REDLINE MARKUP — DRAFT CREDIT AGREEMENT
Prepared by Calderwood & Harkness LLP on behalf of Thalassa Shipping & Logistics SA (Borrower)
April 14, 2023
DRAFT — PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
Markup of Draft Credit Agreement dated April 5, 2023, prepared by Whitmore, Jennings & Alcott LLP on behalf of Meridian Atlantic Bank, National Association (Administrative Agent) and the Lenders
Calderwood & Harkness LLP Matter No.: 1044-00002
Total Comments: 847 across 210 pages
Prepared by:
Sophie Tremblay, Lead Associate Daniel Obi, Associate
Under the supervision of:
Ian Blackwood, Partner
Calderwood & Harkness LLP 425 Park Avenue New York, NY 10022
TRANSMITTAL COVER MEMORANDUM
MEMORANDUM
FROM: Sophie Tremblay Calderwood & Harkness LLP 425 Park Avenue New York, NY 10022 Telephone: (212) 555-7400
Email: stremblay@calderwoodharkness.com
TO: Priya Subramanian Whitmore, Jennings & Alcott LLP 51 West 52nd Street New York, NY 10019 Telephone: (212) 555-3200
Email: psubramanian@wja.com
CC: Harrison Caldwell, Whitmore, Jennings & Alcott LLP Ian Blackwood, Calderwood & Harkness LLP Catherine Hsiang, Meridian Atlantic Bank, N.A. Aris Komnenidis, Thalassa Shipping & Logistics SA
DATE: April 14, 2023
RE: Thalassa Shipping & Logistics SA — $150,000,000 Senior Secured Revolving Credit Facility — Borrower's Markup of Initial Draft Credit Agreement
Dear Priya,
On behalf of Thalassa Shipping & Logistics SA ("TSL" or the "Borrower"), we are pleased to transmit the enclosed redline markup of the initial draft Credit Agreement circulated by Whitmore, Jennings & Alcott LLP ("WJA") on behalf of Meridian Atlantic Bank, National Association (the "Administrative Agent") and the Lenders on April 5, 2023 (the "Initial Draft").
This markup constitutes the Borrower's first-pass response to the Initial Draft and contains a total of 847 comments spread across the full 210-page document. Our comments encompass both substantive legal and commercial objections as well as conforming, cross-referencing, and typographical corrections. The markup has been prepared using tracked changes and embedded comment bubbles for ease of reference. A comprehensive index of all comments, organized by article and section number, is appended hereto as an Appendix.
The principal areas of comment are summarized in the "Summary of Principal Comments" section immediately following this memorandum. For convenience, we highlight below the themes that we believe will require the most substantial discussion between the parties:
1. SOFR Benchmark and Interest Rate Mechanics — We have extensive comments on the benchmark replacement provisions, including the degree of discretion afforded to the Administrative Agent in selecting a successor benchmark rate. We believe the Borrower and Required Lenders should have consent rights over any benchmark transition.
2. Mandatory Prepayment Provisions — The Initial Draft's requirement that 100% of net cash proceeds from vessel sales be applied as mandatory prepayments, without any reinvestment period, is not consistent with market practice for shipping finance revolving credit facilities. We have proposed a 365-day reinvestment period for proceeds up to $30,000,000 per fiscal year.
3. Material Adverse Change (MAC) / Material Adverse Effect (MAE) Definition — The Initial Draft contains an unusually broad MAC definition with no express carve-outs. We have proposed carve-outs for general economic conditions, shipping industry conditions, changes in law, changes in accounting standards, seasonal fluctuations in freight rates, and the announcement effects of the contemplated transactions, in each case consistent with prevailing market standards.
4. Change of Control — The Initial Draft defines "Change of Control" with reference to a 51% equity ownership threshold for Chairman Nikolaos Karadimitriou and provides for automatic acceleration upon a change of control event. We have proposed a reduction of the ownership threshold to 30% and a shift from automatic acceleration to an offer/put mechanism.
5. Financial Covenants — We have material comments on three of the four financial covenants. In particular, the Borrower's position on the step-down level for the consolidated net leverage ratio (4.00:1.00 versus the Initial Draft's 3.75:1.00), the minimum interest coverage ratio (3.00:1.00 versus 3.25:1.00), and the maximum capital expenditures limitation ($80,000,000 versus $65,000,000) require commercial discussion. We have also proposed a limited equity cure right, which is absent from the Initial Draft.
6. Collateral Coverage and Vessel Release Mechanics — The Initial Draft does not include any mechanism for the release of Mortgaged Vessels from the collateral package. We have inserted comprehensive vessel release provisions, which we regard as essential to the Borrower's ability to manage its fleet during the term of the facility.
7. Negative Covenants — Restricted Payments — The Initial Draft's flat prohibition on dividends during any period in which leverage exceeds 3.50:1.00 is not workable for TSL given its private ownership structure and Chairman Karadimitriou's reliance on distributions from the Borrower. We have proposed a builder basket approach with a flat annual basket.
8. Conditions Precedent — The Initial Draft subjects certain documentary conditions precedent to the Administrative Agent's "sole discretion." We have proposed that all documentary conditions be satisfied to the "reasonable satisfaction" of the Administrative Agent.
In addition to the foregoing commercial and legal issues, we have identified a number of structural and definitional issues in the Initial Draft that we believe are best addressed by telephone discussion rather than through iterative written markups. These include, among other things, the incorrect categorization of all Guarantors as organized under a single jurisdiction, the failure to clearly delineate the roles of the Administrative Agent and the Collateral Agent, and the absence of certain schedules and exhibits (including the schedule of subsidiaries and the form of payoff letter for the existing Harborstone facility).
We would like to propose a negotiation call during the week of April 17, 2023 to address the most significant open items identified herein and in our markup. We believe that an efficient discussion of the approximately 45 comments we have flagged as "critical — require discussion before next draft" will substantially narrow the issues for the next revised draft. Please let us know your availability, and we will coordinate with Catherine Hsiang and Aris Komnenidis to ensure appropriate client participation.
