Navigating the liquidity squeeze
The COVID-19 virus and its countermeasures, the plunge in the oil price and extreme currency fluctuations are adding to the pain of a prolonged downturn in several shipping / offshore segments with imminent risk of liquidity loss. Decisive response is thus crucial to preserve value for the stakeholders involved.
In the short to medium term, the global lockdown, oil price war and general uncertainty may limit fixtures in the spot market or of longer charter contracts. The longer perspective will of course depend on the development of the global economy, but could also be impacted by oil companies and others being reluctant to sanction projects or commit to investments in the current environment. In general there is a notable risk that sources of income will be limited and that counterparties may fail on their payment obligations under existing charter contracts.
With an extremely fast changing business environment, industry players are well advised to closely monitor their liquidity position to be able to implement measures timely. Owners should review financing agreements and assess whether breaches are likely or even actual, and forecast when waivers may be required. Application and implementation of waivers may be time consuming - particularly in case of public debt instruments such as bonds. In some circumstances, waivers may not be sufficient and more radical measures, such as suspension of payments, may be required to preserve cash. Such measures obviously need to be addressed early if they are to be implemented on a consensual basis.
Even though solutions may be found with one creditor, the parties also need to be cautious of cross default provisions in other agreements. Typically the discussions start with the senior secured bank loans, but it is important to take note of default provisions in bond terms triggered by defaults or even discussions with creditors in other loan agreements. Such provisions may also be found in some charter agreements, performance parent company guarantees and similar.
On the chartering side there is a risk that the financial situation of the parties may impact their contractual performance. Breach of financial covenants in a parent company guarantee may entitle a charterer to terminate and get out of a charter contract with good rates for the owner. Issues with the ability or willingness of charterers to make payments may entitle owners to get out of charter contracts, or may call for proactive arrangements to see charterers through the immediate crisis.
In sum it is very sensible to early prepare a "fact book" for the liquidity squeeze summarising the company's liquidity forecast and the contractual position under financing and chartering arrangements. Having a good overview at the outset is required to make the right decisions in the immediate future.
Piloted by the government?
The Norwegian government has implemented various support schemes in response to the COVID-19 crisis, including a government loan guarantee scheme for new bank loans to small- and medium-sized businesses and reintroduction of the governmental bond fund. Many owners are however too large to qualify for the former, and the latter may be of less relevance for shipping / offshore companies. On 24 March 2020 the Norwegian Shipowners' Association sent a letter to the Norwegian government suggesting additional measures which includes
- temporary arrangement with new loans for working capital or payment deferrals from the Norwegian export credit agencies (GIEK and Eksportkreditt),
- that the new government loan guarantee scheme mentioned above are also made available for larger businesses,
- a reimbursement scheme for costs and
- government backing of the travel guarantee arrangement (Reisegarantifondet).
The Norwegian government announced today that they will introduce a cash benefit scheme under which they will cover a share of the fixed costs for businesses having had a significant reduction in their earnings following the COVID-19 outbreak and its countermeasures. The arrangement will initially be in place for a period of two months and it is estimated that the scheme will deploy NOK 10 – 20 billion per month. The scheme has a broad scope and is not directed towards specific industries, but businesses within the oil industry and international maritime transport are expressly excluded in the proposal. It has also been indicated that business that have been required to shut down by the government will receive a higher level of compensation under the scheme. The details of the scheme are still under development and more details will be presented next week. It remains to be seen whether businesses in the shipping / offshore sector will in practice be able to benefit from the scheme.
Piloted by lenders?
The liquidity squeeze may challenge an owners' ability to meet financial covenants in their existing financing agreements or more fundamentally challenge their ability to meet their payment obligations as they fall due. In the current environment owners may need to result to traditional arrangements with its existing lenders to deal with these issues and preserve liquidity:
- Financial covenants relief: If the immediate problem for the owner is its ability to satisfy a financial covenant, such as minimum cash, the easiest way to deal with this is of course to temporary waive or completely remove the covenant.
- New credit facility: If fresh cash is needed, the owner could seek commitments to support the business through the crisis from existing lenders, shareholder or third parties. In order to induce such commitments it could be argued that the new credit providers should be allowed super priority in the assets of the company. The existing lenders may be reluctant to agree to such arrangement but, if they do, it will also be necessary to put in place an inter-creditor arrangement with the new credit providers.
- Postpone amortisations: As a substantial part of the cash burn for the company may be payment of amortisations on its existing indebtedness, an effective way to preserve liquidity will be to postpone amortisations to a later date or (preferably) the final maturity date. To the extent that the existing credit agreement requires payment to a blocked debt service retention account or similar on a monthly basis, relief from these payments should also be requested. Introduction of "cash sweep" where the liquidity in excess of a certain threshold is used to make repayments of the loan may be an efficient mechanism to allow amortisation whilst at the same time preserving liquidity.
- PIK interest: Cash interest payments may also be a significant cash burn for companies in the current circumstances. A typical relief would be to satisfy the interest as "payment-in-kind" by adding the interest to the principal amount of the loan. Such PIK interest is often allowed only for a certain period and/or at the option of the company.
- Release of funds from blocked accounts: If the liquidity challenges lasts for a prolonged period the company may be forced to request release of funds from accounts blocked in favour of existing lenders in order to meet operational expenses. These funds will typically be set aside for other purposes, but it may still be easier for the existing lenders to allow release of these funds than to provide new funding as suggested in (1) above.
Since the purpose of the discussions with the existing lenders is to preserve liquidity, it may be difficult to offer any cash consideration for the concessions mentioned above. Monetary consideration may however be offered in form of PIK fees or increased cash or PIK interest. Other concessions may be stricter covenants and to offer security over other assets that may be available from the company or its shareholders.
Piloted by shareholders?
An obvious question for a company in financial difficulties is whether its shareholders can salvage the situation by injecting further equity. This will often also be a requirement for existing lenders to be part of the solution. The shareholders may however not be willing to provide further equity unless they are fairly certain that this will stabilise the company and preserve their existing investment. Even if the shareholders are willing to provide further cash, they may not be able to do so after years of downturn in the industry. Eventually the stress on liquidity may force the company to raise additional funding from new investors, who might end up taking over the company.
Piloted by suppliers?
Suppliers of goods and services are generally unsecured creditors of the company. They will therefore normally be reluctant to grant further credit than what is already conferred through their general payment terms. Even though the security position of the suppliers may not be favourable, they do have some leverage in that they can initiate liquidation or bankruptcy proceedings if their claim is not paid on the due date. Claims for payment of goods or services provided may also be "maritime claims" thereby allowing the claimant to arrest the vessel, and in some jurisdiction (such as the US) the claimants may even have a maritime lien on the vessel. It may however be possible to agree arrangements whereby payment deferrals are agreed with (substantial) suppliers, for example against a parent company guarantee or other security that may be available.
Summary and conclusion
It seems like we currently are in the midst of a perfect storm, and we expect several shipping and offshore companies will struggle with their liquidity positions in the weeks and months to come. There are some possibilities to manage the situation, but they all require challenging discussions with the stakeholders involved. There is unfortunately no quick fix and every situation requires bespoke solutions. It is however advisable that you write your "fact book" and initiate a dialogue early in order to have time to find good solutions.