Originally developed and widely used in the aviation sector, the Japanese Operating Lease with Call Option (JOLCO) has in recent years gained significant traction in shipping. Shipowners are increasingly turning to JOLCOs as a competitive and flexible alternative to traditional bank lending for vessel financing.
A JOLCO consists of two main parts:
The first is an operating lease which is typically provided by a Japanese Special Purpose Vehicle (SPV), funded through a mix of equity from Japanese investors - often via a tokumei kumiai partnership - and bank loans.
The second part is a call option, granted by the SPV and giving the lessee the right - but not the obligation - to purchase the vessel at a pre-agreed price, usually at the end of the lease.
The structure blends elements of loan agreements (and typically includes covenants, undertakings, events of default, drawdown procedures) with bareboat charters (granting the lessor full operational control over the vessel during the lease term), creating both financing efficiency and operational flexibility. Lease terms are typically “hell and high water”, meaning payment obligations continue regardless of operational circumstances.
Cross-border complexity
JOLCO transactions typically involve Japanese investors, international lenders, and vessels registered under foreign flags. This multi-jurisdictional nature increases the number of parties involved and the need for coordination on tax, regulatory, and enforcement matters, raising execution risk.
Limited flexibility in terms
Because JOLCO structures use terms familiar to Japanese investors, the format of the documentation tends to be rather standardized. This leaves limited room for negotiating specific terms or proposing alternative solutions.
Split ownership structure
In shipping, the “Registered Owner”, typically the foreign SPV holding legal title under a commercially favorable flag - is not the same as the Japanese “Owner”, which is the SPV that has raised the financing and is the party to the bareboat charter. This arrangement demands additional documentation, such as, for instance, an Instalment Sale Agreement, to manage the relationship and govern transfer of ownership and title to the vessel.
Enforcement and default risks
Having an SPV as the contracting party for the lease and call option, and another SPV as the “Registered Owner” and holder of the title to the vessel may present enforcement challenges. Comfort is often provided through an Owner Support Letter from the leasing group’s parent company covering the obligations of both the “Owner” and “Registered Owner”, which offers assurance but is not an on-demand guarantee.
Heavy documentation requirements
JOLCO transactions typically require more extensive documentation than traditional sale-and-leaseback deals. In addition to the lease agreement, financing terms, potential bank financing, security arrangements, and call options, they also involve supplementary documents. This includes for instance the Instalment Sale Agreement if the title to the vessel is held by another company other than the “Registered Owner”, the Owner Support Letter, and Funding Indemnity Letter. These must be carefully coordinated, particularly at closing - to ensure a smooth process and avoid exposure.
Outlook
JOLCOs are increasingly used to finance various types of ships, such as tankers, bulk carriers, and container vessels, offering competitive terms and structural flexibility compared with conventional loan arrangements. However, the structure relies on established investor frameworks, leaving limited room for negotiation, and the extensive, complex documentation requires careful legal, tax, and financial planning to ensure compliance.
Our expertise
Our Norwegian and English-qualified lawyers have experience structuring and executing JOLCO transactions. We guide clients through every stage – from initial structuring to closing – ensuring compliance and mitigating cross-border risks and are ready to assist.