We look forward to a productive dialogue and remain available at your convenience to discuss any aspect of our markup. Please do not hesitate to contact the undersigned or Ian Blackwood with any questions or comments.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Sophie Tremblay Lead Associate Telephone: (212) 555-7400
Email: stremblay@calderwoodharkness.com
Enclosures: Redline Markup of Draft Credit Agreement (tracked changes, 210 pages); Summary of Principal Comments; Index of Comments by Section
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SUMMARY OF PRINCIPAL COMMENTS
The following is a high-level summary of the most significant comments reflected in the Borrower's redline markup of the Initial Draft Credit Agreement. This summary is organized thematically and is intended to facilitate review and discussion. It does not purport to be exhaustive; all comments in the redline should be read in full, and all comments not specifically addressed below remain open unless expressly withdrawn. Capitalized terms used in this summary but not otherwise defined shall have the meanings assigned to them in the Initial Draft, as modified by the Borrower's proposed redline.
1. Definitional and Structural Issues
1.1 Definition of "Borrower." The definition of "Borrower" should be confirmed to refer to Thalassa Shipping & Logistics SA, a Société Anonyme (Ανώνυμη Εταιρεία) organized and existing under the laws of the Hellenic Republic, with its registered office at 14 Akti Miaouli, Piraeus 185 35, Greece. The Borrower's Greek Tax Identification Number (AFM) is 094728361, and its GEMI Registration Number is 143209501000. The Initial Draft references the Borrower's corporate form and jurisdiction of organization in several places; we have conformed these references throughout to ensure accuracy and consistency. In particular, the Initial Draft's reference to the Borrower as a société anonyme "organized under the laws of Greece" should be revised to refer to the "Hellenic Republic," which is the formal name of the relevant jurisdiction as it appears in TSL's constituent documents and Greek corporate registry records.
1.2 Definition of "Guarantors." The Initial Draft incorrectly categorizes all Guarantors as organized under a single jurisdiction. In fact, the Guarantors are organized under three separate jurisdictions, as follows:
(a) Thalassa Dry Bulk Holdings Ltd., a company organized under the laws of the Republic of Cyprus;
(b) Thalassa Tanker Operations Ltd., a company organized under the laws of the Republic of the marshall Islands; and
(c) Thalassa Logistics International Ltd., a company organized under the laws of the Republic of Cyprus.
We have corrected the definition of "Guarantors" in the redline and have conformed all references throughout the agreement to reflect the proper jurisdiction of organization for each Guarantor. This correction has implications for, among other things, the legal opinions required as conditions precedent to closing (Section 4), the representations regarding corporate authority and enforceability (Section 5), and the collateral documentation requirements (particularly with respect to the pledge of equity interests in each vessel-owning subsidiary).
1.3 Definition of "Administrative Agent." The definition of "Administrative Agent" should refer to Meridian Atlantic Bank, National Association, with its principal office at 600 Lexington Avenue, 38th Floor, New York, NY 10022. We have conformed this definition and all related notice provisions in the redline.
1.4 Definition of "Collateral Agent." We propose that the role of the Collateral Agent — Pinnacle Trust & Agency Services Inc., One Liberty Plaza, 44th Floor, New York, NY 10006 — be more clearly separated from the role of the Administrative Agent throughout the agreement. The Initial Draft conflates these roles in several provisions, including the provisions relating to the exercise of remedies upon an event of default, the release of collateral, and the filing of security documents with flag state registries. Where the Collateral Agent is acting in its capacity as holder of security in trust for the benefit of the Secured Parties, its rights, obligations, and authority should be distinctly set forth and should not be subsumed within the general agency provisions applicable to the Administrative Agent. We have marked up the relevant provisions accordingly and have inserted standard exculpation and indemnification provisions applicable to Pinnacle Trust in its capacity as Collateral Agent.
1.5 Definition of "Lenders" and "Commitment." The definition of "Lenders" must accurately reflect the full syndicate and the individual commitments of each Lender as follows:
The aggregate Commitment is $150,000,000. Individual Commitments should be set forth in Schedule 2.01, which we have marked up to include the table above. We note that the Initial Draft contains references to the "Lenders" in a manner that suggests additional Lenders may be part of the syndicate; we have requested confirmation that the syndicate is limited to the four Lenders identified above, consistent with the Mandate and Fee Letter dated February 14, 2023 and the syndication allocation agreed upon by the parties.
2. SOFR Benchmark and Interest Rate Provisions
2.1 General. The Borrower has comprehensive comments on the SOFR benchmark and interest rate provisions set forth in Article II of the Initial Draft. These comments are summarized below and are reflected in detail in the redline.
2.2 Interest Rate Structure. The interest rate structure set forth in the Initial Draft provides for interest on revolving loans at a rate per annum equal to the Adjusted Term SOFR Rate plus an applicable margin. The applicable margin ranges from 225 basis points to 325 basis points, determined by reference to a consolidated net leverage ratio pricing grid. The Borrower does not object to the pricing grid structure as proposed, subject to confirmation of the leverage ratio thresholds and step-levels, which should be consistent with the term sheet attached to the Mandate and Fee Letter dated February 14, 2023.
2.3 Benchmark Replacement Provisions. The Borrower objects to the benchmark replacement provisions set forth in Section 2.14 of the Initial Draft. As drafted, these provisions afford the Administrative Agent excessive unilateral discretion to select a successor benchmark rate in the event that Term SOFR is unavailable or is discontinued. Specifically, the Initial Draft permits the Administrative Agent, in its "sole discretion," to designate a "Benchmark Replacement" and to make "Benchmark Replacement Conforming Changes" without the consent of the Borrower or the Lenders. This approach is inconsistent with current market practice for syndicated credit facilities, where the trend has been toward requiring the consent of both the Borrower and the Required Lenders for any benchmark transition, subject to a limited "hardwired" fallback waterfall.
We have proposed revisions to Section 2.14 that would require the consent of the Borrower and the Required Lenders for any benchmark replacement, subject to a customary negative consent mechanism with a five-business-day objection period. In the alternative, we would accept a hardwired fallback waterfall that specifies the sequential replacement benchmarks (beginning with the term rate recommended by the Federal Reserve Board or the ARRC) and that limits the Administrative Agent's discretion to administrative and operational conforming changes only.
