Wednesday, April 4, 2012

Shipping: As Companies Become Insolvent They Sail to American Bankruptcy Courts

From Reuters:
Shippers make U.S. the port of call for bankruptcy
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 (NVIGF.PK).

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....MORE