Excerpts from an interview with Lance Gurley and Hardin Bethea of Blackhill Partners conducted by Matt McCleery.
We’ve had a dramatic increase of institutional investors in the bonds and bank debt of Marine companies that will need restructuring. What impact is that having on restructuring?
The shipping markets are relatively sparsely populated by institutional investors compared with many other global, asset intensive industries, but we believe the industry should benefit longer term from the risk/return orientation and technical discipline that this subset of the capital markets brings with it. We also believe that greater participation by institutional investors will facilitate necessary consolidation in certain segments of the maritime industry, since the historical providers of debt capital (i.e. banks) have been less willing to facilitate consolidation vs. stand-along restructuring of their debtors.
In the past, ship finance was dominated by bilateral lending, one lender one borrower, now capital structures have a variety of different types of capital. How do you go about restructuring a company when there are so many different stakeholders with different rights?
The capital structure and lien holder complexity that you are describing is the type of complexity that Blackhill actively seeks out and that we relish resolving for our clients. Bilateral loans supporting assets without significant contractual revenues attached may appear simple to resolve – lenders take their collateral and owners move on to the next asset or loan. However, most bilateral loans compose only part of a larger capital structure and asset base, not the entire capital structure. There is often an enterprise associated with these individually financed assets which is where the complexity can arise- owners have fiduciary duty considerations that, when viewed in the broader lens, can lead to a single asset lender needing to go along for the ride without other- wise impairing their rights. Assessing the value of an asset against a loan in a vacuum may not provide the most value to any constituent in a troubled circumstance – creditor or debtor. There’s not one right answer to your question except that both debtors and creditors should avail them- selves of the seasoned advice of restructuring professionals as early as possible in the consideration of their alternatives.
When should an institutional investor get involved in the process?
Leaving aside the incumbent holders, there are usually many opportunities for institutional capital to play a role in an active restructuring. The right entry point will depend on an investor’s risk profile. Some of the structures require a high degree of risk- tolerance to see a transaction to fruition. Others, such as debtor-in-possession (or DIP) financing, have a stigma of being ‘scary’ perhaps unfairly. There is certainly a degree of patience and fortitude required to participate in or lead a DIP loan, but the reality is that DIP loans offer protections that otherwise aren’t afforded to out of court solutions (such as priming liens, high pricing, and significant control over budgets and the process.
Do equity holders, either private or public, get a say in the restructuring process? PE investors generally offer no recourse on loans, yet PE investors have continued to pour fresh capital into restructurings of bank loans. Why?
If recent history serves as a barometer for whether equity holders have a say in the restructuring process, it depends on (1) the size of a sponsor’s bank account and (2) the willingness to continue equitizing their original highly-levered investments. The ‘why’ is more likely than not to support existing investments for the option value versus prematurely culling temporary losers. Keep in mind that in recent deals, most banks are only requiring new equity in an amount sufficient to pre-pay amortization otherwise due during the expected weak market of the next 2-3 years.
If secured debt written down to less than par, can equity holders get recovery?
Markets are fluid and pricing can of course fluctuate for securities, products and services. There have been many instances where the appropriate remedy is time for recovery. However, rarely (if ever) has a company ‘grown into’ it’s over-levered balance sheet. A discounted mark on senior secured debt usually indicates an uphill battle for holders that are long the equity.
Can a company that has a complex capital structure be restructured without using the Chapter 11 process?
Certainly, though the unique nature of this industry generally benefits from the protection, structure and tools afforded by US Chapter 11. For instance, a balance sheet transaction such as an exchange offer doesn’t require Chapter 11, but when a change of control is at play often the Chapter 11 proceeding affords the process structure and tools required by the buy side to effectuate a “clean” restructuring transaction. Chapter 11 has a litany of benefits for debtors that aren’t available in other restructuring regimes, but the structure and forum create as much or more benefit for creditors, too; anyone who doubted that previously should see the unfortunate Hanjin situation as a case study for the issues created by a disorderly process.
Can you give an example of a successful shipping restructuring? What made it work? Can you have a successful restructuring without a market turnaround?
It’s important to understand that “success” can have different definitions specific to which part of the capital structure you’re asking. However, it’s fair to say that in most cases, a pro-active or preemptive restructuring (out-of- court or pre-negotiated deal) offers by far the most options and value to stakeholders. For example, TBS Shipping pre- negotiated a deal that converted secured debt to equity, provided for full payment to all unsecured creditors, established a DIP lending syndicate and repositioned its day-to-day efforts without any business interruption issues. This by all accounts was a successful restructuring because the company / Board and constituents were first-movers relative to the restructuring vs. having to react to a restructuring. Often times when companies are either forced or end up filing for Chapter 11 without any plan or process there’s a significant outflow of value that can be very difficult to recapture. Further, correctly rationalizing the balance sheet, among other things, to current market conditions does give a company the ability to navigate market turmoil in the absence of a turn- around.
Restructuring has a negative stigma for some people, yet the entire goal of the process is to preserve value for the stake-holders. How do you get participants in a positive frame of mind?
The importance of the chosen professionals in the deal has tremendous impact. Restructuring doesn’t always bring out the best in people, however most rational parties recognize that brinksmanship generally serves to degrade value for all parties including those instigating the behavior. From one firm’s perspective, Blackhill tenaciously provides our clients with the best results possible through an open and transparent process. We find that being as communicative as possible diffuses a lot of bad behavior. Of course, interests will be divergent at times and the impetus is on the stakeholders to find commonality in supporting a restructuring transaction that is to all parties’ benefit.