2.4 Credit Spread Adjustment. We have requested conforming changes to the credit spread adjustment (CSA) provisions to reflect the current ARRC-recommended market conventions. The Initial Draft references a static CSA that may not align with the ARRC's recommended spread adjustment for the applicable interest period tenor. We have proposed that the CSA be determined by reference to the ARRC's most recently published recommendation at the time of any benchmark transition event.
2.5 Interest Periods. The Borrower requests that the agreement provide for interest periods of 1 month, 3 months, and 6 months for revolving loans, with the option to request a 1-week interest period for swingline loans. The Initial Draft permits only 1-month and 3-month interest periods. The availability of a 6-month interest period is important to the Borrower for treasury management and cash flow planning purposes, and is consistent with standard market practice for facilities of this type and size.
2.6 Broken Funding Provisions. Section 2.16 of the Initial Draft requires the Borrower to indemnify each Lender against any loss, cost, or expense incurred as a result of a prepayment or non-borrowing that results in the breakage of a SOFR interest period. We have proposed revisions to narrow this indemnification obligation to cover only the Lender's actual, documented losses (and not notional or hypothetical losses) arising from the liquidation or redeployment of deposits or other funds. We have deleted the reference to "anticipated profits" as a component of breakage costs, which is not customary in the current market.
3. Facility Structure and Sublimits
3.1 Revolving Credit Facility. The revolving credit facility in the aggregate principal amount of $150,000,000 is consistent with the Mandate and Fee Letter and the Borrower's liquidity requirements. We have no objection to the overall facility size.
3.2 Letter of Credit Sublimit. The Initial Draft provides for a letter of credit sublimit of $20,000,000 but does not identify the issuing bank or include mechanics for the appointment of multiple letter of credit issuers. Given the nature of the Borrower's operations in the international shipping industry, the ability to obtain letters of credit from more than one issuing bank is commercially important. We have proposed that Meridian Atlantic Bank, N.A. serve as the initial issuing bank (the "Initial LC Issuer") and have inserted provisions permitting the Borrower to request the appointment of additional issuing banks, subject to the consent of the Administrative Agent and the proposed additional issuing bank. The participation and reimbursement mechanics for letters of credit issued by additional issuing banks have been marked up to align with the existing participation purchase provisions for letters of credit issued by the Initial LC Issuer.
3.3 Swingline Sublimit. The Initial Draft provides for a swingline sublimit of $15,000,000 but does not identify the swingline lender. We have proposed that Meridian Atlantic Bank, N.A. serve as the swingline lender and have marked up the swingline settlement mechanics and participation purchase provisions in Section 2.05 of the Initial Draft to conform to standard LMA/LSTA swingline provisions. In particular, we have clarified that the swingline lender shall have the right to request that any outstanding swingline loan be refunded by the Lenders in accordance with their respective pro rata shares upon one business day's notice, and that each Lender shall be obligated to fund its pro rata share of any such refunding within one business day of such request.
3.4 Incremental Facility Provisions (Accordion Feature). The Initial Draft does not contain an incremental facility provision. We have proposed the insertion of a new Section 2.20 providing for an uncommitted incremental revolving facility of up to $50,000,000 (the "Accordion Feature"), subject to the following conditions:
(a) no event of default has occurred and is continuing or would result from the incurrence of the incremental commitments;
(b) the Borrower shall be in pro forma compliance with all financial covenants after giving effect to the incremental commitments (and any borrowings thereunder);
(c) the incremental commitments may be provided by existing Lenders (in their sole discretion) or by new lenders approved by the Administrative Agent and the Borrower (such approval not to be unreasonably withheld);
(d) the terms and conditions of the incremental commitments shall be substantially identical to those of the existing revolving commitments, including with respect to maturity, interest rate margin, and security;
(e) the applicable margin for incremental commitments shall not exceed the applicable margin for the existing revolving commitments by more than 25 basis points (and, if it does, the applicable margin for the existing revolving commitments shall be increased to be within 25 basis points of the incremental margin — the so-called "MFN" protection); and
(f) the Borrower shall deliver a certificate of a responsible officer certifying compliance with the foregoing conditions, together with updated corporate authorization documents and such legal opinions as the Administrative Agent may reasonably request.
The Accordion Feature is a standard provision in revolving credit facilities of this size and is important to the Borrower's ability to access incremental liquidity for fleet expansion and other corporate purposes without the need to negotiate a new credit facility. We note that the total facility size, inclusive of the Accordion Feature, would not exceed $200,000,000.
4. Purpose and Use of Proceeds
4.1 Refinancing. The primary purpose of the facility is to refinance the existing $125,000,000 revolving credit facility with Harborstone National Bank (the "Existing Facility"), which was established pursuant to a Credit Agreement dated November 15, 2018 between TSL and Harborstone National Bank, as amended by a First Amendment dated June 30, 2020 and a Second Amendment dated March 1, 2022. The Existing Facility matures on November 15, 2023. At closing, the Borrower intends to draw a portion of the new facility to repay in full all outstanding obligations under the Existing Facility and to obtain a release of all liens securing the Existing Facility.
4.2 Incremental Liquidity and General Corporate Purposes. The facility provides the Borrower with approximately $25,000,000 in incremental liquidity beyond the amount necessary to refinance the Existing Facility ($150,000,000 minus $125,000,000 = $25,000,000). This incremental liquidity, together with the ongoing availability of undrawn revolving commitments, will be used for general corporate purposes and working capital needs.
4.3 Borrower's Comment on Use of Proceeds Restriction. We have marked up the use of proceeds clause in Section 6.12 of the Initial Draft. As drafted, the clause restricts the use of loan proceeds to (a) refinancing the Existing Facility and (b) "working capital purposes directly related to the operation of the Borrower's fleet." This formulation is overly restrictive and does not permit the use of proceeds for legitimate general corporate purposes such as corporate overhead, tax payments, intercompany transactions, and other ordinary course business expenses. We have proposed broadening the permitted use of proceeds to include "general corporate purposes and working capital" without the limiting qualifier "directly related to the operation of the Borrower's fleet."
5. Commitment Fee and Fee Provisions
5.1 Commitment Fee. The commitment fee is 0.375% per annum on the daily average undrawn amount of the total commitments, stepping down to 0.25% per annum during any period in which the utilization of the facility exceeds 50% of total commitments (i.e., utilization in excess of $75,000,000). The Borrower does not object to the commitment fee structure as proposed, subject to the following comment.
