Saturday, September 10, 2011

Omega Navigation appears to be insolvent

Omega Navigation senior lender HSH Nordbank filed a petition to dismiss Chapter 11 reorganization proceedings or convert them to a Chapter 7 liquidation. With his back to the wall, Omega CEO and major shareholder George Kassiotis has launched offensive lawsuits in Greece claiming bad faith by his lenders. Simple math indicates that his company is insolvent with negative net worth. This legal fight makes any recapitalization hope Omega had look very unlikely.

HSH Nordbank obtained an Omega fleet valuation from CW Kellock at $ 239 million for their court filing. From recent sale reports, I would charitably value Omega’s eight mortgaged units (six LR - Long Range product tankers built in the mid-2000’s and 2 MR -Medium Range) product carriers built in 2006) at US $270 million maximum. This still does not cover Nordbank’s total outstanding loan of $ 278.7 million. (HSH is owed US$ 242,7 mio plus another US$ 36 mio owed to NIBC Bank and Bank of Tokyo as 2nd mortgagees).

The debt dynamics look poor. Omega has not been servicing its debt as interest payments and legal expenses are mounting. The mounting interest liabilities are eating into Omega’s weak net worth.

There is no cushion for inevitable transaction expenses that would reduce the realized value. There are the imponderables of trade debt, unpaid crew wages and maintenance level of the vessels. Second mortgage lenders like NIBC Bank are in a precarious position.

Omega has been clamping down on financial information since their dispute with lenders, which is not helpful to their investors. Yet Omega was profitable in 2009 and declared dividends, so it is hard to understand exactly how relations broke down with their lenders.

We would guess that HSH Nordbank pressed for additional equity, but George Kassiotis, out of personal resources after his previous cash infusion, decided to balk. Presumably he was unable to inspire private equity or distressed asset investors like Oaktree or unwilling to accept their (Oaktree) conditions for participation, provided that he explored alternatives for recapitalization.

Omega is hoping to raise an additional US$ 30 million from the sale of the remaining share of the Megacore joint venture with Glencore. The senior lenders are contesting alleged diversion of funds from their cash flow to fund this project. They do not feel the amount is sufficient to secure their debt and turn the company around.

It is difficult to see at this point how the parties are going to come together. After the lawsuits, the senior lenders would likely not wish to support and work with Mr. Kassiotis any further. It seems unlikely that a private equity firm like Oaktree would be willing to step in to offer substantial recapitalization plus oversight of Mr. Kassiotis management, but that seems to me the only way that might allow an orderly reorganization.

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