PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP Counsellors at Law One Exchange Square, London EC2A 2JN Athens Office: 12 Vasilissis Sofias Avenue, 106 74 Athens, Greece
MEMORANDUM
TO: Elena Papadimitriou, Chief Financial Officer, Thalassa Shipping & Logistics SA, 47 Akti Miaouli, 185 35 Piraeus, Greece
FROM: Garrett Simmons, Associate (Tax Group), Calderwood & Harkness LLP
DATE: December 5, 2022
RE: Impact of Customs Dispute Liability on Compass Maritime Bank SA Revolving Credit Facility Covenants
MATTER NO.: C&H-2022-ITS-04781
CC: James Prentice, Partner, Calderwood & Harkness LLP
I. PURPOSE
This memorandum analyzes the potential impact of the Independent Authority for Public Revenue ("AADE") customs classification and valuation dispute on Thalassa Shipping & Logistics SA's ("TSL") financial covenants under the €75,000,000 Revolving Credit Facility Agreement with Compass Maritime Bank SA (the "Facility Agreement"), dated September 1, 2020. The dispute arises from Additional Duty Assessment Notices AADE/ADAN/2022/0073 and AADE/ADAN/2022/0074, each dated August 12, 2022, which collectively assert additional customs duties, import VAT adjustments, administrative penalties, and late-payment interest in connection with TSL's importation of automated container terminal equipment at the Port of Piraeus and the Port of Thessaloniki.
The analysis presented herein models multiple liability scenarios — ranging from a full TSL victory on all disputed issues through a high-end adverse outcome reflecting escalated penalties and compounding interest — and assesses each scenario's impact on TSL's covenant compliance under the Facility Agreement. In particular, the memorandum addresses: (a) the Net Debt to EBITDA ratio covenant set forth in Section 7.3(a) of the Facility Agreement; (b) the Material Adverse Change clause set forth in Section 8.1(g); and (c) accounting treatment considerations under International Accounting Standard 37 ("IAS 37 — Provisions, Contingent Liabilities and Contingent Assets") that bear on both covenant calculations and financial reporting to Compass Maritime Bank.
We note that TSL has already provided material litigation disclosure to Compass Maritime Bank, through Andreas Papathanasiou, Relationship Manager — Shipping & Logistics Division, on October 3, 2022, pursuant to the notification obligations contained in Section 6.2(d) of the Facility Agreement. That disclosure was prepared and transmitted by Calderwood & Harkness LLP on TSL's behalf and included a summary of the AADE assessment notices, the amounts in controversy, and the procedural posture of TSL's administrative objections. As of the date of this memorandum, Compass Maritime Bank has acknowledged receipt of the disclosure without asserting that the dispute constitutes an Event of Default or a Material Adverse Change.
This memorandum should be read in conjunction with the companion memoranda prepared by this office in connection with the AADE customs dispute, including the Customs Classification and Valuation Analysis Memorandum (Matter No. C&H-2022-ITS-04781, November 14, 2022), the DG TAXUD Consultation Strategy Memorandum, the Insurance Coverage Analysis Memorandum, and the Greek Administrative Procedure and Litigation Memorandum. Unless otherwise defined herein, capitalized terms have the meanings assigned to them in the Facility Agreement or in the aforementioned companion memoranda.
II. RELEVANT COVENANT AND DISCLOSURE TERMS
This Section summarizes the principal provisions of the Facility Agreement that are relevant to the customs dispute analysis. The discussion focuses on four categories of provisions: (A) the Net Debt to EBITDA ratio covenant; (B) the material litigation disclosure requirement; (C) the Material Adverse Change clause; and (D) the bank guarantee provisions. For ease of reference, we reproduce or paraphrase the relevant contractual language, though in each case the original provisions of the Facility Agreement govern.
A. Net Debt / EBITDA Ratio Covenant
Section 7.3(a) of the Facility Agreement requires TSL to maintain a ratio of Net Debt to EBITDA of not more than 3.5 to 1.00 (the "Leverage Ratio Covenant"), tested quarterly based on the most recent trailing twelve-month period ending on each quarterly testing date.
For purposes of this covenant, the Facility Agreement defines the relevant terms as follows:
"Net Debt" is defined in Section 1.1 of the Facility Agreement as the aggregate of all financial indebtedness of the Borrower and its consolidated subsidiaries, including without limitation: (i) outstanding amounts drawn under the revolving credit facility; (ii) term loans; (iii) capitalized lease obligations under IFRS 16; (iv) any amounts drawn under bank guarantees or letters of credit issued under the facility; and (v) other financial indebtedness as defined in the agreement — in each case, less unrestricted cash and cash equivalents held by the Borrower and its consolidated subsidiaries. The definition specifically excludes restricted cash, escrow deposits, and cash subject to regulatory or contractual restrictions on use.
"EBITDA" is defined in Section 1.1 as earnings before interest, taxes, depreciation, and amortization, as calculated from the Borrower's consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), adjusted for non-recurring items. The Facility Agreement specifies that "non-recurring items" include extraordinary gains or losses, restructuring charges, asset impairments that do not relate to the ordinary course of business, and similar items, in each case as agreed between the Borrower and the Agent.
The Leverage Ratio Covenant is tested quarterly, with compliance certifications required to be delivered by TSL within sixty (60) days following the end of each fiscal quarter. The next compliance certification is expected to be delivered on or before March 1, 2023, covering the fiscal quarter ending December 31, 2022. The certification is to be accompanied by a compliance certificate executed by TSL's Chief Financial Officer confirming compliance with all financial covenants and attaching reasonably detailed supporting calculations.
