PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
July 5, 2023
FROM: Ian Blackwood, Partner, Banking & Finance, and Sophie Tremblay, Senior Associate, Banking & Finance — Calderwood & Harkness LLP
TO: Elena Vassiliou, Chief Executive Officer; Dimitrios Pantazis, Chief Financial Officer; and Aris Komnenidis, General Counsel — Thalassa Shipping & Logistics SA
RE: Summary of Agreed Terms — $150,000,000 Senior Secured Revolving Credit Facility
MATTER NO.: 1044-00002
REFERENCE: Near-Final Credit Agreement dated July 3, 2023, among Thalassa Shipping & Logistics SA, as Borrower, the Guarantors party thereto, Meridian Atlantic Bank, National Association, as Administrative Agent, and the Lenders party thereto
cc: Stephanie Okafor (Billing Partner) and Daniel Obi (Working Associate), Calderwood & Harkness LLP (internal distribution only)
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I. INTRODUCTION AND PURPOSE
The purpose of this memorandum is to provide the management team of Thalassa Shipping & Logistics SA ("TSL" or the "Borrower") with a comprehensive summary of the final negotiated terms of the proposed $150,000,000 senior secured revolving credit facility (the "Facility") as reflected in the near-final Credit Agreement circulated to all parties on July 3, 2023 (the "Credit Agreement"). This memorandum is intended to serve as a reference document for TSL management in connection with final internal review and approval of the transaction in advance of execution and closing.
The near-final Credit Agreement has been circulated to each of the syndicate lenders and their respective counsel for internal review and is currently being prepared for execution. A 78-item closing checklist and responsibility matrix have been distributed concurrently to all parties, allocating pre-closing deliverables among the Borrower, the Administrative Agent, Lender's Counsel, Borrower's Counsel, and the Collateral Agent.
This memorandum is organized to highlight the key commercial and legal terms as agreed in the near-final Credit Agreement. Where applicable, we have identified material departures from the initial term sheet circulated by Meridian Atlantic Bank, N.A. ("Meridian Atlantic") on March 20, 2023 (the "Term Sheet"), and have noted the significant concessions made by each side during the course of the extensive negotiations that took place from April through June 2023. The negotiations involved multiple rounds of markup to the Credit Agreement, numerous conference calls and two in-person negotiation sessions (in New York on May 11–12 and in Piraeus on June 7–8), and the resolution of several material open issues that were escalated to principals on both sides.
We note that lender's counsel — Whitmore, Jennings & Alcott LLP ("WJA"), specifically Harrison Caldwell (Partner) and Priya Subramanian (Senior Associate) — has confirmed agreement on all terms summarized herein, subject only to final conforming edits to the near-final Credit Agreement and related ancillary documentation. We do not anticipate any substantive changes arising from the conforming edit process.
With respect to the syndication, we understand that commitments from each of the syndicate lenders — Nordkapp Maritime Finance AG, Clearwater Commercial Lending LLC, and Eastbourne Capital Partners LLP — are expected to be formally confirmed imminently, with final commitment confirmations anticipated on or about July 14, 2023. The syndication process has proceeded in line with the timeline set forth in the Mandate and Fee Letter, and we have no reason to believe that any syndicate lender will fail to confirm its commitment at the previously indicated levels.
This memorandum is provided solely for the benefit of TSL management and constitutes a privileged and confidential attorney-client communication. It should not be shared with any third party without the prior written consent of Calderwood & Harkness LLP.
II. TRANSACTION OVERVIEW
A. Parties. The principal parties to the Credit Agreement and related Loan Documents are as follows:
Borrower: Thalassa Shipping & Logistics SA, a Société Anonyme 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 is the ultimate parent company of the Thalassa group of companies and is the primary operating and holding entity for the group's fleet of dry bulk carriers and tankers.
Guarantors: The following wholly owned subsidiaries of the Borrower have been designated as Guarantors under the Credit Agreement and will execute unconditional guarantees of the Borrower's obligations:
(i) Thalassa Dry Bulk Holdings Ltd., a company incorporated and existing under the laws of the Republic of Cyprus;
(ii) Thalassa Tanker Operations Ltd., a corporation organized and existing under the laws of the Republic of the marshall Islands; and
(iii) Thalassa Logistics International Ltd., a company incorporated and existing under the laws of the Republic of Cyprus.
Each Guarantor is a material subsidiary within the Thalassa corporate structure and serves as a holding company or operating entity for a significant portion of the Mortgaged Vessels.
Administrative Agent: Meridian Atlantic Bank, National Association, acting through its offices at 600 Lexington Avenue, 38th Floor, New York, New York 10022. Meridian Atlantic also serves as Sole Lead Arranger and Sole Bookrunner for the Facility.
Collateral Agent / Security Trustee: Pinnacle Trust & Agency Services Inc., acting through its offices at One Liberty Plaza, 44th Floor, New York, New York 10006. Pinnacle Trust will hold all security interests and liens for the benefit of the Secured Parties and will act as Security Trustee under the various ship mortgage and security documentation.
