CALDERWOOD & HARKNESS LLP 425 Park Avenue New York, NY 10022
Telephone: (212) 555-7800 Facsimile: (212) 555-7801
MEMORANDUM PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Ian Blackwood, Partner, Banking & Finance
From: Sophie Tremblay, Senior Associate, Banking & Finance
Date: April 12, 2023
Re: Key Issues in First Draft Credit Agreement — Thalassa Shipping & Logistics SA $150,000,000 Senior Secured Revolving Credit Facility
Matter No.: 1044-00002
I. Executive Summary
This memorandum summarizes and flags the principal substantive issues identified in our review of the first draft credit agreement (the "Draft" or "Draft Credit Agreement") circulated by Whitmore, Jennings & Alcott LLP ("WJA") on behalf of Meridian Atlantic Bank, National Association ("Meridian Atlantic" or "MAB"), in its capacity as Sole Lead Arranger, Sole Bookrunner, and Administrative Agent, dated April 5, 2023. The Draft was transmitted to our office via email from WJA partner Harrison Caldwell on the evening of April 5, with a request for comments by April 17, 2023. WJA's lead associate on the matter is Priya Subramanian.
The Draft runs approximately 210 pages, inclusive of all schedules and exhibits. Calderwood & Harkness's comprehensive redline, which is currently in final preparation and will be delivered to WJA by April 14, 2023, contains approximately 847 comments, spanning matters of both substance and drafting style. This memorandum distills those comments into seven principal issue categories for partner review and discussion with the client prior to delivery of the markup. Many of the remaining comments in the redline are technical or conforming in nature and do not warrant separate discussion at this stage, although several are noted briefly in Section IX below.
The Proposed Facility. The Draft contemplates a $150,000,000 senior secured revolving credit facility (the "Facility") to refinance the existing $125,000,000 revolving credit facility maintained by the Borrower with Harborstone National Bank pursuant to that certain Credit Agreement dated November 15, 2018, as amended by the First Amendment to Credit Agreement dated June 30, 2020 and the Second Amendment to Credit Agreement dated March 1, 2022 (the "Existing Credit Facility"). The Existing Credit Facility matures on November 15, 2023, and the proposed Facility is intended to replace it in its entirety. The incremental $25,000,000 in capacity above the existing commitment level is intended for general corporate purposes and working capital requirements.
The Borrower. The Borrower is Thalassa Shipping & Logistics SA ("TSL" or the "Borrower"), a Société Anonyme organized and existing under the laws of the Hellenic Republic, with its registered office in Piraeus, Greece. TSL is the parent operating company of the Thalassa group, which operates a fleet of 40 vessels consisting of 28 dry bulk carriers and 12 tankers. The company is majority-owned and controlled by Nikolaos Karadimitriou and his family.
The Guarantors. The obligations of the Borrower under the Facility are to be guaranteed by three subsidiaries: (i) Thalassa Dry Bulk Holdings Ltd., a company incorporated in Cyprus; (ii) Thalassa Tanker Operations Ltd., a corporation organized under the laws of the Republic of the marshall Islands; and (iii) Thalassa Logistics International Ltd., a company incorporated in Cyprus (collectively, the "Guarantors" and, together with the Borrower, the "Loan Parties").
The Proposed Syndicate. The Facility is expected to be syndicated among the following lenders, with the following approximate retained commitments:
Governing Law. The Draft Credit Agreement is governed by the laws of the State of New York.
Organization of this Memorandum. This memorandum addresses the following seven principal issue categories, each of which is discussed in detail in the sections that follow:
1. SOFR Fallback Mechanics (Section II);
2. Mandatory Prepayment Waterfall (Section III);
3. Material Adverse Change Definition (Section IV);
4. Change of Control Trigger (Section V);
5. Vessel Sale Proceeds Application (Section VI);
6. Restricted Payments Basket (Section VII); and
7. Events of Default (Section VIII).
Additional observations regarding conditions precedent, voting and amendment mechanics, and swingline and letter of credit provisions are addressed in Section IX. Recommended next steps are set forth in Section X, and a summary table of key issues is appended as Section XI.
II. SOFR Fallback Mechanics (Article II — Interest Rate Provisions)
A. Benchmark Replacement Framework
WJA's Draft pegs interest on borrowings under the Facility to Term SOFR (as published by CME Group Benchmark Administration Limited) plus an applicable margin ranging from 225 basis points to 325 basis points, determined by reference to a consolidated net leverage ratio pricing grid. This pricing structure is consistent with the term sheet circulated by MAB on March 20, 2023 (the "Term Sheet") and does not raise issues of substance in itself.
The Draft includes a benchmark replacement waterfall, set forth in Section 2.14, which is triggered upon the occurrence of a "Benchmark Transition Event." As defined in the Draft, a Benchmark Transition Event includes: (i) a public statement or publication of information by or on behalf of the administrator of SOFR (or the published component used in the calculation thereof) announcing that such administrator has ceased or will cease to provide SOFR (or such component thereof) permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide SOFR (or such component thereof); (ii) a public statement or publication of information by the regulatory supervisor for the administrator of SOFR, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, an insolvency official with jurisdiction over the administrator of SOFR, a resolution authority with jurisdiction over the administrator of SOFR, or a court or an entity with similar insolvency or resolution authority over the administrator of SOFR, which states that such administrator has ceased or will cease to provide SOFR permanently or indefinitely; or (iii) a public statement or publication of information by the regulatory supervisor for the administrator of SOFR announcing that SOFR is no longer representative.
The waterfall sequence following a Benchmark Transition Event is, in our assessment, lender-favorable. Specifically, the Draft grants the Administrative Agent sole discretion to select the replacement benchmark without affirmative Borrower consent. The Draft provides only a negative consent mechanism: the Administrative Agent is required to notify the Borrower and the Lenders of the proposed replacement benchmark, and such replacement shall become effective unless the Borrower delivers a written objection within five (5) Business Days of receipt of such notice. In practice, this structure places the burden on the Borrower to identify and object to a potentially unfavorable replacement benchmark within a compressed timeframe, rather than requiring the Agent to obtain the Borrower's agreement before implementation.
