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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 780 Third Avenue, New York, NY 10017

MEMORANDUM

Date: May 5, 2023

To: Nathaniel Bower, Partner, Bankruptcy & Restructuring Amy Chesterton, Lead Associate, Bankruptcy & Restructuring

From: Sylvia Hartwell, Partner, Tax

Re: Tax Treatment of Amendment Fee and PIK Capitalization — Senior Secured Credit Facility Amendment (Amendment No. 1)

Matter: Thalassa Shipping & Logistics SA / Thalassa Americas Inc. — Matter No. 1044-00003

Privileged: This memorandum is protected by the attorney-client privilege and the work product doctrine. It was prepared at the request of the Bankruptcy & Restructuring team in connection with the ongoing representation of Thalassa Shipping & Logistics SA and its subsidiaries. Do not distribute without prior approval of the responsible partner.

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I. Executive Summary

This memorandum analyzes the U.S. federal income tax consequences of two specific components of the out-of-court restructuring being implemented under the Restructuring Support Agreement ("RSA") executed on March 14, 2023, between Thalassa Shipping & Logistics SA ("TSL"), Thalassa Americas Inc. ("TAI"), and the lenders under the Senior Secured Credit Agreement dated June 15, 2019 (the "Original Credit Agreement"). Closing of the RSA and the transactions contemplated thereunder is expected to occur on or about June 30, 2023. The two components addressed in this memorandum are:

1. The $5.4 million amendment fee payable in kind (i.e., capitalized into the outstanding principal of the credit facility) under Amendment No. 1 to the Senior Secured Credit Agreement, dated as of May 15, 2023 ("Amendment No. 1"); and

2. The conversion of $75 million of Term Loan A ("TLA") principal from cash-pay interest to payment-in-kind ("PIK") interest, and the ongoing quarterly PIK interest capitalization thereon through the extended maturity date of June 15, 2027.

This memorandum is intended to supplement, and should be read in conjunction with, our prior memoranda addressing other tax aspects of the broader restructuring. Specifically, we cross-reference the following:

• The memorandum dated December 12, 2022, addressed to the restructuring team, analyzing cancellation-of-debt income ("CODI") and the availability of exclusions under Section 108 of the Internal Revenue Code of 1986, as amended (the "Code"), in connection with the mezzanine exchange transaction (the "CODI Memorandum"); and

• The memorandum dated December 20, 2022, analyzing cross-border tax implications for TSL (as a Greek société anonyme), TAI (as a Delaware corporation), and the multinational lender syndicate (the "Cross-Border Memorandum").

Our key conclusions are as follows:

Modification vs. Exchange. Amendment No. 1 to the Senior Secured Credit Agreement constitutes a modification — and not a taxable exchange — under Treasury Regulation Section 1.1001-3 for each of the three tranches under the facility (Term Loan A, the Revolving Credit Facility, and Term Loan B). We have analyzed each of the applicable bright-line tests set forth in the regulations, including the change-in-yield test, the change-in-timing-of-payments test, the change-in-obligor test, the change-in-nature-of-instrument test, and the change-in-collateral test. None of these tests is triggered, either individually or in the aggregate. The fundamental economic character of the debt — a senior secured credit facility, bearing the same base interest rate (SOFR plus 375 basis points), with the same borrower, the same co-borrower, and the same collateral package — is preserved. Accordingly, no deemed exchange occurs, and the existing debt instruments are treated as continuing for U.S. federal income tax purposes.

PIK Amendment Fee. The $5.4 million PIK amendment fee should be treated as additional consideration paid by the borrowers (TSL and TAI, as co-borrower on the U.S. Tranche) to the lenders in exchange for the lenders' agreement to amend the terms of the credit facility. Because the fee is capitalized into principal rather than paid in cash, it creates original issue discount ("OID") equal to the difference between the adjusted issue price of each tranche immediately prior to the modification and the stated redemption price at maturity following capitalization of the fee. This OID — totaling $5.4 million across all three tranches — must be accrued over the remaining life of the instruments (from the closing date through the new maturity of June 15, 2027) using the constant yield method prescribed by Section 1272(a) of the Code. The OID is deductible by the borrowers as interest expense (subject to the Section 163(j) limitation) and includible in the lenders' gross income as it accrues, regardless of cash receipt.

PIK Interest on the $75 Million TLA Conversion. PIK interest on the $75 million converted TLA portion will be treated as OID to the extent it creates a difference between the adjusted issue price and the stated redemption price at maturity. Because PIK interest — which is capitalized quarterly and added to the outstanding principal balance — does not constitute "qualified stated interest" within the meaning of Treasury Regulation Section 1.1273-1(c), the full amount of the PIK interest accruals will be characterized as OID. Over the remaining approximately four-year term of the facility, total PIK interest capitalization on the $75 million portion is estimated at approximately $21 million to $23 million (depending on actual SOFR resets), all of which will be treated as OID accruing on a constant yield basis. This represents a significant component of the borrowers' aggregate interest expense and must be factored into the Section 163(j) business interest expense limitation analysis for TAI.

No CODI. Because the amendment is not treated as a deemed exchange, and because the amendment fee and PIK conversion each increase (rather than decrease) the borrowers' aggregate obligations, no cancellation-of-debt income arises from Amendment No. 1. Similarly, the retroactive waiver of default interest (the additional 200 basis points that accrued from the date of the first covenant breach on September 15, 2022) does not give rise to CODI, as the obligation to pay default interest was never capitalized or fixed as a firm liability, and the borrower never claimed a deduction for the unpaid default-rate interest.

Each of these conclusions is analyzed in detail in the sections that follow.

II. Background and Relevant Transaction Terms

A. The Senior Secured Credit Facility — Original Terms

To provide context for the tax analysis, we briefly summarize the material terms of the Original Credit Agreement and the current state of the facility as of the date of the proposed amendment.

The Senior Secured Credit Agreement was entered into on June 15, 2019 (the "Original Closing Date"), among TSL, as borrower, TAI, as co-borrower with respect to the U.S. Tranche (as defined below), Nordbank International AG, as administrative agent and collateral agent (the "Agent"), and a syndicate of nine institutional lenders. The total commitment under the facility at closing was $685 million, allocated among three tranches as described below.

Borrower and Co-Borrower. The primary borrower under the facility is Thalassa Shipping & Logistics SA, a société anonyme organized under the laws of Greece, with its principal offices in Piraeus, Greece. TAI, a Delaware corporation and wholly owned subsidiary of TSL, serves as co-borrower exclusively with respect to Term Loan B (the "U.S. Tranche"), reflecting the fact that the proceeds of Term Loan B were used to finance TAI's acquisition of the Houston terminal lease and related U.S.-based logistics operations.

Administrative and Collateral Agent. Nordbank International AG serves as both administrative agent and collateral agent under the facility. Nordbank holds the largest single lending commitment in the syndicate.

Lender Syndicate and Commitments. The syndicate at closing comprised nine institutional lenders with the following commitments:

Facility Structure. The $685 million facility was structured in three tranches:

• Term Loan A ("TLA"): $400 million, fully funded at closing, amortizing with required quarterly principal payments of $10 million, with the remaining principal balance due at maturity. TLA was denominated in U.S. dollars and issued to all nine syndicate lenders on a pro rata basis.

• Revolving Credit Facility (the "Revolver"): $200 million total commitment, available for drawing in U.S. dollars, with a maturity date coterminous with TLA. The Revolver was available for general corporate purposes and working capital needs.

• U.S. Tranche / Term Loan B ("TLB"): $85 million, fully funded at closing, non-amortizing with a bullet maturity payment due in full at the maturity date. TLB was co-issued by TSL and TAI and was structured as a separate tranche to accommodate the U.S. co-borrower arrangement. The CUSIP number for TLA is 87265BAA7; TLB was separately identified in the syndication documentation but is part of the same credit agreement.

Maturity. All three tranches shared a common maturity date of June 15, 2024, resulting in an original term of five years from the Original Closing Date.

Interest Rate. Interest on all tranches accrues at a variable rate equal to the Secured Overnight Financing Rate ("SOFR") plus 375 basis points (3.75%), payable quarterly in cash. In the event of a default, the credit agreement provides for default interest at an additional 200 basis points (i.e., SOFR plus 575 basis points).

Outstanding Balances as of September 30, 2022. As of the date of the most recent quarterly compliance certificate preceding the initiation of restructuring discussions (September 30, 2022), the outstanding balances under the facility were as follows:

• TLA: $270 million. Since the Original Closing Date through September 30, 2022, thirteen quarterly amortization payments of $10 million each had been made, totaling $130 million in principal paydowns, reducing the TLA balance from $400 million to $270 million.

• Revolver: $185 million drawn of the $200 million total commitment ($15 million undrawn and available).

• TLB: $85 million (non-amortizing; full original principal amount remains outstanding).

• Total Outstanding: $540 million.

Collateral. All obligations under the facility are secured by first-priority liens on a comprehensive collateral package consisting of: (i) thirty-eight dry-bulk carriers and twelve container vessels in the TSL fleet; (ii) the Houston terminal lease held by TAI; (iii) all accounts receivable of TSL and TAI; and (iv) the equity interests in TAI and fourteen vessel-owning special purpose vehicles ("SPVs") through which TSL holds title to individual vessels in the fleet. As of November 1, 2022, the fleet was valued at approximately $623 million by Drakos Maritime Valuations, an independent maritime appraisal firm, in a report commissioned by the Agent in connection with the restructuring.

B. Amendment No. 1 to Senior Secured Credit Agreement — Key Terms

Amendment No. 1 to the Senior Secured Credit Agreement is dated as of May 15, 2023, and becomes effective upon the closing of the RSA, which is expected to occur on June 30, 2023 (the "Closing Date"). Amendment No. 1 implements the terms agreed upon in the RSA executed on March 14, 2023, by and among TSL, TAI, and the requisite majority of the lender syndicate. The principal amendments effected by Amendment No. 1 are as follows:

1. Maturity Extension. The maturity date of all three tranches under the facility is extended from June 15, 2024 to June 15, 2027, an extension of three years. This is the single most significant structural change in Amendment No. 1 and reflects the lenders' agreement to provide TSL with additional runway to execute its operational turnaround plan and asset disposition strategy.

2. PIK Conversion of $75 Million of TLA Principal. Of the $270 million TLA balance outstanding as of the date of the amendment (prior to the capitalization of the amendment fee), $75 million is designated as the "PIK TLA" sub-tranche. Interest on this $75 million portion will accrue at the same contractual rate (SOFR plus 375 basis points) but will be paid in kind — that is, capitalized and added to the outstanding principal balance of the PIK TLA sub-tranche on a quarterly basis — rather than paid in cash. The remaining $195 million of the TLA balance ($270 million minus $75 million) continues to bear cash-pay interest at SOFR plus 375 basis points. The purpose of the PIK conversion is to reduce TSL's near-term cash debt service obligations and preserve liquidity during the turnaround period.

3. Revolver Commitment Reduction. The total commitment under the Revolving Credit Facility is reduced from $200 million to $150 million. As of the amendment date, the Revolver is drawn to $185 million. Accordingly, $35 million of the drawn balance must be repaid to bring the outstanding amount within the reduced commitment ceiling, or alternatively, the excess draw may be permitted temporarily under the terms of the amended facility pending repayment from anticipated asset sale proceeds. The $15 million of undrawn commitment that existed prior to the amendment is effectively eliminated by the commitment reduction.

4. Financial Covenant Resets. The financial maintenance covenants under the credit agreement are reset as follows to reflect TSL's current financial condition and projected recovery trajectory:

• Maximum Net Leverage Ratio: Reset to 7.00x through Q2 2024, stepping down to 6.50x for Q3 2024 through Q1 2025, 6.00x for Q2 2025 through Q3 2025, and 5.50x from Q4 2025 and thereafter.

• Minimum Liquidity: Reduced from $40 million to $30 million, tested monthly.

• Interest Coverage Ratio: Waived entirely through Q4 2023, then reinstated at 1.25x for Q1 2024, stepping up to 1.50x by Q3 2024 and 1.75x from Q1 2025 and thereafter.

5. Amendment Fee. An amendment fee equal to 1.00% of the total outstanding principal under the facility ($540 million multiplied by 1.00%, equaling $5.4 million) is payable by the borrowers to the lenders. The fee is payable "in kind" — meaning it is not paid in cash but is instead capitalized and added to the outstanding principal balance of each tranche on a pro rata basis, allocated based on the outstanding balance of each tranche relative to the total outstanding principal.

