The shipping crisis presents opportunities
June 2014 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING
The shipping markets are already in their sixth year of crisis and they remain in a state of disarray. Ship-owners, funders and their financing banks, investors, third party creditors as well as other participants in the market are almost all currently consumed with questions of insolvency and restructuring. This trend will not change in the foreseeable future because a rapid market recovery is not expected. Therefore all participants in this context must focus intensively on innovative solutions and a sustainable change of structure. As the industry is hit harder than ever, platform solutions and capital markets are becoming options.
Historically there have always been crises in the extremely cyclical business of shipping, but never one that has hit the industry quite so hard. The triggers for the crisis were two cataclysmic developments which together had an explosive effect: firstly, an abundance of debt capital and equity capital which led to partly excessive investment in new shipbuilding; secondly, the worldwide financial and commercial crisis which resulted in a considerable decline in the demand for ships as a means of transport. The course was therefore set for a huge surplus of shipping tonnage. The result was that charter and cargo rates plunged to historical lows meaning that the urgently required cash-flows emanating from the operation of the ships were suddenly no longer available to service the ship credits. In the meantime, it is often the case that the operating costs for the ships cannot even be brought in. Since that time, banks have been battling against write offs, shipping companies have fought for their existence and investors have struggled with the loss of their own capital contributions. Germany has been hit particularly hard by this global development since it is home to by far the largest container fleet in the world, is the headquarter of some of the leading shipping financers, houses two of the largest shipping companies in the world and was, prior to the crisis, one of the most significant locations for shipping funds made up of capital contributions in the form of limited partnerships. The crisis makes a twofold demand on all participants: firstly, to develop innovative solutions for current restructuring and insolvency scenarios, and secondly, to press ahead with sustainable structural changes. Regarding the insolvency scenario, hardly any bank would currently be able or willing to afford forced liquidation of the ships which are mortgaged to the bank in question. This is because almost all ships have lost their value dramatically and the more ships available for sale, the more considerable the drop in prices.
The inevitable write offs which run into billions would actually leave some banks fighting for survival. Also, from an investor’s perspective a quick sale often does not make sense because their equity contribution would be irrecoverably lost. In anticipation of better markets, the key is to win more time – where possible taking account of the interests of all those involved.
Minimising write offs
Therefore so-called platform solutions are used and are urged in the market in various forms. According to one model, a manageable number of investors with the participation of a shipping company, sets up a company (the platform) which buys ships in need and ensures the short term operative and financial stabilisation. The existing financing will be redeemed or taken over and the future market expectations will be adjusted.
The aim is to refinance the ship in question over a period of a few years and to ultimately sell it possibly at a profit. In this way, banks can minimise or even completely avoid a write off of their ship credits and the investors can benefit from a market recovery. This can be achieved by, for example, a so-called debtor warrant in favour of the investors who will be granted rights to payment in the event of a market recovery. Alternatively, if the platform is set up in a way whereby the investors’ limited partnership becomes the shareholder of the new platform, this will retain the opportunity for the investors to receive future dividend payouts. Moreover, the investors escape the risk in the event of insolvency of having to reimburse dividend payouts which were not covered by profits. The German Federal Court of Justice held in a judgment (II ZR 73/11) handed down in March of this year that investing limited partners are only obliged to pay back such payments if the articles of association expressly provide for this. However, this does not mean that the limited partners are definitively released from their risk of liability. This is because the judgment of the German Federal Court of Justice only relates to the relationship between the company and the limited partner. What remains unaffected is the external liability of a limited partner in relation to the creditors which will be asserted by the insolvency administrator in the event of the insolvency of the company. The platform solutions only work outside of a formal insolvency procedure if all cooperate – in particular the shareholders of the companies to be restructured and for funds, the investors. If they withhold their consent to the restructuring solutions, a switch will most likely have to be made to insolvency proceedings.
However, this can also present interesting opportunities and is occasionally the best option. This is the case because since the latest insolvency law reforms in Germany the influence of the creditor on the proceedings has increased and conflicting shareholder interests in the context of an insolvency plan can be overcome. In this situation the reset button can practically be pushed and every measure permissible under company law can be resolved and implemented. Ultimately the advantage of well-timed formal insolvency proceedings is that all otherwise threatening risks of liability are eliminated – from director’s liability to a later insolvency rescission through to possible criminal liability for delayed filing of insolvency.
Structural change required
Furthermore, a sustainable structural change is required in the shipping industry. This must first be addressed by the shipping companies. For many, particularly smaller shipping companies, it is the case that if they want to survive and profit from a later turnaround in the markets, they must consolidate themselves, cooperate with competitors and develop new sources of finance. This is because the banks, due to their current experiences and above all due to the increased underlying requirements for capital contributions in the course of Basel III, will no longer be making available in the future the external capital in the amounts provided up until now. The limited partnership model is as good as dead. As a result, the opening up to private equity investors and the path to the capital markets is inevitable.
Both options are only available to shipping companies, however, if they establish the corporate structures required by the capital market. These include, for example, clear establishment of the company and fully developed liquidity and risk management. Furthermore, the shipping company must be prepared to fulfil increased transparency and publicity requirements and with it the disclosure of individual company and consolidated annual financial statements. This applies in a similar form if private investors are sought. It has recently been shown by the Rickmers Group bond issue that outside financing through the capital markets is a viable solution.
Forms of cooperation
Supported by the motive, synergy effects and cost-savings to be made, different forms of cooperation between shipping companies can be increasingly found. These range from simple contractual cooperation agreements to joint ventures through to real mergers. One example is the merger between German Hapag-Lloyd and Chilean CSAV. One can only hope for further innovation in this direction and that many make use of the crisis for what it is: namely an opportunity to reinvent and emerge stronger.
Dr Stephan R. Goethel and Dr Oliver Rossbach are partners at Taylor Wessing. Dr Goethel can be contacted on +49 (0)40 36803 0 or by email: firstname.lastname@example.org. Dr Rossbach can be contacted on +49 (0)40 36803 0 or by email: email@example.com.
© Financier Worldwide
Stephan R. Goethel and Oliver Rossbach