C&H's Recommended Position. We recommend revising Section 2.14 to require affirmative Borrower consent to any replacement benchmark selected by the Administrative Agent. In the alternative, we recommend adopting a hard-wired fallback approach, consistent with the language recommended by the Alternative Reference Rates Committee ("ARRC") of the Federal Reserve Board, under which: (i) the first fallback would be Daily Simple SOFR (compounded in arrears), and (ii) if Daily Simple SOFR is unavailable, the replacement benchmark would be a rate agreed upon by the Borrower and the Administrative Agent, subject to Required Lender objection. This approach provides certainty and transparency for the Borrower, eliminates the risk of Agent discretion resulting in a higher effective cost of funds, and is consistent with the prevailing market standard in syndicated credit facilities originated on a SOFR basis in 2022 and 2023.
B. SOFR Adjustment / Credit Spread Adjustment
WJA's Draft includes a credit spread adjustment ("CSA") of 0.11448% (11.448 basis points) for one-month Term SOFR and 0.26161% (26.161 basis points) for three-month Term SOFR. These CSA values are the fixed adjustments originally recommended by the ARRC and the International Swaps and Derivatives Association ("ISDA") to account for the historical difference between LIBOR and SOFR at the time of the LIBOR-to-SOFR transition. They were widely adopted in amendment-style LIBOR transition facilities in 2021 and 2022, where the objective was to ensure economic neutrality when converting an existing LIBOR-based facility to SOFR.
The inclusion of a CSA in the present context is not appropriate. The proposed Facility is a new facility originated on a SOFR basis, not a LIBOR transition amendment. There is no preexisting LIBOR-based pricing to which economic neutrality must be maintained. The inclusion of the CSA effectively increases the Borrower's all-in cost of borrowing above the negotiated applicable margin by 11.448 to 26.161 basis points, depending on the interest period selected. Over the four-year tenor of the proposed Facility, this would represent a meaningful increase in aggregate interest expense.
C&H's Recommended Position. We recommend that the CSA be eliminated in its entirety. The applicable margin grid (225 bps to 325 bps) was negotiated on the understanding that it would be applied to Term SOFR without any additional spread adjustment. The CSA is a vestige of LIBOR transition documentation and is not market-standard for new SOFR-originated facilities. We note that neither the Term Sheet nor any of the engagement letter documentation references a CSA, further supporting the position that its inclusion is inadvertent or, at minimum, not the parties' agreed commercial position. We expect WJA may resist removal, but believe this is a commercially reasonable and well-supported request.
C. Conforming Changes
Section 2.14(d) of the Draft grants the Administrative Agent broad authority to make "Conforming Changes" in connection with any benchmark replacement. The term "Conforming Changes" is defined in Section 1.01 as:
"any technical, administrative, or operational changes (including changes to the definition of 'Base Rate,' the definition of 'Business Day,' the definition of 'Interest Period,' timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, conversion or continuation notices, the applicability and length of lookback periods, and any other technical, administrative, or operational changes) that the Administrative Agent decides, in its reasonable discretion, may be appropriate to reflect the adoption and implementation of the applicable Benchmark Replacement and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with market practice."
C&H's Concern. The catch-all phrase "any other technical, administrative, or operational changes" is overbroad and could be read to authorize changes that go beyond the administrative and operational and that have a substantive economic impact on the Borrower. For example, changes to the definition of "Interest Period" could alter the compounding methodology in a manner that materially affects the Borrower's interest obligations, and changes to "lookback periods" could result in the application of higher reference rates in a rising rate environment.
We recommend limiting the definition of "Conforming Changes" to changes that are: (i) administrative or operational in nature; (ii) consistent with then-prevailing market practice for similarly-situated syndicated credit facilities; and (iii) do not, individually or in the aggregate, materially increase the Borrower's economic obligations or materially diminish the Borrower's substantive rights under the Credit Agreement. We further recommend that any Conforming Changes be subject to Borrower notification and a five (5) Business Day objection period (similar to the benchmark replacement mechanism itself), rather than being implemented unilaterally by the Administrative Agent.
D. Interest Period Availability
The Draft limits available interest periods to one-month and three-month periods. This is narrower than the Term Sheet, which expressly contemplated the availability of one-week, one-month, three-month, and six-month interest periods.
The omission of the six-month interest period is commercially significant. TSL has historically utilized six-month interest periods under the Existing Credit Facility to match interest payment dates with the receipt of charter hire payments under its time charters, many of which provide for semi-annual settlement. Restricting interest periods to one-month and three-month periods would create a mismatch between the Borrower's interest payment obligations and its cash flow cycle, potentially increasing short-term liquidity pressure.
C&H's Recommended Position. We recommend restoring the availability of six-month interest periods at a minimum. The elimination of one-week interest periods is of lesser concern for the revolving facility itself, as TSL has not historically utilized one-week periods for revolving borrowings. However, one-week interest periods should be available for swingline loans drawn under the $15,000,000 swingline sublimit, as the swingline facility is intended to provide short-term liquidity to bridge timing gaps in working capital, and the ability to select a one-week interest period is customary for swingline facilities in this market.
III. Mandatory Prepayment Waterfall (Section 2.11)
A. Asset Sale Proceeds
Section 2.11(a) of the Draft requires mandatory prepayment from 100% of net cash proceeds from the sale, transfer, or other disposition of any vessel owned by any Loan Party, regardless of whether such vessel constitutes a "Mortgaged Vessel" (i.e., a vessel subject to a first-priority ship mortgage in favor of the Administrative Agent securing the obligations under the Facility).
This provision is significantly broader than what was contemplated in the Term Sheet and is not consistent with market practice for shipping revolving credit facilities. The effect of the current drafting is to sweep the sale proceeds of all 40 vessels in the TSL fleet — comprising 28 dry bulk carriers and 12 tankers — into the mandatory prepayment waterfall, even though only 18 of those vessels (the "Mortgaged Vessels") are proposed to be pledged as collateral for the Facility. The remaining 22 vessels are unencumbered assets of the Thalassa group and are not part of the collateral package.
