The new laws have made Singapore more attractive for companies looking to restructure, but will it become the jurisdiction of choice for Asian debt restructurings?
The maritime and offshore (M&O) sector has endured almost a decade of distress since the global financial crisis. Overzealous ordering of newbuild vessels during the boom years, made available by cheap credit and the lure of increasing global demand, has left many sectors of the maritime industry oversaturated.
The new laws have made Singapore more attractive for restructurings
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Perhaps the most striking example is the demise of Hanjin Shipping in 2016, saddled with a large debt stack amid an oversupply of container capacity and uncertain market conditions. The company's failure added further pressure to the container market, bringing the Baltic Dry Index crashing below 1,000 and depressing charter rates and vessel values. Similar issues have pervaded the currently ailing offshore market, which has seen capex plans curtailed rapidly. Following a study of 44 offshore supply vessel companies, global consulting firm AlixPartners has predicted a number of insolvencies in Southeast Asia in the next 12 to 18 months and highlighted the fact that the current vessel scrap rate is only around 13 percent of what is required to combat the vessel glut.
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Events in 2016 and 2017 have resulted in looming debt stacks in the face of dwindling cash flow across the sector, particularly in Singapore and Asia-Pacific in general, where the key M&O players have—for the most part—yet to face immediate refinancing pressure. In fact, Marine Money magazine has suggested that between six and eight M&O businesses based or headquartered in Singapore will be seeking a restructuring solution in the near future.
With market recovery still uncertain, debtors in the region may soon have to look to new and existing sources of finance for continued liquidity. The traditional shipping banks and lenders have been gradually reducing their M&O exposure, which may exacerbate liquidity issues for debtors.
BANKS SELLING OUT M&O EXPOSURE (APPROXIMATE TOTAL EXPOSURE; US$)
Lloyds Banking Group
To a certain extent, alternative sources such as direct lending, funds seeking exposure to M&O debt, and equity have been able to meet the shortfall, as have banks and fund managers that were not historically active in the sector. These sources have aided a number of proactive debtors and may be able to do the same for others facing a refinancing in the short to medium term.
DEAL EXAMPLES: FUNDS BUYING INTO M&O
US$750 million and US$380 million shipping loans from Lloyds and Commerzbank respectively.
US$500 million shipping loans from Lloyds.
Acquisition of 60 percent of Teekay Offshore Partners for US$750 million.
Oak Hill and Breakwater:
Acquisition of 50 percent of Odfjell SE.
There has been some criticism that restructurings in the sector are only 'sticking plasters' for the problem rather than wholesale solutions. This is primarily due to the composition of the sector's principal creditors, who have been reluctant to crystallise their position in a depressed market. As a result, a number of restructurings designed to provide additional liquidity and a runway for a company attempting to survive any downturn in fortunes have relied on a recovery in the M&O market—a recovery which has yet to manifest itself.
Singapore's newly implemented restructuring regime could prove preferable to the well-established frameworks of the US and England
EXAMPLES OF DEDICATED M&O FUNDS RAISED SINCE 2012
JPM Global Alternatives
Over the next 12 months, M&O players around the globe will be attempting to shore up their balance sheets and emerge from the downturn by taking advantage of developing opportunities. Singapore's newly implemented restructuring regime could prove popular as it creates a viable means to achieve these goals and, under the right circumstances, it may even prove preferable to the well-established M&O restructuring frameworks of the US' chapter 11 and the English scheme of arrangement.
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Along with New York law, English law continues to be the dominant governing law of finance documents and commercial contracts in the M&O world
Reworked Singaporean regime
Singapore's restructuring and insolvency laws saw several changes as a result of the Companies (Amendment) Bill, amending the Singapore Companies Act, which came into effect on 23 May 2017.
In particular, the law seeks to transpose some of the more powerful tools from chapter 11 into Singaporean law, as well as easing access for foreign companies to the country's restructuring processes (the Judicial Commissioner of Singapore has referred to the 'cherry-picking' of restructuring tools in order to produce a hybrid system). These restructuring tools include rescue financing and an improved framework for schemes of arrangement.
The new rescue financing provisions are similar to the US' post-petition financing model, thus enabling Singaporean courts to rank creditors contributing to the restructuring process ahead of other parties attempting to recover debt from the relevant company. This financing can be secured against both previously secured and unsecured assets, and on a subordinated, pari passu or senior basis.
Improved schemes of arrangement
The legislative framework for schemes of arrangement has been modified to increase its utility as an international restructuring tool.
