case can demonstrate another method that more credibly measures the impact on the fair value of the obligations of changes in credit risk.

Subsection 8. The Institute must value the asset at fair value, cf. Article 129, subsection 1, points (a)-(c) and (g), of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms in connection with the issuance of covered bonds.

Section 12. The Institute must have satisfactory procedures for the ongoing monitoring of the ship's physical condition, including procedures for physical inspection.

Chapter 4

Documentation and Insurance

Section 13. It must appear from the Institute's loan file under what assumptions the valuation and loan determination were made.

Subsection 2. Upon disbursement of a construction loan, the Institute must keep documentation in the loan file proving that the conditions for disbursement of the loan are met.

Section 14. If the ship has been traded less than six months before the loan offer point, the Institute must ensure that information in the loan file about the trading price and terms or other relevant valuation is available, which meets the requirements of Section 4.

Section 15. The Institute must ensure that a ship pledged as security is insured for liability and hull. The ship must otherwise be sufficiently insured, including potentially war insurance, etc.

Subsection 2. The Institute must introduce procedures for monitoring the requirements in subsection 1.

Chapter 5

Penal Provisions

Section 16. Whoever violates Section 1, subsection 2, Section 2, Section 3, subsections 1-3, subsections 5-7, Section 4, subsections 1-3, Sections 5-6, Sections 7-10, Section 11, subsections 1-2 and subsections 5-8, and Sections 12-15, shall be liable to a fine.

Subsection 2. Companies etc. (legal persons) may be subject to criminal liability according to the rules in Chapter 5 of the Criminal Code.

Chapter 6

Entry into Force

Section 17. This Order enters into force on 8 July 2022.

Subsection 2. Order No. 288 of 27 March 2014 on the valuation of pledges and loans in ships secured for the issuance of covered bonds is repealed.

Danish Financial Supervisory Authority, 30 May 2022 Jesper Berg / Kamilla Karen Hjølund