C&H's Recommended Position. Mandatory prepayment from asset sale proceeds should apply only to net cash proceeds from the sale, transfer, or other disposition of Mortgaged Vessels. Proceeds from the sale of non-Mortgaged Vessels should be freely available to the Borrower, subject to a reinvestment right and compliance with the collateral coverage ratio.
Specifically, we recommend the following structure:
(i) Mortgaged Vessel Dispositions: 100% of net cash proceeds from the sale of any Mortgaged Vessel to be applied to mandatory prepayment of outstanding revolving loans, with a concurrent permanent reduction in the revolving commitments in an amount equal to the pro rata share of such vessel in the overall collateral pool, unless the Borrower delivers a substitute Mortgaged Vessel of equivalent or greater appraised value within 90 days of such sale.
(ii) Non-Mortgaged Vessel Dispositions: Net cash proceeds from the sale of non-Mortgaged Vessels to be subject to a twelve (12) month reinvestment period, during which the Borrower may reinvest such proceeds in the acquisition of replacement vessels, capital improvements to existing fleet vessels, or other assets used in the ordinary course of the Borrower's business. If proceeds are not reinvested within the reinvestment period, 100% of unreinvested proceeds to be applied to mandatory prepayment. This is consistent with both the Term Sheet and prevailing market practice for shipping revolvers.
B. Insurance / Casualty Proceeds
Section 2.11(b) of the Draft requires 100% of all insurance and casualty loss proceeds received by any Loan Party with respect to any Mortgaged Vessel to be applied to mandatory prepayment. This provision does not distinguish between partial casualty losses (where the vessel remains operational and can be repaired) and total losses (where the vessel is a constructive or actual total loss).
We note that the requirement to sweep 100% of insurance proceeds for Mortgaged Vessels is generally acceptable in the context of a total loss event. However, in the case of a partial casualty — for example, damage to a vessel's hull or machinery that can be repaired and that is covered by the Borrower's hull and machinery insurance — it is customary and commercially appropriate to permit the Borrower to apply insurance proceeds directly to the cost of repair, so long as the amount of the claim does not exceed a specified threshold.
C&H's Recommended Position. We recommend the following modifications:
(i) Partial Casualty Proceeds — De Minimis Threshold: Insurance and casualty proceeds for any single occurrence below $5,000,000 should be excluded from the mandatory prepayment sweep and should be available to the Borrower to apply to vessel repair without the need for Lender approval. Claims at or below this threshold are routine in the shipping industry and typically involve damage that is repairable within the ordinary course of operations.
(ii) Total Loss Proceeds — Rebuild/Replacement Option: In the event of a total loss of a Mortgaged Vessel, the Borrower should have the option to replace such vessel with a vessel of equivalent or greater appraised value. Specifically, the Borrower should have 180 days from the date of the total loss to commit in writing to the acquisition of a replacement vessel, and 12 months from the date of such commitment to consummate the acquisition and deliver the replacement vessel for mortgage. If the Borrower does not commit to a replacement within the 180-day period, or does not consummate the acquisition within the 12-month period, 100% of total loss proceeds should be applied to mandatory prepayment. During the replacement period, total loss proceeds should be held in a segregated deposit account subject to an account control agreement in favor of the Administrative Agent.
C. Debt Incurrence Proceeds
Section 2.11(c) of the Draft requires 100% of net cash proceeds from the incurrence of any indebtedness by any Loan Party to be applied to mandatory prepayment of outstanding revolving loans. This provision is drafted without exception and would capture proceeds from any debt issuance, including ordinary course vessel financings, capital leases, and refinancings of existing indebtedness of the Thalassa group.
C&H's Recommended Position. We recommend carving out from the debt incurrence sweep all indebtedness constituting "Permitted Indebtedness" as defined in the negative covenants (Section 7.02 of the Draft). The purpose of the Permitted Indebtedness basket is to identify categories of indebtedness that the Borrower is permitted to incur without Lender consent. It would be internally inconsistent to permit the Borrower to incur such indebtedness while simultaneously requiring the proceeds thereof to be applied to prepay the Facility. Ordinary course vessel-level mortgage financings for non-Mortgaged Vessels, equipment financings, and refinancings of existing permitted indebtedness should not trigger the mandatory prepayment waterfall.
D. Waterfall Application Order
Section 2.11(d) of the Draft specifies the order of application of mandatory prepayments as follows:
First, to outstanding swingline loans under the $15,000,000 swingline sublimit;
Second, to outstanding revolving loans;
Third, to cash collateralize outstanding letters of credit up to 103% of the aggregate undrawn face amount of all outstanding letters of credit (subject to the $20,000,000 LC sublimit); and
Fourth, any remaining proceeds to be held in a cash collateral account maintained by the Administrative Agent.
The application of mandatory prepayments first to swingline loans, then to revolving loans, and then to cash collateralize outstanding letters of credit is generally consistent with market practice and is not objectionable.
C&H's Concern. The requirement in the fourth step of the waterfall — that any excess proceeds (i.e., proceeds remaining after all outstanding loans have been repaid and all outstanding LCs have been fully cash collateralized) be retained indefinitely in a blocked cash collateral account — is overly restrictive. In a revolving credit facility, the Borrower retains the right to reborrow (subject to satisfaction of conditions precedent) up to the full amount of the commitment. There is no conceptual basis for requiring the Borrower to maintain excess mandatory prepayment proceeds in a blocked account when the Borrower has no outstanding obligations against which such proceeds would be applied. We recommend that, after application of mandatory prepayment proceeds to outstanding swingline loans, revolving loans, and LC cash collateral, any excess proceeds be returned to the Borrower without restriction.
IV. Material Adverse Change Definition (Section 1.01 — Definitions)
A. Breadth of Definition
The Draft defines "Material Adverse Change" (also referred to as "Material Adverse Effect" or "MAE") in Section 1.01 as follows:
"any event, development, circumstance, change, effect, or condition that has had or could reasonably be expected to have a material adverse effect on (i) the business, operations, property, assets, or financial condition of the Borrower and its Subsidiaries, taken as a whole, (ii) the ability of any Loan Party to perform any of its material obligations under any Loan Document to which it is a party, or (iii) the rights and remedies of the Administrative Agent and the Lenders under the Loan Documents."
