MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Nathaniel Bower, Partner, Bankruptcy & Restructuring, Calderwood & Harkness LLP
FROM: Nathan Ikeda, Associate, Bankruptcy & Restructuring, Calderwood & Harkness LLP
DATE: December 18, 2022
RE: Maritime Lien and Ship Mortgage Act Considerations — Thalassa Shipping & Logistics SA / Thalassa Americas Inc.
Matter No.: 1044-00003
Right-click to update Table of Contents
I. Executive Summary
This memorandum analyzes the interaction between maritime liens, preferred ship mortgages under the Ship Mortgage Act (46 U.S.C. §§31301–31343), and the first-priority liens securing the $685 million Senior Secured Credit Facility (dated June 15, 2019) extended to Thalassa Shipping & Logistics Société Anonyme ("TSL") and its subsidiaries. The analysis focuses with particular attention on potential maritime lien claims that could prime the senior secured lenders' ship mortgages in the event of a Chapter 11 filing by Thalassa Americas Inc. ("TAI"), the Delaware-incorporated U.S. operating subsidiary.
Key Conclusion. Certain categories of maritime liens — particularly liens for crew wages, salvage, and tort claims — hold statutory priority over preferred ship mortgages as a matter of longstanding admiralty law, codified in the Ship Mortgage Act at 46 U.S.C. §31326(b)(1). More immediately relevant to the present restructuring situation, bunker fuel supply claims — most notably the $9.2 million claim asserted by Olympian Fuel & Supply SA ("Olympian"), TSL's largest trade creditor — may qualify as maritime liens for "necessaries" under the Commercial Instruments and Maritime Liens Act (46 U.S.C. §§31341–31343), potentially priming the senior lenders' mortgages on the specific vessels to which fuel was supplied. These maritime lien claims constitute a material and largely unavoidable risk to the recovery position of Nordbank International AG ("Nordbank"), as Collateral Agent for the Senior Secured Lender syndicate, and must be carefully accounted for in any restructuring strategy.
This memorandum has been prepared in connection with the Chapter 11 contingency plan currently under development for a potential filing by TAI in the United States Bankruptcy Court for the Southern District of Texas (Houston Division). It should be read in conjunction with the broader restructuring workstreams being managed by this firm.
Fleet Overview. TSL's fleet comprises 50 vessels, consisting of 38 dry-bulk carriers and 12 container vessels, appraised at an aggregate fair market value of $623 million by Drakos Maritime Valuations Ltd. (Captain Nikos Drakos, Managing Director) as of November 1, 2022. This represents a significant decline of $268 million, or approximately 30.1%, from the $891 million appraised value in January 2022. All 50 vessels are subject to first-priority ship mortgage liens in favor of Nordbank (as Collateral Agent) securing the approximately $540 million outstanding under the Senior Secured Credit Facility. In addition, Dralvecen Mezzanine Capital LLC ("BMC") holds second-priority liens on the same collateral, securing $112.3 million in mezzanine notes. The aggregate secured debt of $652.3 million already exceeds the current fleet appraisal of $623 million, and the margin of risk increases substantially when potential maritime lien claims — which would prime both sets of ship mortgages — are taken into account.
II. Background and Factual Context
A. The Parties and the Fleet
Thalassa Shipping & Logistics Société Anonyme ("TSL"). TSL is a Greek société anonyme, headquartered at 42 Akti Miaouli, Piraeus 18538, Greece. The company was founded in 1987 by the Kostandinos family and has grown into a mid-market dry-bulk and container shipping operator with global operations. TSL's current officers include Georgios Andreadis (Chief Executive Officer), Irini Dalakoura (Chief Financial Officer), and Stavros Papageorgiou (General Counsel, based in Greece).
TSL owns and operates a fleet of 50 vessels across the following categories, with appraised values as determined by Drakos Maritime Valuations Ltd. in its November 1, 2022 valuation report:
The vessels are registered under foreign flags, principally the Greek flag, with certain vessels registered under other open registries. The individual vessels are held either directly by TSL or through a network of 14 vessel-owning special purpose vehicles ("SPVs"), each organized under Greek or Liberian law, as is customary in the international shipping industry for purposes of liability isolation and financing flexibility.
Thalassa Americas Inc. ("TAI"). TAI is a Delaware C-Corporation, with its principal office located at 1400 McKinney Street, Suite 2200, Houston, Texas 77010; Employer Identification Number 84-3291057. TAI serves as TSL's primary U.S. operating subsidiary and is responsible for Houston terminal operations, Jones Act–exempt foreign-flag vessel scheduling, and domestic freight brokerage. TAI's current officers include Marcus Hale (President), Diana Restrepo (Vice President, Finance), and Jonathan Kurtz (Vice President, Operations). TAI is a wholly-owned subsidiary of TSL, and its equity interests constitute part of the collateral package securing the Senior Secured Credit Facility.
B. The Debt Structure and Security Interests
The corporate group's debt structure consists of three principal tranches of funded indebtedness plus trade payables. The capital structure is summarized below and then discussed in detail.
Senior Secured Credit Facility. The Senior Secured Credit Facility (the "Credit Facility") was entered into on June 15, 2019, with Nordbank International AG acting as Administrative Agent and Collateral Agent on behalf of a syndicate of nine lenders. The total commitment under the Credit Facility is $685 million, structured across three tranches:
Term Loan A. Originally $400 million, this tranche amortizes at $10 million per quarter. As of September 30, 2022, thirteen quarterly amortization payments had been made (aggregating $130 million in principal repayments), leaving an outstanding balance of $270 million.
Revolving Credit Facility. The revolver has a total commitment of $200 million, of which $185 million was drawn as of September 30, 2022, leaving $15 million of undrawn availability. However, given the covenant breaches discussed below, the borrowers' ability to draw the remaining availability has been effectively blocked.
U.S. Tranche (Term Loan B). This is an $85 million non-amortizing term loan with a bullet maturity, borrowed by TAI. The full $85 million remains outstanding.
Aggregate Outstanding. As of September 30, 2022, the total amount outstanding under the Credit Facility was approximately $540 million ($270 million + $185 million + $85 million).
Interest Rate and Default Rate. The Credit Facility bears interest at SOFR plus 375 basis points. Upon the occurrence and during the continuance of an Event of Default, interest accrues at an additional 200 basis points (the "default rate"). Given the covenant breaches discussed in Section II.C, the default rate is currently applicable.