5.2 Commitment Fee Calculation. We have proposed that the commitment fee calculation exclude outstanding swingline loans and the stated amount of outstanding letters of credit from the "unused" commitment calculation for fee purposes. The rationale is that swingline loans and letters of credit are drawn against the revolving commitments and reduce availability; the Borrower should not be required to pay a commitment fee on commitment amounts that are effectively utilized through these sub-facilities. This treatment is consistent with standard market practice for revolving credit facilities with swingline and letter of credit sub-facilities.
5.3 Upfront / Arranging Fee. The upfront fee of $750,000 (equal to 0.50% of $150,000,000 total commitments) is payable to Meridian Atlantic Bank, N.A. in its capacity as Sole Lead Arranger and Sole Bookrunner. This fee is referenced in, and governed by, the separate Mandate and Fee Letter dated February 14, 2023 between the Borrower and Meridian Atlantic. We have proposed that the upfront fee not be repeated or described in the body of the credit agreement, as the fee letter is the sole governing instrument for this obligation.
5.4 Administrative Agent Fee. The annual administrative agent fee of $75,000 is payable to Meridian Atlantic Bank, N.A. in its capacity as Administrative Agent. We have proposed that the fee be described in the credit agreement by cross-reference to the Agent Fee Letter rather than specified in the body of the credit agreement, consistent with standard practice and the confidentiality of fee arrangements.
6. Maturity and Repayment
6.1 Maturity Date. The proposed maturity date is five (5) years from the closing date. Based on the anticipated closing in Q2 or Q3 2023, the maturity date would fall approximately in mid-2028. The Borrower accepts the five-year tenor, subject to the extension option described below.
6.2 Extension Option. We have proposed the insertion of a new Section 2.21 providing for an extension option that would permit the Borrower to request up to two (2) one-year extensions of the maturity date (for a maximum extended maturity of approximately mid-2030). Each extension would be subject to the following conditions:
(a) the Borrower shall deliver a written request for extension to the Administrative Agent not earlier than 90 days and not later than 60 days prior to the then-applicable maturity date;
(b) no event of default has occurred and is continuing or would result from the extension;
(c) each Lender shall have the right, in its sole and individual discretion, to consent or decline to consent to the extension within 30 days of receipt of the extension request; any Lender that fails to respond within such 30-day period shall be deemed to have declined;
(d) non-extending Lenders shall be replaced by the Borrower, at the Borrower's expense, with substitute lenders willing to assume such Lender's commitments, or the Borrower shall prepay such Lender's pro rata share of outstanding loans on the original maturity date; and
(e) customary extension-date deliverables (bring-down of representations, updated corporate authorization documents, payment of any applicable extension fee) shall be delivered as a condition to effectiveness of the extension.
6.3 Voluntary Prepayment. We have marked up the voluntary prepayment provisions in Section 2.11 to permit the Borrower to prepay outstanding revolving loans, in whole or in part, without premium or penalty, on any business day, subject to three (3) business days' prior irrevocable written notice to the Administrative Agent (or one (1) business day's prior notice in the case of swingline loans). Each partial prepayment of revolving loans shall be in a minimum principal amount of $5,000,000 (or $1,000,000 in the case of swingline loans) and in integral multiples of $1,000,000 in excess thereof. Prepayments of SOFR loans may be made only on the last day of the applicable interest period, unless the Borrower pays any applicable broken funding costs under Section 2.16 as marked up.
7. Mandatory Prepayment Provisions
7.1 Vessel Sale Proceeds. Section 2.12(a) of the Initial Draft requires that 100% of net cash proceeds from any sale, transfer, or other disposition of a vessel be applied as a mandatory prepayment of outstanding obligations under the facility. This requirement applies without any reinvestment right and without any de minimis or annual aggregate threshold.
We have proposed substantial revisions to this provision. The Borrower's position is as follows:
(a) The Borrower shall have a 365-day reinvestment period within which to reinvest net cash proceeds from vessel sales in the acquisition of replacement vessels or capital improvements to existing fleet vessels.
(b) The reinvestment right shall apply to net cash proceeds up to an aggregate amount of $30,000,000 per fiscal year. Net cash proceeds in excess of $30,000,000 in any fiscal year shall be applied as mandatory prepayment within five (5) business days of receipt.
(c) Any net cash proceeds subject to the reinvestment right that are not actually reinvested within the 365-day reinvestment period shall be applied as mandatory prepayment within five (5) business days following the expiration of such period.
(d) The mandatory prepayment obligation shall be subject to the Borrower's right to designate the order of application among the outstanding loans and to select the interest period(s) against which the prepayment shall be applied.
These revisions are consistent with standard market practice for shipping finance revolving credit facilities and are necessary to preserve the Borrower's operational flexibility to manage its fleet through ordinary course vessel sale-and-purchase activity.
7.2 Insurance Proceeds / Casualty Events. We have proposed revisions to Section 2.12(b) of the Initial Draft to provide that insurance proceeds (other than hull and machinery total loss proceeds) need not be applied as mandatory prepayment unless such proceeds exceed $5,000,000 in the aggregate with respect to any single casualty event or series of related casualty events. For insurance proceeds in excess of the $5,000,000 threshold, the Borrower shall have a reinvestment right on terms consistent with the vessel sale proceeds reinvestment provisions described above.
For hull and machinery total loss proceeds (i.e., proceeds received upon the actual or constructive total loss of a Mortgaged Vessel), we agree that 100% of such proceeds should be applied as mandatory prepayment, subject to the Borrower's right to apply a portion of such proceeds to the acquisition of a replacement vessel if the Borrower enters into a binding purchase agreement for such replacement vessel within 90 days of the loss event.
7.3 Change of Control. A change of control event triggers a mandatory prepayment of all outstanding obligations. The Borrower's specific comments on the definition of "Change of Control" are set forth in Section 11 below. As to the mandatory prepayment consequence, we have proposed that a change of control trigger a mandatory offer to prepay (rather than automatic acceleration), with each Lender having 30 days to elect whether to accept or decline prepayment of its pro rata share. See Section 11 below for further detail.
