Private Equity Funds are ‘Dangerous Bedfellows’ for Shipping Firms
Brett Esber, partner in Blank Rome's maritime group, was recently quoted in the article, "Private Equity Funds are ‘Dangerous Bedfellows’ for Shipping Firms," by Nigel Lowry in the October 17, 2012 online issue of Lloyd's List. To read this article online, visit www.lloydslist.com.
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More banks may find themselves pushed to take equity stakes in shipping companies as an alternative to insolvency, but it will remain an unpopular option, according to restructuring experts speaking in Athens today.
“It will be less a factor than private equity financing, which is how little I see it being done,” Deloitte partner for international restructuring services Carlton Siddle told Lloyd’s List.
Earlier, Mr. Siddle told shipping delegates at the Marine Money Greek Forum that private equity funds made “very dangerous bedfellows” for the industry. Despite an increase in financial players wishing to become involved in shipping over the last 12-15 months, “shipowners need to be aware of the pitfalls of going with private equity”, he said.
For banks, accepting equity could nonetheless be preferable to seeking bankruptcy protection, he said. “There have been some varied results from the use of insolvency procedures in shipping. I view it as a delivery mechanism for a deal rather than a forum for discussions. That is an effective and proper use of the insolvency process. But going into Chapter 11 as a forum for discussions is a recipe for disaster and should be avoided at all costs.”
One recent case where banks took equity in an endangered company was that of Danish tanker and dry bulk owner Torm.
“You are starting to see mentalities change, with one or two lenders taking equity stakes when they would have said two years ago they would never consider something like that,” said Jefferies & Co maritime group senior vice-president of investment banking Harold Malone. “It is about sealing a path to recovery and, as things are, several banks are more willing to accept equity,” said Mr. Malone. “We expect to see more of that going forward. As some have shown they are prepared to do it, it’s no longer an off-limits option.”
Mr. Malone said that it was done only when banks saw that alternatives could have greater cost. “Bankruptcy is generally the last resort, although still an alternative,” he said. “Generally, the best source of capital is an existing capital provider.”
However, he predicts that the industry will see growing interest from outside, from capital providers seeking to enter stressed companies “as people’s challenges become more cash-oriented, rather than just covenant-driven."
Although an equity position for banks might not be the last resort, “there are quite a lot of challenges around banks being able to accept equity as compensation”, said Ernst & Young partner Glenn Peters. Restructurings of all kinds were “all about buying time,” said Mr. Peters. “The prime objective is finding a viable way to buy time and provide enough incentive for the stakeholders to carry on.”
Iraklis Prokopakis, chief operating officer of containership owner Danaos, which underwent a mammoth financial reorganisation two years ago, highlighted the importance of the sponsoring owner committing additional funds, if possible. "An equity contribution is a must for success,” he said. “When and how much are questions for discussion but a commitment of equity is a must.”
Blank Rome partner Brett Esber said: “Many shipping companies are now facing a bullet.” Shipowners needed to “be pro-active” to “establish and maintain management’s credibility” through the restructuring process, he said.
Given the depth of information disclosure required by lenders, that “may be more challenging for some private companies not used to that level of requirement”, Mr. Esber concluded.