PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Park Avenue New York, New York 10022 Telephone: (212) 555-8400 Facsimile: (212) 555-8401 www.calderwoodharkness.com
March 15, 2023
MEMORANDUM
Matter Number: 1044-00002
From: Sophie Tremblay, Senior Associate, Banking & Finance Daniel Obi, Associate, Banking & Finance
To: Aris Komnenidis, General Counsel, Thalassa Shipping & Logistics SA Dimitrios Pantazis, CFO, Thalassa Shipping & Logistics SA
Re: Review and Analysis of Mandate and Fee Letter dated February 14, 2023 between Thalassa Shipping & Logistics SA and Meridian Atlantic Bank, National Association
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP ("C&H") for the sole use of Thalassa Shipping & Logistics SA and its officers and directors. This memorandum constitutes attorney work product and is protected from disclosure under applicable privileges and doctrines. It should not be forwarded to, shared with, or disclosed to any third party without the prior written consent of C&H.
I. Executive Summary
The purpose of this memorandum is to provide Thalassa Shipping & Logistics SA's ("TSL" or the "Borrower") General Counsel and Chief Financial Officer with a comprehensive analysis of the Mandate and Fee Letter dated February 14, 2023 (the "Mandate Letter") executed between TSL and Meridian Atlantic Bank, National Association ("Meridian Atlantic," "MAB," or the "Arranger"). A copy of the Mandate Letter is attached hereto as Appendix A.
Pursuant to the Mandate Letter, Meridian Atlantic has been appointed to serve as Sole Lead Arranger, Sole Bookrunner, and Administrative Agent for a proposed $150,000,000 senior secured revolving credit facility (the "Facility"). The Facility is intended to serve two principal purposes: first, to refinance TSL's existing $125,000,000 revolving credit facility with Harborstone National Bank (the "Existing Facility"), which is governed by the Credit Agreement dated November 15, 2018, as amended by the First Amendment dated June 30, 2020 and the Second Amendment dated March 1, 2022 (collectively, the "Existing Credit Agreement"); and second, to provide TSL with an incremental $25,000,000 of borrowing capacity for general corporate purposes and working capital needs.
The refinancing is time-sensitive. The Existing Facility matures on November 15, 2023, and TSL must ensure that the new Facility closes well in advance of that date to avoid any disruption to its operations or liquidity position. As discussed in greater detail below, we recommend that TSL target a closing date no later than September 2023 to provide an adequate cushion against unexpected delays.
Meridian Atlantic's external legal counsel for this transaction is Whitmore, Jennings & Alcott LLP ("WJA"), located at 51 West 52nd Street, New York, New York 10019. The WJA team is led by Harrison Caldwell, Partner, and Priya Subramanian, Associate.
This memorandum covers the following topics:
1. Key Commercial Terms of the Mandate Letter — an overview of the proposed Facility structure, pricing, collateral package, financial covenants, and guarantor requirements as set forth in the Mandate Letter;
2. Fee Structure — a detailed analysis of the upfront arranging fee, administrative agent fee, and syndication fee mechanics, together with an assessment of their reasonableness relative to current market norms;
3. Syndication Strategy and Market Flex Provisions — a review of the proposed syndicate composition, the syndication process, and the market flex provisions (including the absence of a reverse flex mechanism);
4. Conditions, Exclusivity, and Expense Reimbursement — an analysis of the conditions to Meridian Atlantic's commitments, the exclusivity period, expense reimbursement obligations, and termination provisions; and
5. Key Observations and Recommendations — a summary of our principal recommendations, including specific action items for TSL and proposed next steps for the C&H engagement team.
We have endeavored to flag the issues that are most consequential for TSL from both a legal and commercial perspective. While many of the Mandate Letter's terms are broadly consistent with current market practice for syndicated shipping finance revolvers, several provisions warrant negotiation and refinement as the parties move toward execution of the definitive credit agreement and ancillary documentation. Our specific recommendations are set forth in Section IX of this memorandum.
II. Background
A. The RFP Process
On January 18, 2023, TSL issued a request for proposals (the "RFP") to three financial institutions, seeking competitive proposals for the refinancing of the Existing Facility. The RFP outlined TSL's principal objectives for the refinancing, including: (i) upsizing the revolving commitment from $125,000,000 to at least $150,000,000; (ii) transitioning from LIBOR-based pricing to a SOFR-based benchmark; (iii) extending the maturity of the facility by at least five years; and (iv) optimizing the collateral structure to reflect recent additions to TSL's fleet. Meridian Atlantic submitted its proposal on February 7, 2023, and following a period of evaluation and negotiation, was selected as Lead Arranger. The Mandate Letter was executed on February 14, 2023.
B. TSL Corporate Overview
TSL is a Société Anonyme (Ανώνυμη Εταιρεία) organized and existing under the laws of the Hellenic Republic, with its registered office and principal place of business located at 14 Akti Miaouli, Piraeus 185 35, Greece. TSL's Greek Tax Identification Number (Αριθμός Φορολογικού Μητρώου, or AFM) is 094728361, and its General Electronic Commercial Registry (ΓΕΜΗ) Registration Number is 143209501000.
TSL's principal business is the ownership and operation of a fleet of 40 vessels, consisting of 28 dry bulk carriers and 12 tankers. TSL provides integrated maritime logistics services across the Mediterranean, Black Sea, and transatlantic trade routes, serving a diversified client base that includes major commodity trading houses, industrial shippers, and state-owned enterprises.