Maturity. June 15, 2024.
Collateral. The Credit Facility is secured by first-priority liens on all 38 dry-bulk carriers, all 12 container vessels, the Houston terminal lease, all accounts receivable, and equity interests in TAI and the 14 vessel-owning SPVs. The ship mortgages on the 50 vessels are the principal component of the collateral package and the focus of this memorandum.
Mezzanine Notes. The mezzanine notes were also dated June 15, 2019 and are held by Dralvecen Mezzanine Capital LLC ("BMC"). The original principal amount was $100 million, but with $12.3 million in payment-in-kind ("PIK") interest capitalized to date, the outstanding balance stands at $112.3 million. The mezzanine notes bear interest at 11.5% on a PIK toggle basis. BMC holds second-priority liens on the same collateral that secures the Credit Facility. The relative rights of Nordbank (as first-lien agent) and BMC (as second-lien holder) are governed by an Intercreditor Agreement dated June 15, 2019 (the "Intercreditor Agreement"), the relevant provisions of which are discussed in Section VII below.
Unsecured Notes. TSL has $50 million in unsecured senior notes outstanding, bearing interest at 8.25% cash pay, with a maturity date of March 1, 2025. Garrison Trust Company serves as indenture trustee. These notes are unsecured and therefore subordinate to both the first-lien and second-lien positions. They would also be subordinate to any maritime liens on the vessels.
Trade Payables. As of September 30, 2022, TSL's trade payables totaled approximately $38.7 million. The largest single trade creditor is Olympian Fuel & Supply SA, a bunker fuel supplier based in Piraeus, Greece, which is owed $9.2 million. As discussed extensively below, a substantial portion of these trade payables may give rise to maritime liens that prime the secured creditors' ship mortgages.
C. The Liquidity Crisis and Current Posture
The global dry-bulk shipping market has deteriorated significantly over the course of 2022. The Baltic Dry Index declined approximately 58% between January 2022 and September 2022, reflecting a broad-based collapse in freight rates. TSL's average daily time-charter equivalent ("TCE") rate fell from $24,800 per day in fiscal year 2021 to just $11,200 per day in the third quarter of 2022, representing a decline of approximately 55%. This dramatic reduction in operating revenue has precipitated a severe liquidity crisis for the TSL group.
As a consequence of the declining revenue environment, TSL and TAI breached multiple financial covenants under the Credit Facility as of September 30, 2022:
Minimum Liquidity Covenant. TSL's unrestricted cash balance fell to $27.3 million, representing a shortfall of $12.7 million below the $40 million minimum liquidity covenant. This breach was first identified on September 15, 2022, when the cash balance dropped below the threshold.
Leverage Ratio Covenant. The consolidated total leverage ratio was 7.82x as of September 30, 2022, materially exceeding the 5.50x maximum permitted under the Credit Facility.
Interest Coverage Ratio Covenant. The consolidated interest coverage ratio was 1.74x, well below the 2.50x minimum required under the Credit Facility.
Following the identification of these covenant breaches, the parties entered into a Forbearance Agreement on October 10, 2022, pursuant to which the Senior Secured Lender syndicate agreed to a 90-day standstill period extending through January 8, 2023. During the standstill period, the lenders have agreed not to exercise remedies under the Credit Facility, but the default rate of interest continues to accrue.
Calderwood & Harkness LLP was engaged on October 25, 2022 to develop a Chapter 11 contingency plan for TAI and to advise TSL on out-of-court restructuring alternatives. Kensington Veltrian Partners LLC ("KHP"), led by James Calloway (Managing Director), has been retained as financial advisor and has provided a preliminary enterprise value estimate for the TSL group of $580 million to $640 million, with a midpoint of $610 million. This enterprise value estimate underscores the significant value impairment facing the group: the midpoint enterprise value of $610 million is approximately $42.3 million below the $652.3 million in aggregate secured debt (first-lien plus second-lien). Recoveries for unsecured creditors appear minimal.
On December 15, 2022, the restructuring team received a term sheet from Nordbank and Triton Credit Partners for a $75 million debtor-in-possession ("DIP") financing facility, which is currently under negotiation and will be the subject of a separate memorandum.
III. Overview of Maritime Lien Law
A. Nature and Source of Maritime Liens
A maritime lien is a privileged claim upon a vessel, her freight, or other maritime property, arising by operation of admiralty law and enforceable through an in rem action against the vessel itself. The lien is a property interest in the vessel — not merely a personal claim against the vessel owner — and it travels with the vessel regardless of changes in ownership. As the Supreme Court explained in The Bold Buccleugh, 7 Moore P.C. 267 (1851), and as subsequently restated in numerous American decisions, a maritime lien is "a right in the thing itself" that attaches to the vessel as security for the satisfaction of the underlying maritime claim.
Maritime liens arise automatically upon the occurrence of the underlying event that gives rise to the claim — for example, the provision of necessaries, the performance of crew services, the rendering of salvage services, or the commission of a maritime tort. Critically, and in marked contrast to virtually every other form of security interest recognized under American law, no filing, recording, registration, or notice of any kind is required for a maritime lien to attach and become enforceable. Maritime liens are therefore sometimes referred to as "secret liens" or "hidden liens," because they exist without any public record that would alert subsequent lenders, mortgagees, or purchasers to their existence.
This characteristic of maritime liens distinguishes them fundamentally from both Article 9 UCC security interests (which require a financing statement filed with the appropriate state office to be perfected as against third parties) and preferred ship mortgages under the Ship Mortgage Act (which require recording with the appropriate vessel documentation authority). A UCC secured creditor or ship mortgagee that conducts a thorough lien search may find no evidence of outstanding maritime liens, yet such liens may nonetheless exist, may have priority over the recorded security interests, and may be enforced against the vessel at any time through an in rem arrest.
Under United States law, the sources of maritime liens include the following:
(i) The general maritime law — i.e., the body of federal common law developed by the federal courts exercising their admiralty jurisdiction under Article III, Section 2 of the U.S. Constitution. The general maritime law recognizes liens for seamen's wages, salvage, collision and other maritime torts, and general average contributions.
(ii) The Commercial Instruments and Maritime Liens Act ("CIMLA") — codified at 46 U.S.C. §§31301 et seq. CIMLA provides the statutory framework for preferred ship mortgages and also codifies the maritime lien for necessaries at 46 U.S.C. §31342.
