Will Omega Navigation come out of Chapter 11 as a going concern or be liquidated as per the Marco Polo case?

This week a glimmer of hope surfaced for Omega Navigation (ONAV) in an article in the Tradewinds, where Aaron Kelley reported the signs of a deal where George Kassiotis puts in an additional US$ 2,6 million equity into the company and the company rolls out a rights offering that would give general unsecured creditors and junior lenders a chance to secure a stake in the reorganised company and has agreed to a cash distribution of 10% to unsecured creditors “over time: provided they accept the plan.  Talk of Omega coming out of Chapter 11 with a reorganization plan by November this year.

I have expressed pessimism in the past over Omega, as I saw George Kassiotis’s refuge to Chapter 11 more an defensive act of desperation with his lenders to buy time rather than a serious effort to recapitalize the company. Unlike the successful example of General Maritime (GMR) there was neither any private equity firm ready to provide substantial new funding nor any pre-agreement with senior lenders for a support package. To the contrary, Kassiotis had openly broken with his lenders with a nasty, high profile lawsuit in Piraeus seeking damages.

For Bracewell & Giuliani, Omega’s US attorneys, this was a show case to attract other shipping firms to US bankruptcy court, giving the US legal profession a franchise in maritime bankruptcy. For Jefferies, Omega was a source of badly needed fee-earning business given the collapse of fresh shipping placement deals in capital markets. Hamish Norton, who heads the marine business in Jefferies has a stellar reputation as a knowledgeable and serious investment banker with a high level of integrity and a history of well-structured deals.

Despite this support for Omega, the company financial woes are very challenging with limited room for maneuver. As a smaller listing, Omega lacked the scale of its peers to leverage capital markets and quickly fell behind its peers. The Principal, George Kassiotis, has limited personal wealth from other ventures that he could draw upon to support this Omega. In fact, he seems in an even weaker position than Antonio Zacchello of Marco Polo. All this puts Omega on the same path with a similar fate: move to Chapter 7 liquidation as their senior lenders, HSH Nordbank have already filed for and have been urging.

Meanwhile, whilst Omega has some high powered advisers, they are also some of the highest paid, so there is the specter of mounting costs and legal expenses that are the Achilles Heel in Chapter 11 proceedings. Peter Georgiopoulos had everything in place even before filing in the case of Genmar, to minimize the time and cost in this procedure.

Whilst unquestionably a sign of good faith on the part of Kassiotis, the sum of US$ 2,6 million is a paltry amount for recapitalization of Omega. I am especially intrigued by the rights offering for general unsecured creditors and junior lenders. Is this going to be the main source of funding for company recapitalization along with the sizeable ‘haircut’ to unsecured creditors with promises of the remaining 10% amount paid “over time”? Is not this a sign how bad the situation is?

Who are the largest unsecured creditors? What are liabilities of their advisors Jefferies and legal counsel Bracewell & Giuliani as credtiors. Are unsecured and junior creditors going to be asked to put in new money in this rights issue or will this be a conversion of debt for equity? Why would junior lenders like NIBC and BTMU put more money out on Omega that would in fact benefit HSH Nordbank, who has priority over their position?

Why is not HSH Nordbank sharing the pain in an exchange of debt converted to equity as RBS accepted in their loan restructuring in the case of Eagle Bulk? Would not that give some comfort for a rights offering? Finally who is providing this new restructured senior debt and working capital facility? Has HSH Nordbank changed tack here?

Unquestionably, it would appear that Omega has substantial debtor’s leverage here with creditors in serious jeopardy of severe losses for this formula to be workable. Perhaps it is the magnitude of losses that makes them hesitate to move for the dissolution of the company?

Frankly, the Tradewinds article opens more questions than answers. My reaction is that this tentative agreement is likely still fragile. I am troubled that I do not hear anything about a clear and substantial source of recapitalization for Omega to come out of Chapter 11 as a going concern.

Let’s see what happens by November!

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.

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.

Ship-owner refuge in Chapter 11 proceedings may prove a game-changer in bank foreclosure actions

Several high profile moves by beleaguered shipping companies dealing with their lenders by filing Chapter 11 proceedings in US courts may put shipping banks in a difficult position. In both the Marco Polo and Omega cases, the companies have succeeded to hold their senior lenders at bay. Faced with paying large professional fees that eat into depreciating equity on secured vessels already below loan outstandings puts banks in an extremely difficult position with few options.

If one goes by the book, Chapter 11 requires a company to file a credible plan for reorganization, failing that the lenders can move to Chapter 7 for dissolution of the company and disposal of the assets. The problem is that courts in this situation will give distressed owners considerable leeway and are ill equipped to assess the underlying economics. They regard the process as a means of pressing the parties to an amicable solution. In the meantime, the distressed company can finance the legal expenses from having ceased entirely loan payments. On the other side, the senior lenders are forced into high transaction costs in legal expenses.

One asks himself how US courts would have jurisdiction over these cases of foreign senior lenders and shipping companies with vessels under foreign flags on the high seas in the first place? To the shock of Credit Agricole and Royal Bank of Scotland (RBS) last week in the Marco Polo case, the US Court in New York retained jurisdiction, making Chapter 11 viable for international ship-owners even if they have minimal contacts in the US.

The New York law firm, Bracewell & Giuliani, as counsel for both the Omega and Marco Polo cases, have made a franchise in these actions. The US courts and legal profession have suddenly opened up a new bonanza.

Alternatively, the senior lenders could sell off their loans, but the market for distressed shipping debt has been very limited. Loans made under English law generally require ship-owner consent for any transfer of the debt to a party other than a shipping lender.

