Monday, January 30, 2012

Greek pre-packaged sovereign debt cram-down likely to break all precedents in rule of law and fair bankruptcy distribution

Greek PSI+ negotiations exhibit EU-engineered “survivor bias” making a mockery of core bankruptcy law principles. Capital losses are put on private sector bond holders whilst public bond holders are excluded from mark-downs of their debt. Only those private creditors with interests against outright default (large banks) are represented in the negotiation process. Troika bailout funding to Greece is nothing but a pre-petition Debtor in Possession (DIP) loan, with a first lien and collateral protection. The ECB is essentially conducting a quiet Greek debt-for-equity exchange in the purchase of Greek debt.

European Union (E.U.) policy planners have always shunned transparent market-driven pricing mechanisms in their currency union, showing contempt for rating agencies and market players. They consistently claim the right to be able to set asset prices arbitrarily as it suits them. The Greek PSI+ is a stealthy pre-packed bankruptcy restructuring, without being represented as such.

The main barrier to concluding this pre-packed Greek bankruptcy is the necessity of some majority of bondholders to ratify the final PSI+ debt exchange offer. As the bulk of Greek bonds do not have a collective action clause (CAC) (a framework which says what percentage of favorable votes is needed to enforce a decision), ratification would require 100% of investors to accept the new terms in order to avoid triggering a default, an almost impossible hurdle. Implicitly, the Greek negotiation process requires retroactive imposition of CAC. On one hand, retroactive CAC would facilitate the "exchange offer", however it would create great distrust of any bonds issued under domestic law in other European countries.

This would not, however, be the end of the ratification problem. Greece also has issued a modest amount in bonds, somewhere over €25 billion, under U.K.-law. While Greece could retroactively force local-law bondholders to do pretty much anything under local Greek law, it has no chance of doing this with this U.K. class of bond holders. It is precisely these bonds that allow some form of plurality to be enforced and which override the government's attempt to enforce a unilateral decision of creditor stripping.

Distressed asset investors seek these kinds of opportunities, which historically have had very high recovery rates in subsequent litigation. It is highly likely that some hedge fund cartels have already built up a blocking stake in the U.K.-bonds. It’s no surprise that E.U. policy planners have deliberately shut these creditors out of the PSI+ negotiations.

The E.U. continues to believe that it can shortchange market pricing mechanisms and manipulate its way over financial markets to preserve the currency union and avoid the day of reckoning. Yet demand for risk comes from a sense of stability, of fair and efficient markets, and equitability. A coercive cram down on any one, or all, Greek bondholder classes would make it crystal clear that E.U. authorities will put private sector investors into junior position arbitrarily any time they see fit, adding to the perils of holding E.U. sovereign paper.

A hard sovereign default would make “mark to market” unavoidable, thus exposing the underlying fragility of the banking system and triggering the collapse of the E.U. Ponzi debt structures used to keep weaker members on life support. E.U. policy makers have been calling for a €1.5 trillion rescue umbrella, but are unable to come with any real funding. Predictably, the ECB is rapidly expanding its balance sheet; there is no way to fund their Ponzi debt pyramid other than with massive back-door money printing.

This risks a broad sell-off of indenture bonds of the other PIIGS nations that might eventually lead to the collapse of demand for European paper and severe loss of confidence in the ECB.

Even Germany has a perilously undercapitalized banking system. Already they are discussing a delay in implementing the Basel 3 accords. State recapitalization of the German banking sector would likely lead to a sovereign credit downgrade.

Is it any wonder that institutional investors seem reluctant to take the bait in the face of this fudging, financial manipulation and fraudulent accounting?

Friday, January 27, 2012

Berlian Laju Tankers defaults on US$ 418 million senior debt and lease payments

Just a few months after major loan restructuring as well as new large leasing deal that led to a credit upgrade, Berlian Laju (BLT) has frozen their debt repayments and is facing a serious financial crisis. The major issue will be recapitalization and restructuring. It may follow its Indonesian compatriot, Arpeni Pratama, into US Chapter 11 proceedings.

If you look at the BLT balance sheet over the years, it has never been a tremendously profitable company. Their expansion was heavily financed by debt. They acquired assets at high prices in the boom years. Accordingly, BLT was the darling of the banking community because it was 1.) too big to fail and 2.) in need of money and willing to pay more than sounder companies to get it. Lenders could get loan pricing with BLT that would be impossible with mature peer chemical tanker operators like Stolt or Odfjell.

The rating agencies had downgraded BLT to CCC by this time last year. BLT was upgraded to B- in spring 2011 after a massive $685 million restructuring plus another $90 million leasing deal. Fitch brought the rating back to CCC last December and very recently C.

