General Maritime and its patron Oaktree Capital Management sweetened a deal with creditors, including holders of $300 million in high-yield bonds, to allow an estimated 5.4% recovery. With the hurdle removed, Genmar could emerge from Chapter 11 by next month. European ship finance bankers will, however, probably not have a high degree of comfort with Chapter 11. It is a game not played on their home court and there is no assurance that the next time around for a cram down of unsecured bondholders (as in the Genmar case) to absorb the brunt of the losses. .
Since the Global Financial Crisis, we have seen many times the dilemma of losses that nobody wants to take and everyone is looking to avoid. The first option is ‘pretend and extend’, hoping for a market recovery and rise in asset prices, etc. that proves that present losses are just a bad dream. Sometimes this is accompanied by new loans to assist in repaying old loans in a game of musical chairs with creditors to buy time.
Another option, at least for publicly listed companies, is finding a source of recapitalization. Dilution by “at the market” share offerings largely to retail investors is one technique. This was practiced by DryShips a few years ago. Decline of shareholding by key investors can be partially recouped by general stock awards later on, as happened in the case of George Economou. Eventually, DryShips did a spin-off of OceanRig to the benefit of their shareholders.
A more painful recapitalization option is bringing in private equity. We have seen this in the case of Beluga Shipping and General Maritime. The private equity player faces some difficult legal issues in the structuring of the participation, not to get caught in an equity position should the company ultimately go into bankruptcy. Normally they want, however, the option of getting full control of the company should things not work out, meaning that the original investors take painful losses and lose control of the business. Generally, shipowners do not like this option. In the case of the Omega Chapter 11 proceedings, George Kassiotis has not to date shown much enthusiasm for this approach. Peter Georgiopoulos brought Oaktree into Genmar to protect his position in his other listed companies. Kassiotis does not have this fall back.
The final option is sale of assets to pay down debt. We have seen this in the case of NewLead with its lenders in a series of forced sales. It will be very interesting to see how Berlian Laju Tankers resolve their financial woes. Will the Surya Family dig into their pockets like John Fredriksen to recapitalize the company? Will they split it up into parts? Will they sell of Chembulk to raise cash to retain the remaining portion of the company? What will they do with their bondholders?
It was of great advantage in the Genmar case that the large class of unsecured bondholders and the opportunity for a cram down with this class of creditors to the benefit of the senior lenders, who are avoiding so far any losses. Holders of Genmar’s $300 million of November 2009 bonds stand to get back roughly $16 million in the deal — a huge savings for the cash-strapped shipowner. Oaktree is recapitalizing the company and taking control. There is a fleet of vessels to repay the senior lenders so that they may come out whole.
The European Union has done something similar in the case of Greece by a forced subordination of private Greek sovereign lenders to their position as public lenders in purported debtor in possession financing. In the case of Genmar unlike Greece, the company is being recapitalized by Oaktree and there is a fleet of vessels to repay the senior lenders so they may come out whole. The Greek State by contrast still has very high debt stock including a new EU Ponzi loan of EU 130 billion that exceeds the PSI+ cramdown; but with GDP shrinking by 5-7% per annum, there is a substantial issue on its capacity to service its crushing debt loan.
Of course, Genmar moved very fast to mitigate its cash burn. I do not see this happening in the case of Omega Navigation nor the Greek state. Most distressed ship owners out there who do not have a class of senior unsecured bondholders. Normally, it is just senior debt and some trade debt, and in those cases the usefulness of Chapter 11 is going to depend on the particular numbers in that situation. It is also expensive in legal fees and transaction costs, so this will apply only to companies who can afford to go through the process.
Obviously the HSH Nordbank, BTMU and NIB Capital are very concerned in the case of the Omega Chapter 11 proceedings that they will be taking substantial losses, being crowded out by the mounting legal expenses. In the case of the Greek State, they had run out of cash and needed IMF/ EU assistance in the spring of 2010 or they would have defaulted on their existing debt and would have had difficulties even in paying state employee salaries and pensions. Their acquiescence to increasingly harsh terms like the recent Memorandum II is due to their lack of resources and fear of collapse because they do not have any reserves to fall back on.
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