Shipping Contracts in distress

Transcription

1 Shipping Contracts in distress Bulkform Annual Summit 27 April 2009 Finn Bjørnstad 1

2 Background Collapse in all segments of freight and S&P markets market values below debt Oil price +/- USD 40/pb - affecting field developments and OilCo s willingness and/or ability to pay Capital market dead (?) impatient/demanding lenders/creditors More than 500 vessels/rigs on order for Norwegian interests at a time when shipyards and owners are facing severe challenges Consequences are renegotiations, cancellations, bankruptcies, court protection/chapter 11 and/or other workout situations Understanding of legal implications and risks are important to assess how the future may be formed (who will survive and at how much will it cost) 2

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4 The domino effect of a collapsing market Renegotiations in all parts of a shipping transaction chain the market collapse hitting all parties in the chain one party's performance subject to performance of the later parties in the chain third party risks materialising and difficult to predict who will be hit, when and how hard you may be stuck in the middle and defend and challenge at the same time Purchase USDM 100 Resale USDM 125 Resale USDM 130 Resale USDM 140 Spot rate USD 8,000 Shipyard Owner Chart. SubChart. 1 SubChart. 2 SubChart mnds 24 mnds 12 mnds 8 mnds Market Value USDM 50 USD 50,000 USD 55,000 USD 60,000 USD 65,000 4

5 The domino effect of a collapsing market (cont.) S&P and CPs - most renegotiations are based on power play and fair of the alternative is it possible to build a legal case (defence or to challenge)? technical due diligence vessel performance poor contract work advantage of unclear terms and strict interpretation proper authorisation POA? no force majeure situation strategy to build case over time demonstration of risk of not accepting new terms - alternative may be devastating OR, pure commercial discussions based on sharing of pain and long term relationship The dilemma is whether to accept new terms with reduced earnings/profit or to take the risk that loss may be recovered through legal action Vessel resold or fixed at a profit [any completion risk?] exposure towards buyers/charterers financial strength of counterparty and exposure in case of bankruptcy is the proposal trustworthy or only the first of several renegotiation requests? what is the alternative to renegotiations (pest or cholera) right to terminate litigation takes time even if a good case bankruptcy court protection arrest of vessel, accounts, cargo or other assets forum shopping important 5

6 The domino effect of a collapsing market (cont.) Many blue chip companies are playing hard ball - how to call the bluff? only opportunistic counterparty or is he running out of cash? understand overall financial strength and other commitments is the new offer part of overall plan to save the company intelligence/advisors important equal treatment of owners/charterers? an alternative to force counterparty into court administrated work out proceedings? important with preventive quality control and contingency plans (plan B) Many creative proposals for new terms in S&P and CPs adjust to market rate but keep or split profit from market upturn? longer contract on lower rate use of bonds/credit as part payment termination fee defaulting new terms should rewind to original terms and liability (?) Is the market (including shareholders/board and lenders) expecting all means to be used in order to renegotiate or get out of S&P and CP contracts made at the high peak of the market? 6

7 ChartererHolding (guarantee?) ShipHolding (guarantee?) Building Contract - USD 100 mill. - 20/20/20/20/20-15 montsconstruction Charterer/Buyer (SPC) ShipOwner REDER (SPC) Shipyard Refund Guarantee Construction Financing 2.pr. Building Contract and Refund Guarantee - 1.pr. pant byggekontrakt 1.pr. Building Contract and - Pant Refund garanti Refund Guarantee - Pant T/C Bondholders USD 20 mill. Owners Bank USD 40 mill. Refund Bank 7

8 Renegotiation of Shipbuilding Contracts Reasons for renegotiations contract(s) not full financed financed but not able to satisfy drawing conditions (no contract breach of minimum value) market flex risk not to be underestimated resale failed -market collapse Shipyard not performing or in financial distress Assessment of negotiating position is it possible to take advantage of a strong legal position? important to asses worst case legal exposure (cost of getting out) the Shipyard may also have problems (financing and/or performance) Early warnings that the Shipyard may have problems (you may be lucky) financial strength/market information - stay informed and be prepared (site team important) lack of cooperation, information and reporting on progress conflicts and cooperation problems with class rescheduling of capacity to give priority to prior deliveries change order requests - force majeure notifications problems with subcontractors 8