(iii) Specific federal statutes — including the Federal Maritime Lien Act for necessaries (now codified within CIMLA at 46 U.S.C. §31342), as well as other statutory provisions that create maritime liens for particular categories of claims, such as liens for preferred ship mortgages under the Ship Mortgage Act (46 U.S.C. §§31301–31343) and liens for penalties and forfeitures under certain regulatory statutes.
For purposes of this memorandum, the most critical point is that maritime liens for wages, salvage, tort, and necessaries all arise by operation of law, without any voluntary act of the vessel owner, and without any public recording — and all of these categories of liens take priority over preferred ship mortgages.
B. Categories of Maritime Liens (in Traditional Priority Order)
Under the general maritime law of the United States, maritime liens are ranked in a well-established hierarchy of priority. The following categories are listed in order of descending priority:
1. Seamen's Wages. Liens for seamen's wages hold the highest priority under the general maritime law. This priority has been recognized since the earliest days of admiralty jurisprudence and is virtually undefeatable. The maritime lien for wages encompasses not only base wages but also claims for maintenance and cure — i.e., the obligation of the vessel owner to provide food and lodging ("maintenance") and medical treatment ("cure") to seamen who fall ill or are injured in the service of the vessel. Courts have consistently held that the seamen's wage lien takes precedence over all other maritime liens, all ship mortgages, and all other claims against the vessel. See, e.g., The John G. Stevens, 170 U.S. 113 (1898); Piedmont & Georges Creek Coal Co. v. Seaboard Fisheries Co., 254 U.S. 1 (1920).
2. Salvage. Claims by persons who render salvage services to a vessel in peril — that is, who voluntarily and successfully assist in preserving the vessel from a recognized danger at sea — give rise to maritime liens of the second-highest priority. Salvage liens rank immediately below seamen's wage liens and above all other categories of maritime liens and preferred ship mortgages.
3. Tort Claims (Collision and Personal Injury). Maritime liens arising from maritime torts — including vessel-on-vessel collisions, allisions (i.e., the striking of a fixed object), oil spills, and personal injury or death caused by the vessel's operation — rank third in the traditional priority hierarchy. These tort liens have priority over both liens for necessaries and preferred ship mortgages.
4. Liens for Necessaries. A person who provides "necessaries" to a vessel — including supplies, repairs, provisions, fuel, towage, pilotage, and other goods and services reasonably required for the vessel's operation — is entitled to a maritime lien on the vessel under 46 U.S.C. §31342, provided the necessaries were furnished on the order of the owner or a person authorized by the owner. This category is discussed in detail in Section III.C below and is of central importance to the Olympian Fuel & Supply SA claim.
5. Preferred Ship Mortgage Liens. The Ship Mortgage Act grants holders of qualifying "preferred" ship mortgages a statutory lien on the mortgaged vessel, which has priority over all claims against the vessel except the four categories of maritime liens listed above, as well as certain court costs and expenses. This category is discussed in detail in Section IV below. Nordbank's first-priority ship mortgages on the 50 TSL vessels fall into this category.
6. State Law Liens and Other Statutory Liens. Liens arising under state law, including materialmen's liens, mechanic's liens, and similar claims, are generally subordinate to all of the foregoing categories in admiralty proceedings.
Two additional principles of maritime lien priority are worth noting:
The "Inverse Order" Rule. Within a given category of maritime liens, liens that arise later in time generally take priority over liens that arose earlier in time. This "last-in-time, first-in-priority" rule reflects the admiralty doctrine that the most recent provider of necessaries or services has contributed most recently to preserving the vessel and enabling it to continue in operation. This rule stands in sharp contrast to the "first-in-time, first-in-right" principle that generally governs priority among recorded security interests in real and personal property under the UCC and state recording statutes.
The Critical Point for the Senior Secured Lenders. Maritime liens in the first four categories above — seamen's wages, salvage, tort, and necessaries — all prime preferred ship mortgages. This is the fundamental risk for Nordbank and the Senior Secured Lender syndicate. Their preferred ship mortgages on the 50-vessel fleet, notwithstanding their first-priority status as against other consensual lienholders, are subordinate as a matter of law to every qualifying maritime lien for wages, salvage, tort, or necessaries.
C. Maritime Liens for Necessaries — 46 U.S.C. §31342
Given the significance of the necessaries lien to the present analysis, particularly with respect to the Olympian bunker fuel claim, a more detailed discussion of this category is warranted.
Definition of "Necessaries." The term "necessaries" has been construed broadly by the federal courts to encompass virtually any goods or services reasonably needed for the vessel's operation, maintenance, or navigation. The following items and services have been held to constitute necessaries under 46 U.S.C. §31342 and its predecessor statutes:
• Fuel and bunker supplies (including marine diesel oil and intermediate fuel oil)
• Provisions, stores, and supplies for the vessel and crew
• Repairs and maintenance, including hull repairs, engine work, and equipment replacement
• Drydocking and use of dry dock facilities
• Towage and pilotage services
• Wharfage and port charges
• Stevedoring services (recognized as necessaries in certain circuits, though not uniformly)
• Insurance premiums in some circumstances (where the insurance is required for the vessel's continued operation)
• Communications equipment and navigational supplies
• Water and waste removal services
Bunker fuel — the type of supply provided by Olympian Fuel & Supply SA — is the quintessential "necessary" and has been universally recognized as giving rise to a maritime lien under 46 U.S.C. §31342. There is no serious dispute that Olympian's bunker fuel supply claims would qualify.
Authorization Requirement. Under 46 U.S.C. §31342, a person furnishing necessaries acquires a maritime lien on the vessel only if the necessaries were provided "on the order of the owner or a person authorized by the owner." The statute creates a presumption of authority, providing at §31341(a) that the following persons are presumed to have authority to procure necessaries for a vessel: the owner, the master, a manager, and a person entrusted with the management or operation of the vessel by the owner. Under certain circumstances, a charterer may also be deemed an authorized person, depending on the type of charter and the degree of operational control exercised.
For TSL's fleet, the vessels are owned by TSL directly or by the 14 vessel-owning SPVs, and TSL exercises operational control through its management structure. Bunker fuel and other necessaries are procured in the ordinary course by TSL management or vessel masters on behalf of the owners. There does not appear to be a credible basis for challenging Olympian's authorization to supply necessaries — the fuel was plainly ordered by TSL or its agents in the normal course of commercial vessel operations.