Lenders: The syndicate of Lenders, together with their respective commitments, is as follows:
Meridian Atlantic, as lead arranger and the largest commitment holder, will hold 30% of the total commitments. The remaining 70% has been allocated among three syndicate lenders, each of which is an established participant in the maritime finance market. As noted above, formal commitment confirmations from Nordkapp, Clearwater, and Eastbourne are expected imminently.
B. Facility Structure
The Credit Agreement establishes a $150,000,000 senior secured revolving credit facility. The Facility is structured as a revolving facility, permitting the Borrower to draw, repay, and re-borrow amounts up to the aggregate commitments throughout the term of the Facility, subject to the terms and conditions of the Credit Agreement.
The Facility includes the following sublimits:
(i) Letter of Credit Sublimit: $20,000,000 of the aggregate commitments may be utilized for the issuance of standby and commercial letters of credit. Meridian Atlantic will serve as the initial LC Issuing Bank.
(ii) Swingline Sublimit: $15,000,000 of the aggregate commitments may be utilized for swingline loans, which are short-duration advances made by Meridian Atlantic as Swingline Lender on a same-day or next-day basis to accommodate short-term liquidity needs.
Both the LC sublimit and the swingline sublimit are sub-facilities within the overall $150,000,000 commitment and do not represent additional commitments above the $150,000,000 aggregate.
Purpose: The proceeds of the Facility will be used for two primary purposes:
(i) Refinancing: Repayment in full of the Borrower's existing $125,000,000 revolving credit facility with Harborstone National Bank, N.A. (the "Existing Facility"). The Existing Facility was established pursuant to a Credit Agreement dated November 15, 2018, as amended by the First Amendment thereto dated June 30, 2020, and the Second Amendment thereto dated March 1, 2022. The Existing Facility has a stated maturity date of November 15, 2023. The current outstanding principal balance under the Existing Facility is $124,375,000, with accrued and unpaid interest of approximately $312,500, for a total payoff amount of approximately $124,687,500 (subject to final payoff confirmation from Harborstone). The refinancing of the Existing Facility well in advance of its November 2023 maturity eliminates refinancing risk and secures more favorable terms for the Borrower.
(ii) General Corporate Purposes: The approximately $25,000,000 of incremental capacity above the Existing Facility amount (together with availability generated by future repayments) will be available for general corporate purposes, including working capital, fleet maintenance and drydocking expenditures, and other corporate needs of the Borrower and its subsidiaries in the ordinary course of business.
Governing Law: The Credit Agreement and all related Loan Documents (other than the ship mortgages and certain share pledge documents, which will be governed by the laws of the relevant flag state or jurisdiction of incorporation, as applicable) will be governed by the laws of the State of New York.
C. Maturity. The Facility has a five (5) year maturity, expiring on the date that is five years from the Closing Date. Based on the anticipated closing in late July or early August 2023, the maturity date of the Facility would be approximately late July or early August 2028. All outstanding principal, accrued interest, fees, and other obligations under the Credit Agreement must be repaid in full on the maturity date. The five-year tenor is consistent with market practice for senior secured shipping finance revolving credit facilities of this type and provides TSL with a stable long-term funding platform.
III. PRICING AND FEES
A. Interest Rate
Revolving loans under the Facility will bear interest at a rate per annum equal to Term SOFR plus the Applicable Margin, determined in accordance with the following leverage-based pricing grid:
The Applicable Margin thus ranges from a low of 225 basis points to a high of 325 basis points, depending on the Borrower's Consolidated Net Leverage Ratio as determined from the most recently delivered compliance certificate. The initial Applicable Margin will be set at Level III (SOFR + 275 bps) until the delivery of the first compliance certificate following the Closing Date. Adjustments to the Applicable Margin will take effect on the third business day following delivery of each quarterly compliance certificate.
Departure from Term Sheet: The initial Term Sheet proposed a flat margin of SOFR + 275 basis points, with no adjustment for leverage performance. The introduction of the pricing grid was a significant concession obtained from the Lenders during the course of negotiations. At the low end of the grid (Level I), the Applicable Margin of 225 basis points represents a 50 basis point improvement relative to the flat rate proposed in the Term Sheet. This structure incentivizes deleveraging and rewards TSL for maintaining a conservative balance sheet. Given TSL's current leverage profile and management's financial projections, we would expect TSL to qualify for Level II or Level I pricing within the first 12–18 months of the Facility, which could result in meaningful interest cost savings over the life of the Facility.
B. SOFR Mechanics
The Credit Agreement utilizes Term SOFR (as published by CME Group Benchmark Administration Limited) as the benchmark reference rate. Key features of the SOFR mechanics are as follows:
(i) Interest Period Options: The Borrower may elect interest periods of one (1) month, three (3) months, or six (6) months for each borrowing of Term SOFR loans. This election is made at the time of each borrowing request or continuation/conversion notice, providing TSL with flexibility to manage interest rate exposure and cash flow timing.
(ii) SOFR Floor: A floor of 0.00% applies to Term SOFR, meaning that in no event will Term SOFR be deemed to be less than zero for purposes of calculating the applicable interest rate. This floor was added at the Lenders' request and, in the current interest rate environment (where the prevailing SOFR rate is substantially above zero), is immaterial from a practical standpoint.