9 Renegotiation of Shipbuilding Contracts (cont.) Exposure towards Shipyard in case renegotiations fails? not only to give up paid instalments Owner may have to pay its way out (underestimated exposure?) responsible for net direct economic loss, including currency and loss of profit on the contract indirect and consequential losses normally excluded Shipyard general duty to mitigate - sell the vessel in complete/incomplete state SPC or recourse to owner? Shipyard not obliged to terminate on basis of buyer s breach Any legal basis for threatening with termination? delay in Contractual Delivery Date plus permissible delay (180/270 days) delay in construction schedule not sufficient to terminate (unless expressly agreed) do not rely on an anticipated breach concept as under Norwegian law identified defects and non-compliance with performance criteria (beyond LDs) will give extensive rights to remedy Shipyard in financial distress - bankruptcy/debt negotiations other contract specific - failure to provide Refund Guarantees force majeure and total loss situations 9

10 Renegotiation of Shipbuilding Contracts (cont.) Negotiation strategy early dialogue and create trust proposal must be clear and convincing (cancellation, suspension, price reduction and/or delayed delivery) understand the Shipyards weak points, exposure and estimate of loss (resale of slot/long lead items, currency exposure) - Shipyard may be one of the biggest stakeholders build a case to create a win - win situation? creativity make it clear how the Shipyard may gain from a solution (alternative scenario may be worse) main driver may be to keep the Shipyard going long term show how part of a bigger restructuring/refinancing plan and other stakeholders contribution (may be conditional on renegotiated Shipbuilding Contract) if series of vessels, early deliveries may be saved if reduced price and cancellation of later vessels swapping of vessel type the Shipyard (if financially strong) may be a creative contributor to a solution (deferred payments/delivery, price reduction, sellers credit, equity participation etc) 10

11 Renegotiation of Shipbuilding Contracts (cont.) What happens if the Building Contract is terminated? dispute with the Shipyard regarding right to cancel may take years of litigation right to receive repayment of advances back plus interest no claim for loss of profit (if Shipyard in breach) step 1, claim against the Shipyard ( assuming not able to pay claim in full) step 2, claim against the Refund Guarantor (for amount not recovered for the Shipyard) step 3, claim against the uncompleted Vessel (if not covered under 1 and 2 - right to take possession/ownership?) Any risk for non payment under the Refund Guarantees? amount of the RG compared to aggregate of advance payments financial strength of Refund Guarantor bank or insurance company formal requirements for valid and enforceable guarantee SAFE registration survival clauses covering amendments and/or novation? on demand guarantee or subject dispute resolution jurisdiction and enforcement issues validity period and hopefully automatic extension in the event of litigation? 11

12 Renegotiation of Shipbuilding Contracts (cont.) What happens if the Shipyard becomes bankrupt? if Refund Guarantees not sufficient, the Owner may be better off by taking possession/ ownership normally no contractual right but some contracts with progressive title scheme difficult to secure progressive title rights against bankruptcy risk right to take delivery against payment of unpaid instalments? [minus the value of the remaining work?] what if the Vessel 95% ready only last 20% outstanding the alternative is that the value of the vessel goes into the bankruptcy estate and that Owner is only entitled to a dividend claim for the repayment of the advances [minus payment under the Refund Guarantees] very few jurisdictions allow for the Owner to take possession of the Vessel Norway - possible to mortgage Owners rights in Building Contract under the Liens/Maritime Act Maritime Act is not differentiating between building contract and vessel both may mortgaged conflict between rights of Shipyard creditors and Owners creditors in same asset legal situation unclear (separatist rett i skipet?) in any event, expect problems with unpaid subcontractors! 12

13 Renegotiation of Shipbuilding Contracts (cont.) Rights of lenders/bondholders with security in Shipbuilding Contract/RG no more extensive rights than the Owner (no protection if Shipyard bankrupt) no value if Shipbuilding Contract in default (notification and remedy rights?) no value unless willing and able to perform remaining obligations (pay up remaining instalments) step in very complicated and will require new/additional funding normally no right to sell the contract without the consent of the Shipyard 13

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