We have identified two significant issues with this definition as drafted.
Issue with Clause (i): Forward-Looking Standard. The phrase "could reasonably be expected to have" introduces a prospective, forward-looking element to the definition. Under this standard, an event need not have actually had a material adverse effect on the Borrower's business or financial condition; it is sufficient that the event "could reasonably be expected" to have such an effect at some point in the future. This formulation creates substantial uncertainty for the Borrower. It exposes the Borrower to subjective assessments by the Administrative Agent or the Required Lenders regarding potential future effects of any given event or development, including events that may never ultimately have a material adverse effect. In the shipping industry, where vessel values, freight rates, and charter markets are inherently cyclical and volatile, a forward-looking MAE standard is particularly problematic, as it would allow the Lenders to assert that a downturn in the freight market — even one that has not yet affected TSL's financial performance — "could reasonably be expected" to have a material adverse effect in the future.
Issue with Clause (iii): Rights and Remedies Prong. The inclusion of a "rights and remedies" prong is non-standard and, in our view, inappropriate. Virtually any negative event or development affecting the Borrower could be argued to affect the "rights and remedies" of the Administrative Agent and the Lenders under the Loan Documents, because any deterioration in the Borrower's financial condition arguably affects the Lenders' ability to collect on their claims and realize on their collateral. This prong is therefore circular and effectively eliminates the materiality threshold built into the definition by allowing the Agent or Lenders to assert an MAE based on the indirect impact of any negative development on their theoretical recovery prospects. In practice, this prong converts the MAE standard from a meaningful materiality filter into a near-unlimited tool that the Lenders can invoke to declare a default or refuse to fund a borrowing request.
B. C&H's Recommended Revisions
We recommend the following revisions to the MAE definition:
(i) Replace "could reasonably be expected to have" with "has had." The MAE definition should be limited to events or conditions that have actually had a material adverse effect, not events that might potentially have such an effect in the future. This is the standard used in the Existing Credit Facility with Harborstone National Bank and is consistent with the Borrower's commercial expectation.
(ii) Delete Prong (iii) (rights and remedies of the Administrative Agent and the Lenders). This prong is duplicative of Prong (ii) (ability of Loan Parties to perform obligations) and is overbroad for the reasons described above. The Lenders' interests are adequately protected by Prongs (i) and (ii).
(iii) Add Standard Carveouts. The MAE definition should include the following carveouts, each of which would exclude from the definition events or conditions arising from or relating to the specified circumstances:
(a) changes in general economic or financial market conditions (to the extent such changes do not disproportionately affect the Borrower and its Subsidiaries, taken as a whole, relative to other participants in the industries in which they operate);
(b) changes in conditions in the international shipping industry generally, including changes in freight rates, charter markets, vessel values, and supply and demand dynamics (to the extent such changes do not disproportionately affect the Borrower and its Subsidiaries, taken as a whole, relative to other participants in the shipping industry);
(c) changes in applicable law, regulation, or governmental policy, or changes in GAAP, IFRS, or other applicable accounting standards, in each case after the Closing Date;
(d) changes arising from or relating to acts of war, armed hostilities, terrorism, cyberattacks, natural disasters, earthquakes, hurricanes, floods, epidemics, pandemics, or other force majeure events; and
(e) changes resulting from compliance with the terms and conditions of the Loan Documents, or from actions taken or omitted to be taken with the prior written consent of the Required Lenders.
These carveouts are particularly important for a shipping company operating in the international maritime trade. The shipping industry is characterized by significant cyclicality in freight rates and vessel values, and by exposure to geopolitical events, weather patterns, and global economic conditions over which the Borrower has no control. Without appropriate carveouts, the MAE definition could be triggered by industry-wide or macroeconomic events that affect all shipping companies equally and that do not reflect any deterioration in TSL's relative competitive position or credit quality.
C. Relevance Across the Agreement
The MAE/MAC definition has cascading consequences throughout the Draft Credit Agreement. It is referenced in the following key provisions:
(i) Bring-Down Representation at Each Borrowing (Section 4.02). Each request for a revolving borrowing or the issuance of a letter of credit constitutes a representation by the Borrower that no Material Adverse Change has occurred since the date of the most recent financial statements delivered to the Administrative Agent. If the MAE definition is overbroad, the Borrower risks an inadvertent misrepresentation each time it draws on the Facility.
(ii) Condition Precedent to Initial Funding (Section 4.01). The obligation of the Lenders to fund the initial borrowing is conditioned upon, among other things, the absence of any Material Adverse Change since December 31, 2022 (the date of the most recent audited financial statements). An overbroad MAE definition could give the Agent grounds to refuse to close the Facility based on intervening industry or market developments.
(iii) Event of Default (Section 8.01). The occurrence of a Material Adverse Change constitutes an independent Event of Default under Section 8.01(l) of the Draft. This is distinct from the representation-based default and provides a direct path for the Lenders to accelerate the obligations and terminate commitments upon the occurrence of an event that satisfies the MAE definition.
Given these cascading consequences, the breadth of the MAE definition is among the most commercially significant issues in the Draft and warrants careful discussion with the client before the markup is delivered.
V. Change of Control Trigger (Section 8.01 — Events of Default)
A. WJA's Proposed Definition
Section 1.01 of the Draft defines "Change of Control" as the occurrence of any of the following events:
(a) Nikolaos Karadimitriou and his Family Members (defined to include his spouse, children, grandchildren, and trusts established for the benefit of any of the foregoing) cease to beneficially own, directly or indirectly, at least 51% of the outstanding equity interests of the Borrower (on a fully diluted basis);
(b) Nikolaos Karadimitriou ceases to serve as Chairman of the Board of Directors of the Borrower; or
(c) a change in a majority of the members of the Board of Directors of the Borrower from the persons serving in such capacity on the Closing Date (or their successors nominated by the Board of Directors and approved by a majority vote thereof).
Under Section 8.01(k) of the Draft, a Change of Control constitutes an immediate Event of Default, with no notice requirement and no cure period. Upon the occurrence of a Change of Control Event of Default, the Administrative Agent is authorized to (and, at the direction of the Required Lenders, is required to) declare all outstanding obligations immediately due and payable and terminate all commitments under the Facility.