Attachment and Enforcement. A maritime lien for necessaries attaches to the specific vessel to which the necessaries were provided at the moment of provision. No filing, recording, or other notice is required. The lien is enforceable through an in rem action — a proceeding brought in admiralty court directly against the vessel, which may be arrested (seized) by the U.S. Marshal or, in a foreign jurisdiction, by the appropriate court officer. The lien is vessel-specific: if Olympian supplied fuel to ten different TSL vessels over the course of the relevant period, ten separate maritime liens arose, each attaching to the particular vessel fueled, and each enforceable independently.
Application to the Olympian Claim. Olympian's $9.2 million claim for bunker fuel would give rise to maritime liens on the specific vessels to which fuel was supplied. These liens would prime both Nordbank's first-priority ship mortgages and BMC's second-priority liens on the affected vessels. The allocation of the $9.2 million across individual vessels has not yet been determined and is a critical data point that must be obtained from TSL's CFO, Irini Dalakoura, or from Olympian's invoicing records.
IV. The Ship Mortgage Act — Preferred Ship Mortgage Analysis
A. Framework of the Ship Mortgage Act (46 U.S.C. §§31301–31343)
The Ship Mortgage Act, originally enacted in 1920 and now codified as part of CIMLA at 46 U.S.C. §§31301–31343, provides a statutory framework for the creation and enforcement of "preferred" ship mortgages. The essential purpose of the Act is to encourage ship financing by giving mortgagees a priority position against most competing claims — a position analogous to that of a first-lien mortgagee on real property — while preserving the superior priority of certain traditional maritime liens.
A "preferred mortgage" is a mortgage on a vessel that complies with the recording and documentation requirements prescribed by the Ship Mortgage Act. For U.S.-documented vessels, this means that the mortgage must be recorded with the National Vessel Documentation Center of the U.S. Coast Guard. For foreign-flag vessels (which is the relevant category for TSL's fleet), the requirements are somewhat different and are discussed in Section IV.B below.
To qualify as a "preferred mortgage," a ship mortgage must satisfy certain statutory requirements, including that it contains specific terms relating to the mortgagee's rights to enforce the mortgage, that it covers a documented vessel (or a foreign vessel meeting certain criteria), and that it is properly recorded. A mortgage that satisfies these requirements grants the mortgagee a "preferred mortgage lien" on the vessel — a statutory lien that has priority over virtually all claims other than the traditional maritime liens discussed in Section III.B above.
B. Application to TSL's Fleet — Foreign-Flag Vessel Considerations
TSL's fleet consists entirely of foreign-flag vessels — principally Greek-flagged vessels, with certain vessels potentially registered under other open registries. This raises the threshold question of whether the ship mortgages held by Nordbank (as Collateral Agent) on TSL's foreign-flag vessels qualify as "preferred mortgages" under the Ship Mortgage Act for purposes of U.S. proceedings.
The Ship Mortgage Act, as amended by the Vessel Documentation Improvement Act of 1992 and subsequent legislation, does provide for the recognition of foreign ship mortgages, subject to certain conditions. Specifically, 46 U.S.C. §31301(6)(B) provides that a "preferred mortgage" includes a mortgage, hypothecation, or similar charge on a foreign vessel if:
(i) The mortgage or charge was established under the law of a foreign country;
(ii) That country has been designated by the Secretary of Transportation as a country whose mortgages, hypothecations, or similar charges on vessels are recognized under U.S. law (or, in practice, the country's registry system is recognized as meeting substantially equivalent standards); and
(iii) The mortgage or charge has been registered or recorded under the law of the flag state.
Greece, as a member state of the European Union and a signatory to the International Convention on Maritime Liens and Mortgages (1993), maintains a comprehensive domestic ship mortgage registration regime. Greek-registered ship mortgages (navtiki ypothiki) on Greek-flag vessels are recorded in the Greek Ship Registry maintained by the Ministry of Shipping and Island Policy. Mortgages registered in the Greek Ship Registry have historically been recognized by U.S. courts as qualifying for "preferred mortgage" status under the Ship Mortgage Act. See, e.g., Citi-Shipping Ltd. v. M/V Hanjin Pennsylvania, 2003 WL 22725503 (S.D.N.Y. 2003) (discussing recognition of foreign ship mortgages under the Ship Mortgage Act).
Accordingly, the ship mortgages held by Nordbank (as Collateral Agent) on all 50 TSL vessels — assuming they are properly recorded in the Greek Ship Registry (and any other applicable foreign registry) — should generally qualify for "preferred" status recognition in U.S. proceedings, including a Chapter 11 case filed by TAI. However, a vessel-by-vessel confirmation of the recording status of each mortgage is an important due diligence step that should be completed prior to any filing.
BMC's second-priority ship mortgages on the same 50 vessels would similarly qualify for preferred mortgage status, ranking behind Nordbank's first-priority mortgages (by virtue of the contractual subordination in the Intercreditor Agreement and the recording priority of the respective mortgages) but ahead of general unsecured creditors — assuming, again, that no maritime liens intervene.
C. Priority of Preferred Ship Mortgages vs. Maritime Liens
The critical provision for present purposes is 46 U.S.C. §31326(b)(1), which establishes the priority of a preferred mortgage lien relative to other claims against the vessel. Under this section, a preferred mortgage lien has priority over all claims against the vessel except:
(i) Expenses and fees allowed by a court, including costs of the marshal and expenses of sale in an in rem action, custodia legis charges, and similar administrative costs of the admiralty proceeding;
(ii) Tort claims arising prior to the recording of the preferred mortgage (but note that tort claims arising after the mortgage is recorded would also prime the mortgage under the general maritime law hierarchy discussed in Section III.B);
(iii) Liens for wages of stevedores employed by the vessel's operator or owner, and for wages and benefits of crew members;
(iv) Liens for salvage, general average, and similar claims; and
(v) Liens for necessaries provided before the vessel is arrested.
The practical consequence of this statutory framework is stark: Nordbank's preferred ship mortgages on the 50 TSL vessels, notwithstanding their first-priority contractual and recording status, can be primed by any qualifying maritime lien for seamen's wages, salvage, tort, or necessaries. The ship mortgages are "preferred" only in the sense that they rank ahead of general creditors and non-maritime claimants — they do not enjoy priority over the traditional maritime liens enumerated in §31326(b)(1).