TSL's key financial metrics for fiscal year 2022 are as follows:
• Revenue (FY2022): approximately $620 million
• EBITDA (FY2022): approximately $145 million
• Total Fleet Value (Q1 2023 Appraisal): approximately $1.2 billion
TSL's senior management team includes:
• Nikolaos Karadimitriou — Founder & Chairman of the Board
• Elena Vassiliou — Chief Executive Officer
• Dimitrios Pantazis — Chief Financial Officer
C. Meridian Atlantic Engagement
Following the RFP process, TSL selected Meridian Atlantic as the Sole Lead Arranger for the Facility. The Mandate Letter was executed on February 14, 2023. Within Meridian Atlantic, the transaction is led by the Shipping Finance Division, which is headed by Marcus Whitfield, Managing Director. The day-to-day relationship is managed by Catherine Hsiang, Director, Shipping Finance.
D. Calderwood & Harkness Engagement
TSL engaged Calderwood & Harkness LLP to serve as its legal counsel for the refinancing transaction. The C&H engagement letter was signed on March 10, 2023, and the matter was formally opened on March 13, 2023, under Matter Number 1044-00002. An initial retainer deposit of $75,000 was received on March 15, 2023. The C&H team responsible for this matter consists of Sophie Tremblay, Senior Associate, Banking & Finance, and Daniel Obi, Associate, Banking & Finance.
III. Summary of Key Commercial Terms in the Mandate Letter
Set forth below is a summary and analysis of the key commercial terms reflected in the Mandate Letter. We note that the Mandate Letter is not a definitive credit agreement and that many of these terms will be subject to further negotiation during the documentation process. Nonetheless, the Mandate Letter establishes the foundational framework for the Facility, and it is important that TSL be comfortable with these terms before proceeding to the term sheet and credit agreement stages.
A. Facility Overview
The Mandate Letter contemplates a senior secured revolving credit facility in an aggregate principal amount of $150,000,000. The key structural terms of the proposed Facility are as follows:
Facility Type. The Facility is structured as a senior secured revolving credit facility. Under a revolving structure, TSL may borrow, repay, and reborrow amounts up to the aggregate commitment during the term of the Facility, subject to compliance with applicable conditions precedent. This structure is well-suited to TSL's operational needs, as it provides maximum flexibility to manage working capital, fund vessel operating expenses, and address seasonal cash flow fluctuations inherent in the shipping business.
Facility Amount. The aggregate commitment under the Facility is $150,000,000, representing an increase of $25,000,000 over the Existing Facility's $125,000,000 commitment.
Sublimits. The Mandate Letter provides for the following sublimits within the aggregate $150,000,000 commitment:
• Letters of Credit Sublimit: $20,000,000 — This sublimit permits TSL to request the issuance of standby or commercial letters of credit, which will reduce availability under the revolving commitment on a dollar-for-dollar basis. This sublimit should be adequate for TSL's current letter of credit needs, which we understand are primarily related to port performance guarantees and certain charter party obligations.
• Swingline Loan Sublimit: $15,000,000 — The swingline sublimit provides TSL with access to short-term borrowings (typically one to seven business days) from the swingline lender (expected to be Meridian Atlantic in its capacity as Administrative Agent), which are subsequently funded by the revolving lenders through participation purchases. Swingline availability is a useful feature for managing intra-month cash flow needs.
Purpose. The stated purpose of the Facility is twofold: (i) to refinance all outstanding obligations under the Existing Facility with Harborstone National Bank, and (ii) to provide incremental borrowing capacity of $25,000,000 for general corporate purposes and working capital.
Proposed Maturity. The Facility will have a maturity of five years from the closing date. Based on the currently anticipated closing timeline of Q2/Q3 2023, this would yield an approximate maturity date in mid-2028. This represents a meaningful improvement over the Existing Facility, which was originally a five-year facility maturing in November 2023. We note that the five-year tenor is standard for revolving credit facilities in the shipping sector and aligns with the useful economic lives of the Mortgaged Vessels.
Governing Law. The Mandate Letter specifies that the definitive credit agreement and ancillary documentation will be governed by the laws of the State of New York. This is customary for U.S. dollar-denominated syndicated credit facilities and is consistent with the governing law of the Existing Facility.
B. Pricing
The Mandate Letter sets forth the following pricing terms for the Facility:
Interest Rate. Borrowings under the Facility will bear interest at a rate per annum equal to the Secured Overnight Financing Rate ("SOFR") plus an applicable margin. The applicable margin will range from 225 basis points to 325 basis points, determined by reference to a leverage ratio-based pricing grid. The specific leverage ratio thresholds that trigger step-ups and step-downs in the applicable margin will be set forth in the definitive credit agreement and associated term sheet.
It is important to note the comparison between the proposed pricing and the pricing under the Existing Facility. The Existing Facility bears interest at LIBOR plus a flat margin of 250 basis points (with no grid mechanism). The transition from LIBOR to SOFR introduces a modest structural adjustment. As of the date of this memorandum, the SOFR-LIBOR spread adjustment (as recommended by the Alternative Reference Rates Committee) is approximately 11.448 basis points for one-month SOFR and approximately 26.161 basis points for three-month SOFR. Accordingly, the effective floor of the proposed pricing grid (SOFR + 225 bps) is modestly tighter than the Existing Facility's flat LIBOR + 250 bps pricing, assuming TSL maintains leverage within the lowest tier of the grid. Conversely, the ceiling of the grid (SOFR + 325 bps) represents a meaningful widening relative to the Existing Facility and would apply only in scenarios where TSL's leverage ratio increases to the highest tier.