7.4 Collateral Coverage Deficiency. Section 2.12(d) of the Initial Draft provides that if the collateral coverage ratio falls below 140% of the outstanding facility obligations, the Borrower must cure the deficiency within 30 days by pledging additional vessels, providing additional cash collateral, or prepaying a portion of the outstanding loans sufficient to restore the collateral coverage ratio to at least 140%. If the deficiency is not cured within 30 days, a mandatory prepayment obligation arises for the full amount necessary to restore compliance.
We have proposed the following revisions:
(a) The cure period should be extended from 30 days to 60 days. Given the practical challenges of obtaining vessel appraisals, identifying and pledging additional vessels (including registration of additional ship mortgages with flag state registries), and arranging for cash collateral deposits, 30 days is insufficient to permit the Borrower to take meaningful curative action.
(b) The Borrower should have the right to cure the deficiency through any combination of the following: (i) pledging additional Mortgaged Vessels, (ii) providing additional cash collateral in a deposit account subject to a first-priority security interest in favor of the Collateral Agent, (iii) prepaying a portion of the outstanding loans, or (iv) obtaining additional appraisals from an approved appraiser demonstrating that the aggregate fair market value of the Mortgaged Vessels (including any newly pledged vessels) satisfies the 140% threshold.
8. Collateral Package
8.1 Ship Mortgages. The credit facility is secured by, among other things, first-priority ship mortgages on 18 designated vessels (the "Mortgaged Vessels") drawn from the Borrower's total fleet of 40 vessels (28 dry bulk carriers and 12 tankers). The Mortgaged Vessels have an aggregate appraised fair market value of approximately $780,000,000, as reflected in the preliminary appraisal engagement with Seastone Maritime Advisors Ltd. (formal appraisal reports to be delivered prior to closing). At full utilization of the $150,000,000 revolving facility, the collateral coverage ratio on the Mortgaged Vessels alone would be approximately 520%, which is well in excess of the minimum 140% collateral coverage ratio required by the agreement.
8.2 Minimum Collateral Coverage Ratio. The minimum collateral coverage ratio is 140% of outstanding facility obligations. At a full draw of $150,000,000, the minimum required collateral value would be $210,000,000. The Borrower accepts the 140% ratio, subject to the cure and deficiency provisions described in Section 7.4 above.
8.3 Additional Collateral. In addition to the ship mortgages, the collateral package includes:
(a) Assignment of earnings accounts for each of the Mortgaged Vessels, to be documented through separate account pledge agreements governed by the law of the jurisdiction in which the relevant earnings account is maintained.
(b) Assignment of hull & machinery and P&I insurance for each of the Mortgaged Vessels. The Borrower's insurance broker is Trident Marine Insurance Brokers Ltd. All assignments of insurance shall be effected through notices of assignment delivered to the relevant insurers and P&I clubs.
(c) Pledge of 100% of the equity interests in each vessel-owning subsidiary that is the registered owner of a Mortgaged Vessel. The equity pledges will be documented under the laws of the relevant jurisdiction of organization of each vessel-owning subsidiary (Cyprus, Republic of the marshall Islands, or Greece, as applicable).
(d) Assignment of all time charters with remaining terms of 12 months or more relating to Mortgaged Vessels. Assignments of time charters will be documented through separate assignment agreements and notices of assignment delivered to the relevant charterers.
8.4 Vessel Release Mechanics. The Initial Draft does not include any mechanism for the release of a Mortgaged Vessel from the mortgage. This is a significant omission. The Borrower operates in the international shipping industry and must retain the flexibility to sell, scrap, or otherwise dispose of individual vessels in the ordinary course of its business. We have inserted comprehensive vessel release provisions into the redline, which provide as follows:
(a) The Borrower may obtain a release of a Mortgaged Vessel from the ship mortgage and related collateral documents (including the assignment of earnings, assignment of insurance, and assignment of any time charter relating to such vessel) upon satisfaction of the following conditions:
(i) no event of default has occurred and is continuing or would result from such release;
(ii) after giving pro forma effect to such release (and the application of any net cash proceeds from the disposition of such vessel as a mandatory prepayment, if applicable), the collateral coverage ratio shall be not less than 140%; and
(iii) the Borrower shall deliver to the Administrative Agent and the Collateral Agent an updated appraisal from an approved appraiser (which may be Seastone Maritime Advisors Ltd.) demonstrating compliance with the collateral coverage ratio on a pro forma basis after giving effect to such release.
(b) Upon satisfaction of the foregoing conditions, the Collateral Agent shall, at the Borrower's expense, execute and deliver such instruments of release, discharge, and reassignment as are necessary to effect the release of the applicable Mortgaged Vessel from the collateral package, including the filing of mortgage discharges with the applicable flag state registry.
8.5 Appraisal Frequency. The Initial Draft requires semi-annual appraisals of the Mortgaged Vessels at the Borrower's expense. We have proposed that appraisals be required on an annual basis only, with the Borrower bearing the cost of one annual appraisal per year. Additional appraisals should be required only upon the occurrence of (a) an event of default or (b) a material casualty affecting a Mortgaged Vessel. The semi-annual appraisal requirement proposed in the Initial Draft is not consistent with current market practice for shipping finance revolving credit facilities of this size and is an unnecessary expense for the Borrower, particularly given the robust collateral coverage ratio. We note that Seastone Maritime Advisors Ltd. will be pre-approved as the initial approved appraiser.
8.6 Collateral Agent. Pinnacle Trust & Agency Services Inc. shall hold all security and collateral in trust for the benefit of the Secured Parties. Standard exculpation and indemnification provisions shall apply to Pinnacle Trust in its capacity as Collateral Agent. See also Section 18 below regarding the agency provisions generally.
9. Financial Covenants
The Borrower has significant comments on three of the four financial covenants proposed in the Initial Draft, as well as on the absence of an equity cure provision. The Borrower's positions are supported by reference to TSL's audited financial results for the fiscal year ended December 31, 2022 (audited by Hawthorne & Garrett LLP), which reflect revenue of approximately $620,000,000 and EBITDA of approximately $145,000,000.
