Tuesday, December 6, 2011

Genmar Chapter 11 reorganization: The importance of distressed asset investors being earnest lenders

Oaktree Capital Management (OCM) has their hands full with General Maritime in bankruptcy. The market is questioning the wisdom of taking a position last March in this beleaguered shipping company just months before this Chapter 11 filing. In the meantime, unsecured creditors are trying to make life difficult; they are opening issues that have implications for other shipping companies contemplating this path. The looming question is what would OCM do with a revamped Genmar?

OCM is now obliged to pump a further $175 million into the Peter Georgiopoulos-led company to shore up its original $200 million outlay. Some might call this throwing good money after bad. A common Wall Street expression when investments go bad is: ‘Don’t frown, double down.’ The European Union is a grand master in these kinds of ‘pretend and pray’ lending practices, but OCM are professionals dealing with a distressed asset situations, where doubling up is generally frowned upon as poor risk management.

The immediate challenges are one minor and one major issue. The lesser issue is the unsecured creditors’ court petition, filed in New York, to get control of the Genmar’s cash flow from all accounts. Genmar’s senior lenders are European-based shipping banks. Nordea Bank is one of Genmar’s lead banks and heads a group providing Genmar with a $75 million in debtor-in-possession (DIP) financing to see the company through the Chapter 11 process, which Genmar hopes to exit in April. This would be a generic issue for any shipping company in Chapter 11 proceedings. Nearly all the major shipping banks are European and based outside New York. We will see whether they can find a temporary solution through a large U.S. clearer like Citibank.

The more substantive issue is the negotiation of the “haircut” for unsecured bondholders. They are being sandwiched between OCM and senior lenders, who already appear to be in pre-agreement with one another.

Genmar was in no position to make the $18 million semi-annual coupon payment on these bonds on November 15; The company was virtually out of operating cash. One key to successful restructuring is to get out from under the bond burden, paying only a fraction of the face amount. It’s telling that Genmar’s bonds were trading at around 10 cents on the dollar just prior to the filing, reflecting the market’s view of their worth.

The unsecured bondholders will try to argue that OCM is not a lender, but in an equity position pari passu with them in distribution. This is a common cause in any bankruptcy situation. We can safely assume that OCM studied this matter carefully with its legal counsel in structuring their first $200 million capital injection into the company. It was done in loan form with warrants and controls on stock dilution.

Once these legal issues are resolved, the really interesting part will be what OCM - presumably the new owner of General Maritime – will do with the company? There are a number of aging vessels close to scrap value. Genmar does not have the comparative advantages of peer tanker operators like TeeKay or OSG. Even Frontline has more options. It will take no small effort to make Genmar competitive again, but perhaps OCM is really looking to sell it off to the highest bidder for profit once the tanker markets improve.

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