2016 Annual Review
2016 Annual Review

For chapter 11 in shipping, cramdown is a bad play

Securing support from principal creditors makes all the difference between a chapter 11 restructuring that saves a troubled shipping company and one that sinks it.

When a shipping company's financial distress is extreme, it must work fast to preserve value and stem losses. The use of chapter 11 by shipping companies to coerce principal creditors to support an unfavorable restructuring where ownership refuses to share risk is costly, value destructive and generally fruitless.

All six shipping cases filed since 2011 and maintained without secured lender support failed. Four cases filed with principal creditor support over the same period have confirmed chapter 11 reorganization plans.

For example, the Nautilus Shipping restructuring was effectively four separate cases, each with different lenders, credit facilities and collateral pools. In two of those cases, principal creditors did not support the proposed restructuring, and the vessels (or equity therein) were transferred to creditors to satisfy debt. But in the two cases with creditor support, debtors were able to restructure pursuant to a confirmed chapter 11 plan.

In contrast, Primorsk International filed chapter 11 and immediately proposed a "cramdown" reorganization plan that would force secured lenders to accept a restructured loan on unfavorable terms. After months of costly legal battles, the company disclosed that the principal bondholder, upon whose vote Primorsk was relying, had previously undisclosed contractual arrangements with equity owners that required the bondholder’s vote to be excluded for cramdown purposes. Primorsk promptly chose to liquidate.

In a shipping restructuring, creditor support is essential to the success of a chapter 11 plan. Winning that support demands substantial vessel value or cash flows, or intervention by existing ownership to de-risk the secured lenders.


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