9.1 Maximum Consolidated Net Leverage Ratio. The Borrower accepts a maximum consolidated net leverage ratio of 4.50:1.00 for the period from closing through the third anniversary of the closing date. However, the Borrower objects to the Initial Draft's proposed step-down to 3.75:1.00 commencing with the first fiscal quarter ending after the third anniversary of closing. The Borrower's position is that the step-down should be to 4.00:1.00, which provides the Lenders with meaningful deleveraging protection while preserving the Borrower's financial flexibility. At a 4.00:1.00 leverage ratio and an assumed Consolidated EBITDA of approximately $145,000,000 (consistent with FY2022 results), the maximum permitted consolidated net indebtedness would be approximately $580,000,000 — well in excess of the $150,000,000 facility. The Borrower notes that a 3.75:1.00 step-down is tighter than prevailing market standards for senior secured revolving credit facilities in the shipping sector, which typically range from 4.00:1.00 to 4.50:1.00 throughout the term.
9.2 Minimum Consolidated Interest Coverage Ratio. The Borrower proposes a minimum consolidated interest coverage ratio of 3.00:1.00, compared to the Initial Draft's proposed ratio of 3.25:1.00. A 3.00:1.00 ratio is consistent with market practice for shipping finance transactions and provides adequate coverage for the Lenders. At a 3.00:1.00 ratio and an assumed Consolidated EBITDA of approximately $145,000,000, the maximum permitted consolidated interest expense would be approximately $48,333,333 — significantly in excess of the anticipated interest expense on the facility at full utilization (approximately $5,000,000 to $6,000,000 per annum at current rates plus applicable margin).
9.3 Minimum Liquidity. The Borrower accepts a minimum liquidity requirement of $30,000,000 but objects to the Initial Draft's definition of "Liquidity," which includes only unrestricted cash and cash equivalents. We have proposed that the definition of "Liquidity" be expanded to include available, undrawn, and uncancelled revolving commitments under this facility, in addition to unrestricted cash and cash equivalents. This is consistent with market practice and recognizes the revolving nature of the facility; the availability of undrawn commitments is a meaningful component of the Borrower's liquidity position and should be credited accordingly.
9.4 Maximum Capital Expenditures. The Borrower proposes a maximum capital expenditures limitation of $80,000,000 per fiscal year, compared to the Initial Draft's proposed limitation of $65,000,000. The Borrower's fleet includes 40 vessels with an average age of approximately 9 years. Fleet renewal and maintenance, including periodic drydocking expenditures (which can range from $2,000,000 to $5,000,000 per vessel per drydocking cycle), require a CapEx budget significantly in excess of $65,000,000. In addition, the Borrower may from time to time undertake scrubber installations, ballast water treatment system installations, and other regulatory compliance-related capital expenditures. The Borrower also proposes that unused amounts from the CapEx basket be permitted to carry over to the immediately succeeding fiscal year in an amount up to 50% of the unused CapEx basket for the prior fiscal year.
9.5 Equity Cure Right. The Initial Draft does not contain an equity cure provision. We have proposed the insertion of a limited equity cure right in Section 7.18 of the agreement, which would permit the Borrower's shareholders (including Chairman Nikolaos Karadimitriou) to contribute equity to the Borrower in an amount sufficient to cure a financial covenant breach, subject to the following customary limitations:
(a) no more than two (2) equity cures may be exercised in any consecutive four-fiscal-quarter period;
(b) no more than four (4) equity cures may be exercised during the life of the facility;
(c) the equity contribution must be received by the Borrower within 15 business days following the date of delivery of the applicable compliance certificate;
(d) the proceeds of the equity contribution shall be applied to increase Consolidated EBITDA (for the purposes of the leverage ratio and interest coverage ratio calculations) or to reduce consolidated indebtedness (for the purposes of the leverage ratio calculation), as elected by the Borrower, for the fiscal quarter in which the breach occurred;
(e) no single equity contribution shall be counted toward the cure of more than one financial covenant for any given fiscal quarter; and
(f) the equity contribution shall be in the form of common equity and shall not constitute indebtedness, redeemable equity, or any instrument with debt-like characteristics.
The equity cure right is an important structural protection for the Borrower given the cyclicality of the shipping industry and the potential for short-term fluctuations in earnings to create technical covenant breaches that do not reflect a fundamental deterioration in the Borrower's financial condition.
10. Material Adverse Change (MAC) / Material Adverse Effect (MAE) Definition
10.1 General. We have extensively marked up the definition of "Material Adverse Change" (or "Material Adverse Effect") in Section 1.01 of the Initial Draft. The Initial Draft contains an extremely broad MAC definition that encompasses any material adverse change in or material adverse effect on (a) the business, assets, property, condition (financial or otherwise), or results of operations of the Borrower or any of its subsidiaries, (b) the ability of the Borrower or any Guarantor to perform its obligations under the credit agreement or any security document, or (c) the rights and remedies of the Administrative Agent, the Collateral Agent, or any Lender under the credit agreement or any security document. The definition contains no express carve-outs of any kind.
10.2 Proposed Carve-Outs. The absence of carve-outs from the MAC definition is not consistent with current market standards for syndicated credit facilities, whether in the shipping sector or otherwise. We have proposed the following carve-outs to the MAC definition, each of which is intended to exclude from the definition events and circumstances that are beyond the Borrower's control, are industry-wide or market-wide in scope, or are otherwise not indicative of a Borrower-specific adverse change:
(a) General economic or financial market conditions — changes in general economic conditions (including changes in interest rates, exchange rates, commodity prices, or credit markets) or financial market conditions (including market disruptions, volatility, or liquidity contractions) that do not disproportionately affect the Borrower relative to other participants in the shipping industry;
(b) Shipping industry conditions — changes in conditions generally affecting the international shipping industry, including changes in freight rates, charter hire rates, vessel values, newbuilding prices, scrap values, and tonnage supply/demand dynamics, that do not disproportionately affect the Borrower relative to other participants in the industry;
(c) Changes in applicable law or regulation — changes in or enactments of applicable law, regulation, or governmental policy (including changes in sanctions regimes, environmental regulations, maritime safety regulations, and tax law) that apply generally to the shipping industry or to companies operating in the Borrower's jurisdictions;
(d) Changes in GAAP or IFRS — changes in generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other applicable accounting standards, or changes in the interpretation or application thereof;
(e) Seasonal fluctuations in freight rates — the effects of seasonal fluctuations in freight rates and charter hire rates, which are an inherent characteristic of the shipping industry and do not, in and of themselves, constitute a material adverse change in the Borrower's financial condition; and
(f) Announcement and pendency effects — the effects of the announcement or pendency of the transactions contemplated by the credit agreement, including the refinancing of the Existing Facility and the entry into the security documents.
