This has resulted in several simply giving up and declaring themselves bankrupt or insolvent. Others have tried to find innovative ways to continue trading in the hope that tanker rates will recover in the not too distant future.
One company in the latter category is TORM, which some observers thought was ‘dead and buried’, as it was deemed that the company could not possibly recover from the catastrophic losses posted year in and year out.
No doubt that an ongoing boardroom battle between major shareholders helped to exacerbate the problem, leading to mass resignations of both board members and senior management down the years.
Since then, the remaining board members have attempted to steady the sinking ship by talking with TORM’s major stakeholders, including its banks and charter partners, to find a solution, other than simply declaring bankruptcy and walking away.
At an extraordinary general meeting held on 9th January this year, the current chairman NE Nielsen gave an update on the company’s restructuring programme and also gave details of the agreement reached.
He said that the recently signed agreement had helped to ensure that TORM secured a substantial deferral of its bank credit facilities, gain new liquidity and benefit from significant cost savings from the restructuring of the fleet of chartered-in vessels. The company had thereby been given time to secure its future, long-term capital structure.
Nielsen continued by outlining the significant events that took place last year in TORM’s battle to stay afloat and why these moves were necessary.
He said that since 2010, TORM has worked on improving the company's capital structure and liquidity situation by seeking to tap into different corporate bond markets and through other measures. Mainly due to its strategic position as a spot-oriented company, low freight rates and the generally challenging conditions in the capital markets, the company was unable to obtain this type of financing.
In October 2011, TORM presented a proposal to its banks that combined an equity injection of $100 mill with subscription rights for existing shareholders and a bank moratorium. The proposal was not accepted, but the company achieved a standstill agreement, which was extended several times last year to ensure that a long-term, comprehensive financing solution could be found and implemented.
Nielsen claimed that throughout the whole process, TORM's board and executive management had worked to avoid bankruptcy, or other in-court solutions in Denmark, or abroad. However, the process had also involved detailed negotiations and preparations for a suspension of payments, including under the US Chapter 11 rules.
In the spring of 2012, TORM received conditional offers from reputable, international shipping investors, as well as institutional investors, who were prepared to make new investments in the company provided that substantially amended bank terms were agreed. However, the banks did not find the investor proposals sufficiently attractive to act upon.
A solution was eventually found by which TORM could gain time for a potential general market improvement and as a result, the company signed a conditional agreement in principle with the banks and the major timecharter partners regarding a long-term financing solution.
This formed the basis of the restructuring agreement, which proved very comprehensive and contained a number of supplementary agreements with individual parties, including amendments to TORM's existing financing agreements, Nielsen said. From April to November 2012, the final contractual framework was detailed, documented and completed by the banks, the timecharter partners and the company.
Agreement contents
TORM secured new working capital of $100 mill until 30th September 2014 with first lien in the majority of the company's vessels.
The company's group of banks has aligned key terms and conditions and financial covenants across all existing debt facilities while all maturities on existing credit facilities were adjusted to 31st December 2016. The bank debt remained unchanged at $1,794 mill as of 30th September 2012. The book value of the fleet, excluding vessels under finance leases was $2,167 mill.
Based on broker valuations, TORM's fleet, excluding vessels under finance leases, had a market value of $1,316 mill at the end of September 2012, which was $851 mill lower than the carrying amount. The recognised equity was $358 mill.
Going forward, interest on the existing debt will only be paid if the company had sufficient liquidity and otherwise, the remainder will be accumulated until at least 30th June 2014 with potential extension until 30th September 2014. On average, the interest margin will increase to about 240 basis points on the bank debt and the company will pay interest on the new working capital facility until 30th September 2014.
The new financing agreements provided for a deferral of installments on the bank debt until 30th September 2014, in which period rescheduled principal amortisations will only be payable if TORM has sufficient liquidity. Provided that sufficient positive cash flows are generated, certain cash sweep mechanisms will apply. Annualised minimum amortisations of $100 mill will start from 30th September 2014 until 31st December 2016. If any vessels are sold, the related secured debt will fall due.
TORM has also implemented substantial changes to its internal legal group structure, including transfers of vessels to separate legal entities in Denmark and Singapore based on the individual loan facilities. All legal entities are ultimately owned by TORM A/S.
New financial covenants will apply uniformly across the bank debt facilities and include:
*Minimum liquidity: Cash, plus the available part of the new $100 mill working capital facility, must exceed $50 mill to be tested from 31st December 2012. This will later be adjusted to a cash requirement of $30 mill by 30th September 2014 and $40 mill by 31st March 2015.
Loan-to-value ratio: A senior loan tranche of $1,020 mill was introduced out of the total bank debt of $1,793 mill on 30th June 2012. The senior tranche must have an initial agreed ratio of loan to TORM's fleet value based on broker valuations (excluding vessels under finance leases) at 85% to be confirmed from 30th June 2013. This will gradually be stepped down to 65% by 30th June 2016. The remaining bank debt of $773 mill was divided into two additional debt tranches, both with collateral in the company's fleet.
