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.