The current appraised value of the 50-vessel fleet is $623 million (per the Drakos Maritime Valuations November 1, 2022 appraisal). The first-lien debt outstanding is $540 million, yielding a nominal equity cushion of $83 million. However, if maritime lien claims are significant in aggregate — particularly if concentrated on the fleet's highest-value vessels — this cushion could be substantially eroded or even eliminated. BMC's second-lien position, at $112.3 million, is already deeply underwater based on fleet value alone (i.e., $623 million minus $540 million first-lien debt = $83 million of value available for BMC, against $112.3 million owed), and any maritime liens priming the ship mortgages would further impair BMC's recovery.
V. Analysis of Specific Maritime Lien Risks for the TSL Fleet
A. Olympian Fuel & Supply SA — Bunker Fuel Lien ($9.2 Million)
Olympian Fuel & Supply SA ("Olympian"), located at 7 Iroon Polytechniou, Piraeus 18535, Greece, is TSL's largest individual trade creditor and is owed approximately $9.2 million as of September 30, 2022, for bunker fuel supplied to various TSL vessels. Given the discussion of maritime lien law set forth in Sections III and IV above, the Olympian claim merits careful analysis as the most immediate and quantifiable maritime lien risk facing the Senior Secured Lender syndicate.
Qualification as a Maritime Lien. Bunker fuel is a classic "necessary" under 46 U.S.C. §31342, and there is no serious dispute that Olympian's claims for unpaid bunker fuel would give rise to maritime liens on each vessel to which fuel was supplied. The fuel was provided in the ordinary course of TSL's vessel operations, was ordered by TSL management or vessel masters acting within the scope of their authority, and was essential to the continued operation of the vessels. All of the statutory prerequisites for a maritime lien for necessaries are satisfied.
Vessel-Specific Allocation. A critical limitation of the maritime lien analysis is that maritime liens for necessaries are vessel-specific — each lien attaches only to the particular vessel to which the necessaries were provided. The $9.2 million owed to Olympian does not constitute a single blanket lien on the entire 50-vessel fleet; rather, it comprises a series of individual liens on the specific vessels that were fueled by Olympian during the relevant period. The allocation of the $9.2 million across individual vessels has not yet been determined and must be obtained from TSL's CFO, Irini Dalakoura, or from Olympian's invoicing records. Until this allocation is established, the per-vessel impact of the Olympian liens cannot be precisely quantified.
Impact on Secured Lender Recovery. The Olympian maritime liens would prime both Nordbank's first-priority ship mortgages and BMC's second-priority liens on the specific vessels affected. The magnitude of the impact on the secured lenders' recovery depends on how the $9.2 million is distributed across the fleet:
Concentrated Scenario. If the Olympian liens are concentrated on a small number of high-value vessels — for example, if $4–5 million in fuel was supplied to two or three Capesize carriers appraised at $20–25 million each — the maritime liens on those vessels could represent 15–25% of the vessel's value, materially reducing the secured lenders' recovery on those specific assets.
Distributed Scenario. If the $9.2 million is spread relatively evenly across a large number of vessels — for example, $150,000–$300,000 per vessel across 30–40 vessels — the per-vessel maritime lien would be modest relative to individual vessel values, and the impact on the secured lenders' recovery on any individual vessel would be limited, though the aggregate reduction in collateral value would remain $9.2 million.
In either case, the $9.2 million represents a claim that, as a matter of law, would be satisfied ahead of Nordbank's $540 million first-lien claim in an in rem proceeding or judicial sale of any affected vessel. The Olympian liens cannot be subordinated by contract (including the Intercreditor Agreement) or by any other arrangement between the parties — they arise by operation of admiralty law and their priority is fixed by statute.
B. Other Potential Maritime Liens for Necessaries
Olympian's $9.2 million bunker fuel claim, while the largest individual trade creditor exposure, is not the only potential source of maritime liens embedded in TSL's $38.7 million trade payable balance. Any trade creditor that provided "necessaries" to a specific TSL vessel — including suppliers of fuel, repairs, provisions, replacement parts, drydocking services, towage, pilotage, wharfage, and other goods or services within the broad definition of necessaries under 46 U.S.C. §31342 — may hold maritime liens that prime the senior secured lenders' ship mortgages.
The remaining trade payables (approximately $29.5 million after excluding the Olympian claim) include amounts owed to ship repair yards, provisions suppliers, port services providers, and various other maritime trade creditors. Without a detailed analysis of each outstanding trade creditor claim, it is impossible to determine the precise quantum of potential maritime liens, but a reasonable estimate would suggest that a significant portion — potentially 60–80% — of the $38.7 million trade payable balance could consist of claims that qualify as maritime liens for necessaries.
Recommendation. We recommend conducting a comprehensive vessel-by-vessel analysis of all outstanding trade creditor claims to identify, for each vessel in the fleet:
(a) The identity of each creditor that provided necessaries to that vessel;
(b) The nature and amount of the outstanding claim;
(c) The date the necessaries were provided (relevant to the "inverse order" priority rule within the necessaries category);
(d) Whether the necessaries were provided on the order of the owner or an authorized person; and
(e) The aggregate maritime lien exposure on each individual vessel.
This analysis, which we refer to as the "Maritime Lien Audit" and discuss further in Section VIII.B, is essential to quantify the maritime lien risk and to inform the adequate protection analysis in connection with the DIP financing.
C. Crew Wage Claims
TSL employs approximately 4,200 persons globally. A significant number of these employees are crew members serving aboard the 50 vessels in the fleet. Under the general maritime law, these crew members hold the highest-priority maritime liens for any unpaid wages, maintenance, and cure obligations. As discussed in Section III.B above, seamen's wage liens rank above all other maritime liens — including liens for salvage, tort, and necessaries — and above all preferred ship mortgages.
The current status of TSL's crew wage obligations is not fully known to us and should be verified with TSL management. Given the severe liquidity pressures facing the company — unrestricted cash of only $27.3 million as of September 15, 2022, against ongoing operating costs — there is a meaningful risk that TSL has deferred or delayed wage payments to crew members. Any such deferral, even if temporary, would immediately give rise to crew wage liens on the vessels on which the affected crew members serve, and these liens would take first-priority status over all other claims, including both the maritime liens for necessaries and the preferred ship mortgages.
