Restructurings in the shipping and offshore industry can be particularly complex given the multi-jurisdictional nature of the businesses involved. In the "boom" times stakeholders tend to forget invaluable lessons learned from these restructurings. At the recent panel session for LISW, Alex Blaney, Eleanor Martin and James Stonebridge, together with Chris Ruell and Ian Graham from FTI, gave us a timely reminder of their real life "lessons re-learned" from their extensive experience in the shipping and offshore sector.
Key highlights
Distress signals
It is important for creditors to identify financial distress as early as possible, either through monitoring cash-flow or looking out for operational warning signs. This can be addressed at the outset of a financing transaction by ensuring creditors are given sufficient information to monitor the borrower's financial health. Identifying the need for a restructuring early enables creditors to properly consider the full range of options available, including enforcement of security and the legal and practical obstacles to doing this. It also ensures creditors a "seat at the table" during pivotal discussions with stakeholders and creates an opportunity for creditors to negotiate additional favourable terms (such as access to key strategic and financial information and additional costs coverage) in exchange for supporting debtors in a potential restructuring.
Venue
Chapter 11 can be the benchmark to which other potential large scale proceedings are compared and is traditionally the venue of choice for large scale restructurings. However, it is notoriously expensive and other judicial proceedings or out-of-court processes may instead be used to implement the negotiated restructuring with sufficient creditor support. Other jurisdictions are catching on and increasingly marketing themselves as attractive venues for debtors in what is becoming more of a global market place.
Lessons re-learnt
Distressed Debt Investors
Many creditors seek to de-risk their position in the context of a restructuring by selling down their loans to distressed debt investors. This can drastically change the dynamics of a transaction and debtors and creditors should bear in mind how new entrants can cause a potentially drastic shift in strategy. Similarly company sponsors may look to buy out debt to acquire key voting rights and creditors should consider how to prevent this when preparing the original documentation.
Plan "B"
It is critical for creditors to have a "Plan B" to ensure that they are not cornered into a restructuring that they are not entirely comfortable with. If there is no credible "Plan B", debtors will be aware of this and this may impact the negotiating strength of creditors during a restructuring.
For example, enforcement can be an effective option but there are a number of legal and operational aspects that have to be considered. Creditors will have to consider sale logistics before exercising rights under a mortgage (e.g. public auction or private sale etc.) as well as the practicalities (including impact on timing) of arresting a vessel and what is required to ensure it remains crewed and operational. Enforcing share security can provide creditors with an alternative enforcement method (among others) but creditors need to also be aware of the potential risks involved, including exposure to intercompany liabilities and related claims, procuring replacement directors and funding D&O insurance and potential third-party liability in relation to a vessel.
Restructuring processes and the options available to all parties are continuing to evolve. Ultimately, getting involved early and securing a 'Plan B' remain key to creditors but they should also be prepared to adapt to the circumstances as they materialise. Unpredictability is par for the course, and being able to prepare and adapt is essential. These experiences are too easy to forget and creditors need to also bear these lessons in mind when they come to structuring new transactions.
Take a look at our restructuring hub for further insights, topics and trends.
This year's theme of 'reframing risk in a complex market' could not be more pertinent. The shipping sector is evolving rapidly, and with the macro and micro environmental factors at play, shipping has never been at a more crucial juncture.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