B. C&H's Issues
We have identified significant concerns with each of the three prongs of the Change of Control definition, as well as with the consequence of a Change of Control (automatic Event of Default, as opposed to a mandatory offer to prepay).
Prong (b) — Chairman Requirement. The requirement that Nikolaos Karadimitriou personally serve as Chairman of the Board of Directors of TSL is overly restrictive and does not serve the legitimate credit protection purpose of the Change of Control provision. The fundamental concern underlying any Change of Control provision is to ensure continuity of ownership and management philosophy — i.e., to protect the Lenders against a change in the identity or character of the controlling party. If Karadimitriou retains majority ownership of TSL through Prong (a) and his family retains effective control of the company, a change in his formal title from Chairman to, for example, Founder or Honorary Chairman, or his appointment as a non-executive member of the Board, should not trigger an Event of Default and potential acceleration of $150 million in obligations. There are numerous legitimate business reasons why a controlling shareholder might step back from the Chairman role — including age, health, succession planning, or a desire to elevate the next generation of family leadership — without any diminution in the Lenders' credit protection.
We recommend deletion of Prong (b) in its entirety. In the alternative, if WJA insists on some form of key-man provision, we recommend converting Prong (b) to a standalone "key man" covenant (in the affirmative covenants) requiring that Karadimitriou (or a replacement approved by the Required Lenders, such approval not to be unreasonably withheld) serve in a senior executive or Board-level capacity. Breach of such covenant should be subject to a 90-day cure period, during which the Borrower would have the opportunity to appoint a replacement acceptable to the Required Lenders.
Prong (c) — Board Continuity Clause. The requirement that a majority of the Board of Directors of TSL consist of persons who were serving on the Closing Date (or their Board-approved successors) is not appropriate for a privately held, founder-controlled company. Board continuity clauses of this type are occasionally seen in credit agreements for publicly traded companies, where a hostile takeover could result in a wholesale replacement of the Board of Directors. In the context of TSL — a private company in which the Board is appointed by the controlling shareholder — a change in the composition of the Board is a function of the controlling shareholder's management decisions, not of a hostile change of control. The Lenders' interest in continuity of ownership is adequately protected by Prong (a). We recommend deletion of Prong (c).
Prong (a) — Ownership Threshold. The 51% beneficial ownership threshold in Prong (a) is acceptable in principle. However, we recommend discussing with Aris Komnenidis (General Counsel, TSL) and the Chairman whether a lower threshold — for example, 35%, combined with a requirement that Karadimitriou and his Family Members remain the largest single shareholders of TSL — would be preferable. A lower threshold would provide greater flexibility for the Karadimitriou family to pursue partial equity sales, bring in strategic investors, or implement estate planning and wealth transfer strategies, without triggering a Change of Control. We note that TSL is privately held and there is no near-term plan for a public offering, but the Chairman may wish to preserve future flexibility. This is a business decision for the client.
Consequence of Change of Control — Mandatory Offer to Prepay vs. Event of Default. We recommend that a Change of Control trigger a mandatory offer to prepay (a "put right") rather than an automatic Event of Default. Under a put right structure, upon the occurrence of a Change of Control, the Borrower would be required to offer to prepay the outstanding obligations at par (plus accrued interest), and each Lender would have the option to accept or decline such offer. Lenders that accept the offer would receive prepayment; Lenders that decline would remain in the Facility. This is the standard approach in high-yield bond indentures and is increasingly common in leveraged credit facilities. The put right structure avoids the harsh and potentially disruptive consequences of an automatic acceleration, which could trigger cross-defaults under the Borrower's other financing arrangements and cause a cascade of defaults across the Thalassa group's capital structure.
VI. Vessel Sale Proceeds Application (Section 7.05 / Section 2.11)
A. Current Draft Treatment
The treatment of vessel sale proceeds in the Draft is addressed in two separate provisions that must be read together: Section 2.11 (Mandatory Prepayments), discussed in Section III above, and Section 7.05 (Asset Sales), a negative covenant that imposes substantive restrictions on the Borrower's ability to dispose of vessels. There is significant overlap and, in certain respects, tension between these two provisions, which will need to be harmonized in the markup.
Section 7.05 of the Draft prohibits any Loan Party from selling, transferring, leasing, or otherwise disposing of any vessel except in accordance with the following conditions:
(a) Individual Vessel Threshold: The fair market value of the vessel being disposed of must not exceed $10,000,000 (as determined by the most recent appraisal or, if no appraisal has been conducted within the prior twelve months, by an independent valuation acceptable to the Administrative Agent);
(b) Annual Aggregate Cap: The aggregate fair market value of all vessels disposed of by the Loan Parties during any fiscal year must not exceed $25,000,000; and
(c) Collateral Coverage Maintenance: After giving pro forma effect to the disposition (including the application of net sale proceeds to the mandatory prepayment waterfall), the pro rata collateral coverage ratio (i.e., the ratio of the aggregate appraised value of the remaining Mortgaged Vessels to the aggregate outstanding obligations under the Facility) must be no less than 140%.
Issue. The $10,000,000 individual vessel threshold and the $25,000,000 annual aggregate cap are fundamentally incompatible with TSL's fleet profile and its ordinary course fleet management and renewal activities. Based on the fleet appraisals most recently conducted by Seastone Maritime Advisors (the firm expected to provide closing-date valuations for the Facility), several of TSL's dry bulk carriers and tankers have individual fair market values in the $30,000,000 to $60,000,000 range. The $10,000,000 threshold would effectively preclude the sale of the vast majority of TSL's vessels without Lender consent. Similarly, the $25,000,000 annual aggregate cap would prevent TSL from executing routine fleet renewal transactions — a critical operational requirement for any shipping company that must periodically dispose of aging tonnage and acquire modern, fuel-efficient vessels to remain competitive.
