The vast majority of shipping finance has, for at least the past 50 years, been concluded on the basis of specific asset mortgages, assignments of their earnings and insurances, and some form of personal or corporate guarantees from some management or holding company.
These ship mortgages and earnings assignments have often been cross-collateralised across a number or fleet of ships. The documentation has been of a relatively standard form enhanced by pages of legal jargon, and normally governed by a national legal authority, such as British Law or another with a strong maritime history and the judiciary to support that.
The ships themselves are almost always owned in single-ship companies with minimal capital, registered and therefore flagged in established open registries in Liberia, Panama, The Marshall Islands etc.
The ships will usually be operated or managed by a separate company either owned by the principals in the deal or by an independent manager.
In the event of the borrower failing to pay interest or principal in accordance with the original loan agreement, the lender has the documented right to proceed under the national laws of the mortgage to foreclose the loan, seize the ship and separately pursue the principals under their corporate or personal guarantees.
This well tried and numerously tested system has been used for decades, and rarely challenged other than for the validity of the default claims.
This was true until some shipowners or wannabe shipowners came to New York and raised money in the public and private-equity markets.
The volume of legal documentation increased drastically along with the legal fees and it tried to create companies more in line with US corporate structures, despite the fact that they had little if any value beyond the values of the ships, less the debt attached to them.
The result, following the collapse of nearly all shipping markets, is that the laws of US corporate bankruptcy have invaded the shipping industry under the guise of reconstruction. This even where the companies have little or no base in the US, have never filed corporate of fiscal tax reports in the US and with few, if any, of the creditors in the US.
Welcome to Chapter 11 of the US bankruptcy code.
Where a company with numerous shipowning subsidiaries, banks in various countries and supplier creditors around the world, seeks to reorganise its debt and capital structure, Chapter 11 provides an excellent legal forum through which to formalise this, but it must be pre-arranged before going to court. To file without a plan will make the whole situation more difficult to negotiate in court and vastly more costly in legal fees for all parties.
The numerous reconstructions of airlines in the US have shown how effective this system can be, but the majority of the aircraft are owned by leasing companies and the same is not true for shipping.
The only recent shipping Chapter 11s that have been successfully restructured the debtors were those that were pre-packed and had strong supporting new equity. Others such as Marco Polo and Omega have been a disaster and the latest, Today Makes Tomorrow (TMT), has all the signs of being even more disastrous.
Some aggressive US law firms, of the ambulance-chasing variety, have sought to bring financially bankrupt shipping companies, with minimal or newly created US presence, to the US courts on the pre-text of bringing their bankers and creditors to their knees by overriding their existing security documents and portraying the debtor as some sort of innocent victim who should be entitled to continue to run his business despite the fact that the debts vastly exceed the asset values and the revenues barely cover the operating overheads.
So far the only winners have been the lawyers.
