The shipping industry has faltered as a glut of ships were built before the global recession
When Marco Polo Seatrade BV, of the Netherlands, filed for bankruptcy in a U.S. court in July, lenders fought to get the case thrown out. While the company docks in ports around the globe, the lenders argued, its ties to the United States are limited to two small financial accounts.
Marco Polo has not been alone in seeking Chapter 11 protection in the United States. Other shipping companies, struggling with an oversupply of vessels and weak demand, also have filed for bankruptcy here, thanks to U.S. legal provisions that help companies avoid liquidation and continue to operate, lawyers and investors say.
While struggling companies in other industries may also want to seek Chapter 11 refuge despite having few U.S. links, shipping companies are uniquely placed to do it. Their only material assets – ships – are constantly on the move, letting them conceivably seek insolvency protection anywhere they sail.
“Only in Chapter 11 can you get bankruptcy financing, can your management remain in place, and can you continue to operate the company,” said Thomas Califano, a bankruptcy partner at law firm DLA Piper.
The trend of ship owners seeking a fresh corporate start in U.S. courts is not entirely new – another overseas ship owner went through Chapter 11 a decade ago despite questions over its U.S. ties – but it is expected to pick up as the industry remains in a slump.
Califano, who is not involved in Marco Polo’s case, said his firm is working with other non-U.S. shippers mulling Chapter 11.The trend fits into larger questions by creditors, lawyers and judges about the proper reach of U.S. bankruptcy law and who should have access to U.S. courts. So far, U.S. judges have allowed the ship owners’ bankruptcies to proceed.
Chapter 11 offers broad protections to stave off creditors and give companies an exclusive period to file restructuring plans. It differs from Chapter 15, which allows foreign restructurings to be recognized in the United States but does not give companies the same leeway in reorganizing.
For distressed debt investors like billionaire Wilbur Ross, who become equity owners of troubled firms, the trend means a stronger chance to salvage value from deals that don’t pan out.
In Chapter 11, companies can negotiate compromises with lenders. Lenders would rather push companies into insolvency in more creditor-friendly jurisdictions where they could more easily seize collateral and control the cases.
Chapter 11 also may give companies a strategic advantage, said Ross, whose investment firm, WL Ross & Co, manages about $10 billion and recently made a $62.5 million equity investment in British firm Navigator Holdings Ltd.
Most shipping lenders are European banks inexperienced in the U.S. system, Ross said. “Many borrowers feel this gives them a tactical edge on the lenders and therefore helps them with the ultimate resolution of the case,” he said.
The shipping industry has faltered as a glut of ships built before the global recession caused demand to drop. Bank lenders, facing pressure to cut exposure to risky assets, have also put the squeeze on shippers.At least three U.S.-based shippers have filed for bankruptcy in U.S. courts since November, while other foreign shippers with U.S. creditors have filed for Chapter 15.
Marco Polo has blamed its problems on the high cost of tonnage, low freight income and failed attempts to renegotiate with lenders. It ultimately won the right to continue its bankruptcy in New York, where Judge James Peck denied senior lender Royal Bank of Scotland’s bid to dismiss the case.
RBS had argued it was “being held hostage” and that Marco Polo was just using Chapter 11 to buy time to ride out a floundering shipping market. But Peck deemed the company’s U.S. financial accounts sufficient to allow it to restructure in his court, even though one of the accounts was nothing more than a retainer paid to a law firm to file the bankruptcy.
Another shipper, Omega Navigation Enterprises Inc., which also filed for Chapter 11 last July, prevailed in keeping its case in a Texas bankruptcy court after a five-day trial in which senior lender HSH Nordbank AG HSH.UL argued the case should be thrown out.
The bankruptcy was a tactic by Omega to avoid repaying nearly $243 million in outstanding loans, the bank had argued. It said Omega, which is headquartered in Athens, Greece and incorporated in the Marshall Islands, is only linked to the United States through its chief financial officer, Greg McGrath, who works in Convent Station, New Jersey.Omega did not respond to a request for comment. McGrath declined to comment.
Evan Flaschen, the attorney steering Omega and Marco Polo through bankruptcy, said courts are wary of companies that may try to abuse Chapter 11. In Marco Polo, he said, Peck told the company it would be kept on a “tight leash.” The judge demanded to see monthly reports, “and if he doesn’t see progress toward a reorganization, he may not continue the case,” Flaschen said.
Flaschen also said he is working with other foreign shippers that might consider a U.S. filing if forced to restructure.An early indicator of U.S. courts’ hospitality to foreign shippers came in 2000, when a Delaware judge ruled that a financial account was enough to justify a U.S. restructuring for Greece-based Global Ocean Carriers Ltd. That company, however, also had a subsidiary incorporated in Delaware.
While the jurisdictional bar for a Chapter 11 filing has always been low, requiring only a place of business or property in the United States, the rulings in Marco Polo and Omega suggest courts have no plans to interpret the law narrowly.
In fact, DLA Piper’s Califano said, they appear willing to read it very broadly if that would give companies a chance to survive.