Fundamental restructuring of insolvent companies—in any sector— is a fight for survival.
Given the global nature of the industry, it is perhaps no surprise that shipping companies and their advisors have sought appropriate court protection to alleviate creditor pressure and a possible break-up of the business where a consensual restructuring is not possible.
Since mid-2011, various surviving shipping companies have filed for chapter 11 bankruptcy protection. Central to chapter 11 is the belief that an operating business is worth more than the sum of its parts, and a carefully constructed filing can offer benefits to investors and the company alike.
The need for some meaningful measure of stakeholder consensus to achieve an effective and swift restructuring through chapter 11 proceedings is often misunderstood.
Without such consensus, especially where the value of the underlying assets is exceeded by the amount of indebtedness secured thereby, a chapter 11 proceeding can pose risks to the debtor. In such circumstances, it can be very difficult to achieve a successful outcome. This lesson is illustrated by recent failed chapter 11 reorganizations filed by small shipping companies without any creditor support.
Critical to the success of proceedings—for both creditor and debtor—is stakeholder consensus and professional and swift preparation and implementation. Paul Slater returns to the relevance of the financed assets’ depreciating value: “Chapter 11 proceedings can drag on. If negotiations take two years, the vessels being protected may have shed another 10 percent of their price.” So in some cases, an expedited exit can be vital. Albert Stein sees chapter 11 as a good thing in principle, but notes that it can be abused, adding: “If you put a Ferrari in the hands of a teenager, do not be surprised if it gets wrecked.”
Chapter 11 up close: General Maritime
Chapter 11 can be entered into in a number of ways. The “traditional” approach sees a company file prior to negotiations with its creditors. But insufficient preparation can lead to a “free-fall,” causing material harm to a debtor’s business while risking liquidation and a fire sale of assets.
But there are alternative routes available. The recent case of General Maritime illustrates the potential benefits of a pre-negotiated bankruptcy filing, whereby creditors agree to a proposed reorganization or restructuring before a petition is filed.
General Maritime was providing seaborne transportation services for petroleum products, operating in 70 countries with a fleet of 30 vessels. But the ongoing pressures on tanker rates meant that cash flow was becoming constrained, and its ability to honor debt obligations was diminishing. In 2011, it determined that a renegotiation of its US$1.3 billion of debt would be needed to mitigate these risks.
White & Case partner Thomas Lauria, who leads the Firm’s Global Financial Restructuring and Insolvency Practice, explains the motivations: “To ensure the preservation of business value, and increase the likelihood of a speedy exit from bankruptcy protection, General Maritime sought agreement from its creditors for a company reorganization. We acted on behalf of Nordea Bank and other senior lenders to negotiate a plan to keep the company afloat and protect their positions.”
By the time General Maritime entered chapter 11 in November 2011, a Restructuring Support Agreement with a strict timeline was in place. To bolster cash flow, the lenders agreed to an amortization “holiday” until June 2014 and an initial US$75 million debtor-in-possession financing in cash, with more to follow if required. Creditor Oaktree Capital also agreed to provide US$175 million of new equity investment and to convert all of its pre-petition secured debt to equity. The result saw General Maritime emerge from bankruptcy protection after just six months, having continued normal business operations throughout.
The reorganized company had substantially less debt and significantly more liquidity, granting the potential to enhance its position as a leader in its class. The agreement reduced the risks of default for the creditors and increased the likelihood that their investments will be returned in a realistic timeframe.