The lenders do not appear to have done a very good credit analysis given this massive default less than 12 months later. Indeed they even gave BLT additional funds, increasing their loan exposure to the beleaguered company. There was apparently no request for a significant increase of capitalization nor does there appear to have been any demands for asset sales to reduce exposure. It was very clear that BLT would face serious funding problems in 2012 both for capital expenditure needs and as well as US$ 122 million bond maturities to be refunded.

Now the recapitalization issue is likely to be paramount for BLT. Will the controlling Indonesian shareholder family follow the footsteps of Big John Fredriksen and put up substantial capital of their own to save the company and retain control? Alternately, will they chose the route of Peter Georgiopoulos and find a private equity partner like Oaktree and risk losing control of the company?

One thing that BLT could do to raise cash and deleverage would be to sell their Chembulk operation, one of their most valuable assets. Doug MacShane (the founder and previous owner of Chembulk) is already rebuilding MTM (MTM controlled the Chembulk operation prior Doug MacShane’s divestiture) with fleet expansion at prevailing low tanker prices. MTM’s Singapore subsidiary continued the technical management of the vessels for some time after BLT acquisition. MTM could easily start poaching Chembulk’s customers, with whom Doug MacShane has had 20 to 30 year relationships and where they might feel more comfortable.

Stolt Tankers has the money to buy BLT’s Chembulk operation, if they wish. So could its rival Odfjell, who could potentially secure Lindsay, Goldberg backing. Linday Goldberg, a first class NY-based private equity firm, is already a 49% partner in Odfjell’s chemical storage business.

This possible spin off would allow the Indonesians to concentrate on their cabotage business, Buana Listya, and concentrate on FPSO contracts in its home market. BLT also has smaller chemical tankers suitable for the Asian market as well as a fleet of LPG vessels, some fitted for ethylene.

We will see shortly what route BLT takes to get out of this financial impasse.

Wednesday, January 18, 2012

U.S. Chapter 11 procedure proves traumatic for Omega Navigation’s senior lenders

The Bracewell & Guiliani franchise on Chapter 11 proceedings for beleaguered shipping companies is proving a disaster for major shipping banks which are ill prepared for this ‘brave new world’. HSH Nordbank seems to have badly overplayed its hand with poor legal counsel. Bracewell is demonstrating that a shipping company can use these proceedings to stave off for months – or even years, - any bank foreclosures, without producing any credible reorganization plan.

An adverse court ruling for HSH gives Omega until May to produce any reorganization plans, when that was supposed to be the key issue in this hearing since time is of the essence for its Omega’s creditors. Instead, the main thrust was the ‘soap opera’ scenes between HSH, Omega and its directors for which Bracewell & Guiliani seems to have had a cakewalk in denouncing HSH and avoiding any substantive discussion of the financial issues.

Certain parts of the Bracewell presentation, such as their objections to surveys were amateurish, but even this impressed the court. Actually, banks commonly demand physical surveys of vessels to monitor condition in insolvency cases. These borrowers have little money for vessel maintenance and this impacts asset prices and collateral value.

HSH seems to have been incredibly sloppy in throwing allegations on Omega and then flip-flopping. As a result, Karen Brown, the U.S. judge, threw the book at HSH and allowed Omega to kick the can and continue operations with its lenders in limbo.

Remember that Omega went into Chapter 11 with a frontal attack on its senior lenders and without any clear means of recapitalization. By contrast, Omega compatriot General Maritime went into Chapter 11 with support both from its bankers and with fresh equity money from Oaktree. This US court ruling ignoring economic substance illustrates the perils for shipping banks in Chapter 11 proceedings.

Omega’s senior lenders are frustrated and in deep trouble. If the case is as they portray it, they may to lose an immense amount of money. Omega, on the other hand, likely increases its debtor leverage, making bank foreclosure ever more painful for the lenders. The company also buys itself time to continue operations.

Trust seems to have broken down entirely between Omega and its lenders. How or if this will ever be re-established under the circumstances is a big question. The senior lenders do not seem to want to have anything to do with Omega CEO George Kassiotis and his management.

Whether Kassiotis has alternative backers for recapitalization, like an Oaktree in the Genmar case, is another open question. Peter Georgiopoulos, he is going to lose his equity holding in Genmar as Oaktree becomes the major shareholder. Is Kassiotis prepared for this or is he just trying to maximize his personal position at the expense of his creditors? Perhaps he is simply hoping that an unexpected market upturn will get him and his company out of its current mess if he drags out the Chapter 11 legal proceedings long enough? We may have some answers by spring.

The U.S. courts are becoming a major forum in marine bankruptcies, taking such exotic cases as PT Arpeni Pratama, a local Indonesian company, which operates mainly in domestic trades. Foreclosure has become a far more difficult course for marine lenders.