There are hedge funds and distressed asset investors, who have shown interest in bank portfolios, but at a steep discount. So banks and potential buyers are presently very far apart on price ideas. For distressed asset investors, English law on transfer of debt limits their ability to get control of the assets. Chapter 11 is now a new potential obstacle to this end as well.

Hedge funds increasingly have been scheduling sit downs with distressed owners offering to inject capital into the ailing company in return for an equity stake and a commitment by senior lenders to write down the loans by 10%. It is possible that this might offer a credible means for distressed shipping companies to recapitalize under Chapter 11 proceedings.

What needs to be clarified in the future is how effective US courts prove in facilitating company reorganization under Chapter 11 or they just prolong hopeless cases and make them worse by ‘pretend and extend’ and the US legal profession profits in the value destruction.

Omega Navigation appears to be insolvent

Omega Navigation senior lender HSH Nordbank filed a petition to dismiss Chapter 11 reorganization proceedings or convert them to a Chapter 7 liquidation. With his back to the wall, Omega CEO and major shareholder George Kassiotis has launched offensive lawsuits in Greece claiming bad faith by his lenders. Simple math indicates that his company is insolvent with negative net worth. This legal fight makes any recapitalization hope Omega had look very unlikely.

HSH Nordbank obtained an Omega fleet valuation from CW Kellock at $ 239 million for their court filing. From recent sale reports, I would charitably value Omega’s eight mortgaged units (six LR - Long Range product tankers built in the mid-2000’s and 2 MR -Medium Range) product carriers built in 2006) at US $270 million maximum. This still does not cover Nordbank’s total outstanding loan of $ 278.7 million. (HSH is owed US$ 242,7 mio plus another US$ 36 mio owed to NIBC Bank and Bank of Tokyo as 2nd mortgagees).

The debt dynamics look poor. Omega has not been servicing its debt as interest payments and legal expenses are mounting. The mounting interest liabilities are eating into Omega’s weak net worth.

There is no cushion for inevitable transaction expenses that would reduce the realized value. There are the imponderables of trade debt, unpaid crew wages and maintenance level of the vessels. Second mortgage lenders like NIBC Bank are in a precarious position.

Omega has been clamping down on financial information since their dispute with lenders, which is not helpful to their investors. Yet Omega was profitable in 2009 and declared dividends, so it is hard to understand exactly how relations broke down with their lenders.

We would guess that HSH Nordbank pressed for additional equity, but George Kassiotis, out of personal resources after his previous cash infusion, decided to balk. Presumably he was unable to inspire private equity or distressed asset investors like Oaktree or unwilling to accept their (Oaktree) conditions for participation, provided that he explored alternatives for recapitalization.

Omega is hoping to raise an additional US$ 30 million from the sale of the remaining share of the Megacore joint venture with Glencore. The senior lenders are contesting alleged diversion of funds from their cash flow to fund this project. They do not feel the amount is sufficient to secure their debt and turn the company around.

It is difficult to see at this point how the parties are going to come together. After the lawsuits, the senior lenders would likely not wish to support and work with Mr. Kassiotis any further. It seems unlikely that a private equity firm like Oaktree would be willing to step in to offer substantial recapitalization plus oversight of Mr. Kassiotis management, but that seems to me the only way that might allow an orderly reorganization.

Omega in bankruptcy: Test case for other weak listed shipping companies

Omega Navigation (NASDAQ: ONAV) is a product tanker play with fleet of 12 vessels plus a joint venture with Glencore (LSE: GLEN) .  Most of its fleet on time charter to Glencore.  The fleet is divided between MR and LR 1 units all built in Korea.  The company only had really one good year in 2007.  It was hard hit by the 2008 meltdown.  It had been filing for delays in publishing accounts, but known to be in protracted debt restructuring and suffering from high leverage.

Since this was a vessel provider business model with a relatively small fleet, it was dependent mainly on fleet growth and favorable market conditions to generate profit and value for shareholders. It has one very large customer, Glencore. It remains to be seen what will happen to the Glencore joint venture companies, which have not been included in the Chapter 11 reorganization filings.

Omega entered the product tanker market in boom market conditions, acquiring assets at high prices with leverage. Its CEO Kassiotis had been  commercial director of Target Marine S.A.  He tried to lock in some benefits of the firm charter rates, but its 2009 accounts show a significant drop in time charter equivalent earnings. Further its capital gearing on book value was already over 70%.

Omega's main senior lender in 2008 was HSH Nord-bank of Germany. Apparently HSH Nord-bank intervened early in the game when cashflow problems first emerged. Omega under pressure reworked its credit facility and prepaid principal owed under the main facility with a second-lien infusion of US$ 42.5 mio from new lenders NIBC Bank of Holland and Japan’s Bank of Tokyo-Mitsubishi NFT. Perhaps they were enticed by the fact that this was a public company, the asset quality and the charters; but second lien lending is a highly risky business. Also, this undoubtedly led to a significant increase in financial expense for the service.

Normally, for Omega to get a second mortgage for NIBC and Bank of Tokyo-Mitsubishi, HSH Nord-bank would require that these institutions sign a subordination agreement, preventing them from taking any action without HSH consent. Meanwhile there is no evidence that Omega tried to sell units to pay down debt. In their September 2010 investor presentation, it claims financing is in place to fund capex commitments.

Omega was too small to benefit with ATM follow on offerings to increase capital. They had to means to take advantage of the downturn in tanker values so they tried to team up with Glencore in a joint venture for this purpose. At this point in Chapter 11, they lack resources and the future of the Glencore joint venture is in question.

No doubt with such attractive assets, other product tanker companies would be interested to purchase them at present market values, but George Kassiotis is hoping to survive under Chapter 11 and keep control of this operation.