MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Nathaniel Bower, Responsible Partner, Bankruptcy & Restructuring, Calderwood & Harkness LLP
FROM: Amy Chesterton, Lead Associate, and Nathan Ikeda, Working Associate, Bankruptcy & Restructuring, Calderwood & Harkness LLP
DATE: November 22, 2022
RE: Executory Contract and Unexpired Lease Analysis — Thalassa Americas Inc. (Matter No. 1044-00003)
CC: Colette Whitman, Billing Partner; Sylvia Hartwell, Specialist Partner, Tax (for tax implications of assumption/rejection)
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I. Executive Summary
The purpose of this memorandum is to catalog and analyze all material executory contracts and unexpired leases to which Thalassa Americas Inc. ("TAI") is a party, in connection with the Chapter 11 contingency plan being prepared for a potential filing in the United States Bankruptcy Court for the Southern District of Texas (Houston Division). This memorandum is intended to inform the firm's strategic recommendations regarding assumption, rejection, or further evaluation of each identified contract and lease, and to provide the analytical foundation for the contract-related components of the Chapter 11 Contingency Playbook currently under development.
TAI is a Delaware C-corporation (EIN 84-3291057) with its principal office located at 1400 McKinney Street, Suite 2200, Houston, Texas 77010. TAI's registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. TAI is the wholly-owned U.S. subsidiary of Thalassa Shipping & Logistics SA ("TSL"), a Greek société anonyme headquartered at 42 Akti Miaouli, Piraeus 18538, Greece. TSL is the ultimate parent company of the Thalassa group of companies and exercises operational and financial control over TAI through direct equity ownership, intercompany financing arrangements, and shared management services.
TAI's U.S. operations encompass three principal business lines: (i) Houston terminal operations, including container handling and dry-bulk transloading at the Barbours Cut area facility; (ii) Jones Act–exempt foreign-flag vessel scheduling and commercial coordination for the TSL-controlled fleet calling at U.S. ports; and (iii) domestic freight brokerage, including drayage coordination and inland transportation logistics. TAI reported fiscal year 2021 revenue of approximately $312 million. Fiscal year 2022 estimated revenue has declined significantly to approximately $198 million, reflecting the deterioration in global dry-bulk shipping rates and the precipitous decline in the Baltic Dry Index over the course of 2022. TAI employs approximately 680 individuals in the United States, the substantial majority of whom are based at the Houston terminal facility and the Houston corporate office.
Under Section 365 of the Bankruptcy Code (11 U.S.C. § 365), a debtor-in-possession may assume or reject executory contracts and unexpired leases of the debtor, subject to the cure of defaults and the provision of adequate assurance of future performance. This statutory framework provides TAI with a powerful tool to rationalize its contractual obligations, retain value-enhancing agreements, and shed burdensome or unnecessary commitments as part of a comprehensive restructuring strategy.
Our analysis has identified a total of 47 contracts and leases across five categories: (A) Real Property Leases, (B) Vessel Charter Agreements, (C) Freight Brokerage and Logistics Contracts, (D) Vendor and Supply Agreements, and (E) Intercompany and Corporate Service Agreements. Based on our review, we estimate total cure costs of approximately $6.8 million on a gross basis, though the net cure cost for contracts recommended for assumption is approximately $1.6 million. We recommend that TAI assume 31 contracts and leases, reject 12 contracts and leases, and hold 4 contracts for further evaluation pending additional operational input from TAI management. The estimated annual cost savings from the recommended rejections aggregate approximately $616,400.
This memorandum should be read in conjunction with the following companion deliverables, which are currently in preparation or scheduled for delivery:
• Chapter 11 Contingency Playbook — anticipated delivery date: January 10, 2023;
• Critical Vendor and §503(b)(9) Claims Analysis — anticipated delivery date: January 5, 2023;
• Intercompany Claims and Substantive Consolidation Risk Memorandum — anticipated delivery date: December 5, 2022;
• Preference and Fraudulent Transfer Exposure Analysis — anticipated delivery date: December 1, 2022;
• Maritime Lien and Ship Mortgage Act Considerations Memorandum — anticipated delivery date: December 18, 2022; and
• DIP Budget and Adequate Protection Analysis — anticipated delivery date: January 8, 2023.
II. Legal Framework — Section 365 of the Bankruptcy Code
A. Overview of Section 365
Section 365(a) of the Bankruptcy Code provides that, "subject to the court's approval, the trustee may assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). This provision applies with equal force to a debtor-in-possession, which possesses all the rights, powers, and duties of a trustee under Section 1107(a) of the Bankruptcy Code. The ability to assume or reject executory contracts and unexpired leases is widely regarded as one of the most significant tools available to a debtor-in-possession in a Chapter 11 case, as it permits the debtor to retain contracts that are beneficial to the estate and to reject those that are burdensome or economically unfavorable.
The Bankruptcy Code does not define the term "executory contract." Courts have overwhelmingly adopted the definition articulated by Professor Vern Countryman, which defines an executory contract as one "under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). Under this bilateral test, a contract is executory only if both parties have remaining material obligations such that a failure to perform by either side would give rise to a cause of action for breach. See, e.g., In re Exide Techs., 607 F.3d 957, 962 (3d Cir. 2010); In re Sunterra Corp., 361 F.3d 257, 264 (4th Cir. 2004). Contracts under which only one party has remaining obligations — such as a promissory note requiring only the payment of money — are generally not considered executory for purposes of Section 365.