B. C&H's Recommended Position
We recommend the following revisions to Section 7.05:
(i) Increase Individual Vessel Disposition Threshold. The individual vessel threshold should be increased from $10,000,000 to $40,000,000 per vessel. At this level, the Borrower would have the ability to sell the majority of its fleet vessels in the ordinary course without Lender consent, while dispositions of higher-value vessels (principally the newer Capesize and VLCC tonnage) would require Lender approval. This threshold is consistent with market practice for revolving credit facilities secured by large, diversified shipping fleets.
(ii) Increase Annual Aggregate Disposition Cap. The annual aggregate cap should be increased from $25,000,000 to $75,000,000. This level is approximately aligned with the $80,000,000 annual capital expenditure limitation set forth in the financial covenants, reflecting the expectation that vessel dispositions and acquisitions will occur in roughly equal measure as part of TSL's fleet renewal cycle. A $75,000,000 annual cap would permit the Borrower to sell two to three mid-sized vessels per year without constraint, which is consistent with TSL's historical fleet turnover patterns.
(iii) Required Lender Consent for Above-Threshold Dispositions. Dispositions in excess of the individual or annual aggregate thresholds should be permitted with the consent of the Required Lenders (defined as Lenders holding more than 50% of total commitments), rather than requiring unanimous Lender consent. Unanimous consent requirements are impractical in a four-lender syndicate and are not warranted for asset dispositions that are subject to the collateral coverage maintenance test.
(iv) Clarify Interaction with Mandatory Prepayment. The interplay between Section 7.05 (Asset Sales) and Section 2.11 (Mandatory Prepayments) should be clarified as follows: net sale proceeds from the disposition of Mortgaged Vessels should be applied to prepay outstanding revolving loans or to cash collateralize outstanding letters of credit in accordance with the mandatory prepayment waterfall. Net sale proceeds from the disposition of non-Mortgaged Vessels should be freely available to the Borrower without application to mandatory prepayment, so long as the collateral coverage ratio of 140% is maintained after giving pro forma effect to the disposition.
(v) Release Price Mechanism. We recommend adding a "release price" mechanism for Mortgaged Vessels. Upon the sale of a Mortgaged Vessel, the Borrower should have the right to release the first-priority ship mortgage on such vessel by prepaying a specified percentage (e.g., 110%) of the pro rata share of the outstanding obligations under the Facility attributable to such vessel. The pro rata share would be calculated as the appraised value of the vessel being sold divided by the aggregate appraised value of all Mortgaged Vessels, multiplied by the aggregate outstanding obligations. This mechanism provides certainty to the Borrower regarding the cost of releasing a vessel from the mortgage pool, facilitates orderly fleet management, and ensures that the Lenders receive prepayment in excess of the proportional share of obligations secured by the released vessel.
C. Collateral Coverage Maintenance
As noted above, both Section 7.05 and the mandatory prepayment provisions reference a minimum collateral coverage ratio of 140%. At full draw of the $150,000,000 revolving commitment, this ratio requires minimum aggregate collateral value of $210,000,000.
Based on the most recent preliminary fleet valuations provided by Seastone Maritime Advisors (which are expected to be delivered in final form by July 10, 2023), the 18 Mortgaged Vessels proposed as collateral for the Facility have an aggregate fair market value of approximately $780,000,000. This provides approximately 520% collateral coverage at full draw — a significant cushion above the 140% minimum. Even in a severe market downturn, vessel values would need to decline by approximately 73% before the collateral coverage ratio would be breached.
Notwithstanding this substantial coverage cushion, the manner in which the collateral coverage ratio is tested is important. We recommend the following:
(i) Quarterly Testing, Not Continuous. The collateral coverage ratio should be tested quarterly, as of the last day of each fiscal quarter, in connection with the delivery of quarterly financial statements and compliance certificates. The Draft is ambiguous as to whether the test is continuous (i.e., required to be satisfied at all times) or periodic. Continuous testing would expose the Borrower to technical defaults arising from intra-quarter fluctuations in vessel values, which can be significant in the shipping industry due to the volatility of the secondhand vessel market.
(ii) Appraisal-Based Valuation, Not Mark-to-Market. The collateral coverage ratio should be based on the most recent annual or semi-annual appraisal conducted by an approved independent appraiser, rather than on a mark-to-market or broker-assessed value. Vessel values in the secondhand market can fluctuate dramatically over short periods in response to changes in freight rates, fuel costs, and newbuilding order activity. A mark-to-market approach would introduce excessive volatility into the collateral coverage calculation and could result in technical defaults during temporary market dislocations that do not reflect any fundamental change in the Borrower's credit quality or the underlying value of the collateral.
VII. Restricted Payments Basket (Section 7.06)
A. WJA's Draft Provisions
Section 7.06 of the Draft restricts the ability of the Borrower and its Subsidiaries to declare or pay dividends, make distributions, repurchase equity interests, or make other "Restricted Payments" (as defined in the Draft). Restricted Payments are permitted only if all three of the following conditions are satisfied:
(a) no Default or Event of Default exists at the time of such Restricted Payment or would result therefrom;
(b) after giving pro forma effect to such Restricted Payment, the Borrower's consolidated net leverage ratio (defined as the ratio of consolidated total net debt to consolidated EBITDA for the most recently completed four fiscal quarter period) does not exceed 3.50:1.00; and
(c) the aggregate amount of all Restricted Payments made by the Borrower and its Subsidiaries during any fiscal year does not exceed $20,000,000.
Issue: Leverage Test. The 3.50:1.00 leverage test for Restricted Payments is extremely restrictive in light of the financial covenant maintenance levels set forth in Section 7.11 of the Draft. The financial covenants require the Borrower to maintain a maximum consolidated net leverage ratio of 4.50:1.00 (stepping down to 4.00:1.00 in Year 3 of the Facility). The Restricted Payments leverage test of 3.50:1.00 is a full turn below the maintenance covenant level. This means that the Borrower would be prohibited from making any dividends or distributions in any fiscal quarter in which its consolidated net leverage ratio exceeds 3.50x — even though the Borrower would be in full compliance with its maintenance covenant at leverage levels up to 4.50x (or 4.00x after the step-down). In effect, the Restricted Payments test creates a shadow financial covenant that is significantly more restrictive than the actual maintenance covenant.
