Chapter 11 Stigma Haunts TBS International
June 21, 2012
Transparency is one of the strongest virtues of the US when it comes to doing business with shipping companies.
Publicly listed companies, or even private companies that issue publicly traded bonds, must make full disclosure in Securities and Exchange Commission filings, including the fine print about debt restructuring talks and enforcement threats from creditors.
In a notoriously secretive business such as shipping, the value of such a system need not be laboured. However, the same system can cause major problems for public companies that end up in bankruptcy court and re-emerge as solvent enterprises.
TBS International, the dry bulk and tweendecker company that emerged from Chapter 11 in April, is one such example.
TBS chief operating officer Gregg McNelis admitted in a candid interview with Lloyd’s List that the company today is facing problems with many counterparties, including potential charterers and providers of bunkers and other services. Many have downgraded TBS’ profile to a “high credit risk”, or are hesitating to do any business at all.
“It seems that the Chapter 11 stigma still haunts us — counterparties seem to see us as a dead man walking,” Mr McNelis said. “While I believe transparency is good, in our position we are disappointed in the system.”
TBS’ pre-packaged Chapter 11 reorganisation was consummated in a mere 65 days, a remarkable feat ,considering that some bankruptcies drag on for several quarters. In another supreme irony, TBS did not miss any major vendor payment either before or during its Chapter 11 process.
Yet the revitalised company today is forced to convince counterparties of its bona fides, and dispel what Mr McNelis described as a “misinformed and unfair view”.
He squarely blamed transparency for this turn of events.
TBS went public in June 2005, and was listed on the Nasdaq exchange until its Chapter 11 filing in February this year. As a public company, it was obliged to make mandatory disclosures of its debt and covenant travails, which Lloyd’s List and the shipping world at large diligently followed.
The Chapter 11 process, too, unfolded in full public view, thanks to the remarkably open US court system.
“Our problem is too much transparency,” Mr McNelis said.
“We played by the rules. We hired professional advisers such as Alix Partners, Lazard Frères and law firm Gibson Dunn & Crutcher. We paid a king’s ransom to complete the Chapter 11 reorganisation, because we kept creditors' interests foremost.
“Technically, Chapter 11 allowed us to repudiate creditor claims, but we did no such thing. Not one person was left unpaid. Yet here we are, being treated like a bigger credit risk than many private companies that could be much likelier to fail.
“After emerging from Chapter 11, many counterparties are telling us that their credit risk departments have forced them to tighten terms. Yet we hear about these same counterparties doing business with private companies. What do they really know about these companies, who never have had to disclose any financial details?
“The truth is that almost everyone in shipping is in a tight spot today. The risk that should be associated with unknown private companies is being inappropriately laid on us. It is very frustrating.”
The recent example of B+H Ocean Carriers corroborates Mr McNelis’ complaints about transparency.
B+H, which filed for Chapter 11 this month, delisted itself in November last year. Counterparties that did actual business with B+H were aware of that company’s multi-year attempts to renegotiate debt with its banks and a convoluted legal spat with its charterer TTMI, a Sempra subsidiary sold to JP Morgan.
However, B+H had stopped living its life in a “fishbowl” during the last six months. The lack of public filings after its delisting meant the company’s business remained out of the view of the press and the public.
The Chapter 11 court papers subsequently revealed that the B+H board had empowered the company to file for Chapter 11 as far back as January.
Legal experts sympathised with TBS, but had little to offer by way of commiseration to Mr McNelis.
One lawyer speaking on condition of anonymity said: “Gregg’s real frustration seems to be that TBS was a public company. If a private company files for US bankruptcy, it has to show the judge all its dirty laundry and make full financial disclosure, so transparency also works against a private company at that stage.
“The only lesson from the TBS story is that companies must think twice before tapping public equity markets, and fully understand their reporting obligations.”
Blank Rome partner Jeremy Harwood, a bankruptcy specialist, said part of TBS’ problem was that very few bankrupt companies emerged from the Chapter 11 pipeline in as solid as shape as TBS, and as quickly.
“Yes, it is paradoxical that after such an impressive reorganisation, TBS is facing perception problems,” Mr Harwood said. “However, there is very little the company can do about it.”
Mr Harwood thought TBS should go out of its way to educate counterparties about its bona fides. “This may mean one-on-one meetings, opening up their current books and finances for full inspection, or simply repeat the message that they paid everyone while under bankruptcy protection, so it is reasonable to expect that they will continue to do so.
“The fact remains that the shipping industry is still struggling, and everyone is desperate for business. Good counterparties remain hard to find, and TBS seems like one. All I can say to the company is to be patient.”
"Chapter 11 Stigma Haunts TBS International," by Rajesh Joshi first appeared in Lloyd's List on June 21, 2012. www.lloydslist.com.
Reprinted with permission from Lloyd's List.