The standard for court approval of the debtor's decision to assume or reject an executory contract or unexpired lease is the "business judgment" test. Under this standard, the court will approve the debtor's decision so long as it represents a reasonable exercise of business judgment. See In re Orion Pictures Corp., 4 F.3d 1095, 1098–99 (2d Cir. 1993); In re Chi. & N.W. Transp. Co., 96 B.R. 983, 987 (Bankr. N.D. Ill. 1988). The business judgment standard does not require the debtor to demonstrate that its decision is the optimal choice, but merely that it reflects a rational business decision, made in good faith, and not the product of bad faith or an abuse of discretion. Courts typically do not second-guess the debtor's commercial assessment of the relative benefits and burdens of a particular contract.
B. Requirements for Assumption — Section 365(b)
If a debtor-in-possession seeks to assume an executory contract or unexpired lease under which there has been a default, Section 365(b)(1) imposes three preconditions to assumption. The debtor must: (i) cure, or provide adequate assurance that the debtor will promptly cure, the existing default (other than defaults arising solely from the debtor's insolvency, the commencement of the case, or the debtor's failure to perform a nonmonetary obligation); (ii) compensate, or provide adequate assurance that the debtor will promptly compensate, the counterparty for any actual pecuniary loss resulting from the default; and (iii) provide adequate assurance of future performance under the contract or lease. 11 U.S.C. § 365(b)(1)(A)–(C).
The cure requirement is typically the most significant practical impediment to assumption. Cure encompasses all outstanding monetary obligations under the contract, including accrued and unpaid rent, interest, late fees, and other charges owed to the counterparty as of the date of assumption. The cure amount may be the subject of dispute, and courts routinely adjudicate contested cure claims in connection with assumption motions.
Section 365(b)(2) provides that the debtor is not required to cure defaults arising from so-called "ipso facto" clauses — that is, contract provisions that are triggered solely by the debtor's insolvency, financial condition, or the commencement of a bankruptcy case. 11 U.S.C. § 365(b)(2). Ipso facto clauses are unenforceable in bankruptcy, and the debtor may assume a contract notwithstanding any such provision. This protection is particularly relevant in the TAI context, as discussed in Section V.B.2 below, where three time charter agreements contain financial ratio covenants tied to TSL's parent-level financial performance.
With respect to timing, Section 365 does not impose a general deadline for assumption or rejection of executory contracts, and the debtor may assume or reject contracts at any time before the confirmation of a plan of reorganization. However, the court retains discretion to establish deadlines on request of a counterparty or on its own motion. A critical exception applies to unexpired leases of nonresidential real property: under Section 365(d)(4), such leases must be assumed or rejected within 120 days of the order for relief, and the court may extend this period for an additional 90 days for cause. 11 U.S.C. § 365(d)(4)(A)–(B). If the lease is not timely assumed, it is deemed rejected by operation of law. This deadline is particularly significant for TAI's Houston terminal lease, as discussed in Section IV.A.1 below.
C. Consequences of Rejection — Section 365(g)
Section 365(g) provides that the rejection of an executory contract or unexpired lease constitutes a breach of such contract or lease. 11 U.S.C. § 365(g)(1). If the contract has not been assumed previously, the breach is deemed to have occurred immediately before the date of the filing of the petition, giving rise to a general unsecured prepetition claim for damages. This is a critical feature of the rejection mechanism: by treating the breach as a prepetition event, rejection relegates the counterparty's claim to the pool of general unsecured claims, which typically receive only a fraction of the amount owed (often expressed as a percentage recovery or "cents on the dollar").
For landlord claims arising from the rejection of nonresidential real property leases, Section 502(b)(6) imposes a cap on the amount of the landlord's rejection damage claim. The cap is calculated as the greater of (i) one year's rent, or (ii) 15 percent of the remaining lease term (not to exceed three years from the earlier of the petition date or the date the landlord repossessed the premises), plus any unpaid rent due as of the earlier of the petition date or the date the landlord repossessed the premises. 11 U.S.C. § 502(b)(6). This cap can significantly limit the exposure of the estate to landlord rejection claims, and it is an important consideration in the assumption-versus-rejection calculus for TAI's real property leases.
Certain counterparties possess election rights under the Bankruptcy Code following the debtor's rejection. Under Section 365(h), a lessee of real property may elect to retain its rights under the lease (including the right to remain in possession) for the balance of the lease term, notwithstanding the debtor-lessor's rejection. 11 U.S.C. § 365(h). Under Section 365(n), a licensee of intellectual property may elect to retain its rights under the license (including the right to use the intellectual property) if the debtor-licensor rejects the license agreement, provided the licensee continues to make all royalty payments due. 11 U.S.C. § 365(n). As discussed below, Section 365(n) is relevant to TAI's CargoLogix software license with Meridian Digital Solutions Inc.
D. Assignment — Section 365(f)
Section 365(f) authorizes the debtor to assign an executory contract or unexpired lease to a third party, notwithstanding any provision in the contract or applicable law that restricts, conditions, or prohibits the assignment. 11 U.S.C. § 365(f)(1). This override of contractual anti-assignment provisions is a powerful tool in the bankruptcy context, enabling the debtor to capture the economic value of favorable contracts through assignment to a buyer in connection with a Section 363 sale or plan of reorganization.
As a precondition to assignment, the debtor must first assume the contract (satisfying the cure and adequate assurance requirements of Section 365(b)), and the proposed assignee must demonstrate adequate assurance of future performance under the contract. 11 U.S.C. § 365(f)(2). The standard for "adequate assurance of future performance" is fact-specific and depends on the nature of the contract and the financial condition of the assignee.
