Funds target shipping despite restructures

Author: Ashley Lee | Published: 3 Nov 2014
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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 to find.

"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 said.

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 now.

KEY TAKEAWAYS

  • 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 achieve.

Chapter 11 advantages

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 Management.

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 2013.

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 recent deals..

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.

Investor interest

Although the shipping industry has suffered since the global financial crisis, investors believe there is potential in some areas.

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.

See also

First Asian restructure under UK SOA explained

A work in progress

An all-American process