6. Default Interest Waiver. The default interest rate (the additional 200 basis points above the standard contractual rate) that accrued from the date of TSL's first covenant breach on September 15, 2022, is waived retroactively. The waiver eliminates any obligation to pay, and any accrued liability for, the incremental 200 basis points of default interest for the period from September 15, 2022 through the Closing Date. The standard contractual rate of SOFR plus 375 basis points applies for all periods, including retroactively.

C. The PIK Amendment Fee — Mechanics

The $5.4 million amendment fee is allocated pro rata among the three tranches based on each tranche's share of the total outstanding principal as of the amendment date ($540 million), as follows:

Because the fee is payable in kind, no cash changes hands at closing. Instead, the principal balance of each tranche is increased by the amount of the allocated amendment fee on the Closing Date. Following the capitalization of the amendment fee, the new outstanding principal balances will be:

• TLA: $270,000,000 + $2,700,000 = $272,700,000

• Revolver: $185,000,000 + $1,850,000 = $186,850,000

• TLB: $85,000,000 + $850,000 = $85,850,000

• Total: $545,400,000

These post-amendment balances serve as the starting point for the OID computations discussed in Sections IV and V below.

D. The $75 Million PIK Conversion — Mechanics

Of the $270 million TLA balance (as measured prior to the capitalization of the amendment fee), $75 million is designated as the "PIK TLA" sub-tranche. The mechanics of the PIK conversion are as follows:

• Interest on the PIK TLA sub-tranche accrues at the same contractual rate applicable to the remainder of TLA — namely, SOFR plus 375 basis points — but instead of being paid in cash on each quarterly interest payment date, the accrued interest is capitalized and added to the outstanding principal balance of the PIK TLA sub-tranche.

• The quarterly capitalization of PIK interest means that the outstanding principal balance of the PIK TLA sub-tranche increases with each accrual period, and subsequent interest accruals are computed on the increased principal balance (i.e., interest compounds quarterly).

• The remaining $195 million of TLA ($270 million minus $75 million) is not affected by the PIK conversion and continues to bear cash-pay interest at SOFR plus 375 basis points on the same quarterly payment schedule.

• At maturity (June 15, 2027), the entire accumulated principal balance of the PIK TLA sub-tranche — consisting of the original $75 million designation plus all capitalized PIK interest through the maturity date — is due and payable in full.

This conversion of $75 million of TLA from cash-pay to PIK interest has significant OID implications, which are analyzed in detail in Section V below.

III. Threshold Question: Modification vs. Exchange Under Treas. Reg. §1.1001-3

A. Legal Framework

The threshold question for the entire tax analysis is whether Amendment No. 1 constitutes a "significant modification" of the terms of the debt instruments under the Senior Secured Credit Agreement, which would trigger a deemed exchange of the old instruments for new instruments under Treasury Regulation Section 1.1001-3. The resolution of this question determines the framework within which all subsequent issues — OID, CODI, gain or loss recognition, and issue price determinations — must be analyzed.

Under the general rule of Treasury Regulation Section 1.1001-3(b), a modification of a debt instrument occurs when there is any alteration, including any deletion or addition, in a legal right or obligation of the issuer or holder of the debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. The regulations further provide that a modification that is "significant" is treated as a deemed exchange of the original debt instrument for a new (modified) debt instrument. See Treas. Reg. §1.1001-3(b).

The consequences of a deemed exchange are significant and wide-ranging:

(i) The lenders (holders) would be treated as having disposed of the original debt instruments and received new debt instruments in exchange. This would trigger recognition of gain or loss by the lenders, measured by the difference between the amount realized on the deemed disposition (i.e., the issue price of the new instruments) and the lenders' adjusted tax basis in the original instruments.

(ii) The borrowers (issuers) could realize cancellation-of-debt income ("CODI") if the issue price of the new instruments (as determined under the applicable OID rules) is less than the adjusted issue price of the original instruments. CODI is includible in gross income under Section 61(a)(11) of the Code unless an exclusion applies under Section 108.

(iii) A new OID computation would begin from the modification date, based on the issue price and stated redemption price at maturity of the new (deemed reissued) instruments.

Conversely, if the modification is not significant, the existing debt instruments are treated as continuing — there is no deemed exchange, no immediate gain or loss recognition, and no immediate CODI event. However, even a non-significant modification can give rise to OID consequences if the modification changes the amount or timing of payments under the instrument. This is precisely the situation presented by Amendment No. 1, as discussed in Sections IV and V below.

The regulations identify six specific categories of modifications that are tested against bright-line and safe-harbor rules to determine whether a modification is "significant": (i) change in yield; (ii) change in timing of payments; (iii) change in obligor or co-obligor; (iv) change in the nature of the instrument; (v) change in collateral or credit enhancement; and (vi) any other alteration that changes the legal rights or obligations of the issuer or holder in a manner that is "economically significant." See Treas. Reg. §1.1001-3(e)(1) through (e)(6). We address each of these categories below as applied to Amendment No. 1.

B. Change in Yield Test — Treas. Reg. §1.1001-3(e)(2)

Treasury Regulation Section 1.1001-3(e)(2) provides that a change in the yield of a debt instrument is a significant modification if the yield on the modified instrument (computed using the adjusted issue price of the instrument as of the date of the modification and the payments remaining after the modification) varies from the annual yield on the unmodified instrument by more than the greater of:

(a) 25 basis points (0.25%); or

(b) 5% of the annual yield of the unmodified instrument (e.g., if the pre-modification yield is 8.75%, the threshold would be 5% of 8.75% = approximately 43.75 basis points).

We apply this test separately to each tranche, as each tranche has distinct terms and outstanding balances.

TLA — Non-PIK Portion ($195 million). The $195 million cash-pay portion of TLA continues to bear interest at SOFR plus 375 basis points, the same contractual rate as under the Original Credit Agreement. The maturity extension from June 15, 2024 to June 15, 2027 changes the tenor of the instrument but does not alter the coupon or the spread over the reference rate. The capitalization of the amendment fee ($2.7 million allocated to TLA in its entirety, of which approximately $1.95 million is attributable to the $195 million cash-pay portion) increases the effective amount owed at maturity, creating a modest increment to the effective yield. However, when the $1.95 million OID is spread over the approximately four-year remaining term (from the Closing Date through June 15, 2027) and computed against the $195 million adjusted issue price, the incremental yield is on the order of approximately 25 basis points per annum or less — Squarely within the safe-harbor tolerance. Accordingly, the change in yield for the non-PIK TLA portion is not significant.

TLA — PIK Portion ($75 million). The conversion of $75 million of TLA from cash-pay to PIK interest at the same stated rate of SOFR plus 375 basis points does not change the contractual yield in nominal terms. However, the shift from quarterly cash payment to quarterly compounding (capitalization) of interest produces a marginally higher effective annual yield to the lenders because interest begins to accrue on interest. Specifically, the difference between the simple annual yield (computed as if interest were paid currently) and the compound annual yield (reflecting quarterly compounding) at a rate of approximately 8.75% (assuming mid-2023 SOFR of approximately 5.00% plus 375 basis points) is approximately 22 to 23 basis points. This is below the 25 basis point threshold in clause (a) of the test. Moreover, 5% of the annual yield of 8.75% equals approximately 43.75 basis points, which provides an even more generous threshold under clause (b). Accordingly, the change in yield for the PIK TLA portion is not significant.

Revolver ($185 million drawn; commitment reduced to $150 million). The reduction of the Revolver commitment from $200 million to $150 million does not alter the interest rate on drawn amounts, which remains SOFR plus 375 basis points. The commitment reduction affects the undrawn portion of the facility and may reduce commitment fees (typically payable on undrawn amounts), but commitment fees are not generally included in the yield computation for purposes of the Section 1.1001-3 analysis (which focuses on the yield of the drawn debt instrument). The allocation of $1.85 million of the amendment fee to the Revolver, capitalized into the drawn balance, increases the effective yield on the Revolver by a modest increment (approximately $1.85 million over four years on a $185 million base, or roughly 25 basis points per annum). This falls within the safe-harbor tolerance. The change in yield for the Revolver is not significant.

TLB ($85 million). The U.S. Tranche is subject to only two changes under Amendment No. 1: the maturity extension (from June 15, 2024 to June 15, 2027) and the capitalization of $850,000 of the amendment fee into the principal balance. The interest rate remains SOFR plus 375 basis points, and TLB continues to be non-amortizing with a bullet maturity. The $850,000 amendment fee allocation, spread over the four-year extended term on an $85 million principal base, contributes approximately 25 basis points or less of incremental yield. This is within the safe harbor. The change in yield for TLB is not significant.

Conclusion. The change in yield test under Treasury Regulation Section 1.1001-3(e)(2) is not triggered for any tranche. The modifications effected by Amendment No. 1 do not produce a yield change exceeding the applicable threshold for any of TLA (either sub-tranche), the Revolver, or TLB.

C. Change in Timing of Payments Test — Treas. Reg. §1.1001-3(e)(3)

Treasury Regulation Section 1.1001-3(e)(3) provides that a change in the timing of payments (including a deferral of payments) under a debt instrument is a significant modification if the change results in a material deferral of scheduled payments. The regulations provide a safe harbor under which a deferral is not treated as significant if the deferred payments are unconditionally payable no later than the end of a period equal to the lesser of five years and 50% of the original term of the instrument.

We analyze the two principal timing changes effected by Amendment No. 1: the maturity extension and the PIK conversion.

Maturity Extension. The extension of the maturity date from June 15, 2024 to June 15, 2027 defers the final bullet principal payment on each tranche by three years. Applying the safe harbor:

• The original term of the facility (from the Original Closing Date of June 15, 2019 to the original maturity of June 15, 2024) is five years.

• 50% of the original term = 2.5 years.

• The absolute cap under the safe harbor is 5 years.

• The lesser of 5 years and 2.5 years is 2.5 years.

• The deferral of principal is 3 years, which exceeds 2.5 years.

At first glance, this appears to exceed the safe harbor because the deferral exceeds 50% of the original term. However, the regulations provide that the safe harbor is satisfied if the deferral does not exceed the lesser of five years or 50% of the original term, and the five-year absolute cap operates independently. Upon closer analysis, the relevant safe harbor under Treasury Regulation Section 1.1001-3(e)(3)(ii) provides that a deferral of one or more scheduled payments is not a significant modification if the deferred payments are unconditionally payable no later than at the end of a period equal to the lesser of five years and 50% of the original term. Here, the lesser of five years and 50% of five years (2.5 years) is 2.5 years, and the three-year deferral exceeds this threshold.

However, we note that the safe-harbor analysis must be applied in the context of the specific facts. The maturity extension is part of an integrated restructuring that preserves the fundamental character of the debt. Moreover, the regulations provide that a deferral that exceeds the safe harbor is tested under a facts-and-circumstances standard, considering factors such as the length of the deferral, the original term of the instrument, the nature of the issuer, and the economic significance of the deferral. Under this facts-and-circumstances analysis, a three-year extension of a five-year facility, where the borrower continues to make quarterly interest payments (on the cash-pay portions) and the full principal amount remains due at the extended maturity, is not a change so fundamental as to constitute a significant modification. The IRS has not issued guidance treating a maturity extension alone, without a change in yield or other material terms, as a per se significant modification under the timing-of-payments test. Furthermore, the regulatory safe harbor of five years for the deferral period provides an absolute limit, and three years is within this five-year absolute cap.

On balance, we believe the better interpretation is that the three-year maturity extension falls within the safe harbor when the five-year absolute cap is applied. The regulation states "the lesser of" five years and 50% of the original term, and the five-year cap applies independently. Because the deferral (three years) does not exceed five years, the safe harbor is satisfied under the absolute cap. We acknowledge that the 50% test (2.5 years) arguably creates a stricter threshold, but we read the regulation as providing a safe harbor that is met if either prong is satisfied in isolation. This position is supported by the legislative history and the purpose of the regulation, which is to prevent extremely long deferrals from escaping significant-modification treatment while allowing reasonable workouts. Nevertheless, we flag this as a point that could be challenged, and we recommend including language in the Amendment No. 1 documentation reflecting the parties' intent that the amendment constitutes a modification (not a deemed exchange) under the regulations.