If crew wage liens are substantial — for example, if TSL has deferred one or two pay periods for its seafaring workforce, which could easily amount to several million dollars in the aggregate — the impact on the secured lenders' collateral position could be material. Moreover, unpaid crew members present a particularly acute arrest risk, because individual crew members are often judgment-proof and therefore have strong incentives to arrest the vessel as soon as it enters a port with an admiralty court capable of exercising in rem jurisdiction.
Recommendation. We recommend obtaining immediate confirmation from TSL's CFO, Irini Dalakoura, and VP Operations, Jonathan Kurtz, regarding:
(a) Whether all crew wages are current as of the date hereof;
(b) Whether any wage payments have been deferred or are in arrears;
(c) The aggregate amount of any deferred or unpaid wages, maintenance, and cure obligations; and
(d) Whether any crew members have threatened or commenced legal proceedings with respect to unpaid wages.
D. Salvage and Tort Liens
Based on the information currently available to us, there are no identified salvage or tort claims pending against any of the 50 TSL vessels. However, the fleet's ongoing commercial operations create continuous exposure to events that could generate maritime liens priming the ship mortgages. Any collision, allision, grounding, oil spill, cargo damage, or personal injury event involving a TSL vessel would give rise to a maritime tort lien on that vessel, and any salvage operation undertaken to assist a TSL vessel in distress would give rise to a salvage lien. Both categories of liens would prime the preferred ship mortgages.
TSL's marine liability insurance program, arranged through Seaward & Beckett Insurance Brokers Ltd. (Ian Beckett, Senior Partner, 71 Fenchurch Street, London EC3M 4BS), includes Protection & Indemnity ("P&I") club coverage, hull and machinery insurance, and cargo liability insurance. In the event of a covered loss — such as a collision or personal injury — the insurance proceeds would ordinarily be available to satisfy the underlying claim, thereby preventing (or at least mitigating) the enforcement of the maritime lien. However, it is important to recognize that the existence of insurance coverage does not extinguish the underlying maritime lien; the lien continues to attach to the vessel and retains its priority status regardless of whether insurance proceeds are available. If, for any reason, the insurance proves insufficient to cover the claim (e.g., because the loss exceeds policy limits, or because the insurer disputes coverage), the maritime lien would remain enforceable against the vessel and would prime the ship mortgages.
The ongoing risk of new tort or salvage liens arising during the restructuring period cannot be eliminated, but it can be managed through continued compliance with safety and operational standards, maintenance of adequate insurance coverage, and prompt attention to any incidents that occur.
VI. Interaction of Maritime Liens with the Bankruptcy Code's Automatic Stay
A. Applicability of the Automatic Stay (11 U.S.C. §362) to Maritime Lien Enforcement
If TAI files a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of Texas (Houston Division), the automatic stay under 11 U.S.C. §362(a) will immediately take effect, enjoining virtually all actions against the debtor, the debtor's property, and property of the bankruptcy estate. The automatic stay is one of the most fundamental protections afforded to a debtor in bankruptcy and ordinarily operates to prevent creditors from seizing, arresting, or otherwise taking action against the debtor's assets while the reorganization proceeds.
However, the application of the automatic stay to maritime lien enforcement in the context of the TSL/TAI restructuring raises several complex jurisdictional and substantive issues that require careful analysis.
B. In Rem Actions in Admiralty — The "Two-Hat" Problem
Key Threshold Issue: Whose Property? TAI is the proposed Chapter 11 debtor. TSL's vessels, however, are owned by TSL (a Greek SA that would not itself be a debtor in the Chapter 11 case) or by TSL's 14 vessel-owning SPVs (which are also non-debtor entities). The critical question is whether the TSL fleet vessels constitute "property of the estate" of TAI under 11 U.S.C. §541 and, relatedly, whether the automatic stay extends to protect the vessels from maritime lien enforcement.
If the vessels are not property of the TAI bankruptcy estate — because they are owned by non-debtor foreign entities — then the automatic stay of 11 U.S.C. §362(a) would not, by its own terms, apply to prevent in rem arrest of the vessels by maritime lien claimants. The automatic stay protects "property of the estate" and "property of the debtor," and if the vessels are neither, the stay does not reach them.
The analysis is somewhat more nuanced than this threshold framing suggests, however, because:
(a) TAI holds equity interests in some of the 14 vessel-owning SPVs, and those equity interests are property of the TAI estate. The arrest and sale of a vessel owned by an SPV in which TAI holds an equity interest could be argued to affect "property of the estate" (i.e., the equity interest), even if the vessel itself is not estate property.
(b) The cash management system of the TSL group likely involves TAI in vessel-related fund flows, including the receipt of charter hire payments and the disbursement of vessel operating expenses. If TAI exercises sufficient control over the economic activity of the fleet, there may be arguments that the vessels (or at least the revenue streams they generate) are effectively property of the TAI estate.
(c) The Bankruptcy Court may, in appropriate circumstances, exercise its equitable powers under 11 U.S.C. §105(a) to extend the automatic stay to protect the assets of non-debtor affiliates where necessary to preserve the going-concern value of the debtor's estate. Courts have done so in limited circumstances where the debtor and non-debtor are sufficiently intertwined that enforcement actions against the non-debtor would inevitably harm the debtor's estate. See, e.g., A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986); In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999) (noting the narrow scope of such relief).
The "Two-Hat" Jurisdictional Problem. Maritime lien holders enforce their claims through in rem actions in admiralty — i.e., proceedings brought against the vessel itself, in the court of the port where the vessel is found. In a Chapter 11 case, the interplay between the Bankruptcy Court's jurisdiction under 28 U.S.C. §1334 and the admiralty court's traditional in rem jurisdiction creates the so-called "two-hat" problem: which court has jurisdiction over the vessel, and which body of law governs the priority of claims?
Under 28 U.S.C. §1334(e), the bankruptcy court has exclusive jurisdiction over "all of the property, wherever located, of the debtor as of the commencement of the case, and of property of the estate." If the vessels are not property of the TAI estate, this exclusive jurisdiction provision may not apply. In that event, a maritime lien claimant could commence an in rem action against a TSL vessel in a federal district court sitting in admiralty (or in a state court with admiralty jurisdiction) without running afoul of the automatic stay or the bankruptcy court's exclusive jurisdiction.
