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Dropping anchor

by Hayley Kaplan | Published December 14, 2011 at 2:15 PM

Choppy financial waters have forced a veritable armada of stressed international marine shipping companies to steer toward bankruptcy over the past year.

Companies such as General Maritime Corp., Marco Polo Seatrade BV, Omega Navigation Enterprises Inc. and Trailer Bridge Inc., all of which filed for Chapter 11 in the past six months, collectively blamed their petitions on increased competition, the recession and an inability to restructure debt outside of court.

Marc Richards of Blank Rome LLP, who represents the official committee of unsecured creditors in Marco Polo's case, attributes the recent shipping bankruptcies to the high rate of loans made "in the heyday, when charter rates were greater than they are now."

According to a source close to General Maritime's case, however, the filings boil down to a case of supply and demand.

Court documents filed by the transporter of crude oil and refined petroleum products asserted global consumption of crude oil dropped to 84.7 million barrels a day in 2009 from 86.5 million barrels per day in 2007. In addition, because vessels take about three years to be ordered, many companies are now dealing with a surplus of ships they ordered before the downturn in the economy.

"There's less demand, less business and a lot of supply of available ships on the market," the source says.

In fact, Edward Horton of Seward & Kissel LLP, Omega's corporate and maritime counsel, says all three shipping company sectors -- tankers, dry-bulk carriers and containers -- are depressed, but some are more depressed than others. He said many lenders could force companies into bankruptcy if they wanted to, but they are not doing so because the banks want to have a performing loan as opposed to none at all.

The big question for distressed shipping companies is where to commence a restructuring and whether to use a court at all.

With most of the key parties on board, the legal port of call doesn't matter so much, as in the case of General Maritime, which filed for Chapter 11 on Nov. 17. Unlike its predecessors, General Maritime filed in Manhattan with a prenegotiated reorganization plan that would swap debt for equity, giving private equity firm Oaktree Capital Management LP all new equity in the reorganized company.

Steven Strom, head of recapitalization and restructuring at Jefferies & Co., notes PE firms and entrepreneurs have always been attracted to the shipping industry.

Marco Polo, however, filed for Chapter 11 on July 29 under far different circumstances. On that day, negotiations between the company and secured lender Crédit Agricole Corporate and Investment Bank sank, which led the bank to sweep $1.8 million from the company's bank accounts.

Whereas General Maritime's has been "painstakingly thought-out and negotiated," Richards says, Marco Polo began its stay in bankruptcy in "freefall."

Crédit Agricole and secured lender Royal Bank of Scotland plc then attempted to dismiss the case of the Amsterdam international commercial vessel management company, but on Oct. 21, Judge James M. Peck of the U.S. Bankruptcy Court for the Southern District of New York denied the moves after a three-day trial.

The lenders had alleged, among other things, that because Marco Polo was not based in the U.S. it could not file for Chapter 11.

The decision is making waves in the international shipping community.

The Marco Polo decision "clearly will encourage companies to seek protection in the U.S. courts," Horton says. "Chapter 11 can be a very desirable venue because of global stay orders, and a number of companies would like to seek that kind of protection."

Omega itself could benefit from the earlier Marco Polo ruling, as Omega wrapped up its own five-day dismissal and stay relief trial Dec. 2. The Athens petroleum tanker company awaits a decision by Dec. 19 from Judge Karen K. Brown of the U.S. Bankruptcy Court for the Southern District of Texas in Houston.

Omega debtor counsel William A. Wood III of Bracewell & Giuliani LLP says the Marco Polo decision was "helpful" during Omega Navigation's trial. For example, Wood said secured lender HSH Nordbank AG originally filed an objection to the case's jurisdiction but later withdrew it.

But Jane Freeberg Sarma of Watson, Farley & Williams (New York) LP, who counsels Crédit Agricole in Marco Polo's case and Omega's junior secured lenders, points out that the Marco Polo decision didn't really create any new law, despite recent attention.

Under the U.S. Bankruptcy Code, companies need property in the U.S. to file for Chapter 11.

For shipping companies, however, those waters remain murky because the companies' assets, their vessels, move all over the world. Therefore, what is classified as an asset in the U.S. can sometimes be difficult to determine, which also has caused problems in Chapter 15 bankruptcy cases.

James H. Power of Holland & Knight LLP, debtor counsel to Chapter 15 debtors Korea Line Corp., Transfield ER Cape Ltd. and Armada (Singapore) Pte. Ltd., says there's been recent case law and arguments urging bankruptcy courts to provide global stay orders under Chapter 15 because shipping companies' assets are mobile. "To get a worldwide stay is very important," Power says.

Korea Line (Feb. 25), Containership Co. (TCC) A/S (May 31), Farenco Shipping Co. Ltd. (Aug. 31) and PT Arpeni Pratama OceanLine Tbk (Monday) are among the slew of marine shipping companies that have filed for Chapter 15 bankruptcy protection this year and are reorganizing overseas.

Based on his connections overseas, Power predicts a lot more shipping companies will file for Chapter 15 in the near future. Power declined to reveal the companies consulting him.

"There will be more [filings]. There are companies that probably should be filing, but their largest secured creditor, the bank, keeps breathing short-term breaths of life into [them]," Power says.

If General Maritime, Marco Polo and Omega Navigation use Chapter 11 successfully, more shipping companies may turn to bankruptcy in the U.S. to reorganize their debt, Strom says. "I think there's a pathway being created by these companies, using Chapter 11 as a viable method," he says.

Still, many shipping companies, such as oil tanker giant Frontline Ltd., opt to reorganize outside of court. For example, Hemen Holding Ltd., controlled by oil tanker tycoon John Fredriksen and Frontline's largest shareholder, is guaranteeing $505.5 million to the Bermuda-based company as part of a deal that will create a reorganized Frontline 2012, the world's largest oil tanker company. The reorganized company will also assume $666 million in bank debt attached to contracts and vessels in addition to $325.5 million in remaining shipbuilding commitments, according to a Dec. 6 statement.

"It's almost always preferable to do things on a business-to-business basis," Strom says. "If you can negotiate that out of court, it's almost always cheaper and less risky for everybody involved." As Strom points out, however, some things, such as the ability to cancel leases and cram a deal down on junior creditors, can only be facilitated through bankruptcy.

As a result, if the worldwide economy remains weak, the dire warning of Standard & Poor's in a Dec. 7 report could come to pass: "More shippers eventually could find that there are too few life preservers to go around."

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