(iii) Credit Spread Adjustment: A credit spread adjustment ("CSA") of 10 basis points applies to Term SOFR. This adjustment is a residual feature of the LIBOR-to-SOFR transition and is consistent with current market convention for maritime finance transactions.
(iv) SOFR Fallback Provisions: The Credit Agreement incorporates fallback language consistent with the Alternative Reference Rates Committee ("ARRC") recommended best practices, providing a clear waterfall of successor benchmark rates and conforming changes in the event that Term SOFR is no longer available or is declared to be unrepresentative. The Administrative Agent is authorized to make Benchmark Replacement Conforming Changes without the consent of the Borrower or the Required Lenders, subject to certain notification requirements.
Departure from Term Sheet: The Term Sheet was silent on the credit spread adjustment. During the initial drafting process, the Lenders proposed a CSA of 26.161 basis points, which reflected the historical ARRC-recommended five-year median difference between LIBOR and SOFR. We successfully negotiated this down to 10 basis points, which is now the prevailing market standard for new-issue credit facilities. Over the life of the Facility, this 16 basis point reduction in the CSA will result in meaningful interest cost savings. The Term Sheet also did not address the SOFR floor; the floor of 0.00% was added at the Lenders' request during the May negotiations. As noted above, the floor is immaterial in the current interest rate environment.
C. Commitment Fee
The Borrower will pay a commitment fee to each Lender on the daily average unused portion of such Lender's commitment at the following rates:
(i) Standard Rate: 0.375% per annum on the unused portion of commitments; and
(ii) Reduced Rate: 0.25% per annum on the unused portion of commitments, applicable when utilization of the Facility exceeds 50% of total commitments (i.e., when outstanding loans and LC exposures exceed $75,000,000 in aggregate).
The commitment fee is payable quarterly in arrears on the last business day of each fiscal quarter and on the maturity date. The commitment fee accrues from the Closing Date.
Departure from Term Sheet: The Term Sheet proposed a flat commitment fee of 0.375% per annum with no step-down based on utilization. The utilization-based step-down to 0.25% was a concession obtained by the Borrower during the May negotiations. Given that TSL expects to draw approximately $125,000,000 at closing (to refinance the Existing Facility) and anticipates maintaining utilization above 50% for the near to medium term, the step-down mechanism will result in an immediate reduction in the effective commitment fee rate on the unused portion of the Facility.
D. Upfront / Arranging Fee
An upfront fee equal to 0.50% of total commitments, representing $750,000, is payable to Meridian Atlantic in its capacity as Sole Lead Arranger and Sole Bookrunner. This fee is payable at closing and is due in full on the Closing Date.
The upfront fee is as set forth in the Mandate and Fee Letter dated February 14, 2023, between TSL and Meridian Atlantic, and represents no departure from the Term Sheet. The upfront fee is non-refundable and will be netted from closing proceeds in the funds flow.
E. Administrative Agent Fee
An annual administrative agent fee of $75,000 is payable to Meridian Atlantic in its capacity as Administrative Agent. The agent fee is payable annually in advance on each anniversary of the Closing Date, with the first payment due on the Closing Date.
The administrative agent fee is consistent with the Term Sheet and represents no departure from the terms initially proposed.
F. Letter of Credit Fees
Letters of credit issued under the LC sublimit will be subject to the following fees:
(i) LC Participation Fee: Each Lender will receive its pro rata share of an LC participation fee equal to the Applicable Margin then in effect for revolving loans (i.e., 225 to 325 basis points, determined by the pricing grid described in Section III.A above). This fee is payable quarterly in arrears on the stated amount of each outstanding letter of credit.
(ii) LC Fronting Fee: An LC fronting fee of 0.125% per annum is payable to Meridian Atlantic as LC Issuing Bank on the stated amount of each outstanding letter of credit. This fee compensates the LC Issuing Bank for the credit risk and administrative burden of fronting LCs for the account of the syndicate.
Departure from Term Sheet: The Term Sheet proposed an LC fronting fee of 0.25% per annum. We negotiated a reduction to 0.125% per annum, which represents a 50% reduction in the fronting fee and is favorable to the Borrower. The LC participation fee structure (equal to the Applicable Margin) is consistent with the Term Sheet and market convention.
IV. COLLATERAL PACKAGE
A. Overview. The Facility is secured by a comprehensive collateral package consisting of first-priority security interests in the Borrower's and Guarantors' key assets, structured in a manner consistent with market practice for senior secured shipping finance credit facilities. All security interests are granted in favor of Pinnacle Trust & Agency Services Inc., acting as Collateral Agent and Security Trustee for the ratable benefit of the Secured Parties (being the Administrative Agent, the Lenders, the LC Issuing Bank, and the Swingline Lender, together with any Hedge Counterparties and Cash Management Banks that may be added as Secured Parties in the future).
B. Vessel Mortgages
The cornerstone of the collateral package is first preferred ship mortgages (or, in the case of non-U.S. flag vessels, statutory ship mortgages under applicable flag state law) on eighteen (18) designated vessels (the "Mortgaged Vessels") out of TSL's total fleet of forty (40) vessels. The TSL fleet comprises twenty-eight (28) dry bulk carriers and twelve (12) tankers, with an aggregate estimated fleet value of approximately $1.2 billion.
