Where enforcement is the only option for a lender, co-operation is still required for the lender to avoid value destruction, explains Watson Farley & Williams (Middle East) partner Andrew Baird
In an enforcement situation, a lender that is willing to co-operate is more likely to avoid diminishing the value of their asset. Indeed, "handing the keys back" can lead to an ordered disposal in a jurisdiction favourable for a sensible sale, eg UK, Gibraltar, Hong Kong, Singapore, and this makes achieving a good price all the more likely. This is especially true in an auction situation, where it is key to have a well-established process in place and one that works quickly. A drawn out process in a tricky jurisdiction is likely to lead to deterioration of the vessel’s quality and hence its value. Trying to keep ships out of reach of the mortgage creditors rarely ends well for anybody.
The challenge is to come up with a plan that enables all parties' goals to be reconciled.
On a large syndicated transaction, where there are multiple facilities to a group, or perhaps a mixture of public and conventional debt, an organised and active approach is essential to a successful resolution. This is particularly true where there is a mix of secured and unsecured debt and possibly an awkward bankruptcy regime to content with, coupled with the usual regulatory pressures.
It is important that banks concentrate on legitimate concerns and are realistic about what can actually be delivered in the real world.
It is essential that any plan is put together in an open manner, to avoid any nasty surprises. Playing roulette with the restructuring terms rarely leads to a harmonious conclusion to negotiations, or a long-lasting solution.
In terms of a balanced proposal, key elements should include:
It may be that you end up in a position where there is no choice but to make some form of insolvency filing. Where this has not been planned in advance it usually means handing over control to a judge in bankruptcy proceedings and will benefit the lawyers. Chapter 11 has its place of course but better for an owner for this to occur in the context of a planned procedure, rather than a rushed filing or worse, a Ch 7 filing.
For creditors, potential pitfalls include:
There are also circumstances where lenders may end up in accidental ownership positions through having structured a restructuring in a particular manner. This is usually as a result of having entered into a fee arrangement of some sort, or having ended up with excessive control levels, leading to them being in a quasi-equity positon.
However, if properly advised, you should be able to avoid all of these pitfalls.
This article is an edited version of a fuller presentation made by Watson Farley & Williams (Middle East) partner, Andrew Baird