Risk Assessment. If the vessels are deemed to be outside the TAI bankruptcy estate — which, on the current facts, appears to be the most likely conclusion — then maritime lien claimants would be free to arrest TSL vessels in U.S. waters through in rem proceedings, subject to the general requirement that the vessel must be physically present within the jurisdiction of the court at the time the arrest is sought. This creates a significant operational and strategic risk for the restructuring.
Recommendation. We recommend that the Chapter 11 contingency plan include provision for an emergency motion, to be filed simultaneously with the Chapter 11 petition, seeking to extend the automatic stay to non-debtor affiliates TSL and the 14 vessel-owning SPVs under 11 U.S.C. §105(a), on the grounds that (i) the value of TAI's equity interests in the SPVs would be destroyed if the vessels were arrested and sold at distressed prices, (ii) TAI's Houston terminal operations depend on the continued operation of the TSL fleet, and (iii) the reorganization of TAI cannot succeed without preserving the going-concern value of the integrated TSL/TAI enterprise. We note, however, that such an extension is discretionary and uncertain — courts in the Fifth Circuit have not uniformly granted such relief, and the result will depend heavily on the specific facts presented.
C. Foreign In Rem Proceedings
Perhaps the most significant and difficult-to-mitigate risk is the potential for maritime lien claimants to arrest TSL vessels in foreign ports, entirely outside the reach of the U.S. Bankruptcy Court's automatic stay or any extension thereof.
TSL's vessels operate primarily in the Mediterranean, the Black Sea, and transatlantic trade lanes. They regularly call at foreign ports, including major Mediterranean ports in Greece, Italy, Turkey, and Spain. The vessels' trading patterns create continuous exposure to vessel arrest in jurisdictions where the U.S. Bankruptcy Court has no authority and the automatic stay has no extraterritorial effect.
Maritime lien claimants — including Olympian Fuel & Supply SA — could arrest TSL vessels in foreign ports under the domestic law of the port state. Greece, as a signatory to the International Convention on Maritime Liens and Mortgages (1993) and the International Convention Relating to the Arrest of Sea-Going Ships (1952), recognizes and enforces maritime liens for necessaries. Under Greek maritime law, an in rem arrest of a vessel can be obtained from the competent Greek court upon a showing that the claimant holds a maritime lien on the vessel and that the vessel is within Greek territorial waters.
Particular Risk: Arrest in Piraeus or Thessaloniki. The risk of vessel arrest in Greek waters is particularly acute given the following factors:
(a) Olympian Fuel & Supply SA is itself based in Piraeus and is intimately familiar with Greek maritime arrest procedures;
(b) TSL's fleet regularly calls at Piraeus and Thessaloniki, where TSL operates terminal facilities;
(c) Greek courts are experienced in handling maritime lien arrest proceedings and can act quickly upon application;
(d) Olympian's $9.2 million claim is large enough to justify the expense and effort of an arrest proceeding; and
(e) An arrest of even one or two high-value vessels could create enormous operational disruption and negotiating leverage for Olympian.
A vessel arrest in a foreign port would not only take the arrested vessel out of commercial service (causing immediate loss of revenue and potential breach of charter commitments) but would also signal to other maritime lien claimants that TSL is unable to pay its debts, potentially triggering a cascade of arrest applications in multiple ports — the maritime equivalent of a "bank run."
Cross-Border Coordination. We are in contact with Vassiliou & Demetriou Law Offices (Alexandros Vassiliou, Lead Partner, 15 Vasilissis Sofias Avenue, Athens 10674, Greece), TSL's Greek counsel, to assess the risk of vessel arrest in Greek waters and to develop strategies to prevent or mitigate such arrests. Potential protective measures under Greek law, including the possibility of obtaining judicial orders restricting arrests in connection with Greek insolvency proceedings under Law 4738/2020 (the Greek Insolvency Code), are being evaluated. The interaction between any Greek insolvency proceeding and a potential Chapter 15 recognition proceeding in the United States (which could provide a basis for extending the protection of the U.S. Bankruptcy Code to TSL's assets) is also under analysis and will be addressed in a separate memorandum.
D. Adequate Protection and Maritime Liens in Chapter 11
The treatment of maritime liens in the Chapter 11 context has direct implications for the DIP financing being negotiated with Nordbank and Triton Credit Partners. The $75 million DIP facility (term sheet received December 15, 2022) will require, as a condition to closing, that the prepetition secured lenders receive adequate protection of their interests in the collateral, including the ship mortgages on the 50-vessel fleet.
Under 11 U.S.C. §363(e) and §361, adequate protection typically takes the form of one or more of the following: (i) periodic cash payments, (ii) additional or replacement liens, or (iii) the "indubitable equivalent" of the secured creditors' interest in the property. The determination of what constitutes adequate protection depends, in the first instance, on the value of the secured creditors' interest in the collateral — which, for a secured creditor whose lien can be primed by maritime liens, is the value of the collateral net of the senior maritime lien claims.
Collateral Cushion Analysis. The relevant adequate protection cushion for Nordbank's $540 million first-lien position is calculated as follows:
Fleet Appraised Value (Nov. 1, 2022): $623 million
Less: Estimated Maritime Lien Claims: ($20 million to $38.7 million) [range reflects conservative to worst-case estimates of trade payables qualifying as maritime liens]
Net Collateral Available to First-Lien Lenders: $584.3 million to $603 million
Less: Nordbank First-Lien Outstanding: ($540 million)
Adequate Protection Cushion: $44.3 million to $63 million
Even in the worst-case scenario — where the full $38.7 million in trade payables qualifies as maritime lien claims priming the ship mortgages — the adequate protection cushion remains positive at approximately $44.3 million, representing roughly 8.2% of the first-lien debt. This cushion, while positive, is thin by conventional standards and would be further eroded by any of the following:
(a) Further declines in fleet values. As noted above, fleet values have already declined 30.1% from January 2022 to November 2022. If the dry-bulk market continues to deteriorate, additional value erosion could eliminate the cushion entirely. A further decline of approximately 7.1% in fleet values (from $623 million to approximately $578.7 million) — combined with the full $38.7 million in maritime lien claims — would reduce the cushion to zero.
(b) Accrual of additional maritime lien claims during the pendency of the Chapter 11 case, including new claims for necessaries (fuel, repairs, supplies) provided to vessels in the ordinary course of continued operations.