The 18 Mortgaged Vessels have been appraised at an aggregate fair market value of $780,000,000, based on independent vessel appraisals prepared by Seastone Maritime Advisors Ltd. (lead appraiser: Duncan Fairweather, ASA, MAI) and delivered on July 10, 2023. The Seastone appraisals were conducted in accordance with the standards and guidelines of the American Society of Appraisers and were based on a combination of comparable sales analysis, income capitalization, and depreciated replacement cost approaches.
The selection of the 18 Mortgaged Vessels was determined in consultation with both TSL and the Administrative Agent, taking into account vessel age, type, condition, charter employment, and flag state considerations. The mortgaged fleet provides diversification across both dry bulk and tanker segments and includes vessels employed under a mix of time charters, voyage charters, and spot market employment.
C. Minimum Collateral Coverage Ratio
The Credit Agreement requires the Borrower to maintain a minimum Collateral Coverage Ratio of 140% of outstanding Facility obligations at all times. The Collateral Coverage Ratio is defined as the ratio of (x) the aggregate fair market value of the Mortgaged Vessels (based on the most recent vessel appraisals) to (y) the aggregate outstanding obligations under the Facility (including all outstanding revolving loans, LC exposures, and swingline loans).
At full utilization of the $150,000,000 Facility, the minimum required collateral value under the 140% threshold would be $210,000,000 (i.e., 140% × $150,000,000). Based on the current Seastone appraisals reflecting an aggregate Mortgaged Vessel value of $780,000,000, the current Collateral Coverage Ratio at full draw would be approximately 520% ($780,000,000 ÷ $150,000,000), providing very substantial headroom above the 140% minimum threshold. This significant excess coverage should provide TSL with considerable flexibility to accommodate fleet value fluctuations without triggering a collateral coverage shortfall.
Testing: The Collateral Coverage Ratio will be tested quarterly, based on the most recent vessel appraisals. Independent appraisals by Seastone Maritime Advisors Ltd. (or another internationally recognized vessel appraisal firm approved by the Administrative Agent) are required on an annual basis. In the three interim quarters, desktop appraisals (also prepared by Seastone or an approved appraiser) will be used for testing purposes. The Administrative Agent reserves the right to require updated appraisals on a more frequent basis if it reasonably determines that there has been a material adverse change in market conditions affecting vessel values.
Cure Mechanism: In the event that the Collateral Coverage Ratio falls below 140%, the Borrower shall have a period of sixty (60) days from the date of delivery of the relevant appraisal or compliance certificate to cure the deficiency by one or more of the following actions:
(i) pledging one or more additional vessels (from the TSL fleet or newly acquired) as Mortgaged Vessels under the Facility, thereby increasing the aggregate collateral value;
(ii) prepaying outstanding loans under the Facility in an amount sufficient to restore the Collateral Coverage Ratio to at least 140%; or
(iii) providing additional cash collateral in a blocked account maintained with the Administrative Agent, in an amount sufficient to restore the Collateral Coverage Ratio to at least 140%.
Departure from Term Sheet: The Term Sheet proposed a minimum Collateral Coverage Ratio of 150% with a 30-day cure period. The Borrower successfully negotiated a reduction in the coverage ratio from 150% to 140% and an extension of the cure period from 30 days to 60 days. Both of these modifications represent material concessions obtained from the Lenders. The reduction from 150% to 140% lowers the minimum required collateral value at full draw from $225,000,000 to $210,000,000, providing an additional $15,000,000 of valuation cushion. The extension of the cure period from 30 to 60 days provides TSL with additional time to arrange for substitute collateral, arrange a prepayment, or await a favorable market development, particularly in periods of short-term vessel value volatility that are common in the shipping industry.
D. Other Collateral
In addition to the ship mortgages, the collateral package includes the following:
Earnings Accounts: Assignment and first-priority security interest in the earnings accounts maintained for each Mortgaged Vessel. These accounts receive charter hire, freight revenue, and other earnings generated by the Mortgaged Vessels. The earnings account assignments will be structured as security assignments, permitting the Borrower to continue to access and utilize the earnings accounts in the ordinary course of business so long as no Event of Default has occurred and is continuing.
Insurance Assignments: Assignment of all hull & machinery ("H&M") insurance and protection & indemnity ("P&I") insurance maintained in respect of each Mortgaged Vessel. The insurance assignments will require that the Collateral Agent be named as loss payee (in the case of H&M insurance) and as additional assured (in the case of P&I insurance) on all relevant policies. Insurance coordination will be managed through Trident Marine Insurance Brokers Ltd. ("Trident"), TSL's insurance broker, which has extensive experience with maritime finance insurance assignment requirements.
Share Pledges: Pledge of 100% of the equity interests held by the Borrower or the applicable Guarantor in each vessel-owning subsidiary that owns a Mortgaged Vessel. The share pledges will be governed by the laws of the jurisdiction of incorporation of each vessel-owning subsidiary (Cyprus, marshall Islands, or such other jurisdiction as applicable) and will include customary provisions granting the Collateral Agent the right to exercise voting and dividend rights upon the occurrence and during the continuance of an Event of Default.