10.3 Measurement Standard. We have proposed that the MAC be measured only with respect to the Borrower and the Guarantors taken as a whole, and not with respect to any individual subsidiary. Given the Borrower's multi-subsidiary corporate structure (with individual vessel-owning subsidiaries serving as registered owners of individual vessels), a MAC definition that could be triggered by adverse events affecting a single vessel-owning subsidiary would be impractical and could result in technical MAC events arising from routine fleet management decisions (such as the scrapping or sale of a single older vessel).
10.4 Consistency Across Provisions. We note that the MAC definition is referenced in the credit agreement in multiple contexts, including: (a) as a condition precedent to the initial borrowing and to each subsequent borrowing (Article IV), (b) as a representation and warranty (Article V), and (c) as an event of default (Article VIII). It is essential that the MAC definition be applied consistently across all of these references, and that the proposed carve-outs apply in each context. We have conformed the relevant cross-references in the redline accordingly.
11. Change of Control
11.1 Definition. The Initial Draft defines "Change of Control" as any event in which Nikolaos Karadimitriou (Founder and Chairman of TSL) ceases to own, directly or indirectly, at least 51% of the voting equity interests in the Borrower. We have two principal objections to this definition.
11.2 Ownership Threshold. First, the 51% ownership threshold is not appropriate. Chairman Karadimitriou currently holds approximately 62% of the voting equity in TSL, but the Borrower's capital structure may evolve over the five-year term of the facility to accommodate strategic investors, co-investment partners, or management equity incentive programs. A 51% threshold would effectively preclude any meaningful dilution of Chairman Karadimitriou's equity stake. We have proposed a reduction of the threshold to 30%, which is consistent with the mandatory tender offer threshold under Greek corporate law (Law 3461/2006 and subsequent amendments) and reflects a level of ownership that, taken together with board representation and management control, provides meaningful assurance that Chairman Karadimitriou retains effective influence over the Borrower's operations and strategic direction.
11.3 Ownership and Control Test. Second, the definition should require a change in both ownership and control, not merely ownership. As proposed in our redline, a "Change of Control" would occur only if Chairman Karadimitriou (a) ceases to own, directly or indirectly, at least 30% of the voting equity interests in the Borrower, and (b) ceases to have the ability, directly or indirectly, to direct or cause the direction of the management and policies of the Borrower (whether through ownership of voting securities, by contract, or otherwise). This dual-trigger formulation ensures that a mere reduction in equity ownership — for example, as a result of a capital raise that dilutes all existing shareholders proportionally — does not, standing alone, constitute a Change of Control if Chairman Karadimitriou remains in effective control of the Borrower.
11.4 Key Person Provision. In the alternative, or in addition to the change of control provision, we have proposed a "Key Person" provision that would require Chairman Nikolaos Karadimitriou to remain as Chairman of the Board of Directors or as a member of the Board of Directors of the Borrower. A breach of the Key Person provision would constitute an event of default (subject to a cure period to permit the appointment of a replacement key person acceptable to the Required Lenders). The Key Person provision would operate independently of any equity ownership trigger and would address the Lenders' legitimate concern regarding continuity of management and strategic direction without constraining the Borrower's capital structure.
11.5 Consequences of Change of Control. The Initial Draft provides that a change of control event results in automatic acceleration of all outstanding obligations and termination of all commitments. We object to automatic acceleration, which does not give the Lenders any individual choice in the matter and does not give the Borrower any opportunity to negotiate a consensual resolution. We have proposed an offer/put mechanism in lieu of automatic acceleration, as follows:
(a) Upon the occurrence of a Change of Control, the Borrower shall deliver a written notice to the Administrative Agent (for distribution to the Lenders) offering to prepay all outstanding obligations and terminate all commitments.
(b) Each Lender shall have 30 days from receipt of such notice to elect, in its sole discretion, whether to accept or decline the offer to prepay its pro rata share of the outstanding obligations and cancel its commitment.
(c) Any Lender that elects to accept the offer shall receive prepayment of its pro rata share of the outstanding obligations (together with all accrued interest and fees) within five (5) business days following the expiration of the 30-day election period.
(d) Any Lender that declines the offer (or fails to respond within the 30-day period) shall be deemed to have waived its right to mandatory prepayment in connection with such Change of Control event.
12. Representations and Warranties (Article V)
We have extensive comments across the representations and warranties article. The following summarizes the most significant markups:
12.1 No Litigation (Section 5.04). The "no litigation" representation has been qualified by materiality and now applies only to litigation that could reasonably be expected to result in a Material Adverse Effect. In addition, we have proposed that the representation exclude litigation disclosed on Schedule 5.04 (Disclosed Litigation), which the Borrower will prepare and deliver prior to closing. This is a standard qualification and disclosure mechanism for the no-litigation representation.
12.2 Compliance with Law (Section 5.05). We have added a knowledge qualifier for compliance matters that are not material. As revised, the representation provides that the Borrower and its subsidiaries are in compliance with all applicable laws "in all material respects," and that to the "knowledge of the Borrower," no violation of any law exists that could reasonably be expected to result in a Material Adverse Effect.
12.3 Environmental (Section 5.10). The environmental representation has been limited to material environmental matters and now includes a de minimis threshold of $2,000,000. Specifically, the Borrower represents that no environmental liability or obligation exists that could reasonably be expected to result in aggregate costs or liabilities in excess of $2,000,000.
12.4 Sanctions and Anti-Corruption (Section 5.17). We have proposed Borrower-specific language reflecting the Borrower's status as a Greek entity operating internationally. The sanctions representation now references compliance with applicable sanctions laws and regulations administered by the United States (including OFAC, the SDN List, and the EO 13846 framework), the European Union, the United Kingdom, the United Nations Security Council, and the Hellenic Republic. The anti-corruption representation references compliance with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and applicable Greek anti-bribery legislation.
