Wednesday, November 23, 2011

General Maritime and Omega Navigation: Two very different approaches to Chapter 11

This week has seen substantial developments for both General Maritime, which recently filed for Chapter 11 reorganization, and Omega Navigation, which filed some months ago. The companies’ approaches are radically different.

General Maritime (Genmar) and Omega Navigation (Omega) have been ailing for some time. Both incorrectly believed growth would save them.

Omega was the smaller company. It had an expensive asset base and was caught during the 2008 meltdown with loan covenant violations. It tried to grow itself out of its problems with a joint venture with Glencore, but that did not work out. Management was not proactive in increasing outside capital and the company’s small size imposed constraints for institutional investors. As a means of dealing with its senior lenders, Omega took on more debt with second mortgages from NIB Capital and BTMU. This year Omega got into an impasse with the lenders and filed Chapter 11 as a shield.

Genmar was a larger and more mature company with access to capital markets. It entered into the market downturn in 2008 with somewhat high leverage (75%) and some loan covenant violations. It did an unsecured bond offering to improve liquidity. Ultimately, it chose a large block deal with Metrostar that enabled it to raise a substantial amount of capital in 2010 from investors at par without discount and obtain additional bank credit. Unfortunately, the timing and size of the transaction proved disastrous.

The two companies diverge substantially in their approach to restructuring and dealing with creditors. Omega chose to declare open war on its lenders with a dramatic trial alleging that its lenders broke agreements on restructuring. This seems dubious prima-facie, given the way banks normally work in these cases. Omega’s New York legal team seems no less bombastic with this week’s heated exchange between bank and company lawyers over alleged intimidation of Omega directors. Where Omega and their legal counsel seem absent so far is putting forth any coherent plan to reorganize, raise new capital or restructure its debt. In the meantime, Omega’s financial condition seems parlous and with heavy legal fees, consuming valuable company cash flow and mounting unpaid debt service increasing their already negative net worth. NIB Capital and BTMU risk losing their entire loan outstandings.

Genmar, by contrast, is focussed on working with its senior lenders. Earlier this year, Genmar secured an equity injection from Oaktree Capital, which organized a very professional debt restructuring as part of the deal. Genmar also sought to raise capital with a follow-on equity offering. Unfortunately, their operating losses grew and the increased interest costs from the restructuring put severe pressure on their liquidity. This week, Genmar entered Chapter 11 with agreements for additional support from both Oaktree and their lenders paving the way for reorganization. Unsecured bondholders, however, are in a nasty position, facing substantial losses. It will be interesting to see how these approaches fare in coming months. Omega would appear to have much to learn from Genmar.

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