Singaporean courts are now empowered to grant a moratorium during a company's restructuring negotiations and implementation process, which includes an automatic global moratorium of up to 30 days, as soon as the application is received. The temporary suspension can be extended to related companies such as subsidiaries, and also direct and indirect holdings.
Furthermore, in certain circumstances, the court can 'cram down' creditors that oppose an arrangement or compromise and bind them to accept an outcome—a hybrid of equivalent powers in English and US chapter 11.
In cases where there are pre-negotiated compromises, the courts may be able to approve these without requiring a meeting of creditors (i.e., as a 'pre-pack' solution), although safeguards have also been put in place to protect the creditors' rights.
In particular, the new regulations increase the transparency of information about a proposed compromise or arrangement, thus enabling creditors to assess the situation more easily. These parties have been given the right to apply to the court to vary or terminate the moratorium and to prevent the company from dissipating its assets.
SELECTED M&O SCHEMES OF ARRANGEMENT
Berlian Laju Tanker
Total aggregate principal amount of bonds issued by Singaporean companies, maturing by 2020.
M&O restructurings are often complicated due to the intricacy of the businesses and capital structures for many companies in the sector—and the inherently international nature of the assets. Not only are M&O businesses almost invariably categorised by extremely complex corporate and capital structures covering multiple jurisdictions, in addition, many such structures have been rendered even more challenging by previous restructurings.
Cross-border issues often present complications for both creditors and debtors, and it is worth remembering that participants in the M&O sector are highly dependent upon the uninterrupted continuity of their business. This means that restructuring solutions must protect these companies from value-destructive scenarios such as vessel arrests or termination of charters and key contracts.
In addition, the interaction between cross-border insolvency law and maritime law is rarely straightforward and is often complicated by varying requirements of different jurisdictions where a vessel might be flagged or located, the domicile of the business, the governing law of the relevant documents and the jurisdiction where a restructuring solution is ultimately sought.
Current OSV scrap rate is 13 percent of what is required to combat vessel oversupply.
Multiple M&O restructurings in the wake of the global financial crisis have identified some of the less obvious factors to be considered when an M&O business finds itself in distress and is seeking a restructuring solution.
Changes to lender composition
One of these is the shake-up of the lending landscape. A number of the traditional shipping banks (including, for example, Commerzbank and HSH Nordbank) have been attempting to divest themselves of their M&O positions over the last few years. While certain institutions, such as the Nordic banks, are maintaining their positions, non-traditional financing parties such as funds (including specialised shipping funds) and US banks (such as Bank of America Merrill Lynch, Wells Fargo and Citi) are increasingly taking over M&O positions. This has provided vital liquidity to the sector and can prove more flexible in terms of financing, but often at the cost of increased pricing, more restrictive covenants and potentially more aggressive strategies.
Role of ECAs
Another factor to consider is the role of export credit agencies (ECAs). ECAs, which have traditionally been less familiar with restructurings—although this is rapidly changing—are not commercial lenders and thus operate with different incentives. In addition, it is worth remembering that their actions and decisions may be bound by law, regulation or policy.
Beyond the balance sheet
Many restructurings are spurred on by a wish to address an unfavourable maturity profile and stave off defaulting on financial obligations. However, it is increasingly clear that many M&O businesses will only be able to achieve a comprehensive solution if they undertake more wide-ranging operational measures.
Consensus in chapter 11
In the context of chapter 11, a meaningful level of consensus among the various stakeholders is also important, or at least among the secured creditor class, as it is rare that a workable chapter 11 solution is found in an M&O restructuring without it. In fact, since 2011, all M&O chapter 11 cases filed without meaningful creditor support have failed. Although the legislation does allow cramming down of dissenting creditors, achieving this requires strict conditions to be met (such as the eventual full repayment of crammed down creditors and the requirement of an impaired accepting class).
SELECTED M&O CHAPTER 11 CASES
Eagle Bulk Shipping
Excel Maritime Carriers
Overseas Shipholding Group
Windland Ocean Shipping
EMAS Chiyoda Subsea
Finally, recognising the numerous sector differences is key. There are several distinctions between shipping companies and vessel owners on the one hand, and offshore drillers and service providers on the other. As a result, the stakeholders and objectives for the two sectors will vary significantly.
The offshore market tends to be more inflexible than shipping (which is a highly commoditised sphere), and also tends to require significantly higher capex investment.
These differences highlight the need to distinguish further between box carriers and bulkers, ship owners and liners, drillers and subsea developers, with each group requiring its own tailored approach to any restructuring.