Charter Assignments: Assignment of all time charter parties entered into with respect to the Mortgaged Vessels that have remaining terms of twelve (12) months or more as of the date of the assignment. The charter assignments will be structured as security assignments, with notices of assignment delivered to each relevant charterer, and will include provisions requiring that charter hire payments be directed to the assigned earnings accounts.
Departure from Term Sheet: The Term Sheet required assignment of all charter parties with remaining terms of six (6) months or more. At the Borrower's request, this threshold was increased to twelve (12) months during the course of negotiations. This modification was agreed by the Lenders as a practical concession, recognizing that short-duration charters (those with remaining terms of less than 12 months) are more likely to expire during the collateral administration process and that the administrative burden of documenting, noticing, and tracking such short-term charters outweighs the incremental collateral value they provide.
E. Vessel Release Mechanics
The Credit Agreement provides for the release of individual Mortgaged Vessels from the ship mortgages in connection with vessel sales, subject to the satisfaction of the following conditions:
(i) no Event of Default exists or would result from the proposed sale and release;
(ii) after giving effect to the release of the vessel from the mortgage (and the removal of such vessel's appraised value from the collateral pool), the Collateral Coverage Ratio remains at or above 140%; and
(iii) the net cash proceeds from the sale of the vessel are applied in accordance with the mandatory prepayment provisions of the Credit Agreement (see Section VIII below regarding asset sale prepayment thresholds), or a substitute vessel of comparable value is pledged to the Collateral Agent as a replacement Mortgaged Vessel.
Upon satisfaction of the foregoing conditions, the release of an individual Mortgaged Vessel may be authorized by the Administrative Agent without the consent of the Required Lenders or unanimous Lender consent. This is a departure from the Term Sheet, which was silent on individual vessel release mechanics, and represents a meaningful administrative flexibility for TSL in managing its fleet and executing vessel sale-and-purchase transactions in the ordinary course.
V. FINANCIAL COVENANTS
A. Maximum Consolidated Net Leverage Ratio
The Borrower shall not permit the Consolidated Net Leverage Ratio (defined as the ratio of Consolidated Total Net Debt to Consolidated EBITDA for the trailing four fiscal quarter period) to exceed the following levels, measured as of the last day of each fiscal quarter:
Based on TSL's audited financial statements for the fiscal year ended December 31, 2022, the Borrower reported Consolidated EBITDA of approximately $145 million. At projected initial borrowing levels of approximately $125,000,000, the Borrower's Consolidated Net Leverage Ratio is expected to be comfortably within the 4.50:1.00 covenant level at closing, providing meaningful headroom for the initial period.
Departure from Term Sheet: The Term Sheet proposed a maximum Consolidated Net Leverage Ratio of 4.25:1.00, stepping down to 3.75:1.00 in Year 3. The Borrower obtained an increase of 25 basis points at each level — to 4.50:1.00 for the initial period and 4.00:1.00 following the third anniversary — representing additional financial flexibility for TSL. This was a Borrower concession that required significant negotiation, particularly with respect to the syndicate lenders, who were initially reluctant to deviate from the Term Sheet levels.
B. Minimum Consolidated Interest Coverage Ratio
The Borrower shall not permit the Consolidated Interest Coverage Ratio (defined as the ratio of Consolidated EBITDA to Consolidated Interest Expense for the trailing four fiscal quarter period) to be less than 3.00:1.00, measured as of the last day of each fiscal quarter.
This covenant is consistent with the Term Sheet and represents no departure from the initially proposed terms. Given TSL's current EBITDA levels and the anticipated interest expense under the new Facility, we expect this covenant to be satisfied with substantial headroom.
C. Minimum Liquidity
The Borrower shall maintain Minimum Liquidity of not less than $30,000,000 at all times. For purposes of this covenant, "Minimum Liquidity" is defined as the sum of (i) unrestricted cash and cash equivalents held by the Borrower and its subsidiaries, plus (ii) the available (undrawn and uncommitted) revolving credit facility commitments under the Facility.
The Minimum Liquidity covenant is measured on a monthly basis (as of the last business day of each calendar month) and is reported to the Administrative Agent in connection with the quarterly delivery of financial statements and compliance certificates.
Departure from Term Sheet: The Term Sheet proposed a Minimum Liquidity requirement of $35,000,000. The Borrower successfully negotiated a reduction to $30,000,000, which provides TSL with $5,000,000 of additional operational flexibility without materially diminishing the Lenders' liquidity protection. This was a Borrower concession obtained during the May negotiations.
D. Maximum Capital Expenditures
The Borrower and its subsidiaries shall not make or incur Capital Expenditures in excess of $80,000,000 in any fiscal year. For purposes of this covenant, "Capital Expenditures" includes all expenditures that would be classified as capital expenditures under IFRS, including vessel acquisition costs, drydocking expenditures, and other additions to property, plant, and equipment.