The assignment provisions of Section 365(f) are relevant to TAI's situation insofar as the Chapter 11 contingency plan may contemplate asset sales of certain TAI operations. If TAI's business or specific operating segments are sold, either through a Section 363 sale process or pursuant to a plan of reorganization, the ability to assume and assign favorable contracts — including the Houston terminal lease and revenue-generating charter agreements — will be critical to maximizing value for the estate.
E. Special Considerations — Maritime Contracts
TAI's business involves a significant number of maritime-related contracts, including time charter-out agreements, contracts of affreightment, and voyage charters. The interplay between Section 365 of the Bankruptcy Code and federal admiralty and maritime law raises a number of specialized issues that warrant careful consideration.
Vessel Charter Agreements. Time charter agreements are generally treated as executory contracts for purposes of Section 365, as both the owner/disponent owner and the charterer retain ongoing material obligations throughout the charter period. The owner is obligated to provide a seaworthy vessel and crew, while the charterer is obligated to pay hire and to employ the vessel within the agreed trading limits. Voyage charters, by contrast, may present more complex executory contract questions depending on the stage of performance at the time of the bankruptcy filing. A voyage charter that is substantially performed (e.g., cargo has been loaded and the vessel is in transit) may no longer be considered executory under the Countryman test, as the remaining obligations may be ministerial in nature.
Maritime Liens and the Ship Mortgage Act. Certain claims against vessels and their operators — including claims for bunker fuel, towage, wharfage, stevedoring, and repairs — may give rise to maritime liens under federal maritime law. Maritime liens are in rem claims against the vessel itself, enforceable by arrest of the vessel in an admiralty proceeding, and they take priority over most other claims, including recorded ship mortgages in certain circumstances. The intersection of maritime lien rights with the Bankruptcy Code's automatic stay and executory contract provisions is a developing area of law. These issues are addressed in greater detail in the companion memorandum on Maritime Lien and Ship Mortgage Act Considerations, anticipated for delivery on December 18, 2022.
III. Methodology
Our analysis is based on a comprehensive review of the contracts, leases, and related documentation provided by TAI management and the company's financial advisors. The specific sources of information and analytical methodology are set forth below.
Document Review. We reviewed the contracts and leases provided by Diana Restrepo, Vice President of Finance at TAI; Jonathan Kurtz, Vice President of Operations at TAI; and Irini Dalakoura, Chief Financial Officer of TSL. The documents were provided to us in staged productions between October 15, 2022 and November 10, 2022, supplemented by follow-up requests and clarifications through November 18, 2022. We received copies of executed agreements, amendments, side letters, and, where applicable, assignment and assumption agreements for a total of 47 identified contracts and leases.
Management Interviews. We conducted interviews with Marcus Hale, President of TAI, on November 10, 2022, at TAI's Houston corporate office. The purpose of these interviews was to assess the operational necessity and strategic importance of each contract to TAI's ongoing business operations. Mr. Hale provided insight into the relative criticality of each counterparty relationship, the availability of alternative arrangements, and the practical consequences of assumption or rejection. Where additional operational input is required, we have recommended that certain contracts be placed on "hold" pending further review with Mr. Hale and Mr. Kurtz.
Financial Data. We cross-referenced the contract catalog with TAI's accounts payable aging report as of September 30, 2022, which reflects total consolidated trade payables of $38.7 million for the TSL group, of which TAI's direct share is approximately $14.2 million. The balance of the trade payables relates to TSL and non-U.S. entities within the group. The accounts payable aging report was provided by Ms. Restrepo and reconciled against the general ledger data provided to Kensington Veltrian Partners LLC ("KHP"), TAI's financial advisor, for purposes of the 13-week cash flow model. James Calloway, Managing Director at KHP, confirmed receipt of the contract catalog data for incorporation into the cash flow model on November 14, 2022.
Categorization. We categorized the 47 contracts and leases into five groups based on functional type:
(A) Real Property Leases (4 contracts);
(B) Vessel Charter Agreements (24 agreements, comprising 14 time charter-out agreements, 8 contracts of affreightment, and 2 active voyage charters);
(C) Freight Brokerage and Logistics Contracts (8 agreements);
(D) Vendor and Supply Agreements (10 agreements); and
(E) Intercompany and Corporate Service Agreements (4 agreements/arrangements, including 1 promissory note that is not technically an executory contract).
Analytical Framework. For each contract, we analyzed the following factors:
(i) the identity of the parties;
(ii) material terms, including term, payment obligations, performance covenants, and termination provisions;
(iii) whether the contract qualifies as an "executory contract" or "unexpired lease" within the meaning of Section 365;
(iv) the current default status, if any, and the estimated cure cost required for assumption;
(v) the operational necessity of the contract to TAI's ongoing business; and
(vi) our recommendation as to whether the contract should be assumed, rejected, or held for further evaluation, together with supporting rationale.
The analysis that follows is organized by contract category and addresses each material contract individually.
IV. Category A — Real Property Leases
TAI is party to four real property leases, encompassing its principal terminal facility, corporate office, a secondary warehouse, and a parking/auxiliary storage lot. The real property leases represent the physical infrastructure essential to TAI's Houston-based operations and are among the most significant contracts in this analysis, both in terms of operational importance and exposure under Section 365(d)(4)'s assumption deadline.
A.1. Houston Terminal Lease
Parties: TAI, as lessee, and Port Houston Industrial Properties LP ("PHIP"), as lessor.
Property: The Houston terminal facility is located in the Barbours Cut area of the Port of Houston and comprises approximately 42 acres of improved terminal land, including two container gantry cranes, a dry-bulk transloading facility, and approximately 65,000 square feet of enclosed warehouse space. The facility serves as the operational hub for TAI's U.S. business, handling both containerized and dry-bulk cargo operations for vessels in the TSL-controlled fleet and for third-party charterers.
