10 January 2013

by Tom Leander 

Debtor in possession deal sets precedent for country’s maritime bankruptcies 

SC LOWY, a Hong Kong-based independent fixed income specialist, has underwritten an $85m debtor in possession deal for Korea Line, it emerged today.

The money will be used to provide working capital to operate the remaining ships in Korea Line’s fleet, which was pared down to 60 vessels — mostly dry bulk — from about 140 ships, following Korea Line’s court receivership in 2011.

Korea Line filed for bankruptcy in 2011 in one of the world’s most painful shipping company collapses since the financial crisis started five years ago.

The deal was signed quietly on December 31, but was only announced by SC Lowy today. It appears to have set the groundwork for a bidding race to buy Korea Line that emerged last week, with five domestic bidders joining a contest to be decided on January 22.

The financing is the first major cash injection the company has secured while in receivership and is only the second debtor in possession financing in South Korea since a law was passed allowing the practice two years ago.

Seong-jin Kang, an analyst for Tongyang Securities in Seoul, confirmed to Lloyd’s List earlier this week that two South Korean companies, SK Group and CJ Group, are preparing a bid for Korea Line.

SK Group is the parent of SK Shipping, an owner of nine very large crude carriers.

CJ Group has a logistics subsidiary, CJ GLS, involved in warehousing and air freight forwarding.

Several other companies, including Busan-based private company Dong-A, and two South Korean financing firms are reportedly in the bidding.

Korea Line has about $1.5bn in assets and $70m in equity. SC Lowy was the exclusive adviser on the restructuring that led to the DIP financing, which involved negotiating, executing and settling multiple charter claims against the company from international counterparties.

“This was an ambitious transaction, given the challenges facing the shipping industry, the different classes of trade creditors, as well as the multiple locations of those many creditors,” said Soo Cheon Lee, chief investment officer of SC Lowy.

“However, we were able to transform and reposition the company to deliver considerable benefits to employees, shareholders and creditors,” he said.

Debtor in possession financing is provided for distressed companies under receivership.

The debt is generally ranked as senior to the company’s other issued debt and equity. DIP financing is common in shipping bankruptcy cases in the US. It was first allowed in Japan in 2008, but is a relatively new process in South Korea.

In an exclusive interview with Lloyd’s List, Mr Lee said that SC Lowy entered the creditor negotiation process following Korea Line’s bankruptcy when it purchased an undisclosed stake in the company. “It’s a substantial amount,” said Mr Lee.

Lowy’s businesses include trading in illiquid debt on the secondary market, offering loans to distressed companies and restructuring advisory.

Mr Lee said that SC Lowy began negotiations more than six months ago and that the process involved delicate negotiations with counterparties with vessels chartered out to Korea Line on long-term contracts.

Ultimately, the option of accepting a DIP-style workout in which a substantial cash infusion was injected into the company was preferable to vying against other creditors in a series of lengthy, contentious arbitrations.

“Counterparties were looking for liquidity that will help operate the ships and stabilise the company,” said Mr Lee.

The counterparties now face the prospect of an acquisition by a deep-pocketed chaebol — or group business similar to a Japanese kiretsu — such as SK Group of CJ Holdings buying the company with deep enough pockets to make Korea Line’s creditors whole.

Mr Lee also said that the process meant acquainting the bankruptcy court with the debt in possession financing, a practice he believes will be repeated in South Korea if the Korea Line deal creates a successful outcome for the company and its creditors.

Mr Lee said that Lowy was now seeking to expand its lending to Asian owners amid a withdrawal of financing globally by international ship finance banks.

“I know that owners will be looking for loans at [London interbank offered rate] plus 200 to 300 [basis points], but we think they will have difficulty finding them.”

He said that Lowy’s lending rates would be in the “double digits”, similar to the kind of return that private equity companies expect from stakes in companies.

Mr Lee would not comment on the terms of the Korea Line loan. The press in South Korea has reported an interest rate of 20% based on information from a company official.

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