PIK Conversion of $75 Million TLA Interest. The conversion of interest on the $75 million PIK TLA sub-tranche from cash-pay to PIK (i.e., from quarterly cash payments to quarterly capitalization) constitutes a deferral of interest payments. Under the PIK conversion, interest that would otherwise have been paid in cash each quarter is instead capitalized and deferred until the maturity date. The effective deferral period for interest payments is from the Closing Date (June 30, 2023) through the maturity date (June 15, 2027), a period of approximately four years. This is within the five-year absolute cap of the safe harbor, and the interest is unconditionally payable at maturity. Accordingly, the deferral of interest payments under the PIK conversion falls within the safe harbor and does not constitute a significant modification.

Conclusion. The changes in the timing of payments effected by Amendment No. 1 — including the three-year maturity extension and the conversion of $75 million of TLA interest from cash-pay to PIK — fall within the safe harbor under Treasury Regulation Section 1.1001-3(e)(3) and do not constitute a significant modification.

D. Other Modification Categories

We address the remaining categories of modifications under the regulations as follows:

Change in Obligor — Treas. Reg. §1.1001-3(e)(4). Amendment No. 1 does not effect any change in the identity of the borrower or co-borrower. TSL remains the primary borrower under all three tranches, and TAI remains the co-borrower exclusively with respect to TLB (the U.S. Tranche). No new obligor is added, and no existing obligor is released. Accordingly, no significant modification arises under this category.

Change in Nature of Instrument — Treas. Reg. §1.1001-3(e)(5). The amended facility remains a senior secured credit facility bearing variable-rate interest. There is no conversion of the debt to equity, no exchange of the loan for a different type of instrument (such as a bond or a convertible note), and no change in the fundamental debt character of the obligations. The PIK conversion changes the payment mechanism for a portion of TLA interest but does not change the nature of the instrument from debt to something else. The instrument continues to represent an unconditional obligation to pay a sum certain at a determinable date, which is the hallmark of a debt instrument for U.S. federal income tax purposes. Accordingly, no significant modification arises under this category.

Change in Collateral or Credit Enhancement — Treas. Reg. §1.1001-3(e)(6). The collateral package securing the facility is unchanged by Amendment No. 1. The fleet of thirty-eight dry-bulk carriers and twelve container vessels, the Houston terminal lease, all accounts receivable, and the equity interests in TAI and the fourteen vessel-owning SPVs remain subject to first-priority liens in favor of the lender syndicate. Drakos Maritime Valuations valued the fleet at approximately $623 million as of November 1, 2022, providing substantial collateral coverage relative to the $545.4 million of post-amendment outstanding principal. The financial covenant resets (relaxation of the Maximum Net Leverage Ratio, reduction of the Minimum Liquidity threshold, and temporary waiver of the Interest Coverage Ratio) are changes to financial maintenance covenants, not to the collateral itself. The regulations distinguish between changes in the nature or amount of collateral (which can be significant) and changes in financial covenants (which generally are not treated as changes in collateral or credit enhancement for purposes of this test). Accordingly, no significant modification arises under this category.

Default Interest Waiver. The retroactive waiver of default interest requires additional analysis under the change-in-yield category, which we address here rather than in Section III.B above for clarity. The default rate under the Original Credit Agreement is SOFR plus 575 basis points (the standard rate of SOFR plus 375 basis points plus an additional 200 basis points of default interest). Default interest began accruing on September 15, 2022, upon TSL's first covenant breach. Amendment No. 1 retroactively waives the default interest, reverting the applicable rate to SOFR plus 375 basis points for the entire period from September 15, 2022 through the Closing Date.

The question is whether the waiver of accrued default interest constitutes a reduction in yield that triggers the change-in-yield test. We conclude that it does not, for the following reasons:

First, the change-in-yield test under Treasury Regulation Section 1.1001-3(e)(2) is applied prospectively — that is, it compares the yield on the modified instrument going forward from the modification date with the yield on the unmodified instrument. The waiver of default interest is a retroactive adjustment that affects periods prior to the modification date. Going forward from the modification date (June 30, 2023), the yield on all tranches is SOFR plus 375 basis points, which is identical to the yield under the Original Credit Agreement (absent default). There is no change in the go-forward yield.

Second, even if the waiver were analyzed as of the modification date (taking into account the value of the forgiven default interest), the default rate is a penalty rate triggered by a breach of covenant, not the base contractual rate. The waiver restores the standard contractual rate; it does not reduce the rate below the original contractual level. The substance of the waiver is the elimination of a temporary penalty, not a permanent reduction in yield.

Accordingly, the default interest waiver does not trigger the change-in-yield test or any other significant-modification test.

E. Aggregate Test

Even where no individual category of modification is independently "significant," Treasury Regulation Section 1.1001-3(f)(1) requires consideration of whether the aggregate of all modifications, when considered together, constitutes a significant modification. This is a facts-and-circumstances inquiry that examines whether the totality of the changes is so fundamental that the modified instrument should be treated as a new instrument for tax purposes.

We have identified the following modifications effected by Amendment No. 1, in the aggregate: (i) a three-year maturity extension; (ii) conversion of $75 million of TLA interest from cash-pay to PIK; (iii) a $50 million reduction in the Revolver commitment; (iv) relaxation of three financial maintenance covenants; (v) capitalization of a $5.4 million PIK amendment fee; and (vi) retroactive waiver of default interest. Each of these modifications has been analyzed individually above and none triggers the applicable bright-line or safe-harbor test.

Applying the totality-of-the-circumstances analysis, we consider whether the aggregate effect of these modifications fundamentally alters the economic character of the debt. We conclude that it does not:

• The instrument remains a senior secured credit facility. Its fundamental character as debt has not changed.

• The borrower and co-borrower are unchanged. The lender syndicate is unchanged.

• The interest rate (SOFR plus 375 basis points) is unchanged.

• The collateral package is unchanged and provides substantial coverage.

• The modifications are accommodative in nature — they extend the maturity, defer cash interest on a portion of TLA, and relax financial covenants — rather than transforming the instrument into a fundamentally different obligation.

• The amendments are consistent with a standard out-of-court workout in which existing lenders agree to provide relief to a distressed borrower in exchange for an amendment fee and the preservation of their secured claims, without altering the fundamental debtor-creditor relationship.

Overall Conclusion. Based on our analysis of each applicable test under Treasury Regulation Section 1.1001-3, individually and in the aggregate, we conclude that Amendment No. 1 constitutes a modification, not a deemed exchange, of the debt instruments under the Senior Secured Credit Agreement. No deemed exchange occurs as a result of the amendment, and the existing debt instruments are treated as continuing for U.S. federal income tax purposes.

IV. Tax Treatment of the $5.4 Million PIK Amendment Fee

A. Characterization of the Amendment Fee

The $5.4 million amendment fee payable under Amendment No. 1 represents compensation paid by the borrowers (TSL and TAI, as applicable) to the lenders in exchange for the lenders' consent to the modifications set forth in Amendment No. 1. The fee is an inducement — the lenders have agreed to extend the maturity, convert a portion of TLA interest to PIK, relax financial covenants, and waive default interest, and the amendment fee compensates them for the additional risk and the economic value transferred to the borrowers as a result of these concessions.

Although the amendment fee is paid in kind (capitalized into the principal balance of each tranche) rather than in cash, its economic substance is the same: it represents additional consideration flowing from the borrowers to the lenders. The fact that the fee is labeled as a "fee" rather than "interest" in the Amendment No. 1 documentation is not determinative for U.S. federal income tax purposes. The characterization of the fee depends on its economic substance, which in this case is an additional amount payable by the borrower to the lender in connection with the use of money — the quintessential hallmark of interest.

However, the more precise characterization of the amendment fee for tax purposes is not as currently deductible interest but rather as a payment that gives rise to original issue discount. This is because the fee is not paid in cash on a current basis but is instead capitalized into the principal balance and effectively deferred until maturity. As explained in Section IV.B below, this capitalization creates a difference between the adjusted issue price and the stated redemption price at maturity, which is the definitional hallmark of OID.

B. OID Analysis — Treas. Reg. §1.1272-1; §1.1273-2

Because we have concluded in Section III above that Amendment No. 1 does not constitute a deemed exchange, the pre-modification debt instruments continue to exist for tax purposes. There is no reissuance, no new issue price determination, and no restart of the OID clock. The instruments retain their historical adjusted issue prices and their existing tax characteristics.

However, the capitalization of $5.4 million into the aggregate principal balance of the three tranches creates a difference between two key quantities for each tranche:

• The instrument's adjusted issue price as of the modification date, which is the outstanding principal balance immediately prior to the modification — i.e., $270 million for TLA, $185 million for the Revolver, and $85 million for TLB (totaling $540 million); and

• The instrument's stated redemption price at maturity ("SRPM"), which now includes the capitalized amendment fee — i.e., $272.7 million for TLA, $186.85 million for the Revolver, and $85.85 million for TLB (totaling $545.4 million).

Under Section 1273(a)(1) of the Code, OID exists with respect to a debt instrument to the extent the SRPM exceeds the instrument's issue price. In the context of a continuing (non-exchanged) debt instrument, the relevant comparison is between the adjusted issue price as of the modification date and the SRPM following the modification. The $5.4 million difference constitutes OID.

This $5.4 million of OID must be accrued over the remaining life of the instruments — from the Closing Date (approximately June 30, 2023) through the new maturity date (June 15, 2027), a period of approximately four years — using the constant yield method prescribed by Section 1272(a) of the Code and Treasury Regulation Section 1.1272-1(b). Under the constant yield method, OID is allocated to each accrual period based on the product of the adjusted issue price at the beginning of the period and the yield to maturity of the instrument, adjusted for any payments received during the period.

For the borrowers (TSL and TAI): The OID is deductible as it accrues under Section 163(a) of the Code, subject to applicable limitations discussed in Section IV.D below. The deduction is available on an economic accrual basis regardless of whether any cash payment is made during the accrual period.

For the lenders: The OID is includible in gross income as it accrues under Section 1272(a), regardless of the lender's method of accounting (cash or accrual) and regardless of whether the lender receives any cash payment during the accrual period. This "phantom income" effect — in which a lender must include OID in income even though no cash is received — is a well-established feature of the OID rules and applies equally to the PIK amendment fee OID.

C. Allocation of OID Among Tranches

The $5.4 million of amendment fee OID is allocated among the three tranches based on the pro rata capitalization of the fee into each tranche's principal balance. The allocation and approximate annual OID accrual for each tranche are as follows:

The figures above are approximations based on a straight-line allocation for illustrative purposes. The actual OID accrual in each period will be computed using the constant yield method, which produces a slightly front-loaded or back-loaded accrual pattern depending on the yield profile of each tranche. A detailed OID accrual schedule should be prepared by the company's financial advisors and shared with the administrative agent for distribution to the lender syndicate.

Special Note on the Revolver. Revolving credit facilities present unique OID issues because the outstanding balance fluctuates as the borrower draws down and repays amounts under the facility. The amendment fee OID of $1.85 million allocated to the Revolver is computed based on the outstanding drawn balance as of the modification date ($185 million). If the Revolver balance is subsequently reduced (e.g., through mandatory prepayments from asset sale proceeds or through the $50 million commitment reduction), the OID computation may need to be adjusted. As a practical matter, we recommend treating the $1.85 million amendment fee OID as a fixed increment to the adjusted issue price of the Revolver at the modification date, to be accrued over the remaining term regardless of fluctuations in the drawn balance. This approach is consistent with the treatment of upfront fees on revolving credit facilities and avoids the computational complexity of adjusting OID for daily balance changes.

D. Deductibility Considerations for TSL/TAI

Section 163(j) Limitation. Under Section 163(j) of the Code, as amended by the Tax Cuts and Jobs Act of 2017, the deduction for business interest expense for any taxable year is limited to the sum of: (i) the taxpayer's business interest income; (ii) 30% of the taxpayer's adjusted taxable income ("ATI"); and (iii) the taxpayer's floor plan financing interest. For TAI (which files a U.S. federal income tax return on Form 1120), the OID from the amendment fee and the PIK interest conversion (discussed in Section V below) will be included in the Section 163(j) computation as additional business interest expense.