Term: The lease has a 20-year initial term commencing on January 1, 2010, and expiring on December 31, 2029. The lease includes two five-year renewal options, exercisable by TAI upon not less than 12 months' written notice prior to the expiration of the then-current term, which, if both options are exercised, would extend the lease through December 31, 2039.
Rent: Base rent is $285,000 per month ($3.42 million per year), subject to CPI escalation adjustments at five-year intervals. The most recent CPI adjustment became effective on January 1, 2020, and the next scheduled adjustment will occur on January 1, 2025. In addition to base rent, TAI is responsible for property taxes, insurance, and common area maintenance charges on a triple-net basis, which aggregate approximately $48,000 per month based on the most recent annual reconciliation.
Current Status: TAI is current on all rent and additional charges under the lease. There is no monetary default, and no outstanding notices of default have been received from PHIP. TAI has maintained the premises in compliance with the maintenance and repair obligations set forth in the lease.
Security Deposit: PHIP holds a security deposit of $855,000 (equivalent to three months' base rent), which is refundable upon expiration of the lease term, subject to offset for any outstanding obligations.
Operational Significance: The Houston terminal lease is the single most important contract in TAI's portfolio. The terminal facility is the nexus of TAI's revenue-generating operations, serving as the point of origin and destination for the majority of cargo handled by TAI's chartering business. The two container gantry cranes and the dry-bulk transloading facility represent irreplaceable infrastructure, and the loss of this lease would effectively terminate TAI's ability to operate as a going concern in the United States. There is no readily available alternative terminal facility in the Houston area that could accommodate TAI's operations on comparable terms and within a timeframe consistent with a reorganization.
Secured Lender Interest: The Houston terminal lease is referenced in the Senior Secured Credit Agreement dated June 15, 2019, as collateral subject to a first-priority security interest in favor of Nordbank International AG, as collateral agent, for the benefit of the $685 million senior secured lender syndicate. The leasehold interest is pledged as part of the collateral package securing the senior secured credit facility. Assumption of the lease in Chapter 11 will be necessary to preserve the collateral value of this asset and to maintain the secured lenders' collateral position, which is a prerequisite for any DIP financing arrangement and any consensual restructuring.
Section 365(d)(4) Deadline: As a lease of nonresidential real property, the Houston terminal lease is subject to the 120-day assumption deadline under Section 365(d)(4) of the Bankruptcy Code, with a single 90-day extension available for cause. Failure to assume the lease within this timeframe would result in the deemed rejection of the lease by operation of law, which would be catastrophic to TAI's reorganization prospects. We recommend that assumption of this lease be addressed in a first-day motion or, at the latest, in connection with the final DIP approval hearing, which is targeted for no later than Day 45 of the case.
Cure Cost Estimate: $0. TAI is current on all obligations under the lease.
Recommendation: ASSUME. This lease is absolutely critical to TAI's ongoing operations. The loss of the Houston terminal facility would eliminate TAI's ability to generate revenue, would undermine the value of the estate, and would render any reorganization plan non-viable. Assumption should be prioritized as a first-day or early-case action item.
Assignment Consideration: Section 14.3 of the lease contains an anti-assignment clause that prohibits TAI from assigning or subletting the leased premises without the prior written consent of PHIP. This anti-assignment clause is unenforceable under Section 365(f) of the Bankruptcy Code if assumption occurs, and TAI would retain the ability to assign the lease to a purchaser in connection with a Section 363 sale or plan of reorganization, provided that adequate assurance of the assignee's future performance is demonstrated.
A.2. Houston Corporate Office Lease
Parties: TAI, as tenant, and McKinney Tower Management LLC ("MTM"), as landlord.
Property: Suite 2200, 1400 McKinney Street, Houston, Texas 77010. The leased premises comprise approximately 12,500 square feet of Class A office space in a 36-story office tower located in downtown Houston. The premises serve as TAI's principal corporate office and house TAI's executive team, finance and accounting department, chartering and commercial operations team, and administrative staff.
Term: The lease has a 10-year term commencing on April 1, 2018, and expiring on March 31, 2028. There are no renewal options under the current lease.
Rent: Base rent is $47,500 per month ($570,000 per year), subject to an annual escalation of 3 percent. In addition to base rent, TAI pays a proportionate share of building operating expenses and real estate taxes, which currently aggregate approximately $9,200 per month.
Current Status: TAI is current on all rent and additional charges through November 2022. There are no monetary defaults, and no notices of default have been received from MTM.
Cure Cost Estimate: $0.
Recommendation: ASSUME. The Houston corporate office serves as TAI's principal place of business and is administratively essential to the conduct of TAI's operations and the management of the Chapter 11 case. Additionally, TAI's principal office in Houston provides the venue nexus for the Chapter 11 filing in the United States Bankruptcy Court for the Southern District of Texas (Houston Division), which is the preferred filing venue under the contingency plan. The lease terms are at market rates for comparable Class A office space in downtown Houston, and the lease does not impose any material above-market obligations.
A.3. Warehouse Lease — Galveston
Parties: TAI, as tenant, and Gulf Coast Storage Associates LLC ("GCSA"), as landlord.
Property: Warehouse facility located at Pelican Island, Galveston, Texas, comprising approximately 28,000 square feet of enclosed warehouse space. The facility has been used by TAI for overflow cargo storage and equipment staging in connection with Houston terminal operations.
Term: The lease has a five-year term commencing on July 1, 2020, and expiring on June 30, 2025.
