In tonight’s Google search
for the latest bankrupt company, I ran across this Bloomberg article about a
shipping company name Genco, that just filed for Chapter 11. The company is
owned by a former Drexel Burnham investment banker, New York socialite/failed
shipping baron, Peter Georgiopoulos.
The article itself wasn’t
very interesting or illuminating. The
thrust was that shipping companies, Genco included, have fallen on hard times
because they bought too many big boats in 2008, and now the charter rates they
get paid to carry goods aren’t high enough to cover their expenses.
What caught my eye was the
following paragraph:
“Georgiopopulos’s General Maritime Corp., which operates in more
than 230 ports in more than 70 countries, filed for bankruptcy in November
2012. Its restructuring gave Oaktree Capital Management LP most of the
company’s new stock.”
For some reason, this
reminded me of something that stuck with me from Professor Hunt’s basic finance
class: “bankruptcy simply shifts the ownership of the firm from equity holders
to debt holders without changing the total value to all investors.” (Berk &
DeMarzo, Corporate Finance, pg. 512)
I started to wonder who Oaktree Capital was and how they ended
up the owners of General Maritime.
Specifically, I wondered if Oaktree had become an equity owner in this
business not because of some unlucky market turn, but intentionally. This turned out to be an interesting line of
inquiry.
Oaktree is a private equity fund that invests in “less efficient
markets and alternative investments.” (http://www.oaktreecapital.com) According to
another Reuters article, Oaktree “invested about $175 million as part of
General Maritime’s restructuring. Oaktree had lent General Maritime a $200
million loan in May 2011 year prior to the company’s Chapter 11 filing. That
loan was converted into equity once General Maritime emerged from bankruptcy.
Oaktree now owns 98 percent of General Maritime’s stock.” (http://www.reuters.com/article/2012/07/13/us-generalmaritime-idUSBRE86C10220120713)
As it turns out, the other
creditors had objections to the way the deal went down, and the Bankruptcy judge
was not entirely comfortable with the transaction either. According to another
article, General Maritime had negotiated the loan and Oaktree’s investment
before filing for bankruptcy. The Bankruptcy judge questioned expense
reimbursements and the size of the breakup fee for Oaktree should a higher
bidder emerge to buy the company. The judge said, “This has all the hallmarks
of a loan-to-own structure…Even if the committee is satisfied, I’m not entirely
satisfied.” (http://mobile.bloomberg.com/news/2011-12-15/general-maritime-reaches-agreement-with-creditors-on-75-million-loan.html)
Amazingly, Georgiopopulos was kept on to run the company, and
unsurprisingly this only led to further speculation that Oaktree and
Georgiopopulos had colluded to bilk the unsecured creditors.
I’m not entirely clear how this whole deal went down, and what
exactly happened to the other creditors. What I took away is that hedge funds
that specialize in distressed companies may find bankruptcy a useful tool to
muddy the waters of fiduciary duty, brush aside shareholder rights that would
normally be protected in an acquisition outside bankruptcy, and to otherwise bypass
a lot of the problems that I had to learn about in M&A and Securities
Regulations classes. Not sure if that’s a good or a bad thing…
See also:
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