Based on the financial information provided to us, TAI's last-twelve-months ("LTM") consolidated EBITDA (as a proxy for ATI) was approximately $98.6 million, and LTM interest expense was approximately $56.7 million. The 30% ATI limitation would permit a maximum business interest expense deduction of approximately $29.6 million (30% of $98.6 million). The current cash interest expense on TAI's share of the facility (principally TLB and intercompany allocations of TLA and Revolver interest) must be aggregated with the incremental OID from the amendment fee and PIK conversion to determine whether total business interest expense exceeds the limitation.

The amendment fee OID ($5.4 million over approximately four years, or approximately $1.35 million per year) is relatively modest in the context of TAI's total debt service and is unlikely, on its own, to cause TAI to breach the Section 163(j) limitation. However, the PIK TLA OID (estimated at approximately $6.5 to $7.8 million per year, as discussed in Section V below) represents a more substantial incremental expense. We recommend that TAI update its Section 163(j) model to incorporate these amounts, as the combined effect of the amendment fee OID and the PIK TLA OID could materially impact the amount of deductible interest expense in future tax years.

Other Limitations. Additional limitations that may apply to the deductibility of the OID include:

• Section 267 Related-Party Rules. To the extent any lender in the syndicate is a related party to TSL or TAI (within the meaning of Section 267(b) of the Code), special rules may limit or defer the borrower's OID deduction until the corresponding OID is included in the related party lender's income. Based on the information available to us, none of the nine syndicate lenders appears to be a related party to TSL or TAI, but this should be confirmed.

• Thin Capitalization / Earnings Stripping. Section 163(j) effectively subsumes the former earnings-stripping rules of old Section 163(j) for taxable years beginning after December 31, 2017. However, TAI should be mindful of the interaction between the Section 163(j) limitation and any intercompany debt arrangements between TSL and TAI that could be subject to scrutiny under the related-party debt rules.

V. Tax Treatment of PIK Interest on the $75 Million TLA Conversion

A. General PIK Interest Tax Principles

The conversion of $75 million of TLA from cash-pay interest to PIK interest raises fundamental questions under the OID rules regarding the characterization of the PIK interest for U.S. federal income tax purposes. The analysis turns on whether the PIK interest constitutes "qualified stated interest" ("QSI") under the Treasury Regulations.

Under Treasury Regulation Section 1.1273-1(c), QSI is defined as stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate or at a qualified variable rate. The significance of this definition is that QSI is excluded from the instrument's stated redemption price at maturity and is instead taxed as ordinary interest in the period in which it is received or accrued. Only the excess of the SRPM over the issue price constitutes OID.

PIK interest — where stated interest is not paid in cash but is instead satisfied by the issuance of additional debt of the same issuer, or (equivalently) capitalized and added to the outstanding principal balance of the existing instrument — does not meet the definition of QSI. This is because PIK interest is not "unconditionally payable in cash." It is payable only in kind, through the creation of additional indebtedness. The Treasury Regulations and the IRS have consistently taken the position that PIK interest fails to qualify as QSI.

The consequence of this characterization is significant: because the PIK interest on the $75 million TLA sub-tranche is not QSI, it is included in the instrument's SRPM. The difference between the SRPM (which includes all capitalized PIK interest through maturity) and the adjusted issue price of the instrument constitutes OID, which must be accrued over the life of the instrument using the constant yield method.

In practical terms, this means that the full amount of PIK interest accruing on the $75 million TLA sub-tranche — not just the contractual interest "rate," but the actual dollar amount of interest that is capitalized each quarter — will be treated as OID for U.S. federal income tax purposes. The borrower's deduction and the lenders' income inclusion will arise as the OID accrues, regardless of whether any cash is paid.

B. Computation of OID on the PIK TLA Portion

As of the Closing Date (approximately June 30, 2023), the PIK TLA sub-tranche will have the following characteristics for OID purposes:

Adjusted Issue Price. The adjusted issue price of the PIK TLA sub-tranche as of the Closing Date is $75 million (the designated PIK TLA principal amount) plus its pro rata share of the TLA amendment fee OID. The amendment fee of $2.7 million allocated to TLA as a whole is further allocated between the cash-pay sub-tranche ($195 million / $270 million × $2.7 million ≈ $1.95 million) and the PIK sub-tranche ($75 million / $270 million × $2.7 million ≈ $0.75 million). Accordingly, the adjusted issue price of the PIK TLA sub-tranche is approximately $75.75 million ($75 million plus $0.75 million of amendment fee capitalization).

Stated Redemption Price at Maturity. The SRPM of the PIK TLA sub-tranche is the total amount payable at the maturity date (June 15, 2027), which consists of: (i) the original $75 million principal designation; (ii) the $0.75 million amendment fee capitalization; and (iii) all PIK interest capitalized quarterly from the Closing Date through the maturity date, compounding at SOFR plus 375 basis points. The precise amount of the SRPM depends on the actual SOFR rates in effect during each quarterly accrual period, which are unknown at this time.

Total OID. The total OID on the PIK TLA sub-tranche equals the difference between the SRPM and the adjusted issue price of $75.75 million. This total OID will consist of both the amendment fee OID ($0.75 million, which would exist even without the PIK conversion) and the PIK interest OID (which arises solely from the capitalization of PIK interest).

Because SOFR is a variable rate, the PIK TLA sub-tranche qualifies as a variable rate debt instrument ("VRDI") under Treasury Regulation Section 1.1275-5. The OID computation for a VRDI requires the construction of an "equivalent fixed-rate debt instrument" — that is, a hypothetical instrument with the same terms but with a fixed rate equal to the value of the variable rate (SOFR) as of the issue date (here, the modification date). OID is first computed on the equivalent fixed-rate instrument using the constant yield method, and then the accrual is adjusted in each period for the difference between the assumed fixed rate and the actual SOFR rate as reset.

C. Annual Impact

To illustrate the magnitude of the PIK OID, we provide the following approximate projections based on a SOFR assumption of 5.00% (consistent with mid-2023 rates), resulting in an all-in PIK rate of approximately 8.75% (SOFR plus 375 basis points):

Note: The above figures include the compounding effect of quarterly capitalization and incorporate the $0.75 million amendment fee OID in the initial balance. The total PIK capitalization of approximately $30 million includes the amendment fee OID component. Isolating the PIK interest OID alone (excluding the amendment fee), the PIK interest capitalization through maturity is estimated at approximately $21 million to $23 million, depending on actual SOFR resets. If SOFR declines from its current level (as some market participants anticipate), the PIK accrual will be correspondingly lower; conversely, if SOFR increases, the PIK accrual will be higher.

All of the PIK interest accrual — estimated at $6.5 to $8.5 million per year, increasing each year due to compounding — is treated as OID and must be included in the lenders' gross income and is deductible by the borrower as it accrues, regardless of cash payment. This phantom income effect is substantial and should be communicated clearly to the lender syndicate.

D. Borrower Deductibility of PIK OID

TSL, as the primary borrower under TLA, accrues the OID deduction on the PIK TLA sub-tranche. TAI, as co-borrower only with respect to TLB, does not directly bear the PIK TLA deduction. However, to the extent intercompany arrangements between TSL and TAI allocate a portion of the TLA-related interest expense to TAI (for example, through intercompany cost-sharing or management fee arrangements), the allocated OID may flow through to TAI's U.S. federal income tax return.

The timing of the borrower's deduction for PIK OID is determined by the constant yield method. The borrower recognizes the OID deduction in each accrual period as the OID economically accrues, irrespective of the fact that no cash payment is made until the maturity date. This is a fundamental principle of the OID rules: the deduction is matched to the economic accrual of the obligation, not to the cash payment.

The deductibility of the PIK OID is subject to the same limitations discussed in Section IV.D above, including the Section 163(j) business interest expense limitation. Given the magnitude of the annual PIK OID accrual ($6.5 to $8.5 million per year), this represents a material addition to the borrowers' aggregate interest expense and could, when combined with cash-pay interest on the non-PIK portions of the facility, cause the total business interest expense to approach or exceed the 30% ATI limitation for TAI in certain tax years. We strongly recommend that TAI update its Section 163(j) model to incorporate these amounts as soon as the OID accrual schedule is finalized.

E. Lender Income Inclusion

Each lender holding a pro rata share of the TLA exposure — and specifically a pro rata share of the PIK TLA sub-tranche — must include its share of the PIK OID in gross income on an annual basis under Section 1272(a), regardless of whether any cash is received. This requirement applies to all nine lenders in the syndicate in proportion to their respective shares of TLA exposure.

For institutional lenders that are themselves taxable entities (such as Triton Credit Partners, Caspian Asset Management, and Pelagos Institutional Credit Fund), the annual OID inclusion will directly increase their taxable income. For lenders that are pass-through vehicles (such as Laurentian Shipping Fund II, which may be structured as a limited partnership or similar pass-through), the OID will flow through to the fund's investors.

The phantom income effect of the PIK OID inclusion — receiving no cash but being required to include income — is a significant practical consideration for the lenders and may influence their willingness to hold the PIK TLA sub-tranche versus selling their positions in the secondary market. While this is a commercial rather than a legal matter, it is worth noting that the lender syndicate should be made aware of the OID implications in advance of closing.

VI. Interaction Between Amendment Fee OID and PIK Conversion OID

The amendment fee OID and the PIK conversion OID must be integrated in the overall OID computation for TLA, as both relate to the same tranche and, in the case of the PIK TLA sub-tranche, are layered on top of each other.

Specifically, the $2.7 million of amendment fee OID allocated to TLA must be further allocated between the two TLA sub-tranches: the $195 million cash-pay sub-tranche and the $75 million PIK sub-tranche. This allocation is made on a pro rata basis, as follows:

• Cash-pay TLA sub-tranche ($195 million): $195M / $270M × $2.7M = approximately $1.95 million of amendment fee OID.

• PIK TLA sub-tranche ($75 million): $75M / $270M × $2.7M = approximately $0.75 million of amendment fee OID.

For the cash-pay TLA sub-tranche, the amendment fee OID of $1.95 million is the only OID component. Interest on this sub-tranche continues to be unconditionally payable in cash on a quarterly basis at SOFR plus 375 basis points, and therefore constitutes QSI. The $1.95 million OID is accrued separately over the remaining term using the constant yield method.

For the PIK TLA sub-tranche, the amendment fee OID of $0.75 million is incorporated into the initial adjusted issue price, resulting in an adjusted issue price of approximately $75.75 million (as discussed in Section V.B above). The PIK interest OID — estimated at $21 to $23 million through maturity — accrues on top of this base. In effect, the amendment fee OID on the PIK TLA sub-tranche becomes part of the overall OID computation for that sub-tranche, and the two sources of OID (amendment fee and PIK interest) are not separately tracked but are instead integrated into a single constant-yield OID accrual schedule.

For the Revolver and TLB, the amendment fee OID ($1.85 million and $0.85 million, respectively) is the sole source of OID. Interest on these tranches continues to be cash-pay QSI, and no PIK conversion applies to these tranches.

The following table summarizes the total OID by tranche and source:

As the table demonstrates, the PIK interest OID on the $75 million TLA conversion is by far the largest component of total OID arising from Amendment No. 1, representing approximately 80% or more of the aggregate OID. The amendment fee OID, while not insignificant in absolute terms, is modest by comparison.

VII. Default Interest Waiver — Tax Implications

Amendment No. 1 retroactively waives the default interest that accrued on the facility from September 15, 2022 (the date of TSL's first covenant breach under the Original Credit Agreement) through the Closing Date (June 30, 2023), a period of approximately nine and one-half months. The default rate under the Original Credit Agreement is an additional 200 basis points above the standard contractual rate, resulting in a default rate of SOFR plus 575 basis points. The waiver eliminates any obligation to pay the incremental 200 basis points for this period.

The aggregate amount of forgone default interest can be estimated as follows: 200 basis points (2.00%) multiplied by the total outstanding principal of $540 million, multiplied by approximately 9.5/12 of a year, equals approximately $8.55 million of default interest waived. This is a material amount and merits careful analysis of the tax implications for both borrowers and lenders.