Issue: Annual Dollar Cap. The $20,000,000 annual cap on Restricted Payments is unduly restrictive for a company of TSL's size and profitability. TSL's fiscal year 2022 EBITDA was approximately $145,000,000 (per the audited financial statements prepared by Hawthorne & Garrett LLP). A $20,000,000 annual cap represents less than 14% of EBITDA and would significantly constrain the ability of Nikolaos Karadimitriou and the Karadimitriou family — as controlling shareholders of a private, founder-led company — to receive a reasonable return on their equity investment. We note that private company owners routinely rely on dividends and distributions as their primary source of personal income, and an artificially low cap on distributions can create significant personal financial pressure for the controlling shareholder.
B. C&H's Recommended Position
We recommend the following revisions to the Restricted Payments provisions:
(i) Increase Leverage Test to 4.00:1.00. The leverage test for Restricted Payments should be set at 4.00:1.00 — that is, 0.50x inside the maintenance covenant level of 4.50:1.00. This provides meaningful headroom below the financial covenant default threshold while still ensuring that dividends are not paid at leverage levels approaching the maintenance covenant trigger. A 0.50x cushion between the Restricted Payments test and the maintenance covenant is consistent with market practice for shipping revolving credit facilities and reflects a reasonable balance between the Borrower's desire for distribution flexibility and the Lenders' interest in maintaining adequate credit protection.
(ii) Increase Annual Dollar Cap to $35,000,000. The annual Restricted Payments basket should be increased from $20,000,000 to $35,000,000. At $35,000,000, the annual basket would represent approximately 24% of FY2022 EBITDA — a level that is reasonable for a privately held shipping company of TSL's scale and is consistent with the restricted payments baskets negotiated in comparable shipping finance transactions in which Calderwood & Harkness has been involved in recent years.
(iii) Add Builder Basket. In addition to the fixed annual dollar cap, the Restricted Payments provisions should include a "builder basket" — a cumulative basket that permits Restricted Payments from a specified percentage of cumulative excess cash flow generated since the Closing Date. We recommend a builder basket equal to 50% of cumulative excess cash flow, with "excess cash flow" defined as EBITDA less (A) consolidated cash interest expense, (B) scheduled principal payments of indebtedness, (C) cash income taxes paid, (D) capital expenditures (net of proceeds of asset dispositions reinvested in capital assets), and (E) changes in working capital. The builder basket would provide the Borrower with an alternative pathway for distributions in periods of strong financial performance, even if the annual dollar cap has been reached, and would align the Borrower's distribution capacity with its actual cash generation.
(iv) Tax Distribution Carveout. The Restricted Payments provisions should include a specific carveout for tax distributions to Nikolaos Karadimitriou and any other equity holders of the Borrower, in an amount equal to their estimated income tax liability attributable to TSL's income, to the extent that the Borrower or any of its Subsidiaries is treated as a pass-through entity (or a "controlled foreign corporation" generating Subpart F income or GILTI inclusions) for U.S. federal, Greek, Cypriot, or other applicable income tax purposes. Tax distributions are not economic distributions in the traditional sense — they represent amounts that equity holders are legally obligated to pay to taxing authorities as a consequence of their ownership of the Borrower. Restricting tax distributions could expose the controlling shareholder to personal tax liabilities that exceed his liquid assets, which would be an untenable result and is not the purpose of the Restricted Payments covenant.
VIII. Events of Default (Section 8.01)
Section 8.01 of the Draft sets forth the Events of Default under the Facility. We have identified the following issues, each of which is discussed in turn.
A. Payment Default
Section 8.01(a) provides that it shall be an Event of Default if the Borrower fails to pay (i) any amount of principal when due, with no grace period, or (ii) any amount of interest, fees, or other amounts payable under the Loan Documents within three (3) Business Days after the date on which such payment becomes due.
C&H's Recommended Position. We recommend extending the grace period to three (3) Business Days for payments of principal and five (5) Business Days for payments of interest and fees. TSL is a Greek company that banks primarily with Greek financial institutions; payments under the Facility are denominated in U.S. dollars and will be made through New York correspondent banks. International wire transfers between Greece and the United States are subject to operational delays, including time zone differences, correspondent bank processing times, and potential complications arising from intermediary bank routing. A zero grace period for principal payments and a three-Business Day grace period for interest and fees does not adequately accommodate these operational realities and could result in technical payment defaults arising from bank processing delays rather than from any unwillingness or inability to pay on the part of the Borrower. The proposed grace periods are consistent with those in the Existing Credit Facility with Harborstone National Bank and with market practice for cross-border shipping credit facilities.
B. Representation Default
Section 8.01(b) provides that it shall be an Event of Default if any representation or warranty made or deemed made by any Loan Party in or in connection with any Loan Document shall prove to have been "incorrect in any respect" when made or deemed made.
Issue. The absence of a materiality qualifier is a significant concern. Many of the representations in Article V of the Draft do not contain an embedded materiality or Material Adverse Effect qualifier. Under the current formulation, an immaterial inaccuracy in any representation — for example, an inadvertent error in the list of the Borrower's subsidiaries, a minor discrepancy in the description of a vessel's specifications, or a technical inaccuracy in the representation regarding the Borrower's organizational documents — would constitute an Event of Default. This result is commercially unreasonable and could give the Lenders a pretext for declaring a default based on trivial inaccuracies.
C&H's Recommended Position. We recommend that the representation default trigger be revised to read "incorrect in any material respect" for representations and warranties that do not already contain their own internal materiality or Material Adverse Effect qualifier. This approach avoids the "double materiality" problem — i.e., applying an additional materiality screen to representations that already include a materiality qualifier — while ensuring that representations without an embedded materiality standard are not subject to a zero-tolerance accuracy requirement. This is a standard formulation in syndicated credit facilities and is consistent with the approach taken in the Existing Credit Facility.
