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Why do foreign shipping companies look for a way out in chapter 11?

Why do foreign shipping companies look for a way out in chapter 11?

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In the last 5 years there has been a significant number of shipping companies filing for bankruptcy under the chapter 11 approach in the United States. It all started in 2011 and there are names of big players such as General Maritime, Omega Navigation, Marco Polo, TBS International, B&H, and OSG.  Experts blame the collapse in 2008 and that these bankruptcies are the continuing effects of the precipitous collapse of freight markets which, in turn, caused a significant and probably long-term drop in ship values.

After 2008, owners of vessels were left with huge mortgage payments on significantly devalued vessels generating substantially reduced revenue streams. In the past, these same owners were able to get contracts and  high value long term charters but now they  were finding themselves under immense pressure, either because their charterers were demanding significant concessions or were defaulting altogether. Owners and lenders navigated these rough waters and did whatever was in reach to not become owners of large fleets of foreclosed vessels. But the banks were putting immense pressure and you can only play them for so long.

The United States and the chapter 11 seem to work for shipping companies wishing to file for bankruptcy. Of course not every company can come to the United States to file for bankruptcy, but the ones who have agreements or business with the country can take advantage of this bankruptcy approach. Here are 3 powerful reasons why some companies are coming to the USA to file for bankruptcy under chapter 11 :

Image courtesy of Michael Coghlan at Flickr.com
Image courtesy of Michael Coghlan at Flickr.com

Automatic Stay.

The most amazing advantage for shipping companies in the USA is the automatic stay provided for in Section 362 of the bankruptcy code. This is an automatic injunction which comes into immediate effect upon the filing of a Chapter 11 petition. It blocks any company from taking steps to pursue or enforce claims against the shipping company or property of the estate outside the bankruptcy proceedings. It has worldwide effect, and the consequences for violating it can be severe. It does not mean that any company in the world can use this section of file for bankruptcy in the United States, but after the last crisis nearly every international shipping bank has at least some presence in the United States, which means that ignoring a U.S. bankruptcy court’s orders will bring companies consequence weather they like it or not.

Critical Vendors.

Now that the company has gained automatic stay, the debtor can make an application at the beginning of the process that allows the company to pay its “critical vendors” even for pre-petition obligations. The purpose, of course, is to ensure that the company can continue its day to day operations while it attempts to restructure. Shipping companies have to pay their agents’ fees and costs, managers’ fees, bunkers, supplies, maintenance and repair costs, port costs, and so forth.  It becomes a big problem for shipping companies if they cannot pay for these kinds of suppliers because there will be no chance of saving the company. To put it in context, if a shipping company can’t cover those expenses, the vessels, with their cargos, run the risk of being arrested at every port of call by mortgage lenders or suppliers of necessaries. Companies will not ship their cargo on vessels they know will have this problem at every port and the company will be left out in the dark.  The two previous items, the automatic stay and the ability to pay critical vendors, is very important to manage the crisis and “stabilize the patient,” in order to start recovery.

Debtor in Possession.

Image courtesy of Mehmet Akyuz at Flickr.com
Image courtesy of Mehmet Akyuz at Flickr.com

A very attractive feature of Chapter 11 is that in most instances the debtor actually retains control of the company after the action is commenced. This concept is known as “debtor in possession.” In most foreign insolvency proceedings a trustee is appointed to manage the affairs of the company until the problem has been solved. From a debtor´s point of view it is amazing because it allows the company owner or owners to hold on to the hope that they may yet emerge from Chapter 11 in control of a functioning, reorganized company. It is a little bit strange that parties to a bankruptcy want the debtor to retain control of the company, knowing that it was that person that drove the company to where it is in the first place. In most of the cases the parties benefit from the debtor’s continued participation in the running of the company because he or she is the one that has the contacts, the market experience, the institutional knowledge, and the technical expertise to run the company. In this way, companies and debtor´s assure that a trustee is not appointed and has to start from scratch, leaving the company with an immediate strategic disadvantage.

After all this, no wonder many shipping companies are coming to the United States to try to end their days with dignity, or at least try to save the company and regain control of it.

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