Priya and Harrison,
I hope you are both well. I am writing in connection with the ongoing negotiation of the Credit Agreement for the proposed $150,000,000 Senior Secured Revolving Credit Facility among Thalassa Shipping & Logistics SA (as Borrower), the Guarantors party thereto, Meridian Atlantic Bank, National Association (as Administrative Agent), and the Lenders party thereto. As you know, we represent Thalassa in this transaction.
Following our delivery of the Borrower's second markup of the Credit Agreement on May 8, and in advance of the negotiation call currently scheduled for Monday, May 22, the Borrower wishes to set forth its proposed financial covenant levels together with supporting rationale for each. As reflected in the issues list and negotiation matrix circulated on May 15, the financial covenant package remains among the key open business and legal points, and we thought it would be productive to present the Borrower's positions in writing ahead of the call so that your team and the Lenders have an opportunity to consider them in advance.
**I. Proposed Financial Covenant Levels**
**(a) Maximum Consolidated Net Leverage Ratio**
The Borrower proposes a maximum Consolidated Net Leverage Ratio of **4.50:1.00**, stepping down to **4.00:1.00** commencing on the third anniversary of the Closing Date (i.e., approximately mid-2026, based on the anticipated mid-2023 closing and the proposed five-year maturity extending to approximately mid-2028).
This proposal is well supported by Thalassa's current financial profile. Based on Thalassa's FY2022 audited financial statements (audited by Hawthorne & Garrett LLP), the company reported EBITDA of approximately $145 million on revenue of approximately $620 million. At a full draw of the $150 million Facility, and assuming no other funded indebtedness netted for unrestricted cash, the resulting net leverage ratio would be approximately 1.03x—providing substantial cushion against the proposed 4.50x threshold. The step-down to 4.00x in Year 3 reflects the Borrower's expectation of continued deleveraging as charter revenues stabilize and the company executes on its medium-term business plan.
We would also note that the existing Harborstone facility (Credit Agreement dated November 15, 2018, as amended by the First Amendment dated June 30, 2020 and the Second Amendment dated March 1, 2022) contained a maximum net leverage ratio of 5.00:1.00 with no step-down provision. The Borrower's proposal here is meaningfully tighter than the existing covenant and reflects a constructive approach to providing the Lenders with enhanced credit protection under the new facility.
**(b) Minimum Consolidated Interest Coverage Ratio**
The Borrower proposes a minimum Consolidated Interest Coverage Ratio of **3.00:1.00**.
FY2022 EBITDA of approximately $145 million against current interest expense levels provides significant headroom against this threshold. Given the proposed pricing grid of SOFR + 225–325 bps, even assuming a maximum draw of $150 million at the high end of the applicable margin grid (SOFR + 325 bps), annualized interest expense would remain well within coverage at this level. The proposed 3.00x minimum is consistent with market practice for shipping finance revolving credit facilities of this size and credit quality.
**(c) Minimum Liquidity**
The Borrower proposes a minimum Liquidity covenant of **$30,000,000**, with Liquidity defined to include unrestricted cash and cash equivalents plus available and undrawn commitments under the Revolving Credit Facility.
This level provides an adequate liquidity buffer while appropriately reflecting the seasonal working capital fluctuations inherent in Thalassa's integrated logistics and chartering operations. We would note that the Facility itself, when undrawn or partially drawn, contributes to the available commitment component of this test, and that the incremental $25 million in facility capacity ($150 million proposed versus the $125 million existing Harborstone facility) further supports the Borrower's overall liquidity position.
**(d) Maximum Capital Expenditures**
The Borrower proposes a maximum Capital Expenditures covenant of **$80,000,000** per fiscal year.
As you are aware, Thalassa operates a fleet of 40 vessels (28 dry bulk carriers and 12 tankers) with a total fleet value of approximately $1.2 billion based on recent appraisals. The proposed $80 million annual cap is designed to accommodate routine drydocking, scheduled maintenance capital expenditures, and selective fleet renewal without requiring individual lender consent for each expenditure, and is supported by Thalassa's projected FY2023 capital expenditure budget and historical spending patterns.
We acknowledge that the Lenders may wish to discuss whether the Capital Expenditures covenant should include a carry-forward and/or carry-back mechanism for unused amounts. The Borrower is open to discussing a reasonable carry-forward provision and looks forward to hearing the Lenders' views on appropriate parameters.
**II. Collateral Context**
We believe the proposed financial covenant package should be evaluated in the context of the robust collateral package being offered by the Borrower. As discussed, the collateral package includes first-priority ship mortgages on 18 designated vessels (the "Mortgaged Vessels") with an aggregate appraised fair market value of approximately $780 million (based on appraisals from Seastone Maritime Advisors Ltd., which are expected to be delivered in July), subject to a minimum collateral coverage ratio of 140% of outstanding Facility obligations. At a full draw of $150 million, the minimum required collateral value would be $210 million—well below the anticipated $780 million in mortgaged vessel value—providing a substantial collateral cushion.
The collateral package further includes: (i) assignment of earnings accounts; (ii) assignment of hull & machinery and P&I insurance (placed through Trident Marine Insurance Brokers Ltd.); (iii) share pledges over the vessel-owning subsidiaries, including Thalassa Dry Bulk Holdings Ltd., Thalassa Tanker Operations Ltd., and Thalassa Logistics International Ltd.; and (iv) assignment of time charters with remaining terms of 12 months or more. This comprehensive security package, together with the financial covenants proposed above, provides the Lenders with meaningful and multi-layered credit protection.
**III. Testing and Reporting Mechanics**
The Borrower proposes that all financial covenants be tested on a quarterly basis as of the last day of each fiscal quarter, calculated on the basis of trailing four-quarter (last twelve months) financials. Compliance certificates would be delivered within the timeframe specified in the reporting covenants section of the Credit Agreement.
**IV. Projected Performance**
Without disclosing proprietary projections in detail at this stage, we can note that Thalassa's management, including CEO Elena Vassiliou and CFO Dimitrios Pantazis, expects FY2023 revenue and EBITDA to be in line with or modestly above FY2022 levels, reflecting stable charter rates in the dry bulk segment and improving tanker market conditions. The proposed covenant levels have been set to provide appropriate headroom against both historical and projected performance while still affording the Lenders meaningful credit protection.
**V. Next Steps**
We look forward to discussing these proposals with you and the Lenders on the May 22 call. In the interim, the Borrower reserves the right to propose adjustments to the underlying definitions in the Credit Agreement (including, without limitation, the definitions of "Consolidated Net Debt," "Consolidated EBITDA," and "Capital Expenditures") that may affect covenant calculations; as you will have seen, our definitional comments have been addressed in the second markup delivered on May 8.
If possible, we would welcome the Lenders' counter-proposal on covenant levels in advance of Monday's call, as we believe that would facilitate a more productive discussion. We are also happy to provide any additional financial data or analysis that may be helpful to the Lenders' review of these proposals.
Please do not hesitate to reach out if you have any questions in the meantime. We look forward to speaking on Monday.
Best regards,
Sophie Tremblay Senior Associate
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