12.5 Insurance (Section 5.12). The insurance representation has been revised to reference Trident Marine Insurance Brokers Ltd. as the Borrower's insurance broker and to describe coverage levels by cross-reference to the Insurance Requirements Schedule (to be annexed to the credit agreement). This approach avoids the risk of inconsistencies between the coverage levels described in the body of the agreement and the detailed requirements set forth in the schedule.
12.6 Vessel Condition (Section 5.18). The vessel condition representation has been qualified by the phrase "in all material respects" and now provides that each Mortgaged Vessel is maintained in good working order and condition, "in all material respects," consistent with prudent ship management practice. In addition, the representation requires that each Mortgaged Vessel maintain its classification with an approved classification society free of overdue recommendations, conditions of class, or memoranda that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.
12.7 Financial Statements (Section 5.03). The financial statements representation has been revised to refer specifically to the audited consolidated financial statements of the Borrower for the fiscal year ended December 31, 2022, prepared by Hawthorne & Garrett LLP in accordance with International Financial Reporting Standards (IFRS), which reflect revenue of approximately $620,000,000 and EBITDA of approximately $145,000,000. Interim unaudited quarterly financial statements are represented to be "prepared in accordance with IFRS in all material respects, subject to normal year-end adjustments and the absence of footnotes."
12.8 Ownership of Property / Title to Vessels (Section 5.06). The representation regarding ownership of property and title to vessels has been revised to accurately reflect the multi-jurisdictional fleet structure. The Mortgaged Vessels are registered under the flags of the Hellenic Republic, the Republic of Cyprus, and the Republic of the marshall Islands, and are owned by vessel-owning subsidiaries organized under the laws of those jurisdictions. The representation confirms that each vessel-owning subsidiary has good and marketable title to its respective vessel, free and clear of all liens other than permitted liens.
12.9 No Material Adverse Change (Section 5.03(b)). We object to the "no material adverse change" representation to the extent it is required to be made as of the closing date. We have proposed that this representation be limited to changes since the date of the most recent audited financial statements (i.e., December 31, 2022). A broader temporal scope is not appropriate and could be triggered by ordinary course business fluctuations occurring between December 31, 2022 and the closing date.
12.10 Subsidiaries (Section 5.15). The subsidiaries representation must be supported by a complete schedule listing all direct and indirect subsidiaries of the Borrower, including the three Guarantors (Thalassa Dry Bulk Holdings Ltd., Thalassa Tanker Operations Ltd., and Thalassa Logistics International Ltd.) and all vessel-owning subsidiaries. The Initial Draft does not include a Schedule 5.13 — we have inserted this schedule as a placeholder, to be populated by the Borrower prior to closing.
12.11 Specified Representations for Subsequent Borrowings. We have proposed that only "Specified Representations" be required to be true and correct at the time of each subsequent borrowing under the facility. The Specified Representations are limited to the representations regarding: (i) organization and good standing, (ii) corporate authority, (iii) enforceability, (iv) no conflict, (v) solvency, (vi) use of proceeds, (vii) OFAC/sanctions compliance, and (viii) anti-corruption compliance. All other representations should be made only at closing and should not be conditions to subsequent borrowings. This approach is consistent with current market practice for syndicated revolving credit facilities and avoids the risk that a technical inaccuracy in a non-fundamental representation (such as a minor environmental disclosure matter) could prevent the Borrower from accessing committed revolving availability.
13. Affirmative Covenants (Article VI)
13.1 Financial Reporting (Section 6.01). We have proposed the following financial reporting timeline:
(a) Annual audited financial statements: within 120 days of the end of each fiscal year. The Initial Draft proposes 90 days, which we object to as insufficient given the Greek audit timeline and the engagement with Hawthorne & Garrett LLP. Under IFRS and applicable Greek corporate law, audited financial statements for a Société Anonyme of TSL's size and complexity are typically finalized within 90 to 120 days of fiscal year-end. A 90-day delivery requirement would create an unreasonable risk of technical default in the ordinary course.
(b) Quarterly unaudited financial statements: within 60 days of the end of each of the first three fiscal quarters of each fiscal year. We accept the 60-day timeline proposed in the Initial Draft.
13.2 Vessel Appraisal (Section 6.05). Annual appraisals of the Mortgaged Vessels shall be conducted by an approved appraiser at the Borrower's expense. Seastone Maritime Advisors Ltd. shall be pre-approved as the initial approved appraiser for purposes of the credit agreement. Additional appraisals may be required only upon the occurrence of an event of default or a material casualty affecting one or more Mortgaged Vessels. We have deleted the semi-annual appraisal requirement proposed in the Initial Draft, for the reasons discussed in Section 8.5 above.
13.3 Insurance Covenants (Section 6.06). The Borrower shall maintain hull & machinery insurance, protection and indemnity (P&I) insurance, and war risk insurance for each Mortgaged Vessel in accordance with the requirements set forth in the Insurance Requirements Schedule. The Borrower's insurance broker shall be Trident Marine Insurance Brokers Ltd. or another broker approved by the Administrative Agent (such approval not to be unreasonably withheld). The Borrower shall provide evidence of insurance to the Administrative Agent on an annual basis, and shall promptly notify the Administrative Agent of any material change in insurance coverage.
13.4 Maintenance of Classification (Section 6.07). Each Mortgaged Vessel shall maintain its highest classification with an approved classification society (including Meridian Industries, Bureau Veritas, DNV, American Bureau of Shipping, and Nippon Kaiji Kyokai), free of overdue recommendations, conditions of class, or memoranda. We have conformed this covenant to be consistent with the vessel condition representation in Section 5.18.
13.5 Compliance with Laws (Section 6.03). The Borrower and its subsidiaries shall comply with all applicable laws, rules, and regulations "in all material respects." We have inserted specific cross-references to environmental laws, sanctions laws, and anti-corruption laws to emphasize the importance of compliance in these areas, consistent with the corresponding representations in Article V.
13.6 Notification of Events of Default (Section 6.02). The Borrower shall provide prompt notice to the Administrative Agent upon obtaining knowledge of the occurrence of any event of default or any event that, with the passage of time or the giving of notice (or both), would constitute an event of default. We have proposed a 5-business-day grace period for notification of n