The Capital Expenditure covenant includes a carry-forward provision permitting the Borrower to carry forward up to 50% of any unused Capital Expenditure capacity from a given fiscal year to the immediately succeeding fiscal year. Accordingly, if the Borrower utilizes only $50,000,000 of the $80,000,000 annual basket in Fiscal Year 1, up to $15,000,000 (50% of the $30,000,000 unused amount, subject to the $40,000,000 maximum carry-forward cap) may be added to the $80,000,000 basket for Fiscal Year 2, resulting in a maximum Capital Expenditure capacity of $95,000,000 in Fiscal Year 2. The carry-forward is limited to one fiscal year and does not accumulate across multiple periods.
Departure from Term Sheet: The Term Sheet proposed a Capital Expenditure cap of $75,000,000 per fiscal year with no carry-forward provision. The Borrower obtained both an increase in the annual cap to $80,000,000 and the introduction of the 50% carry-forward mechanism, representing a significant Borrower concession. The carry-forward provision is particularly valuable in the shipping industry, where vessel drydocking cycles and fleet renewal programs can result in uneven capital expenditure patterns across fiscal years.
E. Financial Covenant Testing and Equity Cure
Testing: All financial covenants are tested on a quarterly basis as of the last day of each fiscal quarter, based on the Borrower's consolidated financial statements. Annual financial statements are required to be audited by Hawthorne & Garrett LLP (or another nationally or internationally recognized independent accounting firm acceptable to the Administrative Agent). Quarterly financial statements are management-prepared and are delivered in accordance with the reporting timelines specified in the affirmative covenants.
Equity Cure Right: The Credit Agreement includes an equity cure right permitting the Borrower to cure a financial covenant breach by injecting cash equity into the Borrower within ten (10) business days following the delivery of the compliance certificate that reflects such breach. The cash equity contribution will be added to Consolidated EBITDA (for purposes of the leverage ratio and interest coverage ratio) or treated as a prepayment (for purposes of the leverage ratio), or added to unrestricted cash (for purposes of the Minimum Liquidity covenant), as applicable, solely for the purpose of recalculating compliance with the breached financial covenant.
The equity cure right is subject to the following limitations:
(i) the equity cure right may be exercised no more than two (2) times in any four (4) consecutive fiscal quarter period;
(ii) the equity cure right may be exercised no more than four (4) times during the entire term of the Facility; and
(iii) the amount of any equity cure contribution shall not exceed the amount necessary to bring the Borrower into compliance with the applicable financial covenant (i.e., no "over-cure" that would be carried forward to inflate EBITDA for future testing periods).
Departure from Term Sheet: The Term Sheet did not contemplate an equity cure right. This provision was introduced at the Borrower's request during the May negotiations and was the subject of extended negotiation between the parties. The Lenders initially resisted the concept of an equity cure, arguing that it effectively subordinates financial covenant protection to the Borrower's ability to raise equity capital. Ultimately, the Lenders agreed to include the equity cure right, subject to the frequency caps described above, in recognition of the fact that TSL's principal shareholder, Nikolaos Karadimitriou, has historically demonstrated a willingness to support the company with additional equity in periods of market stress. The frequency limitations ensure that the equity cure is available as a safety valve in extraordinary circumstances but cannot be used as a routine mechanism to avoid covenant compliance.
VI. REPRESENTATIONS AND WARRANTIES
The Credit Agreement contains a comprehensive set of representations and warranties made by the Borrower and each Guarantor, which are standard for a senior secured shipping finance revolving credit facility of this type. The representations and warranties include, among others, the following:
• organization, valid existence, and good standing in each applicable jurisdiction;
• corporate power and authority to execute, deliver, and perform the Loan Documents;
• due authorization by all requisite corporate action;
• enforceability of the Loan Documents;
• no conflict with organizational documents, applicable law, or existing contractual obligations;
• receipt of all governmental approvals necessary for the execution and performance of the Loan Documents;
• accuracy and completeness of financial statements (including the audited financial statements for the fiscal year ended December 31, 2022, audited by Hawthorne & Garrett LLP);
• no material adverse change since December 31, 2022;
• disclosure of all pending or threatened litigation;
• compliance with applicable laws, including sanctions, anti-corruption laws (including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010), and anti-money laundering laws;
• environmental compliance and absence of material environmental liabilities;
• ERISA compliance (to the extent applicable to any U.S.-based subsidiaries or employees);
• payment of taxes and absence of material tax liabilities;
• good and marketable title to the Mortgaged Vessels, free and clear of all liens except Permitted Liens;
• compliance with flag state requirements for each Mortgaged Vessel;
• maintenance of classification with a classification society that is a member of the International Association of Classification Societies ("IACS");
• maintenance of insurance in accordance with the requirements of the Credit Agreement; and
• accuracy and completeness of all information provided in the Confidential Information Memorandum dated March 2023.
Key Negotiated Points:
Material Adverse Change Definition. The definition of "Material Adverse Change" (or "Material Adverse Effect") was the subject of significant negotiation. As agreed, the definition refers to any event, circumstance, development, or condition that has had, or could reasonably be expected to have, a material adverse effect on:
(i) the business, operations, property, or financial condition of the Borrower and its Subsidiaries, taken as a whole;
(ii) the ability of the Loan Parties, taken as a whole, to perform their material obligations under the Loan Documents; or
(iii) the rights and remedies of the Administrative Agent and the Lenders under the Loan Documents.