Consolidated total debt to EBITDA: Initial agreed ratio of a maximum of 30:1 to be tested from 30th June 2013, gradually stepped down to a 6:1 ratio by 30th June 2016.
Interest cover ratio: Agreed EBITDA to interest ratio of initially a minimum of 1.4 x by 30th June 2014, gradually stepped up to 2.5 x by 31st December 2015.
Additional material covenants –
The terms of the credit facilities include a catalogue of additional covenants, including among others:
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A change-of-control provision with a threshold of 25% of shares or voting rights.
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No issuance of new shares or dividend distribution without consent from the banks.
Certain specific option rights were also agreed that may result in vessel sales to be agreed prior to 31st January 2013 for up to 22 vessels and repayment of the related secured debt.
The options given to three bank consortiums, which were subject to certain agreed terms and conditions, are in place until 31st July 2014. One bank consortium had given notice on five vessels. However, TORM said that it would try to maintain the vessels' association with the company.
Chartered-in tonnage
As for the timecharter partners, they accepted that the existing contracts would either be permanently changed and rates aligned to the market level with upside/downside split, or be allowed to terminate. These amendments would result in a significant reduction of the company's future timecharter commitments, TORM said.
TORM estimated that the changes in timecharter contracts corresponded to a total positive nominal mark-to-market impact of about $270 mill. However, a few of the owners of chartered-in tonnage did not take part in the restructuring. As a result, TORM will return 22 vessels to the partners ahead of the original contracted schedule.
Effective from 5th November 2012, the date of the restructuring, TORM's future timecharter commitments were reduced by around $590 mill, to $228 mill, due to the freight rates being aligned to the market level, or by the vessels’ redelivery.
As a result of this agreement, the tanker division had reduced the expected average timecharter costs for the first quarter 2013 by 36% from $18,848 to $12,141 per day.
In the same period, the drybulk division reduced the average timecharter costs from $16,286 to $13,755 per day, equal to a 16% reduction.
New ownership structure
The remuneration given to the timecharter partners as a consequence of the amended contractual conditions, as well as a fee to the banks, estimated at a total net present value of $200 mill, was converted into company shares, corresponding to 90% ownership.
By achieving this, the existing shareholders retained an ownership interest of 10% against the 7.5% announced at the April AGM. The equity allocation between the banks and the timecharter partners was agreed between them and formed part of the restructuring agreement.
Nielsen then provided an account of the changes to the share capital that took place on 5th November 2012.
At TORM's AGM held on 23rd April 2012 it was decided to reduce the share capital by a nominal value of DKK363,272,000 to DKK728,000 nominal value by transfer of the reduction amount to a special reserve fund and by changing the nominal amount per share (denomination) from DKK5 to DKK0.01 in accordance with the Danish Companies Act.
On 5th November 2012, the board decided to complete the capital reduction.
Also at TORM's April AGM, the board authorised an increase in the share capital by up to a total nominal value of DKK2,400,000,000 by payment in cash, conversion of debt, or contribution of assets other than cash without pre-emptive subscription rights for the existing shareholders, at a rate discounted to the market price.
Following this, the board increased TORM’s share capital by a nominal value of DKK6,552,000 by issuing 655,200,000 shares with a nominal value of DKK0.01 each.
This capital increase comprised a new share issue by conversion of debt of DKK1,174,100,581 in total (about $200 mill) under the terms of the restructuring agreement and supplementary agreements to TORM's banks and timecharter partners, or their assignees.
The increase was fully subscribed at a subscription price of DKK1.79 per share of DKK nominal value 0.01 each (around $0.31 per share). The new shares issued corresponded to 90% of TORM's registered share capital and votes following the registration of the capital increase with the Danish Business Authority. TORM's issued share capital now amounted to DKK7,280,000 nominal value, equal to 728,000,000 shares of a nominal value of DKK0.01 each.
The company’s existing share option programmes were subsequently adjusted in accordance with the capital increase, but exercise prices remained significantly higher than the prevailing share price and the share option programmes were therefore ‘under water’.
On 27th September 2012, TORM signed a separate agreement to acquire its own shares from certain timecharter partners. This agreement concerned the acquisition of 3,739,840 shares with an aggregate nominal value of DKK37,398.40, corresponding to 0.5% of the company’s total share capital.
The shares were transferred immediately after the completion of TORM’s restructuring on 5th November 2012, against the release of a claim of an estimated value of $0.6 mill according to an independent valuation.
Following prolonged negotiations and supported by statements from various advisers, the board assessed that the agreement to acquire own shares was the company's only real opportunity of securing participation by the involved parties in the overall restructuring and thus avoiding the imminent detrimental effects of a potential bankruptcy, or other insolvency proceedings, according to the Danish Companies Act.