Torm’s 2012 restructure was one of the
industry’s most complex
Private equity and hedge funds are increasingly
looking to shipping investments. But the sector has seen a
number of restructurings over the past five years, and the area
remains legally challenging.
The cross-border nature of the industry, which is
one of the most troubled since the 2008 financial crisis, makes
its restructurings notoriously complicated.
But that hasn’t deterred fund
investors, who believe they may achieve efficiencies that more
traditional shipping companies haven’t been able
"The shipping sector continues to be a source of
restructuring work, and I don’t necessarily see it
getting better at any point soon," said Damien Coles, partner
at Kirkland & Ellis. "The stress in some of the commodities
industries is having a knock-on effect on shipping."
Lian Hoon Lim, managing director at advisory firm
AlixPartners, said dry bulk and tanker companies are creating
the most restructurings. His firm is involved in several cases
around the world.
One theme that is surfacing involves non-operating
owners, who bought ships in the boom years between 2006 and
2008, and chartered them on medium and long-term charters.
Those ships are now coming off their charters and are taking a
steep drop in revenue. "The trouble is that
they’re still servicing the same debt," Lim
According to Lim, what exacerbates this problem is
that modern ships are more efficient with their fuel
consumption and performance. That matters far more than it did
six to seven years ago, because oil prices are so much higher
- Shipping restructurings have been common in the
years following the global financial crisis;
- Those restructurings are among the most complex
due to the cross-border nature of the industry and
complicated corporate structures;
- Regardless, private equity and hedge funds are
looking to shipping investments, hoping to find efficiencies
that larger shipping companies weren’t able to
A number of shipping companies have had to restructure in
the past six years. Danish tanker company Torm agreed a
financial restructuring with lenders and some shipowners
in 2012. Last week it
agreed another deal with its lenders and Oaktree Capital
Others that have completed restructurings include Indonesian
shipping company PT Arpeni Pratama Ocean Line – the
first Indonesian suspension of debt payments obligations
process (PKPU) to receive recognition under US Chapter 15 – and Korea Line, which sold a 50% controlling stake to Hahn & Co in
Companies still restructuring include PT Berlian Laju Tanker and Taiwan Maritime Transportation.
"Shipping companies are generally large, global enterprises
with assets in multiple jurisdictions," said Coles.
Normally, he said, a holdco will issue the debt while
various subsidiaries will have ownership of the ships.
Generally those subsidiaries will be domiciled in a
shipping-friendly jurisdiction like the Marshall Islands,
Labuan or somewhere similarly exotic.
Their capital structures are also complicated. Their
restructurings require cross-border issues to be addressed, and
Coles said a lot of innovative techniques have been used in
Taiwan Maritime Transportation has filed for Chapter 11
protection in the Houston Bankruptcy Court, rather than filing
elsewhere – including its native Taiwan. That
eliminates the need to have a local bankruptcy process
recognised under Chapter 15 of the US Bankruptcy Code, which
has occurred in previous restructurings – most notably
that of PT Arpeni Pratama.
"Chapter 11 can be an attractive option for shipping
companies," Coles said. "It’s the one
restructuring process that is universally respected."
And unlike other reorganisation proceedings, it is
considered to have worldwide effect and impact all of the
debtor’s assets – even if they are
located in different jurisdictions.
Although the shipping industry has suffered since the global
financial crisis, investors believe there is potential in some
Lim said private equity is looking very hard at the space
– either buying assets outright or buying debt in
troubled companies. But he warned: "The sector is very
cyclical, and it is notoriously difficult for private equity
firms to meet the returns that they need."
Coles also observed investor interest. He’s
seen funds try to cherry pick vessels from various sources, and
then put them on one platform to operate – either by
themselves or with an experienced partner "Given the
dislocation in the shipping industry and the distressed
pricing, there is untapped value and it is possible to make
money exploiting that," he added.
But environmental risk is a concern. "If a private equity
firm or a hedge fund is trying to build a portfolio of shipping
investments, it should think carefully about environmental risk
and adopt a holding structure that minimises this risk to the
greatest extent possible," Coles said.
Lim believed that colourful personalities may be the biggest
challenge. In the dry bulk and tanker spaces in particular,
companies are very fragmented. "A lot of them are family-owned
or founder-managed, and that means personality issues come into
restructurings," he added. "Those can be more difficult than
the legal issues.
First Asian restructure under UK SOA
A work in progress
An all-American process