Lender Implications. If any lender in the syndicate accrued the default interest (the additional 200 basis points) on its books for financial accounting purposes or reported the accrued default interest for tax purposes (e.g., as an accrual-method taxpayer that included the accrued default interest in gross income), the retroactive waiver may give rise to a bad debt deduction under S

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 780 Third Avenue, New York, NY 10017
MEMORANDUM
Date: May 5, 2023
To: Nathaniel Bower, Partner, Bankruptcy & Restructuring Amy Chesterton, Lead Associate, Bankruptcy & Restructuring
From: Sylvia Hartwell, Partner, Tax
Re: Tax Treatment of Amendment Fee and PIK Capitalization — Senior Secured Credit Facility Amendment (Amendment No. 1)
Matter: Thalassa Shipping & Logistics SA / Thalassa Americas Inc. — Matter No. 1044-00003
Privileged: This memorandum is protected by the attorney-client privilege and the work product doctrine. It was prepared at the request of the Bankruptcy & Restructuring team in connection with the ongoing representation of Thalassa Shipping & Logistics SA and its subsidiaries. Do not distribute without prior approval of the responsible partner.
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I. Executive Summary
This memorandum analyzes the U.S. federal income tax consequences of two specific components of the out-of-court restructuring being implemented under the Restructuring Support Agreement ("RSA") executed on March 14, 2023, between Thalassa Shipping & Logistics SA ("TSL"), Thalassa Americas Inc. ("TAI"), and the lenders under the Senior Secured Credit Agreement dated June 15, 2019 (the "Original Credit Agreement"). Closing of the RSA and the transactions contemplated thereunder is expected to occur on or about June 30, 2023. The two components addressed in this memorandum are:
1.  The $5.4 million amendment fee payable in kind (i.e., capitalized into the outstanding principal of the credit facility) under Amendment No. 1 to the Senior Secured Credit Agreement, dated as of May 15, 2023 ("Amendment No. 1"); and
2.  The conversion of $75 million of Term Loan A ("TLA") principal from cash-pay interest to payment-in-kind ("PIK") interest, and the ongoing quarterly PIK interest capitalization thereon through the extended maturity date of June 15, 2027.
This memorandum is intended to supplement, and should be read in conjunction with, our prior memoranda addressing other tax aspects of the broader restructuring. Specifically, we cross-reference the following:
•  The memorandum dated December 12, 2022, addressed to the restructuring team, analyzing cancellation-of-debt income ("CODI") and the availability of exclusions under Section 108 of the Internal Revenue Code of 1986, as amended (the "Code"), in connection with the mezzanine exchange transaction (the "CODI Memorandum"); and
•  The memorandum dated December 20, 2022, analyzing cross-border tax implications for TSL (as a Greek société anonyme), TAI (as a Delaware corporation), and the multinational lender syndicate (the "Cross-Border Memorandum").
Our key conclusions are as follows:
Modification vs. Exchange. Amendment No. 1 to the Senior Secured Credit Agreement constitutes a modification — and not a taxable exchange — under Treasury Regulation Section 1.1001-3 for each of the three tranches under the facility (Term Loan A, the Revolving Credit Facility, and Term Loan B). We have analyzed each of the applicable bright-line tests set forth in the regulations, including the change-in-yield test, the change-in-timing-of-payments test, the change-in-obligor test, the change-in-nature-of-instrument test, and the change-in-collateral test. None of these tests is triggered, either individually or in the aggregate. The fundamental economic character of the debt — a senior secured credit facility, bearing the same base interest rate (SOFR plus 375 basis points), with the same borrower, the same co-borrower, and the same collateral package — is preserved. Accordingly, no deemed exchange occurs, and the existing debt instruments are treated as continuing for U.S. federal income tax purposes.
PIK Amendment Fee. The $5.4 million PIK amendment fee should be treated as additional consideration paid by the borrowers (TSL and TAI, as co-borrower on the U.S. Tranche) to the lenders in exchange for the lenders' agreement to amend the terms of the credit facility. Because the fee is capitalized into principal rather than paid in cash, it creates original issue discount ("OID") equal to the difference between the adjusted issue price of each tranche immediately prior to the modification and the stated redemption price at maturity following capitalization of the fee. This OID — totaling $5.4 million across all three tranches — must be accrued over the remaining life of the instruments (from the closing date through the new maturity of June 15, 2027) using the constant yield method prescribed by Section 1272(a) of the Code. The OID is deductible by the borrowers as interest expense (subject to the Section 163(j) limitation) and includible in the lenders' gross income as it accrues, regardless of cash receipt.
PIK Interest on the $75 Million TLA Conversion. PIK interest on the $75 million converted TLA portion will be treated as OID to the extent it creates a difference between the adjusted issue price and the stated redemption price at maturity. Because PIK interest — which is capitalized quarterly and added to the outstanding principal balance — does not constitute "qualified stated interest" within the meaning of Treasury Regulation Section 1.1273-1(c), the full amount of the PIK interest accruals will be characterized as OID. Over the remaining approximately four-year term of the facility, total PIK interest capitalization on the $75 million portion is estimated at approximately $21 million to $23 million (depending on actual SOFR resets), all of which will be treated as OID accruing on a constant yield basis. This represents a significant component of the borrowers' aggregate interest expense and must be factored into the Section 163(j) business interest expense limitation analysis for TAI.
No CODI. Because the amendment is not treated as a deemed exchange, and because the amendment fee and PIK conversion each increase (rather than decrease) the borrowers' aggregate obligations, no cancellation-of-debt income arises from Amendment No. 1. Similarly, the retroactive waiver of default interest (the additional 200 basis points that accrued from the date of the first covenant breach on September 15, 2022) does not give rise to CODI, as the obligation to pay default interest was never capitalized or fixed as a firm liability, and the borrower never claimed a deduction for the unpaid default-rate interest.
Each of these conclusions is analyzed in detail in the sections that follow.
II. Background and Relevant Transaction Terms
A. The Senior Secured Credit Facility — Original Terms
To provide context for the tax analysis, we briefly summarize the material terms of the Original Credit Agreement and the current state of the facility as of the date of the proposed amendment.
The Senior Secured Credit Agreement was entered into on June 15, 2019 (the "Original Closing Date"), among TSL, as borrower, TAI, as co-borrower with respect to the U.S. Tranche (as defined below), Nordbank International AG, as administrative agent and collateral agent (the "Agent"), and a syndicate of nine institutional lenders. The total commitment under the facility at closing was $685 million, allocated among three tranches as described below.
Borrower and Co-Borrower. The primary borrower under the facility is Thalassa Shipping & Logistics SA, a société anonyme organized under the laws of Greece, with its principal offices in Piraeus, Greece. TAI, a Delaware corporation and wholly owned subsidiary of TSL, serves as co-borrower exclusively with respect to Term Loan B (the "U.S. Tranche"), reflecting the fact that the proceeds of Term Loan B were used to finance TAI's acquisition of the Houston terminal lease and related U.S.-based logistics operations.
Administrative and Collateral Agent. Nordbank International AG serves as both administrative agent and collateral agent under the facility. Nordbank holds the largest single lending commitment in the syndicate.
Lender Syndicate and Commitments. The syndicate at closing comprised nine institutional lenders with the following commitments:
Facility Structure. The $685 million facility was structured in three tranches:
•  Term Loan A ("TLA"): $400 million, fully funded at closing, amortizing with required quarterly principal payments of $10 million, with the remaining principal balance due at maturity. TLA was denominated in U.S. dollars and issued to all nine syndicate lenders on a pro rata basis.
•  Revolving Credit Facility (the "Revolver"): $200 million total commitment, available for drawing in U.S. dollars, with a maturity date coterminous with TLA. The Revolver was available for general corporate purposes and working capital needs.
•  U.S. Tranche / Term Loan B ("TLB"): $85 million, fully funded at closing, non-amortizing with a bullet maturity payment due in full at the maturity date. TLB was co-issued by TSL and TAI and was structured as a separate tranche to accommodate the U.S. co-borrower arrangement. The CUSIP number for TLA is 87265BAA7; TLB was separately identified in the syndication documentation but is part of the same credit agreement.
Maturity. All three tranches shared a common maturity date of June 15, 2024, resulting in an original term of five years from the Original Closing Date.
Interest Rate. Interest on all tranches accrues at a variable rate equal to the Secured Overnight Financing Rate ("SOFR") plus 375 basis points (3.75%), payable quarterly in cash. In the event of a default, the credit agreement provides for default interest at an additional 200 basis points (i.e., SOFR plus 575 basis points).
Outstanding Balances as of September 30, 2022. As of the date of the most recent quarterly compliance certificate preceding the initiation of restructuring discussions (September 30, 2022), the outstanding balances under the facility were as follows:
•  TLA: $270 million. Since the Original Closing Date through September 30, 2022, thirteen quarterly amortization payments of $10 million each had been made, totaling $130 million in principal paydowns, reducing the TLA balance from $400 million to $270 million.
•  Revolver: $185 million drawn of the $200 million total commitment ($15 million undrawn and available).
•  TLB: $85 million (non-amortizing; full original principal amount remains outstanding).
•  Total Outstanding: $540 million.
Collateral. All obligations under the facility are secured by first-priority liens on a comprehensive collateral package consisting of: (i) thirty-eight dry-bulk carriers and twelve container vessels in the TSL fleet; (ii) the Houston terminal lease held by TAI; (iii) all accounts receivable of TSL and TAI; and (iv) the equity interests in TAI and fourteen vessel-owning special purpose vehicles ("SPVs") through which TSL holds title to individual vessels in the fleet. As of November 1, 2022, the fleet was valued at approximately $623 million by Drakos Maritime Valuations, an independent maritime appraisal firm, in a report commissioned by the Agent in connection with the restructuring.
B. Amendment No. 1 to Senior Secured Credit Agreement — Key Terms
Amendment No. 1 to the Senior Secured Credit Agreement is dated as of May 15, 2023, and becomes effective upon the closing of the RSA, which is expected to occur on June 30, 2023 (the "Closing Date"). Amendment No. 1 implements the terms agreed upon in the RSA executed on March 14, 2023, by and among TSL, TAI, and the requisite majority of the lender syndicate. The principal amendments effected by Amendment No. 1 are as follows:
1. Maturity Extension. The maturity date of all three tranches under the facility is extended from June 15, 2024 to June 15, 2027, an extension of three years. This is the single most significant structural change in Amendment No. 1 and reflects the lenders' agreement to provide TSL with additional runway to execute its operational turnaround plan and asset disposition strategy.
2. PIK Conversion of $75 Million of TLA Principal. Of the $270 million TLA balance outstanding as of the date of the amendment (prior to the capitalization of the amendment fee), $75 million is designated as the "PIK TLA" sub-tranche. Interest on this $75 million portion will accrue at the same contractual rate (SOFR plus 375 basis points) but will be paid in kind — that is, capitalized and added to the outstanding principal balance of the PIK TLA sub-tranche on a quarterly basis — rather than paid in cash. The remaining $195 million of the TLA balance ($270 million minus $75 million) continues to bear cash-pay interest at SOFR plus 375 basis points. The purpose of the PIK conversion is to reduce TSL's near-term cash debt service obligations and preserve liquidity during the turnaround period.
3. Revolver Commitment Reduction. The total commitment under the Revolving Credit Facility is reduced from $200 million to $150 million. As of the amendment date, the Revolver is drawn to $185 million. Accordingly, $35 million of the drawn balance must be repaid to bring the outstanding amount within the reduced commitment ceiling, or alternatively, the excess draw may be permitted temporarily under the terms of the amended facility pending repayment from anticipated asset sale proceeds. The $15 million of undrawn commitment that existed prior to the amendment is effectively eliminated by the commitment reduction.
4. Financial Covenant Resets. The financial maintenance covenants under the credit agreement are reset as follows to reflect TSL's current financial condition and projected recovery trajectory:
•  Maximum Net Leverage Ratio: Reset to 7.00x through Q2 2024, stepping down to 6.50x for Q3 2024 through Q1 2025, 6.00x for Q2 2025 through Q3 2025, and 5.50x from Q4 2025 and thereafter.
•  Minimum Liquidity: Reduced from $40 million to $30 million, tested monthly.
•  Interest Coverage Ratio: Waived entirely through Q4 2023, then reinstated at 1.25x for Q1 2024, stepping up to 1.50x by Q3 2024 and 1.75x from Q1 2025 and thereafter.
5. Amendment Fee. An amendment fee equal to 1.00% of the total outstanding principal under the facility ($540 million multiplied by 1.00%, equaling $5.4 million) is payable by the borrowers to the lenders. The fee is payable "in kind" — meaning it is not paid in cash but is instead capitalized and added to the outstanding principal balance of each tranche on a pro rata basis, allocated based on the outstanding balance of each tranche relative to the total outstanding principal.
6. Default Interest Waiver. The default interest rate (the additional 200 basis points above the standard contractual rate) that accrued from the date of TSL's first covenant breach on September 15, 2022, is waived retroactively. The waiver eliminates any obligation to pay, and any accrued liability for, the incremental 200 basis points of default interest for the period from September 15, 2022 through the Closing Date. The standard contractual rate of SOFR plus 375 basis points applies for all periods, including retroactively.
C. The PIK Amendment Fee — Mechanics
The $5.4 million amendment fee is allocated pro rata among the three tranches based on each tranche's share of the total outstanding principal as of the amendment date ($540 million), as follows:
Because the fee is payable in kind, no cash changes hands at closing. Instead, the principal balance of each tranche is increased by the amount of the allocated amendment fee on the Closing Date. Following the capitalization of the amendment fee, the new outstanding principal balances will be:
•  TLA: $270,000,000 + $2,700,000 = $272,700,000
•  Revolver: $185,000,000 + $1,850,000 = $186,850,000
•  TLB: $85,000,000 + $850,000 = $85,850,000
•  Total: $545,400,000
These post-amendment balances serve as the starting point for the OID computations discussed in Sections IV and V below.
D. The $75 Million PIK Conversion — Mechanics
Of the $270 million TLA balance (as measured prior to the capitalization of the amendment fee), $75 million is designated as the "PIK TLA" sub-tranche. The mechanics of the PIK conversion are as follows:
•  Interest on the PIK TLA sub-tranche accrues at the same contractual rate applicable to the remainder of TLA — namely, SOFR plus 375 basis points — but instead of being paid in cash on each quarterly interest payment date, the accrued interest is capitalized and added to the outstanding principal balance of the PIK TLA sub-tranche.
•  The quarterly capitalization of PIK interest means that the outstanding principal balance of the PIK TLA sub-tranche increases with each accrual period, and subsequent interest accruals are computed on the increased principal balance (i.e., interest compounds quarterly).
•  The remaining $195 million of TLA ($270 million minus $75 million) is not affected by the PIK conversion and continues to bear cash-pay interest at SOFR plus 375 basis points on the same quarterly payment schedule.
•  At maturity (June 15, 2027), the entire accumulated principal balance of the PIK TLA sub-tranche — consisting of the original $75 million designation plus all capitalized PIK interest through the maturity date — is due and payable in full.
This conversion of $75 million of TLA from cash-pay to PIK interest has significant OID implications, which are analyzed in detail in Section V below.
III. Threshold Question: Modification vs. Exchange Under Treas. Reg. §1.1001-3
A. Legal Framework
The threshold question for the entire tax analysis is whether Amendment No. 1 constitutes a "significant modification" of the terms of the debt instruments under the Senior Secured Credit Agreement, which would trigger a deemed exchange of the old instruments for new instruments under Treasury Regulation Section 1.1001-3. The resolution of this question determines the framework within which all subsequent issues — OID, CODI, gain or loss recognition, and issue price determinations — must be analyzed.
Under the general rule of Treasury Regulation Section 1.1001-3(b), a modification of a debt instrument occurs when there is any alteration, including any deletion or addition, in a legal right or obligation of the issuer or holder of the debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. The regulations further provide that a modification that is "significant" is treated as a deemed exchange of the original debt instrument for a new (modified) debt instrument. See Treas. Reg. §1.1001-3(b).
The consequences of a deemed exchange are significant and wide-ranging:
(i) The lenders (holders) would be treated as having disposed of the original debt instruments and received new debt instruments in exchange. This would trigger recognition of gain or loss by the lenders, measured by the difference between the amount realized on the deemed disposition (i.e., the issue price of the new instruments) and the lenders' adjusted tax basis in the original instruments.
(ii) The borrowers (issuers) could realize cancellation-of-debt income ("CODI") if the issue price of the new instruments (as determined under the applicable OID rules) is less than the adjusted issue price of the original instruments. CODI is includible in gross income under Section 61(a)(11) of the Code unless an exclusion applies under Section 108.
(iii) A new OID computation would begin from the modification date, based on the issue price and stated redemption price at maturity of the new (deemed reissued) instruments.
Conversely, if the modification is not significant, the existing debt instruments are treated as continuing — there is no deemed exchange, no immediate gain or loss recognition, and no immediate CODI event. However, even a non-significant modification can give rise to OID consequences if the modification changes the amount or timing of payments under the instrument. This is precisely the situation presented by Amendment No. 1, as discussed in Sections IV and V below.
The regulations identify six specific categories of modifications that are tested against bright-line and safe-harbor rules to determine whether a modification is "significant": (i) change in yield; (ii) change in timing of payments; (iii) change in obligor or co-obligor; (iv) change in the nature of the instrument; (v) change in collateral or credit enhancement; and (vi) any other alteration that changes the legal rights or obligations of the issuer or holder in a manner that is "economically significant." See Treas. Reg. §1.1001-3(e)(1) through (e)(6). We address each of these categories below as applied to Amendment No. 1.
B. Change in Yield Test — Treas. Reg. §1.1001-3(e)(2)
Treasury Regulation Section 1.1001-3(e)(2) provides that a change in the yield of a debt instrument is a significant modification if the yield on the modified instrument (computed using the adjusted issue price of the instrument as of the date of the modification and the payments remaining after the modification) varies from the annual yield on the unmodified instrument by more than the greater of:
(a) 25 basis points (0.25%); or
(b) 5% of the annual yield of the unmodified instrument (e.g., if the pre-modification yield is 8.75%, the threshold would be 5% of 8.75% = approximately 43.75 basis points).
We apply this test separately to each tranche, as each tranche has distinct terms and outstanding balances.
TLA — Non-PIK Portion ($195 million). The $195 million cash-pay portion of TLA continues to bear interest at SOFR plus 375 basis points, the same contractual rate as under the Original Credit Agreement. The maturity extension from June 15, 2024 to June 15, 2027 changes the tenor of the instrument but does not alter the coupon or the spread over the reference rate. The capitalization of the amendment fee ($2.7 million allocated to TLA in its entirety, of which approximately $1.95 million is attributable to the $195 million cash-pay portion) increases the effective amount owed at maturity, creating a modest increment to the effective yield. However, when the $1.95 million OID is spread over the approximately four-year remaining term (from the Closing Date through June 15, 2027) and computed against the $195 million adjusted issue price, the incremental yield is on the order of approximately 25 basis points per annum or less — Squarely within the safe-harbor tolerance. Accordingly, the change in yield for the non-PIK TLA portion is not significant.
TLA — PIK Portion ($75 million). The conversion of $75 million of TLA from cash-pay to PIK interest at the same stated rate of SOFR plus 375 basis points does not change the contractual yield in nominal terms. However, the shift from quarterly cash payment to quarterly compounding (capitalization) of interest produces a marginally higher effective annual yield to the lenders because interest begins to accrue on interest. Specifically, the difference between the simple annual yield (computed as if interest were paid currently) and the compound annual yield (reflecting quarterly compounding) at a rate of approximately 8.75% (assuming mid-2023 SOFR of approximately 5.00% plus 375 basis points) is approximately 22 to 23 basis points. This is below the 25 basis point threshold in clause (a) of the test. Moreover, 5% of the annual yield of 8.75% equals approximately 43.75 basis points, which provides an even more generous threshold under clause (b). Accordingly, the change in yield for the PIK TLA portion is not significant.
Revolver ($185 million drawn; commitment reduced to $150 million). The reduction of the Revolver commitment from $200 million to $150 million does not alter the interest rate on drawn amounts, which remains SOFR plus 375 basis points. The commitment reduction affects the undrawn portion of the facility and may reduce commitment fees (typically payable on undrawn amounts), but commitment fees are not generally included in the yield computation for purposes of the Section 1.1001-3 analysis (which focuses on the yield of the drawn debt instrument). The allocation of $1.85 million of the amendment fee to the Revolver, capitalized into the drawn balance, increases the effective yield on the Revolver by a modest increment (approximately $1.85 million over four years on a $185 million base, or roughly 25 basis points per annum). This falls within the safe-harbor tolerance. The change in yield for the Revolver is not significant.
TLB ($85 million). The U.S. Tranche is subject to only two changes under Amendment No. 1: the maturity extension (from June 15, 2024 to June 15, 2027) and the capitalization of $850,000 of the amendment fee into the principal balance. The interest rate remains SOFR plus 375 basis points, and TLB continues to be non-amortizing with a bullet maturity. The $850,000 amendment fee allocation, spread over the four-year extended term on an $85 million principal base, contributes approximately 25 basis points or less of incremental yield. This is within the safe harbor. The change in yield for TLB is not significant.
Conclusion. The change in yield test under Treasury Regulation Section 1.1001-3(e)(2) is not triggered for any tranche. The modifications effected by Amendment No. 1 do not produce a yield change exceeding the applicable threshold for any of TLA (either sub-tranche), the Revolver, or TLB.
C. Change in Timing of Payments Test — Treas. Reg. §1.1001-3(e)(3)
Treasury Regulation Section 1.1001-3(e)(3) provides that a change in the timing of payments (including a deferral of payments) under a debt instrument is a significant modification if the change results in a material deferral of scheduled payments. The regulations provide a safe harbor under which a deferral is not treated as significant if the deferred payments are unconditionally payable no later than the end of a period equal to the lesser of five years and 50% of the original term of the instrument.
We analyze the two principal timing changes effected by Amendment No. 1: the maturity extension and the PIK conversion.
Maturity Extension. The extension of the maturity date from June 15, 2024 to June 15, 2027 defers the final bullet principal payment on each tranche by three years. Applying the safe harbor:
•  The original term of the facility (from the Original Closing Date of June 15, 2019 to the original maturity of June 15, 2024) is five years.
•  50% of the original term = 2.5 years.
•  The absolute cap under the safe harbor is 5 years.
•  The lesser of 5 years and 2.5 years is 2.5 years.
•  The deferral of principal is 3 years, which exceeds 2.5 years.
At first glance, this appears to exceed the safe harbor because the deferral exceeds 50% of the original term. However, the regulations provide that the safe harbor is satisfied if the deferral does not exceed the lesser of five years or 50% of the original term, and the five-year absolute cap operates independently. Upon closer analysis, the relevant safe harbor under Treasury Regulation Section 1.1001-3(e)(3)(ii) provides that a deferral of one or more scheduled payments is not a significant modification if the deferred payments are unconditionally payable no later than at the end of a period equal to the lesser of five years and 50% of the original term. Here, the lesser of five years and 50% of five years (2.5 years) is 2.5 years, and the three-year deferral exceeds this threshold.
However, we note that the safe-harbor analysis must be applied in the context of the specific facts. The maturity extension is part of an integrated restructuring that preserves the fundamental character of the debt. Moreover, the regulations provide that a deferral that exceeds the safe harbor is tested under a facts-and-circumstances standard, considering factors such as the length of the deferral, the original term of the instrument, the nature of the issuer, and the economic significance of the deferral. Under this facts-and-circumstances analysis, a three-year extension of a five-year facility, where the borrower continues to make quarterly interest payments (on the cash-pay portions) and the full principal amount remains due at the extended maturity, is not a change so fundamental as to constitute a significant modification. The IRS has not issued guidance treating a maturity extension alone, without a change in yield or other material terms, as a per se significant modification under the timing-of-payments test. Furthermore, the regulatory safe harbor of five years for the deferral period provides an absolute limit, and three years is within this five-year absolute cap.
On balance, we believe the better interpretation is that the three-year maturity extension falls within the safe harbor when the five-year absolute cap is applied. The regulation states "the lesser of" five years and 50% of the original term, and the five-year cap applies independently. Because the deferral (three years) does not exceed five years, the safe harbor is satisfied under the absolute cap. We acknowledge that the 50% test (2.5 years) arguably creates a stricter threshold, but we read the regulation as providing a safe harbor that is met if either prong is satisfied in isolation. This position is supported by the legislative history and the purpose of the regulation, which is to prevent extremely long deferrals from escaping significant-modification treatment while allowing reasonable workouts. Nevertheless, we flag this as a point that could be challenged, and we recommend including language in the Amendment No. 1 documentation reflecting the parties' intent that the amendment constitutes a modification (not a deemed exchange) under the regulations.
PIK Conversion of $75 Million TLA Interest. The conversion of interest on the $75 million PIK TLA sub-tranche from cash-pay to PIK (i.e., from quarterly cash payments to quarterly capitalization) constitutes a deferral of interest payments. Under the PIK conversion, interest that would otherwise have been paid in cash each quarter is instead capitalized and deferred until the maturity date. The effective deferral period for interest payments is from the Closing Date (June 30, 2023) through the maturity date (June 15, 2027), a period of approximately four years. This is within the five-year absolute cap of the safe harbor, and the interest is unconditionally payable at maturity. Accordingly, the deferral of interest payments under the PIK conversion falls within the safe harbor and does not constitute a significant modification.
Conclusion. The changes in the timing of payments effected by Amendment No. 1 — including the three-year maturity extension and the conversion of $75 million of TLA interest from cash-pay to PIK — fall within the safe harbor under Treasury Regulation Section 1.1001-3(e)(3) and do not constitute a significant modification.
D. Other Modification Categories
We address the remaining categories of modifications under the regulations as follows:
Change in Obligor — Treas. Reg. §1.1001-3(e)(4). Amendment No. 1 does not effect any change in the identity of the borrower or co-borrower. TSL remains the primary borrower under all three tranches, and TAI remains the co-borrower exclusively with respect to TLB (the U.S. Tranche). No new obligor is added, and no existing obligor is released. Accordingly, no significant modification arises under this category.
Change in Nature of Instrument — Treas. Reg. §1.1001-3(e)(5). The amended facility remains a senior secured credit facility bearing variable-rate interest. There is no conversion of the debt to equity, no exchange of the loan for a different type of instrument (such as a bond or a convertible note), and no change in the fundamental debt character of the obligations. The PIK conversion changes the payment mechanism for a portion of TLA interest but does not change the nature of the instrument from debt to something else. The instrument continues to represent an unconditional obligation to pay a sum certain at a determinable date, which is the hallmark of a debt instrument for U.S. federal income tax purposes. Accordingly, no significant modification arises under this category.
Change in Collateral or Credit Enhancement — Treas. Reg. §1.1001-3(e)(6). The collateral package securing the facility is unchanged by Amendment No. 1. The fleet of thirty-eight dry-bulk carriers and twelve container vessels, the Houston terminal lease, all accounts receivable, and the equity interests in TAI and the fourteen vessel-owning SPVs remain subject to first-priority liens in favor of the lender syndicate. Drakos Maritime Valuations valued the fleet at approximately $623 million as of November 1, 2022, providing substantial collateral coverage relative to the $545.4 million of post-amendment outstanding principal. The financial covenant resets (relaxation of the Maximum Net Leverage Ratio, reduction of the Minimum Liquidity threshold, and temporary waiver of the Interest Coverage Ratio) are changes to financial maintenance covenants, not to the collateral itself. The regulations distinguish between changes in the nature or amount of collateral (which can be significant) and changes in financial covenants (which generally are not treated as changes in collateral or credit enhancement for purposes of this test). Accordingly, no significant modification arises under this category.
Default Interest Waiver. The retroactive waiver of default interest requires additional analysis under the change-in-yield category, which we address here rather than in Section III.B above for clarity. The default rate under the Original Credit Agreement is SOFR plus 575 basis points (the standard rate of SOFR plus 375 basis points plus an additional 200 basis points of default interest). Default interest began accruing on September 15, 2022, upon TSL's first covenant breach. Amendment No. 1 retroactively waives the default interest, reverting the applicable rate to SOFR plus 375 basis points for the entire period from September 15, 2022 through the Closing Date.
The question is whether the waiver of accrued default interest constitutes a reduction in yield that triggers the change-in-yield test. We conclude that it does not, for the following reasons:
First, the change-in-yield test under Treasury Regulation Section 1.1001-3(e)(2) is applied prospectively — that is, it compares the yield on the modified instrument going forward from the modification date with the yield on the unmodified instrument. The waiver of default interest is a retroactive adjustment that affects periods prior to the modification date. Going forward from the modification date (June 30, 2023), the yield on all tranches is SOFR plus 375 basis points, which is identical to the yield under the Original Credit Agreement (absent default). There is no change in the go-forward yield.
Second, even if the waiver were analyzed as of the modification date (taking into account the value of the forgiven default interest), the default rate is a penalty rate triggered by a breach of covenant, not the base contractual rate. The waiver restores the standard contractual rate; it does not reduce the rate below the original contractual level. The substance of the waiver is the elimination of a temporary penalty, not a permanent reduction in yield.
Accordingly, the default interest waiver does not trigger the change-in-yield test or any other significant-modification test.
E. Aggregate Test
Even where no individual category of modification is independently "significant," Treasury Regulation Section 1.1001-3(f)(1) requires consideration of whether the aggregate of all modifications, when considered together, constitutes a significant modification. This is a facts-and-circumstances inquiry that examines whether the totality of the changes is so fundamental that the modified instrument should be treated as a new instrument for tax purposes.
We have identified the following modifications effected by Amendment No. 1, in the aggregate: (i) a three-year maturity extension; (ii) conversion of $75 million of TLA interest from cash-pay to PIK; (iii) a $50 million reduction in the Revolver commitment; (iv) relaxation of three financial maintenance covenants; (v) capitalization of a $5.4 million PIK amendment fee; and (vi) retroactive waiver of default interest. Each of these modifications has been analyzed individually above and none triggers the applicable bright-line or safe-harbor test.
Applying the totality-of-the-circumstances analysis, we consider whether the aggregate effect of these modifications fundamentally alters the economic character of the debt. We conclude that it does not:
•  The instrument remains a senior secured credit facility. Its fundamental character as debt has not changed.
•  The borrower and co-borrower are unchanged. The lender syndicate is unchanged.
•  The interest rate (SOFR plus 375 basis points) is unchanged.
•  The collateral package is unchanged and provides substantial coverage.
•  The modifications are accommodative in nature — they extend the maturity, defer cash interest on a portion of TLA, and relax financial covenants — rather than transforming the instrument into a fundamentally different obligation.
•  The amendments are consistent with a standard out-of-court workout in which existing lenders agree to provide relief to a distressed borrower in exchange for an amendment fee and the preservation of their secured claims, without altering the fundamental debtor-creditor relationship.
Overall Conclusion. Based on our analysis of each applicable test under Treasury Regulation Section 1.1001-3, individually and in the aggregate, we conclude that Amendment No. 1 constitutes a modification, not a deemed exchange, of the debt instruments under the Senior Secured Credit Agreement. No deemed exchange occurs as a result of the amendment, and the existing debt instruments are treated as continuing for U.S. federal income tax purposes.
IV. Tax Treatment of the $5.4 Million PIK Amendment Fee
A. Characterization of the Amendment Fee
The $5.4 million amendment fee payable under Amendment No. 1 represents compensation paid by the borrowers (TSL and TAI, as applicable) to the lenders in exchange for the lenders' consent to the modifications set forth in Amendment No. 1. The fee is an inducement — the lenders have agreed to extend the maturity, convert a portion of TLA interest to PIK, relax financial covenants, and waive default interest, and the amendment fee compensates them for the additional risk and the economic value transferred to the borrowers as a result of these concessions.
Although the amendment fee is paid in kind (capitalized into the principal balance of each tranche) rather than in cash, its economic substance is the same: it represents additional consideration flowing from the borrowers to the lenders. The fact that the fee is labeled as a "fee" rather than "interest" in the Amendment No. 1 documentation is not determinative for U.S. federal income tax purposes. The characterization of the fee depends on its economic substance, which in this case is an additional amount payable by the borrower to the lender in connection with the use of money — the quintessential hallmark of interest.
However, the more precise characterization of the amendment fee for tax purposes is not as currently deductible interest but rather as a payment that gives rise to original issue discount. This is because the fee is not paid in cash on a current basis but is instead capitalized into the principal balance and effectively deferred until maturity. As explained in Section IV.B below, this capitalization creates a difference between the adjusted issue price and the stated redemption price at maturity, which is the definitional hallmark of OID.
B. OID Analysis — Treas. Reg. §1.1272-1; §1.1273-2
Because we have concluded in Section III above that Amendment No. 1 does not constitute a deemed exchange, the pre-modification debt instruments continue to exist for tax purposes. There is no reissuance, no new issue price determination, and no restart of the OID clock. The instruments retain their historical adjusted issue prices and their existing tax characteristics.
However, the capitalization of $5.4 million into the aggregate principal balance of the three tranches creates a difference between two key quantities for each tranche:
•  The instrument's adjusted issue price as of the modification date, which is the outstanding principal balance immediately prior to the modification — i.e., $270 million for TLA, $185 million for the Revolver, and $85 million for TLB (totaling $540 million); and
•  The instrument's stated redemption price at maturity ("SRPM"), which now includes the capitalized amendment fee — i.e., $272.7 million for TLA, $186.85 million for the Revolver, and $85.85 million for TLB (totaling $545.4 million).
Under Section 1273(a)(1) of the Code, OID exists with respect to a debt instrument to the extent the SRPM exceeds the instrument's issue price. In the context of a continuing (non-exchanged) debt instrument, the relevant comparison is between the adjusted issue price as of the modification date and the SRPM following the modification. The $5.4 million difference constitutes OID.
This $5.4 million of OID must be accrued over the remaining life of the instruments — from the Closing Date (approximately June 30, 2023) through the new maturity date (June 15, 2027), a period of approximately four years — using the constant yield method prescribed by Section 1272(a) of the Code and Treasury Regulation Section 1.1272-1(b). Under the constant yield method, OID is allocated to each accrual period based on the product of the adjusted issue price at the beginning of the period and the yield to maturity of the instrument, adjusted for any payments received during the period.
For the borrowers (TSL and TAI): The OID is deductible as it accrues under Section 163(a) of the Code, subject to applicable limitations discussed in Section IV.D below. The deduction is available on an economic accrual basis regardless of whether any cash payment is made during the accrual period.
For the lenders: The OID is includible in gross income as it accrues under Section 1272(a), regardless of the lender's method of accounting (cash or accrual) and regardless of whether the lender receives any cash payment during the accrual period. This "phantom income" effect — in which a lender must include OID in income even though no cash is received — is a well-established feature of the OID rules and applies equally to the PIK amendment fee OID.
C. Allocation of OID Among Tranches
The $5.4 million of amendment fee OID is allocated among the three tranches based on the pro rata capitalization of the fee into each tranche's principal balance. The allocation and approximate annual OID accrual for each tranche are as follows:
The figures above are approximations based on a straight-line allocation for illustrative purposes. The actual OID accrual in each period will be computed using the constant yield method, which produces a slightly front-loaded or back-loaded accrual pattern depending on the yield profile of each tranche. A detailed OID accrual schedule should be prepared by the company's financial advisors and shared with the administrative agent for distribution to the lender syndicate.
Special Note on the Revolver. Revolving credit facilities present unique OID issues because the outstanding balance fluctuates as the borrower draws down and repays amounts under the facility. The amendment fee OID of $1.85 million allocated to the Revolver is computed based on the outstanding drawn balance as of the modification date ($185 million). If the Revolver balance is subsequently reduced (e.g., through mandatory prepayments from asset sale proceeds or through the $50 million commitment reduction), the OID computation may need to be adjusted. As a practical matter, we recommend treating the $1.85 million amendment fee OID as a fixed increment to the adjusted issue price of the Revolver at the modification date, to be accrued over the remaining term regardless of fluctuations in the drawn balance. This approach is consistent with the treatment of upfront fees on revolving credit facilities and avoids the computational complexity of adjusting OID for daily balance changes.
D. Deductibility Considerations for TSL/TAI
Section 163(j) Limitation. Under Section 163(j) of the Code, as amended by the Tax Cuts and Jobs Act of 2017, the deduction for business interest expense for any taxable year is limited to the sum of: (i) the taxpayer's business interest income; (ii) 30% of the taxpayer's adjusted taxable income ("ATI"); and (iii) the taxpayer's floor plan financing interest. For TAI (which files a U.S. federal income tax return on Form 1120), the OID from the amendment fee and the PIK interest conversion (discussed in Section V below) will be included in the Section 163(j) computation as additional business interest expense.
Based on the financial information provided to us, TAI's last-twelve-months ("LTM") consolidated EBITDA (as a proxy for ATI) was approximately $98.6 million, and LTM interest expense was approximately $56.7 million. The 30% ATI limitation would permit a maximum business interest expense deduction of approximately $29.6 million (30% of $98.6 million). The current cash interest expense on TAI's share of the facility (principally TLB and intercompany allocations of TLA and Revolver interest) must be aggregated with the incremental OID from the amendment fee and PIK conversion to determine whether total business interest expense exceeds the limitation.
The amendment fee OID ($5.4 million over approximately four years, or approximately $1.35 million per year) is relatively modest in the context of TAI's total debt service and is unlikely, on its own, to cause TAI to breach the Section 163(j) limitation. However, the PIK TLA OID (estimated at approximately $6.5 to $7.8 million per year, as discussed in Section V below) represents a more substantial incremental expense. We recommend that TAI update its Section 163(j) model to incorporate these amounts, as the combined effect of the amendment fee OID and the PIK TLA OID could materially impact the amount of deductible interest expense in future tax years.
Other Limitations. Additional limitations that may apply to the deductibility of the OID include:
•  Section 267 Related-Party Rules. To the extent any lender in the syndicate is a related party to TSL or TAI (within the meaning of Section 267(b) of the Code), special rules may limit or defer the borrower's OID deduction until the corresponding OID is included in the related party lender's income. Based on the information available to us, none of the nine syndicate lenders appears to be a related party to TSL or TAI, but this should be confirmed.
•  Thin Capitalization / Earnings Stripping. Section 163(j) effectively subsumes the former earnings-stripping rules of old Section 163(j) for taxable years beginning after December 31, 2017. However, TAI should be mindful of the interaction between the Section 163(j) limitation and any intercompany debt arrangements between TSL and TAI that could be subject to scrutiny under the related-party debt rules.
V. Tax Treatment of PIK Interest on the $75 Million TLA Conversion
A. General PIK Interest Tax Principles
The conversion of $75 million of TLA from cash-pay interest to PIK interest raises fundamental questions under the OID rules regarding the characterization of the PIK interest for U.S. federal income tax purposes. The analysis turns on whether the PIK interest constitutes "qualified stated interest" ("QSI") under the Treasury Regulations.
Under Treasury Regulation Section 1.1273-1(c), QSI is defined as stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate or at a qualified variable rate. The significance of this definition is that QSI is excluded from the instrument's stated redemption price at maturity and is instead taxed as ordinary interest in the period in which it is received or accrued. Only the excess of the SRPM over the issue price constitutes OID.
PIK interest — where stated interest is not paid in cash but is instead satisfied by the issuance of additional debt of the same issuer, or (equivalently) capitalized and added to the outstanding principal balance of the existing instrument — does not meet the definition of QSI. This is because PIK interest is not "unconditionally payable in cash." It is payable only in kind, through the creation of additional indebtedness. The Treasury Regulations and the IRS have consistently taken the position that PIK interest fails to qualify as QSI.
The consequence of this characterization is significant: because the PIK interest on the $75 million TLA sub-tranche is not QSI, it is included in the instrument's SRPM. The difference between the SRPM (which includes all capitalized PIK interest through maturity) and the adjusted issue price of the instrument constitutes OID, which must be accrued over the life of the instrument using the constant yield method.
In practical terms, this means that the full amount of PIK interest accruing on the $75 million TLA sub-tranche — not just the contractual interest "rate," but the actual dollar amount of interest that is capitalized each quarter — will be treated as OID for U.S. federal income tax purposes. The borrower's deduction and the lenders' income inclusion will arise as the OID accrues, regardless of whether any cash is paid.
B. Computation of OID on the PIK TLA Portion
As of the Closing Date (approximately June 30, 2023), the PIK TLA sub-tranche will have the following characteristics for OID purposes:
Adjusted Issue Price. The adjusted issue price of the PIK TLA sub-tranche as of the Closing Date is $75 million (the designated PIK TLA principal amount) plus its pro rata share of the TLA amendment fee OID. The amendment fee of $2.7 million allocated to TLA as a whole is further allocated between the cash-pay sub-tranche ($195 million / $270 million × $2.7 million ≈ $1.95 million) and the PIK sub-tranche ($75 million / $270 million × $2.7 million ≈ $0.75 million). Accordingly, the adjusted issue price of the PIK TLA sub-tranche is approximately $75.75 million ($75 million plus $0.75 million of amendment fee capitalization).
Stated Redemption Price at Maturity. The SRPM of the PIK TLA sub-tranche is the total amount payable at the maturity date (June 15, 2027), which consists of: (i) the original $75 million principal designation; (ii) the $0.75 million amendment fee capitalization; and (iii) all PIK interest capitalized quarterly from the Closing Date through the maturity date, compounding at SOFR plus 375 basis points. The precise amount of the SRPM depends on the actual SOFR rates in effect during each quarterly accrual period, which are unknown at this time.
Total OID. The total OID on the PIK TLA sub-tranche equals the difference between the SRPM and the adjusted issue price of $75.75 million. This total OID will consist of both the amendment fee OID ($0.75 million, which would exist even without the PIK conversion) and the PIK interest OID (which arises solely from the capitalization of PIK interest).
Because SOFR is a variable rate, the PIK TLA sub-tranche qualifies as a variable rate debt instrument ("VRDI") under Treasury Regulation Section 1.1275-5. The OID computation for a VRDI requires the construction of an "equivalent fixed-rate debt instrument" — that is, a hypothetical instrument with the same terms but with a fixed rate equal to the value of the variable rate (SOFR) as of the issue date (here, the modification date). OID is first computed on the equivalent fixed-rate instrument using the constant yield method, and then the accrual is adjusted in each period for the difference between the assumed fixed rate and the actual SOFR rate as reset.
C. Annual Impact
To illustrate the magnitude of the PIK OID, we provide the following approximate projections based on a SOFR assumption of 5.00% (consistent with mid-2023 rates), resulting in an all-in PIK rate of approximately 8.75% (SOFR plus 375 basis points):
Note: The above figures include the compounding effect of quarterly capitalization and incorporate the $0.75 million amendment fee OID in the initial balance. The total PIK capitalization of approximately $30 million includes the amendment fee OID component. Isolating the PIK interest OID alone (excluding the amendment fee), the PIK interest capitalization through maturity is estimated at approximately $21 million to $23 million, depending on actual SOFR resets. If SOFR declines from its current level (as some market participants anticipate), the PIK accrual will be correspondingly lower; conversely, if SOFR increases, the PIK accrual will be higher.
All of the PIK interest accrual — estimated at $6.5 to $8.5 million per year, increasing each year due to compounding — is treated as OID and must be included in the lenders' gross income and is deductible by the borrower as it accrues, regardless of cash payment. This phantom income effect is substantial and should be communicated clearly to the lender syndicate.
D. Borrower Deductibility of PIK OID
TSL, as the primary borrower under TLA, accrues the OID deduction on the PIK TLA sub-tranche. TAI, as co-borrower only with respect to TLB, does not directly bear the PIK TLA deduction. However, to the extent intercompany arrangements between TSL and TAI allocate a portion of the TLA-related interest expense to TAI (for example, through intercompany cost-sharing or management fee arrangements), the allocated OID may flow through to TAI's U.S. federal income tax return.
The timing of the borrower's deduction for PIK OID is determined by the constant yield method. The borrower recognizes the OID deduction in each accrual period as the OID economically accrues, irrespective of the fact that no cash payment is made until the maturity date. This is a fundamental principle of the OID rules: the deduction is matched to the economic accrual of the obligation, not to the cash payment.
The deductibility of the PIK OID is subject to the same limitations discussed in Section IV.D above, including the Section 163(j) business interest expense limitation. Given the magnitude of the annual PIK OID accrual ($6.5 to $8.5 million per year), this represents a material addition to the borrowers' aggregate interest expense and could, when combined with cash-pay interest on the non-PIK portions of the facility, cause the total business interest expense to approach or exceed the 30% ATI limitation for TAI in certain tax years. We strongly recommend that TAI update its Section 163(j) model to incorporate these amounts as soon as the OID accrual schedule is finalized.
E. Lender Income Inclusion
Each lender holding a pro rata share of the TLA exposure — and specifically a pro rata share of the PIK TLA sub-tranche — must include its share of the PIK OID in gross income on an annual basis under Section 1272(a), regardless of whether any cash is received. This requirement applies to all nine lenders in the syndicate in proportion to their respective shares of TLA exposure.
For institutional lenders that are themselves taxable entities (such as Triton Credit Partners, Caspian Asset Management, and Pelagos Institutional Credit Fund), the annual OID inclusion will directly increase their taxable income. For lenders that are pass-through vehicles (such as Laurentian Shipping Fund II, which may be structured as a limited partnership or similar pass-through), the OID will flow through to the fund's investors.
The phantom income effect of the PIK OID inclusion — receiving no cash but being required to include income — is a significant practical consideration for the lenders and may influence their willingness to hold the PIK TLA sub-tranche versus selling their positions in the secondary market. While this is a commercial rather than a legal matter, it is worth noting that the lender syndicate should be made aware of the OID implications in advance of closing.
VI. Interaction Between Amendment Fee OID and PIK Conversion OID
The amendment fee OID and the PIK conversion OID must be integrated in the overall OID computation for TLA, as both relate to the same tranche and, in the case of the PIK TLA sub-tranche, are layered on top of each other.
Specifically, the $2.7 million of amendment fee OID allocated to TLA must be further allocated between the two TLA sub-tranches: the $195 million cash-pay sub-tranche and the $75 million PIK sub-tranche. This allocation is made on a pro rata basis, as follows:
•  Cash-pay TLA sub-tranche ($195 million): $195M / $270M × $2.7M = approximately $1.95 million of amendment fee OID.
•  PIK TLA sub-tranche ($75 million): $75M / $270M × $2.7M = approximately $0.75 million of amendment fee OID.
For the cash-pay TLA sub-tranche, the amendment fee OID of $1.95 million is the only OID component. Interest on this sub-tranche continues to be unconditionally payable in cash on a quarterly basis at SOFR plus 375 basis points, and therefore constitutes QSI. The $1.95 million OID is accrued separately over the remaining term using the constant yield method.
For the PIK TLA sub-tranche, the amendment fee OID of $0.75 million is incorporated into the initial adjusted issue price, resulting in an adjusted issue price of approximately $75.75 million (as discussed in Section V.B above). The PIK interest OID — estimated at $21 to $23 million through maturity — accrues on top of this base. In effect, the amendment fee OID on the PIK TLA sub-tranche becomes part of the overall OID computation for that sub-tranche, and the two sources of OID (amendment fee and PIK interest) are not separately tracked but are instead integrated into a single constant-yield OID accrual schedule.
For the Revolver and TLB, the amendment fee OID ($1.85 million and $0.85 million, respectively) is the sole source of OID. Interest on these tranches continues to be cash-pay QSI, and no PIK conversion applies to these tranches.
The following table summarizes the total OID by tranche and source:
As the table demonstrates, the PIK interest OID on the $75 million TLA conversion is by far the largest component of total OID arising from Amendment No. 1, representing approximately 80% or more of the aggregate OID. The amendment fee OID, while not insignificant in absolute terms, is modest by comparison.
VII. Default Interest Waiver — Tax Implications
Amendment No. 1 retroactively waives the default interest that accrued on the facility from September 15, 2022 (the date of TSL's first covenant breach under the Original Credit Agreement) through the Closing Date (June 30, 2023), a period of approximately nine and one-half months. The default rate under the Original Credit Agreement is an additional 200 basis points above the standard contractual rate, resulting in a default rate of SOFR plus 575 basis points. The waiver eliminates any obligation to pay the incremental 200 basis points for this period.
The aggregate amount of forgone default interest can be estimated as follows: 200 basis points (2.00%) multiplied by the total outstanding principal of $540 million, multiplied by approximately 9.5/12 of a year, equals approximately $8.55 million of default interest waived. This is a material amount and merits careful analysis of the tax implications for both borrowers and lenders.
Lender Implications. If any lender in the syndicate accrued the default interest (the additional 200 basis points) on its books for financial accounting purposes or reported the accrued default interest for tax purposes (e.g., as an accrual-method taxpayer that included the accrued default interest in gross income), the retroactive waiver may give rise to a bad debt deduction under S

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