Rent: Base rent is $18,200 per month ($218,400 per year). The lease does not include CPI escalation provisions.
Current Status: TAI is currently one month in arrears on the Galveston warehouse lease. The October 2022 rent payment of $18,200 was not made as of November 15, 2022. We understand from Ms. Restrepo that the missed payment is the result of cash management prioritization decisions rather than a dispute over the rent amount.
Cure Cost Estimate: $18,200 (one month's arrears).
Recommendation: HOLD. The operational necessity of the Galveston warehouse requires further review with Jonathan Kurtz, Vice President of Operations. TAI's utilization of the Galveston facility has declined over the course of 2022 in connection with the overall reduction in cargo volumes. If Mr. Kurtz determines that the warehouse's overflow storage function can be consolidated into the Houston terminal facility (which has approximately 65,000 square feet of warehouse space), the Galveston lease should be rejected, generating annual savings of approximately $218,400. Conversely, if the Galveston warehouse remains necessary for overflow storage or for staging operations that cannot be accommodated at the Houston terminal, the lease should be assumed with a cure payment of $18,200. We recommend that this determination be finalized no later than December 15, 2022.
A.4. Parking and Auxiliary Storage Lease — Houston
Parties: TAI, as tenant, and Bayou Land Partners LP ("BLP"), as landlord.
Property: Paved parking lot and modular storage units adjacent to the Houston terminal facility, comprising approximately 3.5 acres. The premises are used for employee and visitor parking and for temporary storage of equipment and supplies that do not require enclosed warehouse space.
Term: The lease originally had a three-year term that expired in June 2022. TAI is currently in a month-to-month holdover tenancy. Under the holdover provisions of the lease, either party may terminate the tenancy upon 30 days' written notice.
Rent: Base rent is $8,500 per month ($102,000 per year).
Current Status: TAI is current on all rent payments. There are no defaults or outstanding notices.
Cure Cost Estimate: $0.
Recommendation: REJECT. The month-to-month holdover tenancy can be terminated with 30 days' written notice even outside of a bankruptcy proceeding, and the modular storage units and parking functions are of minimal operational necessity given the existing capacity at the Houston terminal facility. Rejection of this lease would generate annual savings of approximately $102,000. Given the holdover status, no significant rejection damages would be incurred.
V. Category B — Vessel Charter Agreements
B.1. Overview of TAI's Vessel Chartering Role
TAI does not own any vessels directly. All 50 vessels in the TSL fleet — comprising 38 dry-bulk carriers and 12 container vessels — are owned by TSL or by 14 vessel-owning special purpose vehicles ("SPVs") organized under TSL. The fleet was appraised by Drakos Maritime Valuations Ltd. as of November 1, 2022, at an aggregate fair market value of $623 million, reflecting a decline of approximately 30 percent from the January 2022 appraised value of $891 million. The fleet breakdown by vessel class is set forth in Exhibit E.
TAI's role in the chartering structure is that of U.S.-side commercial coordinator and scheduling agent for foreign-flag vessel calls at U.S. ports. TAI enters into time charter-out agreements and contracts of affreightment with U.S.-based charterers and cargo interests on a disponent owner or agent basis, acting on behalf of TSL and the vessel-owning SPVs. In this capacity, TAI receives charter hire from third-party charterers and remits the net proceeds to TSL after deducting TAI's commissions and U.S. operating costs. This revenue flow is a central element of the intercompany relationship between TAI and TSL, and the net amounts owed by TAI to TSL are governed in part by the $76.4 million subordinated intercompany promissory note discussed in Section VIII below.
As of November 15, 2022, TAI is party to the following vessel charter arrangements:
• 14 active time charter-out agreements with U.S.-based charterers;
• 8 contracts of affreightment with U.S.-based cargo interests; and
• 2 active voyage charters on a spot basis (both expected to be fully performed before any hypothetical petition date).
B.2. Time Charter-Out Agreements (14 Agreements)
TAI is party to 14 active time charter-out agreements with U.S.-based charterers. These agreements are the primary revenue-generating contracts in TAI's portfolio and are central to TAI's going-concern value.
Counterparties and Charter Rates. The 14 time charter-out agreements are with the following principal counterparties:
• Pinnacle Bulk Trading LLC: 3 time charter-out agreements covering 3 dry-bulk carriers; aggregate daily charter rate of $28,500 ($9,500 per vessel per day);
• Great Lakes Commodity Transport Inc.: 2 time charter-out agreements covering 2 dry-bulk carriers; aggregate daily charter rate of $19,200 ($9,600 per vessel per day);
• Atlantic Seaboard Chartering Co.: 2 time charter-out agreements covering 2 dry-bulk carriers; aggregate daily charter rate of $22,000 ($11,000 per vessel per day); and
• Seven other U.S.-based charterers: 7 time charter-out agreements covering the remaining chartered vessels, at various daily rates.
Revenue Contribution. The 14 time charter-out agreements represent approximately $78 million of TAI's estimated FY2022 revenue, making them the single largest revenue category in TAI's business.
Market Conditions and Rate Deterioration. The average daily time charter equivalent ("TCE") rate across TAI's chartered fleet has declined precipitously from $24,800 per day (FY2021 average) to approximately $11,200 per day (Q3 2022 average). This decline of approximately 55 percent reflects the dramatic deterioration in global dry-bulk shipping markets, driven by weakening demand for raw materials, increasing vessel supply, and macroeconomic headwinds. The Baltic Dry Index, a widely used barometer of dry-bulk shipping rates, has declined by approximately 58 percent between January 2022 and September 2022. This rate deterioration is the principal driver of TAI's revenue decline from $312 million in FY2021 to an estimated $198 million in FY2022, and it is a significant factor in the financial distress that has prompted the Chapter 11 contingency planning.