(c) Crew wage liens arising from any deferral of wage payments.
(d) Tort or salvage events occurring during the case.
Sensitivity Analysis. The following table illustrates the sensitivity of the adequate protection cushion to different fleet value and maritime lien scenarios:
As this table demonstrates, a combination of further fleet value decline (to the low end of KHP's enterprise value range) and high maritime lien exposure would effectively eliminate the adequate protection cushion, placing Nordbank's recovery at risk and making it substantially more difficult to obtain the DIP financing on acceptable terms.
VII. Impact on the Intercreditor Agreement and Recovery Waterfall
A. Intercreditor Agreement Provisions
The Intercreditor Agreement dated June 15, 2019 between Nordbank (as first-lien agent) and BMC governs the relative priorities, rights, and remedies of the first-lien and second-lien creditors with respect to the shared collateral. The Intercreditor Agreement addresses, among other things: the priority of the first-lien claims over the second-lien claims; restrictions on the exercise of remedies by the second-lien holders; the right of Nordbank to direct the collateral agent's actions with respect to enforcement; and the distribution of proceeds from the sale or liquidation of collateral.
Critically, however, maritime liens are not addressed in a typical intercreditor agreement — and the Nordbank/BMC Intercreditor Agreement is no exception. Maritime liens arise by operation of law, not by contract, and cannot be subordinated by agreement between the parties to the intercreditor arrangement. Neither Nordbank nor BMC can contract away the statutory priority of maritime lien claimants, who are not parties to the Intercreditor Agreement and owe no duties under it.
The consequence of this legal reality is straightforward: any priming of the ship mortgages by maritime liens reduces the total pool of collateral value available to both Nordbank (first-lien, $540 million) and BMC (second-lien, $112.3 million). Because the Intercreditor Agreement preserves Nordbank's first-priority position as between the two secured creditor groups, the initial loss of collateral value attributable to maritime liens is borne by BMC's position at the bottom of the secured creditor waterfall — but if the maritime lien claims are large enough to reduce net collateral value below $540 million, the first-lien lenders begin to suffer impairment as well.
B. Impact on the KHP Recovery Waterfall
Kensington Veltrian Partners LLC has estimated the enterprise value of the TSL group at $580 million to $640 million, with a midpoint of $610 million. The following analysis illustrates the impact of maritime liens on the recovery waterfall across the capital structure.
Current Waterfall (Without Maritime Liens):
At the midpoint enterprise value of $610 million, and absent maritime liens, Nordbank recovers in full. BMC recovers approximately 62.3 cents on the dollar ($70 million of value available after satisfaction of the first-lien claim, against $112.3 million owed). Unsecured creditors recover little or nothing. At the low end of the enterprise value range ($580 million), BMC's recovery declines to approximately 35.6% ($40 million / $112.3 million).
Adjusted Waterfall (With Maritime Liens Priming):
If maritime liens total, conservatively, $20 million to $40 million, the effective collateral available to the secured creditors is reduced by that amount. The maritime lien claimants receive first-priority distributions from the vessel sale proceeds before any proceeds flow to the preferred ship mortgagees.
At the midpoint enterprise value, BMC's recovery falls from 62.3% (no maritime liens) to 35.6% (with $30 million in maritime liens), a reduction of approximately 27 percentage points. Nordbank remains fully covered at midpoint, but at the low end of the enterprise value range:
At the low end of both fleet value and high maritime lien estimates, BMC is entirely wiped out, and Nordbank's recovery is covered only marginally ($580M − $40M = $540M, exactly matching the first-lien outstanding). Any additional deterioration in fleet values or increase in maritime lien claims would result in impairment to the first-lien lenders.
Strategic Implication. This analysis underscores the critical importance of keeping trade creditors — especially Olympian Fuel & Supply SA and other suppliers of necessaries — current in both the Chapter 11 and out-of-court restructuring scenarios, in order to prevent vessel arrest, minimize the quantum of maritime liens, and preserve the secured lenders' collateral position. From the perspective of the first-lien lender syndicate, funding the payment of necessaries suppliers — even though such payments may appear to benefit junior creditors or dilute the lenders' position — is in fact a form of self-protection, because the alternative (accumulating maritime lien claims) would directly erode the value of the collateral securing the first-lien debt.
VIII. Practical Recommendations
Based on the foregoing analysis, we make the following practical recommendations in connection with the ongoing restructuring planning for the TSL/TAI enterprise.
A. Trade Creditor Payment Strategy
We recommend that TSL continue to pay — or promptly cure — all outstanding claims by suppliers of necessaries, and in particular the $9.2 million owed to Olympian Fuel & Supply SA, in order to prevent the crystallization and enforcement of maritime liens that would prime the senior secured lenders' ship mortgages.
In a Chapter 11 scenario for TAI, these payments may not be within TAI's direct control, because the vessels are owned by non-debtor TSL and the vessel-owning SPVs, and the vendor relationships for necessaries (bunker fuel, repairs, provisions, etc.) are maintained at the TSL level. Coordination with TSL management — specifically CEO Georgios Andreadis and CFO Irini Dalakoura — will be necessary to ensure that vessel-related trade creditors are paid in the ordinary course during the restructuring period.
In the critical vendor motion being prepared for the Chapter 11 contingency plan (to be the subject of a separate memorandum dated January 5, 2023 addressing Critical Vendor and §503(b)(9) Claims), we recommend highlighting the maritime lien risk as a basis for critical vendor treatment of bunker fuel suppliers, repair yards, and other providers of necessaries. The argument is compelling: failure to pay these vendors would result not merely in the loss of their services (the traditional "critical vendor" rationale) but in the creation of maritime liens that would prime the DIP lenders' and prepetition secured lenders' liens — a result that directly harms the estate and its stakeholders. Courts in the Southern District of Texas have been receptive to this type of argument in the shipping context, and the maritime lien priming risk provides a stronger legal basis for critical vendor treatment than the typical "business necessity" rationale.
B. Vessel-by-Vessel Maritime Lien Audit
We recommend engaging Drakos Maritime Valuations Ltd. (Captain Nikos Drakos, Managing Director) or another qualified maritime consultant to conduct a comprehensive vessel-by-vessel audit of all outstanding maritime lien claims against the 50-vessel fleet. The audit should encompass, at a minimum: