MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP in connection with the provision of legal advice to Thalassa Shipping & Logistics Société Anonyme and Thalassa Americas Inc. This memorandum is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges. Distribution is restricted to the addressees and authorized representatives of the client identified below. Any unauthorized disclosure, copying, or distribution of this memorandum or its contents is strictly prohibited.
CALDERWOOD & HARKNESS LLP 780 Third Avenue New York, NY 10017
Matter Number: 1044-00003
Date: February 15, 2023
TO: Nathaniel Bower, Partner, Calderwood & Harkness LLP Board of Directors, Thalassa Shipping & Logistics Société Anonyme (for presentation by Georgios Andreadis, Chief Executive Officer)
FROM: Amy Chesterton, Lead Associate, and Nathan Ikeda, Associate, Bankruptcy & Restructuring Group, Calderwood & Harkness LLP
RE: Comparative Analysis — Out-of-Court Restructuring Support Agreement vs. Chapter 11 Filing by Thalassa Americas Inc.
COPIES: Colette Whitman, Billing Partner, Calderwood & Harkness LLP Sylvia Hartwell, Tax Partner, Calderwood & Harkness LLP James Calloway, Managing Director, Kensington Veltrian Partners LLC
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I. EXECUTIVE SUMMARY AND RECOMMENDATION
This memorandum presents a comprehensive side-by-side comparison of the two restructuring paths currently available to Thalassa Shipping & Logistics SA ("TSL" or the "Company") and its U.S. subsidiary Thalassa Americas Inc. ("TAI" and, together with TSL, the "Thalassa Entities"): (A) the out-of-court Restructuring Support Agreement (the "RSA") currently under negotiation with the Company's principal creditor constituencies, and (B) a Chapter 11 filing by TAI in the United States Bankruptcy Court for the Southern District of Texas (Houston Division). The purpose of this memorandum is to equip the TSL Board of Directors with the information necessary to evaluate each alternative and to authorize the appropriate course of action at the next regularly scheduled board meeting.
This memorandum has been prepared for board-level review and is intended for presentation by Chief Executive Officer Georgios Andreadis at the next TSL board meeting scheduled for late February 2023. The financial projections, waterfall analyses, and cash flow models referenced herein were prepared by Kensington Veltrian Partners LLC ("KHP"), the Company's retained financial advisor (James Calloway, Managing Director), and the fleet valuation work referenced herein was performed by Drakos Maritime Valuations Ltd. (Captain Nikos Drakos). This memorandum incorporates and synthesizes the conclusions of those advisors with the legal analysis of Calderwood & Harkness LLP ("C&H" or the "Firm").
Recommendation. Based on the analysis set forth in detail below, Calderwood & Harkness LLP and Kensington Veltrian Partners LLC jointly recommend that the TSL Board of Directors authorize management and its advisors to pursue the out-of-court RSA path, subject to reaching acceptable definitive terms with the Ad Hoc Group of Senior Secured Lenders (as defined below) and Dralvecen Mezzanine Capital LLC ("BMC"), for the following principal reasons:
(i) Superior Estimated Recoveries. The out-of-court RSA delivers superior or equivalent recoveries for all creditor classes, including dramatically better outcomes for the mezzanine lender and unsecured creditors, when compared to the Chapter 11 alternative. The unsecured noteholders, in particular, receive a 100% recovery under the RSA versus an estimated 8% to 14% recovery in a Chapter 11 scenario.
(ii) Cost Avoidance. The out-of-court RSA avoids approximately $18.5 million in Chapter 11 administrative costs over the first twelve months, resulting in net professional fee and administrative cost savings of approximately $6.5 million to $8.0 million relative to the Chapter 11 path.
(iii) Compressed Timeline. The RSA path provides a significantly compressed timeline from execution to closing — approximately 3.5 months from RSA execution to closing (with an outside date of June 30, 2023) — compared to approximately 10 months for a Chapter 11 plan process, representing a time savings of approximately 5 to 6 months.
(iv) Preservation of Commercial Relationships. The out-of-court RSA preserves customer, charterer, and counterparty relationships that are critical to TSL's Mediterranean, Black Sea, and transatlantic trade lanes, avoiding the significant commercial disruption and reputational harm associated with a public bankruptcy filing.
(v) Protection of Family Control. The RSA structure preserves the Kostandinos family's controlling equity position at approximately 68% post-dilution (down from 80%), whereas a Chapter 11 filing would almost certainly result in the elimination of the family's equity ownership given that total secured and mezzanine claims exceed the estimated enterprise value at the midpoint.
Important Caveat. Notwithstanding this recommendation, the Chapter 11 contingency plan — detailed in the Comprehensive Execution Playbook dated January 10, 2023 — remains fully prepared and ready for deployment on 48 hours' notice should out-of-court negotiations fail, the forbearance period expire without resolution, or other circumstances arise that make a consensual restructuring impracticable. The current second forbearance extension runs through April 7, 2023, having been extended from the original January 8, 2023 standstill date (with the first extension running to March 8, 2023). All draft pleadings, first-day motions, DIP financing term sheets, CRO engagement letters, and claims agent arrangements are current and in a state of filing readiness.
II. BACKGROUND AND CURRENT SITUATION
A. The Company
Thalassa Shipping & Logistics Société Anonyme. TSL is a shipping and logistics company organized under the laws of the Hellenic Republic (Greece), headquartered at 42 Akti Miaouli, Piraeus 18538, Greece. The Company was founded in 1987 by the Kostandinos family and has grown over the past three and a half decades into a diversified maritime transportation enterprise with global operations spanning dry-bulk shipping, container shipping, and terminal operations.
TSL currently operates a fleet of 50 vessels, consisting of 38 dry-bulk carriers and 12 container vessels. The dry-bulk fleet includes 10 Capesize vessels, 14 Panamax vessels, and 14 Supramax vessels. The container fleet consists of 12 Sub-Panamax container vessels. In addition to its vessel operations, TSL operates terminal facilities at Piraeus, Thessaloniki, and Houston, Texas. The Company's trade lanes encompass the Mediterranean Sea, the Black Sea, and transatlantic routes, with particular strength in Eastern Mediterranean and Black Sea dry-bulk trades.
For the fiscal year ended December 31, 2021, TSL reported consolidated revenue of approximately €1.42 billion. For the fiscal year ended December 31, 2022 (estimated), TSL's consolidated revenue declined to approximately €987 million, representing a decline of approximately 30.5% year-over-year. This revenue decline is directly attributable to the severe downturn in the global dry-bulk shipping market experienced during 2022, as discussed in greater detail in Section II.B below.
TSL employs approximately 4,200 individuals globally, including approximately 680 employees based in the United States.
Thalassa Americas Inc. TAI is a Delaware C-Corporation, with its principal office located at 1400 McKinney Street, Suite 2200, Houston, Texas 77010. TAI's Employer Identification Number is 84-3291057, and its registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801.
TAI serves as TSL's primary U.S. operating subsidiary, responsible for Houston terminal operations, Jones Act–exempt foreign-flag vessel scheduling, and domestic freight brokerage services. TAI also serves as the U.S.-based obligor on the U.S. Tranche (Term Loan B) of the Senior Secured Credit Facility, as more fully described in Section II.C below.
For the fiscal year ended December 31, 2021, TAI reported revenue of approximately $312 million. For the fiscal year ended December 31, 2022 (estimated), TAI's revenue declined to approximately $198 million, reflecting the broader downturn affecting the Thalassa group.
Key Principals. The following individuals hold key positions within the Thalassa corporate structure:
• Dimitrios Kostandinos — Chairman of the Board; holds 62% of TSL equity through KFO Holdings SA
• Elena Kostandinos-Pavlou — Vice Chairwoman of the Board; holds 18% of TSL equity
• Georgios Andreadis — Chief Executive Officer
• Irini Dalakoura — Chief Financial Officer
• Marcus Hale — President, Thalassa Americas Inc.
• Diana Restrepo — Vice President, Finance, Thalassa Americas Inc.
• Jonathan Kurtz — Vice President, Operations, Thalassa Americas Inc.
B. The Liquidity Crisis
The liquidity crisis currently confronting the Thalassa Entities is the direct result of a severe and prolonged downturn in the global dry-bulk shipping market, the effects of which have been compounded by the Company's leveraged capital structure and its exposure to declining vessel asset values.
Market Deterioration. The Baltic Dry Index ("BDI"), the principal benchmark index for the cost of shipping dry-bulk commodities, declined approximately 58% between January 2022 and September 2022. This dramatic decline in freight rates had a direct and material adverse impact on TSL's revenue-generating capacity. TSL's average daily time-charter equivalent ("TCE") rate fell from $24,800 per day (FY2021 average) to $11,200 per day (Q3 2022 average), representing a decline of approximately 55%. This compression of charter rates rendered the Company unable to generate sufficient cash flow to service its debt obligations and maintain required levels of liquidity.
Fleet Value Decline. The market downturn also had a severe impact on the collateral value of TSL's fleet. An independent fleet appraisal conducted by Drakos Maritime Valuations Ltd. on November 1, 2022 valued the fleet at $623 million, a decline of $268 million (30.1%) from the January 2022 valuation of $891 million. The Drakos appraisal values are broken down by vessel class as follows:
Covenant Breaches. The combination of declining revenue and eroding asset values triggered a cascade of financial covenant breaches under the Senior Secured Credit Facility:
Minimum Liquidity Covenant Breach (September 15, 2022). On September 15, 2022, TSL's unrestricted cash balance fell to $27.3 million, breaching the Minimum Liquidity Covenant requiring maintenance of $40.0 million in unrestricted cash — a shortfall of $12.7 million. This breach constituted an Event of Default under Section 8.01(d) of the Credit Agreement.
Maximum Net Leverage Ratio Breach (September 30, 2022). As of September 30, 2022, the Maximum Net Leverage Ratio stood at 7.82x, calculated as Net Debt of $770.9 million divided by Last Twelve Months ("LTM") EBITDA of $98.6 million. This significantly exceeded the maximum permitted ratio of 5.50x under Section 7.11(a) of the Credit Agreement.
Minimum Interest Coverage Ratio Breach (September 30, 2022). As of September 30, 2022, the Minimum Interest Coverage Ratio stood at 1.74x, calculated as LTM EBITDA of $98.6 million divided by LTM Interest Expense of $56.7 million. This fell below the minimum required ratio of 2.50x under Section 7.11(b) of the Credit Agreement.
Forbearance Agreement. Following the occurrence of the foregoing Events of Default, TSL and TAI negotiated and executed a Forbearance Agreement with the Senior Secured Lender syndicate on October 10, 2022. The original Forbearance Agreement provided for a 90-day standstill period during which the lenders agreed not to exercise remedies, expiring on January 8, 2023. The standstill period has been extended twice: a first extension to March 8, 2023, executed on January 8, 2023, and a second extension to April 7, 2023, executed on March 8, 2023. The current forbearance period expires on April 7, 2023, and there can be no assurance that any further extension will be granted.
Missed Unsecured Note Interest Payment. In addition to the covenant defaults under the Senior Secured Credit Facility, TAI failed to make the semi-annual interest payment due December 1, 2022 on the $50 million Unsecured Notes. The missed payment of $2,062,500 (calculated as $50,000,000 × 8.25% ÷ 2) triggered a 30-day cure period under the indenture. The cure period expired on January 1, 2023 without cure, resulting in an Event of Default under the Unsecured Notes Indenture. This constitutes an additional cross-default under the Senior Secured Credit Facility.
C. The Capital Structure
The following is a summary of the Thalassa Entities' consolidated capital structure as of September 30, 2022:
1. Senior Secured Credit Facility
The Senior Secured Credit Facility was established pursuant to a Credit Agreement dated June 15, 2019, with a total commitment of $685 million. Nordbank International AG serves as Administrative Agent and Collateral Agent.
The facility is composed of the following tranches:
Term Loan A ("TLA"). Original principal amount of $400 million, amortizing at $10 million per quarter. After 13 quarters of scheduled amortization payments (from Q3 2019 through Q3 2022), the outstanding balance of TLA is $270 million.
Revolving Credit Facility ("RCF"). Total commitment of $200 million. As of September 30, 2022, $185 million was drawn and $15 million remained available and undrawn.
U.S. Tranche — Term Loan B ("TLB"). Original and outstanding principal amount of $85 million, structured as a non-amortizing bullet maturity. TAI is the primary obligor on TLB.
Total Outstanding as of September 30, 2022: $540 million ($270 million TLA + $185 million RCF + $85 million TLB).
The applicable interest rate under the Credit Agreement is the Secured Overnight Financing Rate ("SOFR") plus 375 basis points. Following the occurrence of the Events of Default described in Section II.B, the default interest rate — an additional 200 basis points on top of the applicable rate — has been accruing, subject to the Forbearance Agreement's provisions regarding retroactive waiver.
The facility matures on June 15, 2024. The obligations under the Credit Agreement are secured by first-priority liens on: (a) 38 dry-bulk carriers, (b) 12 container vessels, (c) the Houston terminal lease, (d) all accounts receivable, and (e) the equity interests in TAI and 14 vessel-owning special purpose vehicles ("SPVs").
The Senior Secured Lender syndicate consists of the following institutions, with their respective commitments:
2. Mezzanine Notes
BMC holds $112.3 million in Mezzanine Notes, consisting of the original principal amount of $100 million plus $12.3 million in payment-in-kind ("PIK") interest that has been capitalized through September 30, 2022. The Mezzanine Notes bear interest at 11.5% on a PIK toggle basis; since Q2 2022, all interest has been paid in kind rather than in cash, reflecting the Company's constrained liquidity position.
The Mezzanine Notes are secured by a second-priority lien on the same collateral as the Senior Secured Credit Facility, subordinate in all respects to the first-priority lien of the Senior Secured Lenders. The relationship between the first-lien and second-lien interests is governed by an Intercreditor Agreement dated June 15, 2019, by and between Nordbank International AG (as first-lien agent) and BMC (as second-lien holder). The Mezzanine Notes mature on December 15, 2024.
3. Unsecured Notes
TAI has outstanding $50 million in aggregate principal amount of 8.25% Senior Unsecured Notes. The Unsecured Notes pay interest semi-annually in cash and mature on March 1, 2025. Garrison Trust Company, located at 100 Wall Street, 16th Floor, New York, New York 10005, serves as indenture trustee. The CUSIP number for the Unsecured Notes is 87265BAB5. As noted in Section II.B, the December 1, 2022 interest payment of $2,062,500 was not made, and the resulting Event of Default remains uncured.
4. Intercompany Note
TAI has issued a subordinated intercompany promissory note in favor of TSL in the principal amount of $76.4 million. The note bears interest at 5.0% per annum and is contractually subordinated to all external indebtedness of TAI. This intercompany note represents one of the principal assets of TSL attributable to its U.S. operations and is a significant consideration in the comparative analysis of the two restructuring paths, particularly in light of the recharacterization and equitable subordination risks that would arise in a Chapter 11 proceeding, as discussed in Section VIII.B below.
5. Trade Payables
As of September 30, 2022, the Thalassa Entities had aggregate trade payables of approximately $38.7 million outstanding to vendors and suppliers. The largest single trade creditor is Olympian Fuel & Supply SA, a bunker fuel supplier, with an outstanding balance of approximately $9.2 million. The treatment of trade payables is a significant consideration in both restructuring paths, given the potential for maritime lien claims and the critical importance of maintaining vendor relationships for ongoing operations.
6. Total Consolidated Debt
The total consolidated indebtedness of the Thalassa Entities as of September 30, 2022 is summarized as follows:
Including the intercompany note and trade payables, total funded debt and liabilities aggregate approximately $817.4 million. Total funded external debt (excluding the intercompany note and trade payables) is approximately $702.3 million. Total debt across all facilities, including the intercompany note, is approximately $778.7 million, and total obligations including trade payables aggregate approximately $817.4 million. On an all-in basis including all obligations, the total indebtedness is approximately $847.3 million when accrued and unpaid interest is included.
D. Valuation Context
A clear understanding of the enterprise value of the Thalassa group is essential to the comparative analysis of the two restructuring paths, as enterprise value determines the relative recoveries available to each class of creditors.
Enterprise Value. KHP has conducted an enterprise valuation analysis of the Thalassa group using a combination of discounted cash flow, comparable company, and comparable transaction methodologies. Based on this analysis, KHP has estimated the enterprise value of the Thalassa group at $580 million to $640 million, with a midpoint of $610 million. This range incorporates the current depressed state of the dry-bulk shipping market, the contracted earnings from existing time charters, and KHP's projections for a gradual market recovery over the 2023–2025 period.
Fleet Value. The Drakos Maritime Valuations fleet appraisal dated November 1, 2022, which valued the fleet at $623 million (as detailed in Section II.B above), falls within and broadly corroborates the KHP enterprise value range.
Fulcrum Security Analysis. At all points within the KHP enterprise value range, the Senior Secured Lenders' claim of $540 million is fully covered. The fulcrum security — i.e., the class of claims that is partially, but not fully, satisfied by the available enterprise value — is the Mezzanine Notes held by BMC. At the KHP midpoint enterprise value of $610 million, the mezzanine recovery is calculated as follows:
Mezzanine Recovery = (Enterprise Value − Senior Secured Claims) ÷ Mezzanine Claims = ($610M − $540M) ÷ $112.3M = $70M ÷ $112.3M = 62.3%
At the low end of the KHP range ($580 million), the mezzanine recovery drops to 35.6%, and at the high end ($640 million), the recovery rises to 89.0%.
Unsecured Recovery. Because the Mezzanine Notes are the fulcrum security and are not fully recovered at any point within the KHP enterprise value range (other than approaching the high end), the claims junior to the mezzanine — including the $50 million Unsecured Notes and the $76.4 million intercompany note — receive little to no recovery in a Chapter 11 liquidation or reorganization scenario. KHP's waterfall analysis estimates unsecured noteholder recovery in a Chapter 11 scenario at 8% to 14%, reflecting the possibility of some residual value being distributed through plan negotiations, gift transactions, or other mechanisms.
E. Key Parties and Their Advisors
The following is a summary of the principal parties involved in the restructuring and their retained professional advisors:
Ad Hoc Group of Senior Secured Lenders. An ad hoc group consisting of Nordbank International AG, Harborstone Bank plc, Triton Credit Partners LP, and Continental Maritime Lending GmbH has been formed to negotiate the restructuring on behalf of a critical mass of the Senior Secured Lender syndicate. The Ad Hoc Group holds aggregate commitments of $372 million, representing 54.3% of the total $685 million facility commitment. The Ad Hoc Group is represented by the law firm of Whitfield, Crane & Burgess LLP (Graham Whitfield III, lead partner) and has retained Draycott Advisory Group LLC (Vanessa Chow, Managing Director) as its financial advisor.
Dralvecen Mezzanine Capital LLC. BMC, the holder of the $112.3 million Mezzanine Notes, is represented by the law firm of Kellner & Foss LLP (Theodore Kellner and Samantha Ong, lead attorneys).
Informal Group of Unsecured Noteholders. An informal group of holders of the $50 million Unsecured Notes has been organized and is represented by the law firm of Ashford, Brightmoor Group & McKay PC (Carolyn Brightmoor Group and Robert Mancini, lead attorneys).
TSL/TAI. TSL and TAI are represented by Calderwood & Harkness LLP (Nathaniel Bower, Partner; Colette Whitman, Billing Partner; Amy Chesterton, Lead Associate; Nathan Ikeda, Associate; and Sylvia Hartwell, Tax Partner) as restructuring counsel, Kensington Veltrian Partners LLC (James Calloway, Managing Director) as financial advisor, and Vassiliou & Demetriou Law Offices (Alexandros Vassiliou, lead partner) as Greek counsel.
CRO Designee (Standby). Richard "Rick" Thornberg of Alderney Management Advisors LLC has been designated as the standby Chief Restructuring Officer for TAI in the event of a Chapter 11 filing. Mr. Thornberg has served as CRO in three prior shipping-related Chapter 11 cases and is immediately available for deployment.
III. DESCRIPTION OF THE TWO RESTRUCTURING PATHS
A. Path 1: Out-of-Court RSA
The out-of-court RSA represents a consensual, bilaterally negotiated restructuring that would be implemented without any court filing or public disclosure (other than as may be required under applicable securities or regulatory reporting requirements). The RSA is being negotiated among TSL/TAI, the Ad Hoc Group of Senior Secured Lenders, BMC, and the informal group of unsecured noteholders.
Status. An RSA term sheet incorporating the key economic and structural terms was circulated to all creditor constituencies on February 10, 2023. That term sheet was revised to incorporate comments received from the Ad Hoc Group following preliminary discussions between C&H and Whitfield, Crane & Burgess LLP during the week of February 6, 2023. The revised term sheet is attached as Appendix C to this memorandum.
Target Timeline. The target execution date for the definitive RSA is mid-March 2023, which would be before the expiration of the second forbearance extension on April 7, 2023. Execution of the RSA would supersede the Forbearance Agreement and establish a new contractual framework governing the parties' obligations during the implementation period. The RSA provides for an outside date of June 30, 2023 (the "Outside Date"), by which all conditions to closing must be satisfied or waived and the restructuring transactions must be consummated.
Key RSA Terms. The principal terms of the RSA, as reflected in the revised term sheet, are as follows:
1. Senior Secured Facility Amendment
The Senior Secured Credit Facility would be amended and restated to implement the following modifications:
Maturity Extension. The maturity date of all tranches (TLA, RCF, and TLB) would be extended from June 15, 2024 to June 15, 2027, a three-year extension. This extension provides the Company with the breathing room necessary to navigate the current market downturn and benefit from the anticipated cyclical recovery in dry-bulk and container shipping rates.
PIK Conversion. $75 million of the outstanding TLA principal would be converted from cash-pay to payment-in-kind, reducing the Company's near-term cash debt service burden. The PIK conversion would be documented in an amended amortization schedule, with the $75 million PIK amount capitalizing to TLA principal on a quarterly basis until the extended maturity date.
Revolver Commitment Reduction. The total commitment under the Revolving Credit Facility would be reduced from $200 million to $150 million. Given that only $185 million was drawn as of September 30, 2022, this reduction will require a partial paydown of the RCF using proceeds from the KFO equity contribution and/or the planned asset sales.
Financial Covenant Reset. The financial covenants under the Credit Agreement would be reset as follows: (a) the Maximum Net Leverage Ratio would be reset to 7.00x, stepping down to 6.25x by Q4 2024 and to 5.50x by Q4 2025; (b) the Minimum Liquidity Covenant would be reduced from $40 million to $30 million; and (c) the Minimum Interest Coverage Ratio would be waived entirely through Q4 2023, reinstating at 1.75x in Q1 2024 and stepping up to 2.50x by Q4 2025.
Amendment Fee. The Senior Secured Lenders would receive an amendment fee equal to 1.00% of the $540 million outstanding principal balance, yielding a fee of $5.4 million. This fee would be payable in kind (capitalized to TLA principal), thereby preserving the Company's cash liquidity.
Default Interest Waiver. Default interest at the 200 basis point penalty rate that has been accruing since the occurrence of the Events of Default in September 2022 would be retroactively waived from the respective covenant breach dates through the closing date of the RSA.
2. Mezzanine Notes Exchange
The restructuring of the Mezzanine Notes is the central economic element of the RSA and the component that requires the most significant concession from an individual creditor.
Exchange Transaction. The $112.3 million in outstanding Mezzanine Notes (inclusive of capitalized PIK interest) would be exchanged for (a) $60 million in aggregate principal amount of new second-lien secured notes (the "New Second-Lien Notes") and (b) 15% of the common equity of TSL on a fully diluted post-closing basis.
New Second-Lien Notes. The New Second-Lien Notes would bear interest at 10.0% per annum on a payment-in-kind basis and mature on June 30, 2028. The New Second-Lien Notes would be secured by a second-priority lien on the same collateral as the Senior Secured Credit Facility, subject to an Amended and Restated Intercreditor Agreement to be negotiated between Nordbank (on behalf of the first-lien lenders) and BMC.
Debt Haircut. The exchange represents a nominal debt haircut of 46.6%, calculated as ($112.3 million − $60 million) ÷ $112.3 million = $52.3 million ÷ $112.3 million = 46.6%. However, the equity component is intended to compensate BMC for a portion of this haircut through participation in the Company's future upside.
Equity Dilution. The issuance of 15% equity to BMC would dilute all existing equity holders proportionally. The Kostandinos family's combined ownership would be diluted from 80% to 68% (calculated as 80% × 85% = 68%), and non-family holders would be diluted from 20% to 17% (calculated as 20% × 85% = 17%).
3. Unsecured Notes
Under the RSA, the $50 million Unsecured Notes would remain outstanding and fully unimpaired. There would be no modification to the terms of the indenture governing the Unsecured Notes. The missed December 2022 coupon payment of $2,062,500 would be paid in full in cash at the closing of the RSA. This treatment is designed to cure the existing Event of Default under the indenture and to restore the Unsecured Notes to performing status, thereby eliminating the cross-default under the Senior Secured Credit Facility.
4. Equity Contribution
KFO Holdings SA, the Kostandinos family's holding company, has agreed in principle to contribute €35 million (approximately $38.2 million at the current exchange rate of €1.00 = $1.0914) in new equity capital to TSL. The proceeds of the equity contribution would be used to (a) fund the Company's near-term liquidity requirements, (b) pay transaction costs associated with the RSA, including professional fees and the catch-up payment on the Unsecured Notes, and (c) partially pay down the Revolving Credit Facility in connection with the commitment reduction from $200 million to $150 million. The equity contribution demonstrates the Kostandinos family's commitment to the long-term viability of the enterprise and provides fresh capital at a critical juncture.
5. Asset Sales
As part of the RSA, TSL has committed to sell six older dry-bulk carriers (with an average vessel age of approximately 18 years) within 12 months of the RSA closing date. The estimated aggregate proceeds from these sales are approximately $72 million, based on current market valuations adjusted for the age and condition of the specific vessels. Net proceeds from the asset sales, after deducting customary transaction costs and any applicable taxes, would be applied to prepay TLA principal, thereby reducing the Company's leverage and improving its debt service coverage metrics.
6. Trade Creditors
All trade creditors of the Thalassa Entities would be paid in full in the ordinary course of business. No trade creditor would suffer any impairment of its claims. This treatment preserves the Company's critical vendor relationships, including the bunker fuel supply arrangement with Olympian Fuel & Supply SA, and avoids the operational disruption that would result from vendor payment defaults or supply chain interruption.
7. Intercompany Note
The $76.4 million subordinated intercompany note from TAI to TSL would be amended to extend its maturity from its current maturity date to December 31, 2028, and to reduce the interest rate from 5.0% to 2.0% per annum. The note would remain contractually subordinated to all external indebtedness of TAI. This amendment preserves the intercompany note as an asset of TSL while reducing the cash burden on TAI and extending the repayment timeline to align with the overall restructuring.
B. Path 2: Chapter 11 Filing by TAI
The Chapter 11 alternative involves a voluntary bankruptcy filing by TAI in the United States Bankruptcy Court for the Southern District of Texas (Houston Division). This path is fully documented in the Chapter 11 Contingency Playbook dated January 10, 2023, a summary of which is attached as Appendix D to this memorandum.
Filing Entity. The filing entity would be TAI only. TSL, the Greek parent company, would not file for bankruptcy in the United States or, at least initially, in Greece. This structure is intended to contain the bankruptcy proceeding to the U.S. subsidiary and minimize the impact on TSL's global operations and the fleet of vessels, which are owned by TSL and its vessel-owning SPVs rather than by TAI directly.
Venue. The venue selected for the Chapter 11 filing is the United States Bankruptcy Court for the Southern District of Texas (Houston Division). Venue is proper in the Houston Division based on TAI's principal office location at 1400 McKinney Street, Suite 2200, Houston, Texas 77010. The Southern District of Texas is a well-established venue for complex Chapter 11 cases, with experienced judges and efficient case management procedures.
Chapter 15 Coordination. If TSL were to separately commence insolvency proceedings under Greek Law 4738/2020 (the Greek Debt Settlement & Insolvency Code), a Chapter 15 recognition proceeding could be filed in the United States Bankruptcy Court running parallel to the TAI Chapter 11 case. This would involve recognition of the Greek proceeding as a "foreign main proceeding" based on TSL's center of main interests ("COMI") in Greece, and would provide ancillary relief in the United States. The cross-border issues associated with this structure are analyzed in a separate memorandum dated January 15, 2023, prepared with input from Alexandros Vassiliou of Vassiliou & Demetriou Law Offices.
DIP Financing. A debtor-in-possession ("DIP") credit facility of $75 million has been arranged on a standby basis. The DIP facility would be provided by Nordbank International AG and Triton Credit Partners LP as co-lenders, and would bear interest at SOFR plus 600 basis points with a 0.50% commitment fee. The DIP facility would have a 12-month maturity from the petition date and would be secured by superpriority administrative claims and priming liens, subject to adequate protection for existing secured creditors. A term sheet for the DIP facility was received on December 15, 2022 and has been reviewed by C&H.
Chief Restructuring Officer. Richard "Rick" Thornberg of Alderney Management Advisors LLC has been designated as the Chief Restructuring Officer ("CRO") for TAI, to be deployed upon the filing of the Chapter 11 petition. Mr. Thornberg is a seasoned restructuring professional who has served as CRO in three prior shipping-related Chapter 11 cases and is thoroughly familiar with the unique operational and legal issues presented by maritime restructurings.
Key Milestones. The anticipated timeline for the Chapter 11 case, based on the Contingency Playbook and C&H's experience with comparable cases in the Southern District of Texas, is as follows:
Estimated Administrative Costs. The total estimated administrative costs for the Chapter 11 case over the first 12 months are approximately $18.5 million. These costs include, but are not limited to: legal fees for debtor's counsel (C&H), committee counsel, and any special counsel retained during the case; financial advisory fees for KHP (monthly retainer of $250,000 plus a potential $2.0 million filing fee); CRO fees payable to Alderney Management Advisors; U.S. Trustee quarterly fees; claims and noticing agent fees payable to Pendleton Claim Services (standby engagement signed November 15, 2022); vessel appraiser costs; and other professional expenses. A detailed breakdown of these costs is provided in Section VI.B below.
Draft Pleadings. All necessary first-day pleadings and filing documents have been drafted and are maintained in a state of readiness. The following documents are on standby: (a) voluntary petition for TAI; (b) six first-day motions (cash management, DIP financing, critical vendor, wage and employee benefit orders, insurance maintenance, and prepetition tax payment authorization); (c) DIP motion and proposed interim and final orders; (d) retention applications for C&H and KHP; (e) the Marcus Hale first-day declaration; and (f) the corporate ownership statement.
IV. COMPARATIVE ANALYSIS: ESTIMATED CREDITOR RECOVERIES
A. Methodology
The recovery analysis presented in this Section IV is based on financial models and waterfall analyses prepared by KHP and reviewed by C&H. The key assumptions underlying the analysis are as follows:
Valuation Basis. The analysis uses KHP's enterprise value estimate of $580 million to $640 million (midpoint $610 million), corroborated by the Drakos Maritime Valuations fleet appraisal of $623 million.
Chapter 11 Administrative Cost Drag. In the Chapter 11 scenario, the $18.5 million in estimated administrative costs over the first 12 months is treated as a deduction from distributable value. Administrative claims enjoy superpriority status under Section 507(a)(2) of the Bankruptcy Code and must be paid in full before any distributions to prepetition creditors.
Out-of-Court Transaction Costs. The out-of-court RSA scenario assumes total transaction costs (legal, advisory, amendment fees) that are substantially lower than the Chapter 11 administrative costs, as detailed in Section VI below.
Cash Flow Models. KHP has prepared 13-week cash flow projections under both scenarios, which are attached as Appendix B to this memorandum. These projections demonstrate the Company's ability to maintain operations and service its restructured obligations under the RSA scenario.
B. Recovery Analysis — Senior Secured Lenders ($540 Million Outstanding)
Out-of-Court RSA. Under the RSA, the Senior Secured Lenders receive par recovery on their $540 million in outstanding claims. No principal reduction is imposed. The key modifications — maturity extension to June 15, 2027, PIK conversion of $75 million of TLA principal, revolver commitment reduction to $150 million, financial covenant reset, and retroactive default interest waiver — restructure the timing and terms of the lenders' recovery but do not diminish the ultimate principal amount owed. Additionally, the Senior Secured Lenders receive a $5.4 million amendment fee (payable in kind), which constitutes additional compensation for agreeing to the modified terms. The effective recovery for the Senior Secured Lenders is 100% of principal with modified terms and delayed cash flows.
Chapter 11. In a Chapter 11 scenario, the Senior Secured Lenders would also be expected to receive full recovery on account of their first-priority lien position, given that the Drakos fleet appraisal value of $623 million comfortably exceeds the $540 million secured claim at all points within the KHP enterprise value range. However, several factors diminish the present value of the lenders' recovery in a Chapter 11 context: (a) administrative costs of $18.5 million, while not directly reducing the secured lenders' recovery, consume value that might otherwise be available to fund the restructuring; (b) the $75 million DIP facility would carry superpriority liens that prime the existing secured lenders' collateral interests, requiring adequate protection payments and creating lien priority disputes; (c) the estimated 10-month case timeline introduces delay in the realization of value; and (d) market deterioration during the pendency of the Chapter 11 case could erode vessel values below the secured claim amount, converting the lenders' position from fully secured to impaired. The estimated recovery for the Senior Secured Lenders in a Chapter 11 scenario is 100% of principal, but with a 10-month delay and material risk of value erosion during the case.
Net Comparison. The recovery for the Senior Secured Lenders is substantially equivalent under both paths in nominal terms. However, the RSA is clearly superior on a present-value and certainty basis. The RSA avoids the DIP priming lien, eliminates adequate protection disputes, avoids the administrative cost drag, and provides a significantly shorter timeline to closing. The RSA also provides the amendment fee as additional compensation that is not available in the Chapter 11 context.
C. Recovery Analysis — Mezzanine Lender (BMC, $112.3 Million Outstanding)
Out-of-Court RSA. Under the RSA exchange transaction, BMC would exchange its $112.3 million in Mezzanine Notes for (a) $60 million in New Second-Lien Notes (10.0% PIK, due June 2028) and (b) 15% of the common equity of TSL. On the debt component alone, the nominal recovery is $60 million ÷ $112.3 million = 53.4%. However, the equity component provides BMC with meaningful participation in the Company's future upside, which must be factored into the total recovery analysis. Based on KHP's midpoint enterprise value of $610 million and taking into account the senior claims, the equity component may have a value of approximately $7 million to $19 million (depending on the assumed total equity value of TSL), yielding a combined estimated recovery in the range of approximately 60% to 70%.
Chapter 11. In a Chapter 11 scenario, BMC's recovery is a direct function of the realized enterprise value, as the Mezzanine Notes are the fulcrum security. The recovery at each point in the KHP enterprise value range is as follows:
Low EV ($580M): ($580M − $540M) ÷ $112.3M = $40M ÷ $112.3M = 35.6% Midpoint EV ($610M): ($610M − $540M) ÷ $112.3M = $70M ÷ $112.3M = 62.3% High EV ($640M): ($640M − $540M) ÷ $112.3M = $100M ÷ $112.3M = 89.0%
However, these nominal recoveries must be adjusted for BMC's pro rata share of the $18.5 million in Chapter 11 administrative costs. After deducting administrative costs that would reduce the distributable estate, the effective midpoint recovery is reduced to approximately 55% to 60%. The wide variance in recovery outcomes — from 35.6% at the low end to 89.0% at the high end — reflects the significant uncertainty inherent in a Chapter 11 process, where enterprise value realization depends on market conditions, the contested plan process, and the court's valuation rulings.
Net Comparison. The RSA provides BMC with a more predictable recovery in the 60% to 70% range (inclusive of the equity component), with meaningful upside participation if the Company performs well post-restructuring. The Chapter 11 path offers a wider range of outcomes (35.6% to 89.0%), with a midpoint recovery of approximately 55% to 60% after administrative costs — slightly below the RSA midpoint. The RSA also avoids the risk that enterprise value could be realized at the low end of the range, which would deliver a severely impaired recovery to BMC. We understand from preliminary communications between C&H and Kellner & Foss LLP that BMC's counsel, Theodore Kellner, has indicated that BMC is evaluable on the exchange terms as currently structured, which suggests that the RSA provides a recovery that BMC views as acceptable.
D. Recovery Analysis — Unsecured Noteholders ($50 Million Outstanding)
Out-of-Court RSA. Under the RSA, the Unsecured Notes remain fully unimpaired. The $50 million in outstanding principal is not modified, the indenture terms are not altered, and the missed December 2022 coupon payment of $2,062,500 is paid in full in cash at the RSA closing. The recovery for unsecured noteholders is 100%.
Chapter 11. The Chapter 11 recovery analysis for the unsecured noteholders is dramatically different. As discussed in Section II.D, the Mezzanine Notes are the fulcrum security, meaning that available value is exhausted before reaching the unsecured creditor class at all points within the KHP enterprise value range except at the very high end. At the midpoint enterprise value of $610 million, the residual value after satisfaction of the $540 million senior secured claims is $70 million — all of which flows to the mezzanine class, which holds claims of $112.3 million. There is no residual value available for the unsecured noteholders in the primary waterfall. KHP's waterfall analysis estimates that the unsecured noteholders might receive a recovery of 8% to 14% (i.e., $4 million to $7 million on $50 million in claims) through plan negotiation dynamics, including the potential for a "gift" or "tip" from the fulcrum mezzanine class in exchange for unsecured creditor support for the plan.
Net Comparison. The difference in recovery for the unsecured noteholders between the two paths is stark and constitutes one of the most powerful arguments in favor of the out-of-court RSA: 100% recovery under the RSA versus 8 to 14 cents on the dollar in a Chapter 11. This differential creates a significant alignment of interest between the Company and the unsecured noteholders, who have a compelling economic incentive to support the out-of-court path. The informal group of unsecured noteholders and their counsel at Ashford, Brightmoor Group & McKay PC (Carolyn Brightmoor Group and Robert Mancini) can be expected to be strong advocates for the RSA.
E. Recovery Analysis — Trade Creditors ($38.7 Million Outstanding)
Out-of-Court RSA. Under the RSA, all trade creditors are paid in full in the ordinary course of business, with no impairment of any kind. The largest trade creditor, Olympian Fuel & Supply SA ($9.2 million outstanding), continues its supply relationship with TSL without interruption. The recovery for trade creditors is 100%.
Chapter 11. The treatment of trade creditors in a Chapter 11 scenario is more complex and uncertain. Essential suppliers may receive "critical vendor" treatment pursuant to a first-day critical vendor motion, which would authorize payment of prepetition claims of suppliers deemed critical to the ongoing operations of the debtor. However, not all suppliers would qualify for critical vendor treatment, and the scope of the critical vendor order is subject to court approval and potential creditor objections. Suppliers who delivered goods within 20 days prior to the petition date would have administrative priority claims under Section 503(b)(9) of the Bankruptcy Code for the value of such goods, but claims outside the 20-day window would be treated as general unsecured claims, receiving the same 8% to 14% recovery estimated for unsecured noteholders. Additionally, the uncertainty of a Chapter 11 proceeding may cause suppliers to demand cash-on-delivery terms or refuse to extend trade credit altogether, creating significant supply chain disruption and operational instability.
Net Comparison. The RSA is clearly superior for trade creditors, delivering 100% recovery in the ordinary course and avoiding any disruption to the Company's vendor relationships and supply chain.
F. Recovery Analysis — Intercompany Note ($76.4 Million, TAI → TSL)
Out-of-Court RSA. Under the RSA, the intercompany note is amended to extend the maturity to December 31, 2028 and reduce the interest rate from 5.0% to 2.0%, but the full principal amount of $76.4 million is preserved. TSL, as the holder of the intercompany note, retains the full value of its intercompany claim against TAI, subject to the modified terms.
Chapter 11. In a Chapter 11 scenario, the intercompany note from TAI to TSL would be exposed to significant legal risks. As a subordinated intercompany claim held by a parent company, the note would be subject to: (a) potential recharacterization as an equity contribution rather than true debt, under the multifactor analysis applied by courts in the Fifth Circuit; (b) equitable subordination under Section 510(c) of the Bankruptcy Code, if the court determines that TSL engaged in inequitable conduct in its dealings with TAI; and (c) if substantive consolidation of TAI with TSL were ordered (as discussed in Section VIII.C), the intercompany claim would be eliminated entirely. Given the parent-subsidiary relationship and the factors commonly considered by bankruptcy courts, the risk of adverse treatment of the intercompany note in a Chapter 11 proceeding is substantial. Recovery is highly uncertain and is estimated at near zero.
Net Comparison. The RSA preserves the intercompany claim value for TSL; the Chapter 11 path puts it at substantial risk. This is a particularly important consideration for TSL's Board of Directors, as the intercompany note is a significant asset of the parent company.
G. Recovery Summary Table
The following table summarizes the estimated recoveries for each creditor class under the two restructuring paths:
As the foregoing table demonstrates, the out-of-court RSA delivers equal or superior recovery outcomes for every class of creditor. The most dramatic differentials are in the unsecured noteholder class (100% vs. 8–14%) and the intercompany note (100% vs. near zero), both of which are constituencies with strong incentives to support the RSA path.
V. TIMELINE COMPARISON
A. Out-of-Court RSA Timeline
The following is the anticipated timeline for the out-of-court RSA, measured from the initial engagement of professional advisors through closing:
Total time from advisory engagement to closing: Approximately 8 months (October 2022 to June 2023).
Total time from RSA execution to closing: Approximately 3.5 months (mid-March 2023 to June 30, 2023).
A key advantage of the out-of-court path is that implementation is controlled bilaterally between the parties without court involvement. There are no court calendars to navigate, no judicial schedules to accommodate, and no contested hearings to prepare for. The timeline is subject to the parties' ability to negotiate and document the agreed terms within the RSA framework, and to obtain the requisite lender consents under the Credit Agreement. Assuming the cooperation of the key creditor constituencies — which preliminary indications suggest is achievable — the RSA timeline is realistic and deliverable.
B. Chapter 11 Timeline
The following is the anticipated timeline for a Chapter 11 filing by TAI, based on the Contingency Playbook and C&H's experience in the Southern District of Texas:
Total time from petition to emergence: Approximately 10 months.
The Chapter 11 timeline is subject to numerous risks that could extend the case duration beyond the estimated 10-month period. These risks include: (a) the court calendar — the timing of hearings is dependent on the assigned judge's availability and docket management; (b) creditor objections — any creditor may object to the DIP financing, the disclosure statement, or the plan of reorganization, potentially resulting in contested hearings and delays; (c) the appointment of an official committee of unsecured creditors — which would add an additional party to the negotiations, with its own counsel and financial advisor, increasing both cost and complexity; (d) adversary proceedings — avoidance actions (preferences, fraudulent transfers) and related litigation could consume time and resources; and (e) regulatory approvals — to the extent that the restructuring transactions require regulatory approvals (e.g., maritime regulatory filings), the court-supervised process adds procedural layers.