Default Status. There are no monetary defaults by TAI on any of the 14 time charter-out agreements. TAI has performed its obligations under these agreements in all material respects, including the timely provision of vessels, compliance with trading limits, and satisfaction of commercial terms.
However, three of the 14 time charter agreements contain financial performance covenants that are tied to the financial ratios of TSL, TAI's parent company. These covenants typically require that TSL maintain a Net Leverage Ratio below a specified threshold (5.50x) and an Interest Coverage Ratio above a specified threshold (2.50x). As of September 30, 2022, TSL breached both of these covenants, with the Net Leverage Ratio at 7.82x (versus the 5.50x covenant threshold) and the Interest Coverage Ratio at 1.74x (versus the 2.50x covenant threshold). These covenant breaches would, under the literal terms of the charter agreements, constitute events of default entitling the charterers to terminate the agreements.
However, these financial covenant provisions are classic "ipso facto" clauses within the meaning of Section 365(b)(2) of the Bankruptcy Code, as they are triggered by the financial condition of the debtor (or, in this case, the debtor's parent). In a Chapter 11 case, these clauses are unenforceable, and TAI may assume the charter agreements notwithstanding the covenant breaches. See 11 U.S.C. § 365(b)(2)(A)–(D). The practical risk, however, is that one or more counterparties may attempt to invoke these termination provisions prior to the petition date, while TAI is not yet protected by the automatic stay. We address this risk in Section X.C below.
Cure Cost Estimate: $0 for monetary defaults. The ipso facto clause issue is addressed by Section 365(b)(2).
Recommendation: ASSUME ALL 14. These are TAI's core revenue-generating contracts. Assumption preserves TAI's going-concern value and maintains the revenue stream that is essential to debt service under any restructuring scenario, whether through a standalone reorganization, a sale of the business, or a combination thereof. Failure to assume these contracts would effectively eliminate the commercial value of TAI's U.S. operations.
Intercompany Revenue Flow. As noted above, charter hire received by TAI from third-party charterers is remitted on a net basis to TSL after deduction of TAI's commissions and U.S. operating costs. This intercompany revenue flow is part of the relationship governed by the intercompany services agreement and the $76.4 million subordinated intercompany note (TAI → TSL), both of which are addressed in Section VIII below. The treatment of this intercompany revenue flow in a Chapter 11 case will require careful structuring to ensure that the DIP budget adequately reflects TAI's cash needs and that the intercompany arrangements do not create grounds for substantive consolidation challenges.
B.3. Contracts of Affreightment (8 Agreements)
TAI is party to eight contracts of affreightment ("COAs") with U.S.-based cargo interests. COAs are volume-based contracts under which TAI commits to transport specified quantities of cargo over a defined period, with the specific vessels and voyage schedules to be designated by TAI from the available fleet. These contracts are typically shorter in duration than time charter agreements, with terms ranging from three to twelve months, and they provide cargo commitments that underpin fleet utilization and revenue stability.
Counterparties. The principal counterparties include:
• Heartland Grain Exporters Co-op: 2 COAs covering grain cargo shipments from Gulf Coast ports to international destinations;
• Southern Gulf Petrochemical Trading Inc.: 1 COA covering petrochemical cargo shipments; and
• Five other U.S.-based cargo interests with various commodity types and trade routes.
Revenue Contribution. The eight COAs represent approximately $42 million of TAI's estimated FY2022 revenue.
Default Status. There are no monetary or performance defaults under any of the eight COAs. One COA, with Southern Gulf Petrochemical Trading Inc., is scheduled to expire by its terms on December 31, 2022. Under the Chapter 11 contingency timeline, which anticipates a potential petition date in late January or early February 2023, this COA will have expired prior to the filing date and will not require an assumption or rejection decision under Section 365.
Cure Cost Estimate: $0.
Recommendation: ASSUME 7 of 8. The seven COAs that will remain in effect as of the anticipated petition date should be assumed to preserve revenue and customer relationships. The eighth COA, with Southern Gulf Petrochemical Trading Inc., will expire on December 31, 2022, prior to any filing. If TAI and Southern Gulf elect to negotiate a successor agreement, the new contract would be entered into in the ordinary course (either pre-petition or post-petition as an administrative expense contract).
B.4. Voyage Charter Agreements (As-Needed Basis)
TAI periodically enters into voyage charter agreements on a spot basis for individual cargoes. Voyage charters are one-off agreements for the transportation of a specific cargo on a specific voyage, and they are typically not executory at any given time because performance is substantially completed upon loading, carriage, and discharge of the cargo. Once the cargo has been loaded and the voyage is underway, the remaining obligations of both parties are largely ministerial, and the contract may no longer satisfy the Countryman test for executory status.
As of November 15, 2022, TAI has two active voyage charters:
(i) One voyage charter for a cargo currently completing discharge at the Port of Houston, with estimated completion on November 25, 2022; and
(ii) One voyage charter for a cargo currently loading at the Port of New Orleans, with estimated completion on December 5, 2022.
Both voyage charters are expected to be fully performed well before any hypothetical petition date under the contingency timeline.
Recommendation: No Section 365 action required. These contracts are expected to be fully performed prior to any bankruptcy filing, and they will not constitute executory contracts at the time of the petition.