We will provide a more detailed pricing comparison once the specific pricing grid tiers are established in the term sheet.
Commitment Fee. TSL will pay a commitment fee of 0.375% per annum on unused commitments under the Facility. The commitment fee steps down to 0.25% per annum when utilization exceeds 50% of total commitments (i.e., when outstanding loans plus letter of credit exposure exceed $75,000,000). This utilization-based step-down is a borrower-favorable feature that is increasingly common in the syndicated lending market and rewards TSL for maintaining higher utilization levels.
Default Rate. Following the occurrence and during the continuance of an event of default, all outstanding obligations under the Facility will bear interest at a rate equal to SOFR plus the then-applicable margin plus an additional 200 basis points. This is a standard default rate premium.
C. Proposed Collateral Package
The Mandate Letter contemplates a comprehensive security package designed to provide the Facility lenders with first-priority liens on a significant portion of TSL's fleet and associated assets. The proposed collateral package consists of the following elements:
Ship Mortgages. TSL will grant first-priority ship mortgages (or, where applicable, preferred mortgages under the laws of the relevant flag state) on 18 designated vessels (the "Mortgaged Vessels") selected from TSL's total fleet of 40 vessels. The specific vessels to be designated as Mortgaged Vessels will be identified in the definitive credit agreement, taking into account vessel age, value, charter employment, and flag state. We understand from preliminary discussions with Meridian Atlantic that the 18 Mortgaged Vessels are expected to include a mix of dry bulk carriers and tankers, with an aggregate fair market value substantially in excess of the minimum collateral coverage requirements.
Collateral Coverage Ratio. The Mandate Letter requires TSL to maintain a minimum collateral coverage ratio of 140% of outstanding Facility obligations at all times. At a full draw of $150,000,000, this translates to a minimum required collateral value of $210,000,000. The collateral coverage ratio will be tested periodically (typically semi-annually or annually) based on independent vessel appraisals. If the collateral coverage ratio falls below the minimum threshold, TSL will be required to either (i) provide additional vessel collateral, (ii) prepay a portion of the outstanding Facility obligations, or (iii) deposit cash collateral in an amount sufficient to cure the deficiency, in each case within a specified cure period.
Given that TSL's total fleet is valued at approximately $1.2 billion and the 18 Mortgaged Vessels are expected to represent a meaningful subset of that value, the 140% coverage ratio should be comfortably achievable under current market conditions. However, it is important to note that vessel values in the shipping sector are inherently cyclical and can experience significant volatility. TSL should monitor vessel values closely and assess the risk of a collateral shortfall under adverse market scenarios.
Assignment of Earnings. TSL will assign to the Collateral Agent (for the benefit of the Facility lenders) all earnings accounts associated with the Mortgaged Vessels. This is a standard feature of ship finance security packages and ensures that the lenders have a priority claim on charter hire and freight income generated by the Mortgaged Vessels.
Assignment of Insurance. TSL will assign to the Collateral Agent all hull and machinery ("H&M") insurance and protection and indemnity ("P&I") insurance relating to the Mortgaged Vessels. The lenders will be named as loss payees on the H&M policies and as additional assureds on the P&I entries. We will coordinate with TSL's insurance broker, Trident Marine Insurance Brokers Ltd., to ensure that all insurance assignments and endorsements are in proper form.
Pledge of Equity Interests. TSL will pledge 100% of the equity interests in each vessel-owning subsidiary that owns a Mortgaged Vessel. This is a standard feature of ship finance security packages and provides the lenders with step-in rights to take control of vessel-owning subsidiaries upon enforcement.
Assignment of Charters. TSL will assign to the Collateral Agent all time charters relating to the Mortgaged Vessels that have remaining terms of 12 months or more. This assignment provides the lenders with a direct interest in the contracted revenue streams of the Mortgaged Vessels and enhances the cash flow visibility of the collateral package.
Collateral Agent / Security Trustee. The proposed Collateral Agent and Security Trustee for the Facility is Pinnacle Trust & Agency Services Inc., with offices at One Liberty Plaza, 44th Floor, New York, New York 10006. Pinnacle is a well-known agency services provider with extensive experience in ship finance transactions and is an acceptable counterparty for this role.
D. Proposed Financial Covenants
The Mandate Letter sets forth the following financial covenants, which will be incorporated into the definitive credit agreement:
Maximum Consolidated Net Leverage Ratio. TSL will be required to maintain a maximum consolidated net leverage ratio (defined as the ratio of consolidated net debt to consolidated EBITDA) of 4.50:1.00, stepping down to 4.00:1.00 beginning in Year 3 of the Facility. Based on TSL's FY2022 EBITDA of approximately $145 million, a leverage ratio of 4.50x would permit maximum consolidated net debt of approximately $652.5 million, which provides meaningful headroom relative to the proposed Facility size.
Minimum Consolidated Interest Coverage Ratio. TSL will be required to maintain a minimum consolidated interest coverage ratio (defined as the ratio of consolidated EBITDA to consolidated interest expense) of 3.00:1.00. This is a standard covenant level for investment-grade and near-investment-grade shipping credits.
Minimum Liquidity. TSL will be required to maintain minimum liquidity of $30,000,000, measured as the sum of unrestricted cash and cash equivalents plus available (undrawn and unborrowed) revolving commitments under the Facility. This covenant provides the lenders with assurance that TSL maintains an adequate liquidity buffer at all times.