C. Financial Covenant Default
Section 8.01(c) provides that it shall be an Event of Default if the Borrower fails to observe or perform any financial covenant set forth in Section 7.11, with no notice requirement and no cure period. The financial covenants in Section 7.11 include:
(i) Maximum consolidated net leverage ratio of 4.50:1.00, stepping down to 4.00:1.00 beginning with the first fiscal quarter ending on or after the third anniversary of the Closing Date;
(ii) Minimum consolidated interest coverage ratio (EBITDA to consolidated cash interest expense) of 3.00:1.00;
(iii) Minimum liquidity (unrestricted cash and cash equivalents plus availability under the revolving commitment) of $30,000,000 at all times; and
(iv) Maximum capital expenditures of $80,000,000 per fiscal year.
C&H's Recommended Position. We recommend including an equity cure right in the financial covenant default provisions. An equity cure right would permit the Borrower (or Nikolaos Karadimitriou or any other equity holder, acting through a cash equity contribution to the Borrower) to cure a financial covenant default by contributing additional equity capital within fifteen (15) Business Days following the date on which the Borrower delivers (or is required to deliver) the financial statements for the fiscal quarter in which the default occurred. The equity contribution would be applied, for purposes of recalculating the relevant financial covenant, to reduce consolidated net debt (for the leverage ratio test) or to increase EBITDA (for the interest coverage ratio test, if the parties agree to a deemed EBITDA adjustment).
We recommend limiting the equity cure right as follows:
(a) the equity cure may be exercised no more than two (2) times in any four (4) consecutive fiscal quarter period;
(b) the equity cure may be exercised no more than four (4) times over the life of the Facility;
(c) the equity contribution must be made in cash and must be contributed as common equity (not subordinated debt or preferred equity); and
(d) the amount of the equity contribution credited toward recalculation of the financial covenant shall not exceed the amount necessary to bring the Borrower into compliance with the relevant covenant (i.e., no "over-cure" credit).
Equity cure rights are widely accepted in leveraged and sponsor-backed credit facilities and are increasingly common in shipping finance transactions, particularly for founder-controlled private companies where the controlling shareholder has both the ability and the incentive to inject additional equity capital to avoid a financial covenant default. The equity cure right provides a meaningful safety valve that protects the Borrower against technical defaults arising from cyclical fluctuations in EBITDA or temporary increases in leverage, while preserving the Lenders' ongoing financial monitoring and early warning function through the maintenance covenant framework.
D. Cross-Default. Section 8.01(f) provides that it shall be an Event of Default if the Borrower or any Subsidiary (i) defaults in any payment of any indebtedness (other than the obligations under the Facility) in an aggregate principal amount exceeding $5,000,000, or (ii) defaults in the observance or performance of any agreement or condition relating to any such indebtedness, or any other event occurs, the effect of which default or event is to cause, or to permit the holder or holders of such indebtedness to cause, such indebtedness to become due prior to its stated maturity.
C&H's Recommended Position. We recommend two modifications:
(i) Increase Threshold to $10,000,000. The $5,000,000 cross-default threshold is too low given the scale of TSL's operations. TSL has consolidated revenue of approximately $620,000,000 and total fleet value of approximately $1.2 billion. The Thalassa group maintains vessel-level mortgage financings on a number of its non-Mortgaged Vessels, as well as equipment financings, working capital facilities, and other ordinary course indebtedness. A $5,000,000 threshold could be triggered by routine commercial disputes related to individual vessel financings — for example, a disagreement with a vessel mortgagee over the scope of a financial reporting covenant — that have no bearing on TSL's overall creditworthiness or its ability to service the Facility. A $10,000,000 threshold is more appropriate for a borrower of this size and is consistent with the cross-default thresholds in comparable shipping credit facilities.
(ii) Limit to Payment Defaults and Acceleration Events. Clause (ii) of the cross-default provision captures any covenant default under any other indebtedness that gives rise to an acceleration right, regardless of whether acceleration has actually occurred. This is an extremely broad formulation. A technical covenant default under a vessel-level mortgage financing — for example, a late delivery of a financial certificate or a marginal breach of a collateral maintenance ratio — would constitute a cross-default under the Facility even if the affected lender has taken no enforcement action and has no intention of accelerating. We recommend limiting the cross-default to (a) payment defaults that have not been cured within any applicable grace period, and (b) events that have actually resulted in the acceleration of the relevant indebtedness. This ensures that the cross-default captures genuine credit events — i.e., situations where another lender has actually declared a default and accelerated its obligations — rather than theoretical acceleration rights arising from technical or immaterial covenant breaches.
E. Judgment Default
Section 8.01(g) provides that it shall be an Event of Default upon the entry of one or more final, non-appealable judgments or orders for the payment of money in an aggregate amount exceeding $5,000,000 against the Borrower or any Subsidiary.
C&H's Recommended Position. Consistent with our recommendation on the cross-default threshold, we recommend increasing the judgment default threshold from $5,000,000 to $10,000,000. In addition, we recommend adding a sixty (60) day cure period following the entry of such judgment, during which the Borrower would have the opportunity to pay, appeal, vacate, discharge, bond, or stay such judgment before an Event of Default is triggered. Judgments in maritime disputes are common in the shipping industry, and the entry of a judgment — even a substantial one — does not necessarily indicate a deterioration in the Borrower's financial condition if the Borrower has the ability and intention to satisfy or appeal the judgment. A 60-day cure period is consistent with market practice and provides a reasonable window for the Borrower to take appropriate action.
F. ERISA / Pension Events
Section 8.01(i) of the Draft includes standard U.S. ERISA-related default triggers, including the occurrence of any ERISA Event (as defined in the Draft to include the occurrence of a reportable event under Section 4043 of ERISA, the filing of a notice of intent to terminate a pension plan, the institution of proceedings to terminate a pension plan by the PBGC, the failure to meet minimum funding standards, the imposition of a lien under Section 430(k) of the Internal Revenue Code, and related events) that, individually or in the aggregate, could reasonably be expected to result in liability to the Loan Parties in excess of $5,000,000.
C&H's Observation. TSL is a Société Anonyme organized under the laws of the Hellenic Republic. It does not maintain any employee benefit plans that are subject to ERISA, and it does not currently have any U.S. subsidiaries. The inclusion of standard U.S. ERISA default triggers is therefore of limited relevance to TSL's current organizational structure. Greek and Cypriot pension and social security obligations are governed by local law and are not within the scope of ERISA.
C&H's