VI. Category C — Freight Brokerage and Logistics Contracts
C.1. Freight Brokerage License and Carrier Agreements
TAI holds a Federal Motor Carrier Safety Administration ("FMCSA") freight broker license (motor carrier authority) and operates a domestic freight brokerage arm that arranges drayage and inland transportation services for cargo moving to and from the Houston terminal. TAI is party to six master brokerage agreements with domestic trucking carriers for drayage and overland transportation.
Lone Star Drayage LLC
Parties: TAI (broker/shipper) and Lone Star Drayage LLC ("Lone Star") (carrier).
Term: Three-year master drayage agreement expiring in August 2024.
Material Terms: The agreement includes minimum volume commitments of 500 containers per month and provides for Lone Star to furnish chassis, trucks, and drivers for the drayage of containers between the Houston terminal and inland destinations within a 200-mile radius. The agreement contains fuel surcharge adjustment provisions tied to the Department of Energy's weekly diesel price index.
Monthly Cost: Current monthly payments to Lone Star aggregate approximately $425,000, making Lone Star TAI's single largest drayage provider.
Default Status: TAI is approximately $187,000 in arrears on payments to Lone Star as of November 15, 2022. The arrearage arises from a disputed fuel surcharge adjustment for the months of September and October 2022. TAI's operations team has taken the position that the applicable fuel surcharge index value was lower than the amount invoiced by Lone Star, while Lone Star contends that the surcharge was correctly calculated using the weekly index date corresponding to the date of dispatch rather than the date of delivery. This dispute is commercial in nature and may be susceptible to negotiated resolution.
Cure Cost Estimate: $187,000 (the full disputed amount; the actual cure amount may be reduced through negotiation of the fuel surcharge dispute).
Recommendation: ASSUME. Lone Star is the critical drayage provider for the Houston terminal, and its services are essential to the movement of containerized cargo between the terminal and inland customers. Loss of the Lone Star relationship would create severe operational disruption, as alternative drayage capacity in the Houston area is limited on short notice and at comparable rates. We recommend that TAI resolve the fuel surcharge dispute in connection with the cure process, either through negotiation of a compromise cure amount or through payment of the full amount with a reservation of rights on the merits.
Magnolia Freight Services Inc.
Parties: TAI (broker) and Magnolia Freight Services Inc. ("Magnolia") (carrier).
Term: Two-year master brokerage agreement expiring in March 2024.
Material Terms: The agreement provides for spot-rate-based drayage and inland transportation services, with no minimum volume commitments. Magnolia serves as TAI's secondary drayage provider for overflow volumes and for routes not covered by the Lone Star agreement.
Monthly Cost: Variable, depending on volume; current average monthly payments of approximately $85,000.
Default Status: TAI is current on all obligations to Magnolia. There are no arrears or outstanding disputes.
Cure Cost Estimate: $0.
Recommendation: ASSUME. Magnolia provides flexible, spot-rate drayage capacity that supplements the Lone Star arrangement. The absence of minimum volume commitments makes this agreement cost-effective, as TAI pays only for services actually rendered. Retention of Magnolia's services provides operational redundancy and flexibility.
Four Smaller Regional Carriers
TAI is party to four additional carrier agreements with smaller regional trucking companies. These agreements are structured as annual contracts, renewable upon mutual agreement, with no minimum volume commitments and rate structures at or near market levels. The four carriers provide supplemental capacity for specialized routes and seasonal volume peaks.
Default Status: TAI is current on all obligations under these four agreements.
Cure Cost Estimate: $0.
Recommendation: REJECT 2; HOLD 2. Based on our preliminary assessment with Mr. Hale, two of the four regional carriers provide redundant capacity that overlaps with the services provided by Lone Star and Magnolia. Rejection of these two agreements would reduce administrative complexity and eliminate marginal costs. The remaining two regional carriers serve specialized routes (one focusing on petrochemical cargo movements in the Beaumont-Port Arthur corridor, and one focusing on refrigerated container transport) that may not be readily replaceable. We recommend that these two agreements be held for further review with Mr. Kurtz, with a determination to be made by December 15, 2022.
C.2. Logistics Software License — Meridian Digital Solutions Inc.
Parties: TAI, as licensee, and Meridian Digital Solutions Inc. ("Meridian"), as licensor.
Software: Integrated terminal management and cargo tracking platform known as "CargoLogix." The CargoLogix platform provides real-time cargo tracking, berth scheduling, container yard management, documentation management, customs interface, and billing functionality. The platform is fully integrated into TAI's terminal operations and is the primary tool used by TAI's terminal operators, logistics coordinators, and commercial team for day-to-day cargo handling.
Term: Five-year license agreement commencing January 1, 2021, and expiring December 31, 2025.
License Fee: Base license fee of $32,000 per month ($384,000 per year), plus per-transaction fees that vary based on cargo volume and currently average approximately $12,000 per month. Total monthly cost is therefore approximately $44,000 per month ($528,000 per year).
Current Status: TAI is current on all license fees and per-transaction charges. There are no arrears, defaults, or outstanding disputes.
Cure Cost Estimate: $0.
intellectual Property Considerations: The CargoLogix software license qualifies as a license of "Intellectual property" within the meaning of Section 101(35A) of the Bankruptcy Code, which includes copyrighted works and trade secrets (but not patents). Section 365(n) of the Bankruptcy Code provides special protections for licensees of intellectual property in the event the licensor rejects the license agreement. However, in this case, TAI is the licensee, not the licensor. If TAI were to reject the license, it would lose its right to use the CargoLogix platform. Conversely, Section 365(n) would protect TAI's right to retain the license if Meridian (the licensor) were the debtor and sought to reject. Here, the relevant consideration is that assumption of the license preserves TAI's right to continue using CargoLogix, which is essential to terminal operations. If, hypothetically, TAI were to reject the license, TAI would need to identify and implement a replacement terminal management system — a process that would take months and cost significantly more than the license fees currently owed to Meridian.