Critically, the Borrower successfully excluded a subjective lender judgment standard from the MAC definition. The initial draft proposed by WJA included language permitting the Administrative Agent to determine "in its reasonable judgment" whether a Material Adverse Change had occurred. The agreed formulation requires that any alleged Material Adverse Change be objectively demonstrable. This is a meaningful protective provision for the Borrower, as it limits the ability of the Administrative Agent or the Lenders to invoke the MAC provision based on subjective assessments of market conditions or business prospects.
Knowledge Qualifier. The Borrower obtained a knowledge qualifier with respect to the representations regarding litigation and environmental matters, limiting these representations to matters "known to" the Borrower (defined as the actual knowledge of the officers of the Borrower after due inquiry). This qualification was appropriate given the breadth of TSL's global operations and the difficulty of providing unqualified representations regarding all potential litigation and environmental matters across multiple jurisdictions.
Sanctions Compliance. The representation regarding sanctions compliance was limited to the Borrower, the Guarantors, and their respective directors and officers. The Lenders initially proposed extending this representation to cover all employees, agents, and representatives of the Loan Parties, which the Borrower resisted on the grounds that it would be impractical to monitor and verify the sanctions compliance status of all employees and agents across the Thalassa group. The agreed formulation is consistent with market practice and appropriately limits the scope of the representation to persons over whom the Borrower has direct oversight and control.
VII. AFFIRMATIVE COVENANTS
The Credit Agreement imposes a comprehensive set of affirmative covenants on the Borrower and its subsidiaries, requiring the Loan Parties to take certain actions and maintain certain conditions throughout the term of the Facility. The affirmative covenants are standard for a senior secured shipping finance revolving credit facility and include, among others, the following:
• Financial Reporting: Delivery of (i) audited annual consolidated financial statements within 120 days after the end of each fiscal year, and (ii) unaudited quarterly consolidated financial statements within 60 days after the end of each fiscal quarter. Annual financial statements must be audited by Hawthorne & Garrett LLP or another nationally or internationally recognized independent accounting firm acceptable to the Administrative Agent.
• Compliance Certificates: Delivery of a compliance certificate signed by the Chief Financial Officer of the Borrower concurrently with each set of quarterly financial statements, setting forth in reasonable detail the calculation of each financial covenant and certifying compliance therewith (or, in the case of non-compliance, specifying the nature and extent of any breach and any proposed cure).
• Maintenance of Corporate Existence: Preservation of the corporate existence and good standing of the Borrower and each Guarantor in their respective jurisdictions of organization.
• Maintenance of Insurance: Maintenance of insurance on the Mortgaged Vessels in accordance with the requirements of the Credit Agreement, including hull & machinery insurance, P&I insurance, war risk insurance, and such other insurance as is customary for vessels of similar type and employment. Insurance coordination will be managed through Trident Marine Insurance Brokers Ltd.
• Maintenance of Vessel Classification: Maintenance of classification of each Mortgaged Vessel with a classification society that is a member of IACS, free of all overdue conditions of class and recommendations.
• Compliance with Laws: Compliance with all applicable laws, regulations, and orders, including sanctions, anti-corruption, anti-money laundering, environmental, and maritime safety laws.
• Payment of Taxes: Timely payment of all taxes, assessments, and governmental charges, except to the extent contested in good faith by appropriate proceedings and for which adequate reserves have been established.
• Inspection Rights: Permitting the Administrative Agent and its representatives to inspect the Mortgaged Vessels, the Borrower's books and records, and the Borrower's operations upon reasonable notice.
• Use of Proceeds: Application of the proceeds of the Facility solely for the purposes specified in the Credit Agreement.
• Further Assurances: Execution and delivery of such additional instruments and documents as may be reasonably requested by the Administrative Agent to carry out the purposes of the Loan Documents and to perfect and maintain the security interests granted therein.
Key Negotiated Points:
Vessel Inspection Rights. The Borrower successfully negotiated a limitation on the Administrative Agent's vessel inspection rights to once per calendar year per Mortgaged Vessel, absent the existence of an Event of Default. Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent may conduct inspections at any time and with reasonable frequency. The Lenders initially proposed a right to inspect each Mortgaged Vessel twice per calendar year, which the Borrower resisted on the grounds that frequent inspections disrupt vessel operations (particularly for vessels on time charter) and impose significant cost and logistical burdens. The agreed annual inspection frequency is consistent with the annual independent appraisal cycle and is sufficient for the Lenders' collateral monitoring purposes.
Insurance Reporting. The Borrower negotiated a reduction in insurance reporting frequency from quarterly (as initially proposed by the Lenders) to semi-annual. The Borrower will deliver a summary of insurance coverage for each Mortgaged Vessel to the Administrative Agent semi-annually, together with evidence of renewal or replacement of expiring policies promptly upon renewal. This modification reduces the administrative burden on TSL's insurance department and on Trident without materially affecting the Lenders' ability to monitor insurance compliance.
Compliance Certificate Delivery. The Borrower obtained an agreement that compliance certificates will be delivered concurrently with the quarterly financial statements, rather than within five (5) business days following delivery of financial statements as initially proposed by the Lenders. This modification simplifies the reporting process and avoids a separate compliance certificate delivery obligation.