To compete effectively with established M&O restructuring hubs, Singapore will have to gain the confidence of the sector
Market acceptance for Singapore
In theory, the new Singapore restructuring tools are an excellent fit for M&O restructurings, but it remains to be seen whether they will be embraced in practice by the key players. Rescue financing depends upon the availability of a market willing to provide the credit rapidly and on a flexible basis. Despite the new statutory protections, debtors in the Singapore market may not find adequate rescue financing if the market does not develop quickly enough to compete with the highly developed US market for 'post-petition' financing.
The chapter 11 worldwide stay is 'automatic' only as a matter of US law and could thus, in theory, be ignored outside of the jurisdiction of the US courts, but the majority of international investors are kept at bay by the risk of being found in contempt of court in the US, as they will almost certainly have some degree of US interests. While many creditors of M&O businesses are likely to have some presence in Singapore—in particular those active in the lending market in the region—they are unlikely to reach the ubiquity of creditors with US interests.
US CHAPTER 11 AND M&O RESTRUCTURINGS
In cases where a formal reorganisation process has been required, chapter 11 of the US Bankruptcy Code has been the most widely used procedure in M&O restructurings, as many of the tools available to a debtor are eminently suited to these scenarios. In general, this is an extremely flexible procedure, allowing for a variety of bespoke outcomes dependent upon the circumstances of the case.
The debtor-in-possession structure preserves business continuity by allowing existing management to continue running the business while the restructuring is ongoing. It can also protect assets from value destruction by aggressive creditors and—in certain circumstances—'cram down' dissenting creditors and force them to accept a solution, thus reducing the risk of holdout creditors.
Financing for entities in chapter 11 (known as 'DIP financing') is readily available and comes with a number of protections including super-senior ranking or priming of existing security, if needed.
Creditors across the globe are likely to adhere to the automatic, worldwide stay on the business and its assets as soon as the filing is made, as most commercial entities will not be willing to act in contempt of a US court.
Chapter 11 will not always be the ideal solution, particularly as the process can be expensive and time-consuming.
As a formal insolvency proceeding, it may trigger insolvency defaults in finance documents and commercial agreements.
Each case will require a robust analysis to determine whether and how chapter 11 can be used to effect an M&O restructuring, and if there are other local or international processes that would better achieve the outcomes sought by all stakeholders.
Source: White & Case
Along with New York law, English law continues to be the dominant governing law of finance documents and commercial contracts in the M&O world and it is, as yet, uncertain how the courts in these jurisdictions will react to restructurings implemented through the Singaporean courts. Even if Singapore was to allow a compromise of foreign law obligations, there is no guarantee that the ruling would be recognised in England (under the 'Gibbs principle'), and accordingly, the risk of new proceedings in the English courts in respect of charter and finance documents would remain.
The extensive jurisprudence and relative certainty surrounding the English scheme and chapter 11 make these frameworks attractive to both creditors and debtors. The sanctioning of the TORM scheme by the English courts in 2014, and approval by the US federal bankruptcy court of a chapter 11 reorganisation plan relating to the indebtedness of EMAS Chiyoda Offshore earlier this year have cemented the impression that these jurisdictions facilitate the proper implementation of even high-pressure, time-sensitive restructurings, with minimal business interruption.
A number of M&O schemes of arrangement have taken place outside England in other common law jurisdictions including Bermuda (Seadrill), the Cayman Islands (Ocean Rig) and indeed Singapore (Berlian Laju Tanker). The fact that schemes in these jurisdictions are able to make use of English jurisprudence grants stakeholders comfort that there will be some certainty to the process.
To compete effectively with established M&O restructuring hubs, Singapore will have to gain the confidence of the sectors' businesses, banks, funds and ECAs—and the advisors who will ultimately steer them towards a solution. These stakeholders will require convincing that a restructuring in Singapore would produce a superior outcome compared to chapter 11 or an alternative process. Despite these challenges, there is already evidence emerging from cases such as EMAS Offshore and Nam Cheong that regional players are keen to make use of this new, local regime.
The new Singapore regime is a welcome addition to the restructuring toolbox for the Asia-Pacific M&O sector and beyond.
Adopting many of the most useful elements of the US and English systems has resulted in—on paper—a robust restructuring regime, with the added benefit of removing one more element of cross-border uncertainty for local debtors and creditors.
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It remains to be seen, however, whether Singapore will become the jurisdiction of choice for the Asia-Pacific M&O restructurings in the short term, or whether the market will need more time to mature and develop before large-scale cross-border restructurings become the norm ahead of chapter 11 or a solution in England. The deciding factor will be whether market participants believe Singapore's regime is capable of dealing with the very complex nuances of M&O restructurings.
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