Recommendation: ASSUME. The CargoLogix platform is mission-critical software without which TAI's terminal operations could not function. There is no viable alternative platform that could be deployed on the timeline required for a Chapter 11 case, and the cost of implementing a replacement system would far exceed the cost of the Meridian license over its remaining term. Assumption is the only commercially reasonable option.
C.3. Customs Brokerage Agreement — Atlas Customs Services LLC
Parties: TAI, as principal, and Atlas Customs Services LLC ("Atlas"), as customs broker.
Term: Annual contract, with the current term running through December 31, 2022. The agreement auto-renews for successive one-year terms unless either party provides 60 days' written notice of termination prior to the end of the then-current term. The notice deadline for preventing the 2023 renewal has already passed, and the agreement will automatically renew for the period January 1, 2023 through December 31, 2023.
Fee: Atlas charges on a per-entry basis for customs brokerage services, including the preparation and filing of customs entries, payment of duties and fees, and coordination with U.S. Customs and Border Protection. The aggregate monthly charges currently average approximately $8,500, depending on the volume of entries processed.
Current Status: TAI is current on all payments to Atlas. There are no arrears or outstanding disputes.
Cure Cost Estimate: $0.
Recommendation: ASSUME. Customs brokerage services are an essential component of TAI's import/export operations at the Houston terminal. Atlas handles all customs documentation and compliance requirements for cargo moving through the terminal, and the loss of these services would impede cargo clearance and could result in regulatory penalties. The cost of the Atlas agreement is modest, and the services are operationally necessary.
VII. Category D — Vendor and Supply Agreements
D.1. Overview
TAI's accounts payable as of September 30, 2022, include approximately $14.2 million attributable directly to TAI, out of the $38.7 million in consolidated trade payables for the TSL group. The balance of approximately $24.5 million relates to TSL and non-U.S. entities within the group and is not the direct obligation of TAI. The distinction between TAI's direct obligations and the obligations of other entities in the TSL group is important for the Chapter 11 analysis, as only TAI's direct obligations will be affected by a TAI Chapter 11 filing.
The largest single vendor claim against the TSL group is the $9.2 million bunker fuel claim of Olympian Fuel & Supply SA ("Olympian"), a Piraeus-based bunker fuel supplier. This claim is against TSL and the vessel-owning SPVs, not against TAI directly. However, the Olympian claim presents intercompany allocation issues that may be relevant to TAI's Chapter 11 case, as Olympian may assert that some portion of the fuel was supplied in connection with vessel calls at U.S. ports coordinated by TAI. The potential maritime lien implications of the Olympian claim are addressed in the companion memorandum on Maritime Lien and Ship Mortgage Act Considerations.
D.2. TAI Vendor Contracts Catalog
Gulf Energy Supply Co. LLC — Fuel and Supplies
Parties: TAI (purchaser) and Gulf Energy Supply Co. LLC ("Gulf Energy") (supplier).
Contract: Annual bunker fuel and diesel supply contract for the Houston terminal, providing fuel for terminal equipment (including container handling equipment, transloading machinery, and service vehicles) and, on occasion, bunker fuel for vessels calling at the Houston terminal. The current contract term runs through June 2023.
Monthly Cost: Variable, depending on fuel prices and consumption; current average monthly invoiced amount of approximately $145,000.
Current Status: TAI has an outstanding payable to Gulf Energy of approximately $1.3 million, representing invoices that are 60 to 90 days past due. This arrearage is the largest single vendor default in TAI's portfolio and reflects the cash management pressures that TAI has experienced in Q3 and Q4 of 2022.
Cure Cost Estimate: $1,300,000.
Maritime Lien Consideration: To the extent that fuel supplied by Gulf Energy was delivered to vessels rather than to shore-based equipment, the unpaid invoices may give rise to a maritime lien against the vessels under federal maritime law. A maritime lien would entitle Gulf Energy to arrest the vessel(s) in an admiralty proceeding, which could disrupt TAI's operations and create complications for the Chapter 11 case. Prompt assumption and cure of the Gulf Energy contract is therefore recommended not only for operational reasons but also to mitigate the risk of maritime lien enforcement. This issue is discussed further in Section X.F below and in the companion maritime lien memorandum.
Recommendation: ASSUME. Gulf Energy is a critical vendor for TAI's Houston terminal operations. Terminal equipment requires a continuous and reliable fuel supply to function, and any interruption in fuel deliveries would halt cargo handling operations. Additionally, assumption and prompt cure will mitigate the risk of maritime lien enforcement. We recommend that Gulf Energy be included in the critical vendor motion for purposes of obtaining court authorization to pay the prepetition cure amount promptly following the petition date. Cross-reference to the Critical Vendor and §503(b)(9) Claims Analysis (anticipated January 5, 2023).
Southern Industrial Maintenance Corp. — Terminal Equipment Maintenance
Parties: TAI (customer) and Southern Industrial Maintenance Corp. ("SIMC") (service provider).
Contract: Three-year maintenance agreement for the gantry cranes, dry-bulk transloading equipment, and related terminal infrastructure at the Houston terminal. SIMC provides scheduled preventive maintenance, emergency repair services, and parts procurement for the terminal's critical cargo handling equipment.
Monthly Cost: $65,000 per month ($780,000 per year).
Current Status: TAI is approximately $130,000 in arrears (two months' payments past due, representing September and October 2022 invoices).
Cure Cost Estimate: $130,000.