VIII. NEGATIVE COVENANTS
The Credit Agreement imposes a comprehensive set of negative covenants on the Borrower and its subsidiaries, restricting certain activities without the prior consent of the Required Lenders (or, in certain cases, the Administrative Agent). The negative covenants are standard for a senior secured shipping finance revolving credit facility and include limitations on:
• indebtedness;
• liens;
• investments;
• restricted payments (including dividends and distributions);
• asset sales (including vessel sales);
• mergers, consolidations, and acquisitions;
• transactions with affiliates;
• changes in business;
• amendments to organizational documents;
• changes in fiscal year; and
• sale and leaseback transactions.
Key Negotiated Points:
Permitted Indebtedness. The negative covenant on indebtedness includes a general basket permitting the Borrower and its subsidiaries to incur additional unsecured indebtedness in an aggregate principal amount not exceeding $15,000,000 at any time outstanding. This general basket is available for trade payables, equipment financing, working capital lines, and other ordinary course indebtedness that does not rise to the level of a material financing. The Lenders initially proposed a general basket of $10,000,000; the Borrower obtained an increase to $15,000,000 to provide additional operational flexibility.
Restricted Payments. The Credit Agreement permits the Borrower to make dividends and distributions to its equity holders, subject to the following conditions:
(i) no Default or Event of Default exists or would result from the proposed restricted payment;
(ii) after giving pro forma effect to the proposed restricted payment, the Borrower would be in compliance with all financial covenants set forth in the Credit Agreement; and
(iii) the aggregate amount of restricted payments made in any fiscal year does not exceed 50% of the Borrower's Consolidated Net Income for the immediately preceding fiscal year.
Departure from Term Sheet: The Term Sheet proposed a restricted payments cap of 35% of prior fiscal year Consolidated Net Income. The Borrower obtained an increase to 50%, which represents a material concession and provides TSL and its shareholders with meaningfully greater flexibility to return capital. This was among the more intensely negotiated provisions, as the Lenders expressed concern that a higher dividend payout rate could impair deleveraging and cash accumulation. Ultimately, the Lenders were persuaded by the pro forma covenant compliance condition, which ensures that any restricted payment will be subject to forward-looking financial covenant compliance testing.
Asset Sales (Vessel Sales). Net cash proceeds from vessel sales are subject to mandatory prepayment requirements as follows:
(i) Net proceeds from any individual vessel sale in excess of $5,000,000 must be applied to prepay outstanding loans under the Facility within five (5) business days of receipt.
(ii) Net proceeds from vessel sales in the aggregate in any fiscal year in excess of $15,000,000 must be applied to prepay outstanding loans under the Facility within five (5) business days of receipt.
(iii) Net proceeds from vessel sales below the thresholds specified in (i) and (ii) above may be retained by the Borrower for reinvestment in the business within twelve (12) months of receipt. If such proceeds are not reinvested within the twelve-month period, they must be applied to prepay outstanding loans.
Departure from Term Sheet: The Lenders initially proposed mandatory prepayment thresholds of $2,500,000 per individual vessel sale and $10,000,000 in aggregate per fiscal year. The Borrower successfully negotiated an increase in these thresholds to $5,000,000 (individual) and $15,000,000 (aggregate), providing greater flexibility for TSL to recycle capital from vessel sales into fleet renewal and other investments without triggering mandatory prepayment obligations.
Permitted Acquisitions. The Credit Agreement includes a carveout from the general prohibition on acquisitions, permitting the Borrower and its subsidiaries to acquire vessels or shipping businesses with an aggregate purchase price not exceeding $40,000,000 per fiscal year, subject to the following conditions:
(i) no Default or Event of Default exists or would result from the proposed acquisition;
(ii) after giving pro forma effect to the proposed acquisition (including any acquisition indebtedness), the Borrower would be in compliance with all financial covenants set forth in the Credit Agreement;
(iii) the acquisition has been approved by the board of directors of the Borrower; and
(iv) the Borrower has delivered to the Administrative Agent pro forma financial statements demonstrating compliance with all financial covenants after giving effect to the acquisition.
Departure from Term Sheet: This carveout was not included in the initial Term Sheet and was introduced at the Borrower's request during the June negotiations. The inclusion of the permitted acquisition basket provides TSL with the ability to pursue opportunistic vessel acquisitions and fleet expansion within defined parameters, without the need to seek lender consent on a case-by-case basis. This was viewed by TSL management as a critical provision for maintaining competitive flexibility in the vessel sale-and-purchase market.
Change of Control. The Credit Agreement includes a change of control provision triggered by either of the following events:
(i) Nikolaos Karadimitriou and his immediate family members (the "Karadimitriou Family") ceasing to own, directly or indirectly, at least 51% of the issued and outstanding voting equity interests of the Borrower; or
(ii) a change in the composition of the board of directors of the Borrower such that individuals who (a) were members of the board on the Closing Date, or (b) were nominated or appointed by such members, cease to constitute a majority of the board.
Upon the occurrence of a Change of Control, the Administrative Agent shall declare all outstanding obligations immediately due and payable, and the commitments of the Lenders shall be terminated.