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Genco Shipping pre-pack: debt in the driver’s seat

Genco Shipping pre-pack: debt in the driver’s seat
After much anticipation and last minute brinksmanship, Genco Shipping & Trading, the Peter Georgiopoulos-linked dry bulk entity listed on the NYSE, has submitted a plan for Chapter 11 bankruptcy protection, in a “pre-packaged” deal, which means that the path towards rehabilitation has been agreed among the parties, in advance.

Genco was launched in 2005, initially riding the market’s upward waves with vessel purchases continuing into 2007 – 2008. Basically, after the market fell, the company doubled down on its bets, amidst a brief uptick in 2010, buying more vessels at a time of a hoped-for bottom. The company’s lenders cooperated, up to a point, with prospects seemingly buoyed, again, by the dry bulk market’s strength in late 2013. By March, 2014 as the dry bulk markets failed to hold their gains of several months earlier, with a weekly stream of announcements, it was evident that Genco was on the rocks.

Through all of Genco’s travails, its base of European lenders has shown itself to be extraordinarily loyal. Indicative of the lingering drybulk optimism, the pre-pack agreement shows the sentiment of market improvement. With more than a dozen lenders, spread over three senior bank facilities, holders of notes “convertible” into equity, and hundreds of general creditors, such agreements are by necessity highly complex.

One New York ship finance lawyer told Seatrade Global: “With a pre-packaged bankruptcy, the rights as well as the expectations of the competing interests of secured and unsecured creditors can be analyzed in advance of a structured court proceeding. Ultimately, pre-packs have saved time, costs and hopefully some shareholder participation.” In essence, the current holders of senior debt in a nearly $1.1bn deal (agreed in 2007- with DNB Bank in the lead, and amended in 2012) would gain 81.1% equity in the new reconstituted company’s equity.

Two other large bank facilities, $74m on a $100m loan agreed in 2010, in connection with a purchase of ships from Metrostar, and  $176m outstanding on a $253m loan signed in 2010, connected to the purchase of a fleet of Chinese built supramaxes from Bourbon, will be either replaced, or amended, with a maturity out through 2019. Holders of Genco’s $125m of convertible notes, issued in July 2010, will gain 8.4% of the new equity. Unsecured creditors will make out okay, with Genco agreeing to “…the unimpairment of all general unsecured creditors claims…”

All existing equity will be cancelled, however existing equity holders will receive warrants good for seven years that will enable them to acquire 6% of the new equity, based on a “strike” value of the new equity at $1.295bn. A three-tiered structure of additional warrants will enable Genco’s management and directors to gain an equity stake. The new management team is not named, except for a stipulation that long time cfo John Wobensmith will remain onboard.

For inquisitive readers, the fine print also sheds light on the degree of infiltration by “distressed debt investors”, whose cooperation is necessary to make the deal happen.  Indeed, the company’s new board will include Georgiopoulos along other investors- who took stakes in the 2007 debt deal. These include Apollo Management Holdings LP,  Centerbridge Partners (a big debt holder),  Midtown Acquisitions,  Panning Capital Management, LP, and Solus Alternative Asset Management LP will have an important say in matters related to running the company.

And, in a most interesting development, a major distressed debt investor, Strategic Value Partners (Victor Khosla), bought a 9.4% stake in Genco, just two days prior to the bankruptcy filing. Whether this represents bad timing, or a foreshadowing of future machinations involving Genco’s debt, remains to be seen. But if the plan is approved, traders of debt will be running the show.

Read our analysis of the fine print of the proposed debt deal here