C. Timeline Comparison Table
The timeline comparison chart is presented graphically in Appendix F to this memorandum.
As the foregoing analysis demonstrates, the RSA path achieves restructuring completion approximately 5 to 6 months faster than the Chapter 11 alternative. Specifically, the RSA Outside Date of June 30, 2023 would be achieved approximately six months before the estimated Chapter 11 effective date of late 2023 or early 2024 (assuming a mid-March 2023 petition date). This compressed timeline reduces the period of uncertainty for all stakeholders, minimizes market and operational risk, and preserves value that would otherwise be eroded by the passage of time.
VI. COST COMPARISON
A. Out-of-Court RSA Estimated Costs
The estimated professional fees and transaction costs associated with the out-of-court RSA are as follows:
Calderwood & Harkness LLP (Restructuring Counsel). Projected legal fees of approximately $3.5 million to $4.0 million through closing, plus disbursements. As a reference point, actual fees billed through the date of this memorandum total $3,847,250 in fees plus $142,680 in disbursements (totaling $3,989,930), and the Firm projects that remaining work through RSA closing will bring the total within the estimated range.
Kensington Veltrian Partners LLC (Financial Advisor). Monthly retainer of $250,000 (approximately $2.0 million to $2.5 million through closing, depending on timeline) plus a $4.5 million completion fee payable upon RSA execution. Total estimated KHP fees: approximately $6.5 million to $7.0 million.
Vassiliou & Demetriou Law Offices (Greek Counsel). Estimated fees of $200,000 to $400,000 for Greek law advisory work, including review of the equity contribution structure, Greek corporate approvals, and coordination on cross-border tax and regulatory matters.
Amendment Fee to Senior Secured Lenders. $5.4 million (1.00% of $540 million outstanding). This fee is payable in kind (capitalized to TLA principal), meaning it is not a cash cost to TSL, but is included here for completeness.
Other Transaction Costs. Estimated at $300,000 to $500,000, encompassing Drakos appraisal update fees, insurance broker consultations (Seaward & Beckett), document reproduction, filing fees, and miscellaneous expenses.
Total Estimated Out-of-Court Costs (Cash): Approximately $10.5 million to $12.0 million, excluding the $5.4 million PIK amendment fee.
B. Chapter 11 Estimated Costs
The estimated administrative costs for a TAI Chapter 11 case over the first 12 months are substantially higher:
Calderwood & Harkness LLP (Debtor's Counsel). Estimated legal fees of $5.0 million to $6.0 million. The increase over the out-of-court estimate reflects the significantly higher billing volume associated with a Chapter 11 case, including court appearances, discovery, contested matters, adversary proceedings, claims administration, and the preparation and prosecution of a plan of reorganization.
Kensington Veltrian Partners LLC (Financial Advisor). Monthly retainer of $250,000 × 12 months = $3.0 million, plus a $2.0 million filing fee (triggered upon the petition date per the KHP engagement letter). Total estimated KHP fees: approximately $5.0 million.
Alderney Management Advisors LLC (CRO — Richard Thornberg). Estimated CRO fees of $2.0 million to $3.0 million over the first 12 months, based on customary monthly retainer and success-based compensation arrangements.
Committee Counsel and Advisors. If an official committee of unsecured creditors is appointed (which is anticipated in a case of this size), the committee's counsel and financial advisor would be compensated from the estate. Estimated committee professional fees: $2.0 million to $3.0 million.
Pendleton Claim Services (Claims/Noticing Agent). Estimated fees of $500,000 to $1.0 million for claims administration, court-ordered noticing, docketing, and related services. A standby engagement letter was signed with Pendleton on November 15, 2022.
U.S. Trustee Quarterly Fees. Estimated at $500,000 to $1.0 million, calculated based on the expected quarterly disbursements of the estate under the fee schedule established by 28 U.S.C. § 1930(a)(6).
Other Professional Fees and Costs. Estimated at $1.0 million to $2.0 million, encompassing special counsel for specific issues (e.g., maritime law, tax, regulatory), expert witnesses, appraisers, and miscellaneous expenses.
Total Estimated Chapter 11 Administrative Costs (First 12 Months): Approximately $18.5 million.
In addition to the foregoing administrative costs, the DIP financing facility would impose significant incremental costs. The $75 million DIP facility carries interest at SOFR plus 600 basis points (currently yielding an all-in rate of approximately 10.5% to 11.0%) plus a 0.50% commitment fee ($375,000). If the facility is fully drawn, the annual interest expense alone would be approximately $7.9 million to $8.3 million, a significant incremental cost that does not exist under the out-of-court RSA scenario.
Total Estimated Chapter 11 Costs: $18.5 million (first 12 months) plus DIP interest expense.
C. Cost Differential
The net cost savings from pursuing the out-of-court RSA path rather than the Chapter 11 alternative are significant:
Professional Fee Savings. The out-of-court RSA is estimated to cost approximately $10.5 million to $12.0 million in cash professional fees and transaction costs, compared to approximately $18.5 million for the Chapter 11 case. This represents a net savings of approximately $6.5 million to $8.0 million in professional fees and administrative expenses.
Avoidance of DIP Financing Costs. The out-of-court RSA eliminates the need for a DIP financing facility entirely. The avoidance of DIP interest expense at SOFR + 600 basis points on drawn amounts, plus the $375,000 commitment fee, represents additional savings that could amount to $4 million to $8 million or more over the life of the Chapter 11 case, depending on the amount and duration of DIP borrowings.
Avoidance of U.S. Trustee Quarterly Fees. The out-of-court path avoids the U.S. Trustee quarterly fee obligation entirely, saving an estimated $500,000 to $1.0 million.
Avoidance of Committee-Related Costs. The out-of-court path avoids the $2.0 million to $3.0 million in estimated professional fees associated with an official committee of unsecured creditors.
These cost savings flow directly to the benefit of all stakeholders through the preservation of enterprise value. Every dollar saved in administrative costs is a dollar that remains available for distribution to creditors or reinvestment in the business.