Maximum Capital Expenditures. TSL's consolidated capital expenditures will be capped at $80,000,000 per fiscal year. This covenant is designed to limit TSL's ability to make large, unplanned investments in new vessels or other capital assets without lender consent. We note that this covenant may warrant further discussion if TSL anticipates significant fleet renewal or expansion activity during the term of the Facility. We recommend that TSL consider requesting carry-forward provisions for unused capital expenditure capacity and specific exclusions for certain types of maintenance capital expenditures.
E. Guarantors
The Mandate Letter identifies the following entities as guarantors of TSL's obligations under the Facility:
1. Thalassa Dry Bulk Holdings Ltd. — a private limited company organized under the laws of the Republic of Cyprus. Thalassa Dry Bulk Holdings serves as the intermediate holding company for TSL's dry bulk fleet and holds the equity interests in the vessel-owning subsidiaries that own TSL's 28 dry bulk carriers.
2. Thalassa Tanker Operations Ltd. — a private limited company organized under the laws of the Republic of the marshall Islands. Thalassa Tanker Operations is the operating subsidiary for TSL's tanker fleet and manages the commercial and technical operations of TSL's 12 tankers.
3. Thalassa Logistics International Ltd. — a private limited company organized under the laws of the Republic of Cyprus. Thalassa Logistics International is TSL's logistics and chartering subsidiary and is responsible for the marketing and management of TSL's chartering activities.
The requirement that these three subsidiaries serve as guarantors is consistent with standard lender expectations in ship finance transactions, where the guarantor group typically includes the key holding, operating, and chartering entities within the borrower's corporate structure. We will review the constitutional documents of each proposed guarantor to confirm that they have the corporate authority to execute the guaranty and that there are no restrictions on the provision of upstream or cross-stream guarantees under the laws of their respective jurisdictions.
IV. Fee Structure Analysis
A. Upfront / Arranging Fee
The Mandate Letter provides for an upfront arranging fee payable to Meridian Atlantic in its capacity as Sole Lead Arranger and Sole Bookrunner. The key terms of the upfront fee are as follows:
• Amount: 0.50% of total commitments, calculated as 0.50% × $150,000,000 = $750,000
• Payee: Meridian Atlantic Bank, National Association
• Payment Timing: Payable in full at closing of the Facility
• Refundability: Non-refundable upon execution of the definitive credit agreement
Analysis. An upfront arranging fee of 50 basis points is within the market range for shipping finance revolving credit facilities of this size. Based on our review of comparable transactions in the syndicated shipping finance market during Q4 2022 and Q1 2023, upfront fees for revolvers in the $100,000,000 to $200,000,000 range have generally fallen between 35 and 75 basis points, with the median in the range of 45 to 55 basis points. At 50 basis points, the proposed fee is at the midpoint of this range and appears reasonable for a transaction of this size and complexity.
We note, however, that the upfront fee is calculated on the full $150,000,000 commitment amount, rather than on the net new money of $25,000,000. While this is standard practice — arranging fees are customarily calculated on the total commitment — TSL should be aware that the effective fee on the incremental $25,000,000 of new capacity is proportionally significant. We do not view this as an unusual or objectionable feature, but it is worth noting for budgeting purposes.
Recommendation. TSL should confirm whether any portion of the upfront fee is rebatable in the event that the syndication process achieves tighter pricing or stronger demand than anticipated. As discussed in Section VI below, the Mandate Letter does not contain an explicit reverse flex provision, and the absence of such a mechanism means that there is currently no contractual basis for TSL to benefit from favorable syndication outcomes. We recommend addressing this point in the term sheet markup.
B. Administrative Agent Fee
The Mandate Letter provides for an annual administrative agent fee payable to Meridian Atlantic in its capacity as Administrative Agent for the Facility:
• Amount: $75,000 per annum
• Payment Timing: Payable in advance on each anniversary of the closing date
• Payee: Meridian Atlantic Bank, National Association
Analysis. An annual administrative agent fee of $75,000 is reasonable and within market norms for a revolving credit facility of this size with a four-lender syndicate. Administrative agent fees for comparable shipping finance facilities typically range from $50,000 to $100,000 per annum, depending on the complexity of the facility, the number of lenders, and the volume of administrative tasks required of the agent (including processing borrowing requests, distributing payments, coordinating consent solicitations, and maintaining the loan register). We do not recommend that TSL seek to negotiate this fee.
C. Syndication Fees / Participation Fees
The Mandate Letter contemplates that Meridian Atlantic will retain flexibility to offer participation fees (sometimes referred to as "sell-down" fees or "new issue concessions") to syndicate lenders as an inducement to participate in the Facility. These participation fees will be carved out from Meridian Atlantic's own arranging fee and are not a separate cost to TSL. The key features are as follows:
• No separate syndication fee is payable by TSL beyond the upfront arranging fee described in Section IV.A above.
• Any participation fees shared with syndicate lenders are for Meridian Atlantic's account and are funded from the 50-basis-point upfront fee.
• Meridian Atlantic has sole discretion to determine the amount and allocation of participation fees to syndicate lenders.
Analysis. This structure is standard and borrower-favorable in that it shields TSL from the risk of incremental fee demands from syndicate lenders. TSL's total fee obligation is fixed at 50 basis points (plus the annual agent fee), regardless of the syndication outcome. However, as noted above, the absence of a reverse flex or fee-sharing mechanism means that TSL does not benefit if the syndication is completed at lower cost to Meridian Atlantic than anticipated.
D. Observations on Fee Structure
Total Day-One Fee Burden. TSL's total day-one fee burden at closing will consist of the following:
This amount should be reflected in the closing funds flow and factored into TSL's overall cost analysis for the refinancing. In addition to the fees payable to Meridian Atlantic, TSL will also incur legal fees (both Calderwood & Harkness fees and the lender's counsel fees payable to WJA), appraisal costs, filing fees, and other transaction expenses, which are discussed further in Section VII.C below.
No Break-Up Fee or Work Fee. The Mandate Letter does not include a break-up fee or work fee. If the Facility does not close for any reason, TSL has no obligation to pay any arrangement or commitment fee to Meridian Atlantic. TSL's only financial exposure in a no-close scenario is the obligation to reimburse Meridian Atlantic's reasonable and documented out-of-pocket expenses, as discussed in Section VII.C below. The absence of a break-up fee is favorable to TSL and provides flexibility in the event that the transaction is terminated or restructured prior to closing.
V. Syndication Strategy
A. Proposed Syndicate Composition
The Mandate Letter contemplates that Meridian Atlantic will syndicate portions of the $150,000,000 Facility to a targeted group of lenders, while retaining a meaningful hold position and serving as Administrative Agent. Based on preliminary discussions between TSL and Meridian Atlantic, the proposed syndicate composition and commitment allocation is as follows:
A summary of the proposed commitment allocation is also set forth in Appendix C attached hereto.
B. Syndication Process
The Mandate Letter outlines the following framework for the syndication process:
Confidential Information Memorandum. Meridian Atlantic will prepare a confidential information memorandum (the "CIM") for distribution to prospective syndicate lenders. The CIM will contain a detailed description of TSL's business, fleet, financial performance, and the terms of the proposed Facility. TSL will be required to cooperate in the preparation of the CIM, including by providing financial data, fleet information, and other materials requested by Meridian Atlantic's syndication team. TSL's management team, including the CEO and CFO, should be prepared to participate in lender meetings and/or presentations if requested by Meridian Atlantic.
TSL Cooperation. TSL has agreed in the Mandate Letter to use commercially reasonable efforts to assist Meridian Atlantic in the syndication process. This obligation includes making senior management available for lender meetings, providing timely access to financial and operational information, and promptly responding to diligence requests from prospective syndicate lenders.
Syndication Timing. The Mandate Letter provides that syndication is to be completed prior to or concurrently with closing of the Facility. There is no requirement that syndication be completed before the credit agreement is executed; rather, the syndication may occur on a "sign and syndicate" basis, where the credit agreement is executed with Meridian Atlantic as the sole lender and commitments are subsequently assigned to syndicate lenders through an assignment and assumption mechanism.
Arranger Discretion. The Mandate Letter provides that Meridian Atlantic has sole discretion over the syndication process, including the selection of syndicate members, the allocation of commitments among syndicate lenders, and the timing and manner of the syndication. This discretion is subject to a limited borrower consent right: TSL has the right to approve the identity of syndicate lenders, and such approval shall not be unreasonably withheld, conditioned, or delayed.
C. Observations on Syndicate Composition
The proposed four-lender syndicate provides reasonable diversification of credit exposure and is well-suited to a facility of this size. Several features of the proposed syndicate merit comment:
Meridian Atlantic's Retained Commitment. Meridian Atlantic's proposed retained commitment of $45,000,000 represents 30% of the total Facility. This is a meaningful anchor position that signals Meridian Atlantic's confidence in TSL's credit and demonstrates a strong alignment of interests between the Arranger and the Borrower. A 30% hold is at the higher end of the range for lead arrangers in shipping finance syndicates (where retained holds typically range from 20% to 35%) and should facilitate a smoother syndication process.
Geographic Diversity. The proposed syndicate includes lenders from Switzerland (Nordkapp), the United States (Clearwater), and the United Kingdom (Eastbourne), in addition to Meridian Atlantic (also U.S.-based). This geographic diversity provides TSL with a balanced lender group that spans the major shipping finance centers and reduces concentration risk relative to the current single-bank arrangement with Harborstone.
Sector Expertise. Each of the proposed syndicate lenders has established capabilities in shipping and maritime lending. Nordkapp Maritime Finance AG is a well-known participant in the European shipping finance market; Clearwater Commercial Lending LLC has an active structured lending practice with exposure to the maritime sector; and Eastbourne Capital Partners LLP specializes in maritime credit and has a strong track record in the UK ship finance market. This sector expertise should facilitate efficient due diligence and documentation.
Recommendation. We recommend that TSL promptly confirm its consent to all three proposed syndicate lenders — Nordkapp, Clearwater, and Eastbourne — to avoid any delays in the syndication process. If TSL has any concerns regarding any of these lenders (including with respect to sanctions compliance, reputational considerations, or prior business relationships), those concerns should be raised with Meridian Atlantic as soon as practicable.
VI. Market Flex Provisions
Market flex provisions are a standard feature of syndicated lending mandate letters and fee letters. They provide the lead arranger with the ability to adjust pricing and structural terms of the facility if market conditions or syndication feedback indicate that the originally proposed terms are insufficient to achieve a successful syndication. The Mandate Letter includes the following market flex provisions.
A. Pricing Flex
The Mandate Letter grants Meridian Atlantic the right to adjust the pricing terms of the Facility upward if necessary to achieve successful syndication. The specific parameters of the pricing flex are as follows:
• Applicable Margin Flex: Meridian Atlantic may increase the applicable margin by up to an additional 25 basis points. This means that, at maximum flex, the applicable margin range would be SOFR + 250 basis points to SOFR + 350 basis points (compared to the base range of SOFR + 225 to SOFR + 325 bps).
• Commitment Fee Flex: Meridian Atlantic may increase the commitment fee by up to an additional 12.5 basis points, resulting in a maximum commitment fee of 0.50% per annum (compared to the base commitment fee of 0.375% per annum, with the utilization-based step-down increasing proportionally).
Exercisability. The pricing flex is exercisable at Meridian Atlantic's sole discretion based on its assessment of prevailing market conditions and feedback received from prospective syndicate lenders during the syndication process. The Mandate Letter does not require Meridian Atlantic to provide TSL with advance notice before exercising the flex, nor does it require Meridian Atlantic to demonstrate that the flex is necessary to achieve syndication. We recommend that TSL negotiate for a notice and consultation requirement in the term sheet markup, even if the final decision rests with the Arranger.
B. Structural Flex
In addition to pricing flex, the Mandate Letter grants Meridian Atlantic the right to propose structural changes to the Facility if necessary to achieve successful syndication. While the Facility is structured as a revolving credit facility with no scheduled amortization (and thus traditional amortization flex is not directly applicable), the structural flex could potentially extend to:
• Modifications to mandatory prepayment triggers or sweep mechanisms;
• Adjustments to the collateral coverage ratio or other collateral-related requirements;
• Changes to financial covenant levels or testing frequencies; and
• Reallocations of commitments among syndicate lenders, provided that the total aggregate commitment remains at $150,000,000.
Analysis. The structural flex provisions are broadly drafted and provide Meridian Atlantic with significant latitude to reshape the terms of the Facility. While this latitude is necessary for the Arranger to navigate the syndication process effectively, TSL should be aware that structural changes made pursuant to the flex could have meaningful implications for TSL's operations and financial flexibility. We will monitor the exercise of structural flex closely during the syndication process and advise TSL on the implications of any proposed changes.
C. Reverse Flex
The Mandate Letter does not contain an explicit reverse flex provision. A reverse flex mechanism would allow TSL to benefit from favorable syndication outcomes — for example, by reducing the applicable margin, lowering the upfront fee, or adjusting other terms in TSL's favor if the syndication is oversubscribed or attracts stronger demand than anticipated.
The absence of a reverse flex provision is a notable gap in the Mandate Letter and represents a borrower-unfavorable feature. In practice, if Meridian Atlantic is able to syndicate the Facility at tighter pricing than the terms reflected in the Mandate Letter, or if the syndication is oversubscribed, the economic benefit of those favorable outcomes will accrue entirely to Meridian Atlantic (through lower participation fees payable to syndicate lenders) rather than being shared with TSL.
Recommendation. We strongly recommend that TSL seek to negotiate one or more of the following mechanisms:
1. Explicit Reverse Flex Provision: A provision that requires Meridian Atlantic to reduce the applicable margin and/or upfront fee by a specified amount if the syndication achieves pricing tighter than the base terms (e.g., a dollar-for-dollar sharing of any fee savings below a specified threshold).
2. Most Favored Nation (MFN) Provision: A provision ensuring that any economic concessions offered by Meridian Atlantic to syndicate lenders (including fee rebates, yield enhancements, or other inducements) are reflected proportionally in a reduction of the upfront fee payable by TSL.
3. Fee Rebate Mechanism: A provision requiring Meridian Atlantic to rebate a portion of the upfront fee to TSL if the total cost of the syndication (including participation fees paid to syndicate lenders) falls below a specified benchmark.
We recommend raising this issue with Catherine Hsiang (Meridian Atlantic) and/or Harrison Caldwell (WJA) during the term sheet negotiations. Given TSL's credit quality — FY2022 EBITDA of approximately $145 million, total fleet value of approximately $1.2 billion, and a strong collateral package consisting of 18 Mortgaged Vessels with aggregate fair market value well in excess of the 140% coverage requirement — TSL should have meaningful leverage to negotiate on this point.
D. Observations and Recommendations on Market Flex
Market flex provisions are a well-established feature of the syndicated lending market and serve a legitimate purpose by providing the Arranger with the tools necessary to respond to evolving market conditions. The upward flex parameters in the Mandate Letter — 25 basis points on the applicable margin and 12.5 basis points on the commitment fee — are reasonable and within the range of market norms for shipping finance revolvers of this size. We do not recommend that TSL seek to eliminate or materially reduce the upward flex.
However, the asymmetry between the upward flex (which benefits Meridian Atlantic) and the absence of any reverse flex or fee-sharing mechanism (which would benefit TSL) is a borrower-unfavorable feature that should be addressed. The current shipping finance market is generally favorable for borrowers of TSL's credit quality, and we believe there is a reasonable prospect of negotiating a reverse flex or MFN provision. We recommend that TSL raise this issue as a priority item in connection with the term sheet markup, which is expected to be circulated by March 27, 2023.
VII. Conditions, Exclusivity, and Expense Reimbursement
A. Conditions to Meridian Atlantic's Commitments
The Mandate Letter provides that Meridian Atlantic's commitment to arrange and underwrite the Facility is subject to the satisfaction of the following conditions:
(i) Completion of Satisfactory Due Diligence. Meridian Atlantic must complete due diligence on TSL to its satisfaction, including Know Your Customer / Anti-Money Laundering ("KYC/AML") screening, financial due diligence, and fleet/collateral due diligence. TSL should anticipate that Meridian Atlantic will request extensive documentation in connection with this condition, including corporate organizational documents, beneficial ownership certifications, vessel registration documents, classification society records, commercial management agreements, and historical financial statements.
(ii) Absence of Material Adverse Change. The Mandate Letter conditions Meridian Atlantic's commitment on the absence of any material adverse change ("MAC") in TSL's business, financial condition, operations, properties, or prospects, or in the shipping market generally. As discussed below, the breadth of this MAC condition is a significant concern.
(iii) Negotiation and Execution of Definitive Documentation. The commitment is conditioned on the negotiation and execution of definitive documentation satisfactory to Meridian Atlantic in its sole discretion, including the credit agreement, security documents, guaranty, and all ancillary agreements.
(iv) Satisfactory Independent Vessel Appraisals. Meridian Atlantic requires that independent vessel appraisals be obtained from Seastone Maritime Advisors Ltd. (Contact: Duncan Fairweather; 55 Gracechurch Street, London EC3V 0EE, United Kingdom), confirming that the aggregate fair market value of the Mortgaged Vessels meets or exceeds the required collateral coverage ratio.
(v) Receipt of All Required Legal Opinions. The commitment is conditioned on the receipt of legal opinions from borrower's counsel and local counsel in each relevant jurisdiction, covering customary matters such as corporate authorization, enforceability, and non-contravention.
Analysis — MAC Condition. The MAC condition set forth in the Mandate Letter is notably broad in scope. In particular, the reference to "the shipping market generally" provides Meridian Atlantic with discretion to withdraw from the mandate based on adverse developments in the broader shipping industry — even if TSL's own business and financial condition remain strong. For example, a significant decline in Baltic Dry Index levels, a contraction in vessel values, or a deterioration in charter rates could potentially constitute a MAC under this formulation, regardless of the impact on TSL's specific operations.
This is a significant risk for TSL. In a highly cyclical industry like shipping, broad market downturns are not uncommon, and a MAC condition that references general market conditions effectively gives the Arranger an escape valve that it can exercise based on factors outside TSL's control.
Recommendation. We strongly recommend that TSL seek to narrow the MAC condition in the Mandate Letter — and subsequently in the definitive credit agreement — to focus on TSL-specific events. Specifically, we recommend that the MAC definition be revised to exclude changes in general economic or market conditions (including the shipping market), except to the extent that such conditions have a disproportionate and material adverse effect on TSL relative to other similarly situated companies in the shipping industry. This formulation is consistent with market practice in leveraged lending and M&A documentation and provides a more balanced allocation of risk between the Borrower and the Arranger.
B. Exclusivity
The Mandate Letter includes an exclusivity provision restricting TSL's ability to pursue alternative financing arrangements during the syndication process. The key terms of the exclusivity provision are as follows:
• Duration: 90 days from the date of the Mandate Letter (February 14, 2023), yielding an expiration date of approximately May 15, 2023.
• Scope: During the exclusivity period, TSL agrees not to solicit, negotiate, or accept any alternative financing proposals for the refinancing of the Existing Facility, whether from other banks, financial institutions, or capital markets sources.
• No Extension Mechanism: The Mandate Letter does not contain an automatic extension mechanism for the exclusivity period. If Meridian Atlantic requires additional time, it would need to negotiate a separate extension agreement with TSL.
Analysis. The exclusivity period has already commenced and will expire on approximately May 15, 2023. As of the date of this memorandum, approximately 60 days remain in the exclusivity period. TSL should be mindful of this timeline and assess whether the syndication and documentation process is progressing at a pace that will permit closing within a reasonable time after the exclusivity period expires. If Meridian Atlantic requests an extension of the exclusivity period, TSL should evaluate whether an extension is in its interest and, if so, should consider negotiating for additional protections or concessions in exchange for the extension (e.g., a commitment by Meridian Atlantic to deliver the initial term sheet by a specified date, or a cap on the pricing flex).
After expiration of the exclusivity period, TSL will be free to pursue alternative arrangers. However, as a practical matter, the engagement with Meridian Atlantic will likely continue through closing, and pursuing alternative proposals at that stage could introduce delays and additional costs.
C. Expense Reimbursement
The Mandate Letter includes a standard expense reimbursement provision pursuant to which TSL agrees to reimburse Meridian Atlantic for its reasonable and documented out-of-pocket expenses incurred in connection with the Facility. The scope of reimbursable expenses includes:
• Legal fees of WJA (Whitmore, Jennings & Alcott LLP, 51 West 52nd Street, New York, New York 10019), Meridian Atlantic's external legal counsel for the transaction;
• Due diligence costs, including environmental assessments, vessel appraisals, and background checks;
• Travel expenses incurred by Meridian Atlantic personnel in connection with the transaction (including lender meetings, site visits, and management presentations); and
• Other customary out-of-pocket expenses.
Survival. The expense reimbursement obligation survives termination of the Mandate Letter. This means that TSL is obligated to reimburse Meridian Atlantic's expenses even if the Facility does not close — whether due to TSL's decision to terminate the mandate, Meridian Atlantic's decision to withdraw, or any other cause.
No Cap. The Mandate Letter does not specify a cap on the amount of expenses that TSL may be required to reimburse. This is a notable omission and represents a risk for TSL. Without a cap, TSL's exposure to expense reimbursement is theoretically unlimited, and there is no mechanism in the Mandate Letter for TSL to control or limit the accumulation of reimbursable expenses.
Recommendation. We strongly advise TSL to negotiate a cap on the expense reimbursement obligation. In comparable transactions, expense caps for revolving credit facilities of this size typically range from $150,000 to $350,000 (exclusive of lender's counsel fees, which may be subject to a separate cap or arrangement). At a minimum, we recommend that TSL negotiate for:
(a) An aggregate cap on total reimbursable expenses (including WJA legal fees);
(b) A requirement that Meridian Atlantic provide TSL with advance notice and obtain TSL's prior written consent before incurring any single expense item (or series of related expense items) exceeding $25,000; and
(c) A reporting obligation requiring Meridian Atlantic to provide TSL with monthly or bi-weekly summaries of expenses incurred to date.
These protections will enable TSL to manage its overall transaction cost budget and avoid surprises at closing.
D. Termination
The Mandate Letter provides for the following termination mechanisms:
• Either party may terminate the Mandate Letter upon written notice to the other party. No advance notice period is specified.
• Surviving Obligations. Upon termination, TSL's obligation to reimburse Meridian Atlantic's expenses (as described in Section VII.C above) and the parties' confidentiality obligations survive and remain in full force and effect.
• No Break-Up Fee. TSL has no obligation to pay a break-up fee or termination fee upon termination of the Mandate Letter.
• No Commitment to Complete. The Mandate Letter does not include an explicit commitment by Meridian Atlantic to complete the syndication or to close the Facility. Meridian Atlantic may withdraw from the mandate at any time for strategic, commercial, or business reasons unrelated to TSL's creditworthiness, subject only to the general obligation of good faith.
Observation. The termination provisions are relatively permissive and provide limited protections for TSL in the event that Meridian Atlantic decides to withdraw from the mandate. While this is a common feature of mandate letters in the syndicated lending market — and reflects the fact that mandate letters are preliminary agreements, not definitive commitments — TSL management should be aware that the Mandate Letter does not guarantee that the Facility will close. The risk of arranger withdrawal, while low in this case given the strength of TSL's credit and the advanced stage of discussions, is a background risk that TSL should monitor throughout the process.
VIII. Relationship to Existing Harborstone Facility
The refinancing contemplated by the Mandate Letter is directly linked to the upcoming maturity of TSL's Existing Facility with Harborstone National Bank. The Existing Facility is a $125,000,000 revolving credit facility governed by the Credit Agreement dated November 15, 2018, as subsequently amended by the First Amendment dated June 30, 2020 and the Second Amendment dated March 1, 2022. TSL's primary contact at Harborstone is Philip Rennert, Director, Structured Shipping Finance, located at 350 Park Avenue, 20th Floor, New York, New York 10022.
Maturity Date. The Existing Facility matures on November 15, 2023. Upon maturity, all outstanding principal, accrued interest, and other obligations under the Existing Facility become due and payable in full. TSL does not have the right to extend the maturity of the Existing Facility under the terms of the Existing Credit Agreement, and any extension would need to be separately negotiated with Harborstone.
Use of Proceeds. The Mandate Letter contemplates that the initial borrowing under the new Facility will be used to repay all outstanding obligations under the Existing Facility in full. The closing of the new Facility and the payoff of the Existing Facility should be structured as concurrent or same-day transactions to avoid any gap in TSL's credit availability.
Timeline Considerations. Given the November 15, 2023 maturity date, timely execution of the refinancing is critical. We recommend that TSL target a closing date of no later than September 2023, which would provide approximately two months of cushion against potential delays in the documentation or syndication process. A September closing would also provide TSL with a full quarter of operations under the new Facility before year-end, which may simplify financial reporting and audit considerations.
Contingency Planning. If the refinancing is delayed beyond September 2023 — whether due to syndication difficulties, documentation disputes, or other factors — TSL should consider proactively engaging Harborstone regarding a potential short-term extension of the Existing Facility. Such an extension could take the form of:
(a) A formal amendment to the Existing Credit Agreement extending the maturity date by 90 to 180 days (i.e., to February or May 2024);
(b) A forbearance agreement under which Harborstone agrees not to exercise its remedies upon maturity for a specified period; or
(c) A new short-term bridge facility with Harborstone on terms to be negotiated.
We recommend that TSL begin informal conversations with Philip Rennert at Harborstone to assess Harborstone's willingness to accommodate a short-term extension if needed. These conversations should be conducted carefully to avoid triggering any obligations under the Mandate Letter's exclusivity provision, which restricts TSL from soliciting alternative refinancing proposals but may not prohibit discussions regarding a short-term extension of the Existing Facility. We will provide further guidance on this point as needed.
Existing Facility Documentation Review. As noted in the Next Steps section below, TSL should provide C&H with copies of the Existing Credit Agreement and all amendments thereto. We will review these documents to identify: (i) any restrictions on refinancing, including prepayment premiums or consent requirements; (ii) the mechanics for payoff and release of existing collateral; and (iii) any provisions that may affect the structuring or timing of the new Facility.
IX. Summary of Recommendations
Based on our review and analysis of the Mandate Letter, we recommend that TSL consider the following actions:
1. Reverse Flex. Negotiate a reverse flex or fee reduction mechanism in the Mandate Letter or, alternatively, address this issue in the term sheet markup expected to be circulated by March 27, 2023. TSL's credit quality and collateral strength provide meaningful leverage to negotiate on this point. At a minimum, TSL should seek a most favored nation provision ensuring that any fee rebates offered by Meridian Atlantic to attract syndicate lenders are shared proportionally with TSL.
2. MAC Condition. Seek to narrow the material adverse change condition in the Mandate Letter — and subsequently in the definitive credit agreement — to focus on TSL-specific events rather than broad industry or market conditions. The current language, which references "the shipping market generally," provides Meridian Atlantic with inappropriately broad discretion to withdraw from the mandate based on factors outside TSL's control. The MAC definition should be revised to exclude general economic and market conditions except to the extent they have a disproportionate adverse effect on TSL.