B. Material Litigation Disclosure Requirement
Section 6.2(d) of the Facility Agreement imposes a continuing obligation on TSL to notify Compass Maritime Bank "promptly, and in any event within ten (10) business days," of the commencement or threat of any litigation, arbitration, or administrative proceeding in which the amount in controversy exceeds €2,000,000, or which could otherwise reasonably be expected to have a material adverse effect on the Borrower's financial condition, operations, or ability to perform its obligations under the Facility Agreement.
The notification must be provided in writing to the Agent and must include a summary description of the proceeding, the parties involved, the amounts at issue, and the Borrower's assessment of the likely outcome and financial impact. Failure to provide timely notification constitutes an informational covenant breach under Section 8.1(c) of the Facility Agreement, which, subject to applicable cure periods, may constitute an Event of Default.
TSL provided the required notification on October 3, 2022, via a letter prepared by Calderwood & Harkness LLP and transmitted to Compass Maritime Bank at its offices at 5 Kolokotroni Street, 105 62 Athens, Greece, directed to the attention of Andreas Papathanasiou, Relationship Manager — Shipping & Logistics Division. The notification described both Assessment Notices, summarized the AADE mid-case assessment of approximately €8.8 million and the high-end exposure of approximately €14.7 million, and confirmed that both amounts significantly exceed the €2,000,000 notification threshold established by Section 6.2(d). The notification further described the basis for TSL's administrative objections and the anticipated procedural timeline. As of the date of this memorandum, Compass Maritime Bank has acknowledged receipt of the notification through informal communication from Mr. Papathanasiou but has not provided a formal written response or asserted any rights under the Facility Agreement in connection with the dispute.
C. Material Adverse Change (MAC) Clause
Section 8.1(g) of the Facility Agreement provides that the occurrence of a "Material Adverse Change" constitutes an Event of Default, entitling Compass Maritime Bank to exercise its remedies under Article IX of the Facility Agreement, including acceleration of all outstanding amounts, termination of undrawn commitments, and enforcement of security interests.
The term "Material Adverse Change" is defined in Section 1.1 of the Facility Agreement as any change, event, development, condition, or circumstance that, individually or in the aggregate, has or could reasonably be expected to have a material adverse effect on:
(i) the business, operations, financial condition, assets, or prospects of the Borrower and its consolidated subsidiaries, taken as a whole;
(ii) the ability of the Borrower to perform any of its material obligations under the Facility Agreement or any ancillary document; or
(iii) the validity, legality, or enforceability of the Facility Agreement, any ancillary security document, or any material provision thereof.
The MAC definition in the Facility Agreement does not include carve-outs or exclusions (such as general market conditions, industry-wide developments, or changes in law or regulation) that are sometimes found in more borrower-friendly credit facilities. This absence of carve-outs gives Compass Maritime Bank somewhat broader discretion in asserting a MAC, though as discussed in Section V below, the substantive threshold for establishing a MAC remains high under applicable law and market practice. The MAC definition also includes the forward-looking "could reasonably be expected to have" language, which permits Compass Maritime Bank to assert a MAC based on anticipated, rather than realized, adverse effects — though this forward-looking element is tempered by the requirement that the expectation be "reasonable."
D. Bank Guarantee Provisions
The Facility Agreement permits TSL to request the issuance of bank guarantees by Compass Maritime Bank under the revolving credit facility, subject to the terms and conditions set forth in Section 3.4 of the Facility Agreement. Bank guarantees issued under the facility reduce the available undrawn capacity on a dollar-for-dollar basis and are subject to the aggregate facility limit of €75,000,000. If a bank guarantee is drawn by the beneficiary, the drawn amount automatically converts to a direct borrowing by TSL under the revolving facility, bearing interest at the applicable margin plus the reference rate, and is treated as financial indebtedness for all purposes under the Facility Agreement, including the Net Debt calculation.
In connection with the proposed standstill arrangement with AADE — pursuant to which AADE has agreed to suspend enforcement of the Assessment Notices pending the outcome of the DG TAXUD consultation on classification — TSL has arranged, but as of the date of this memorandum has not yet formally issued, a bank guarantee in the amount of €5,000,000 as security for the disputed customs amounts. This guarantee is intended to serve as a condition precedent to the standstill arrangement, demonstrating TSL's financial capacity and good faith to AADE while preserving TSL's right to contest the assessments through the administrative and judicial process. We understand that the guarantee, designated as Guarantee No. CMB-BG-2023-0291, was ultimately issued by Compass Maritime Bank on March 10, 2023, following execution of the standstill letter agreement with AADE on March 1, 2023. The implications of this guarantee for TSL's facility availability and covenant position are discussed in Sections IV and VII below.
III. CURRENT FINANCIAL POSITION (AS OF DECEMBER 31, 2022 — PROJECTED)
A. Key Metrics
The following table presents TSL's projected key financial metrics as of December 31, 2022, based on management's updated Q4 2022 forecasts provided to this office by Ms. Papadimitriou on November 28, 2022. These projections are subject to revision upon finalization of TSL's year-end financial statements and audit by Kestrel & Palladian LLP.
The headroom calculation is straightforward: at the 3.5× covenant maximum and projected EBITDA of €45,600,000, the maximum permissible Net Debt is €159,600,000 (€45,600,000 × 3.5). Current projected Net Debt of €132,300,000 leaves headroom of €27,300,000 (rounded in the table to €27,360,000 to reflect the precise 0.6× headroom at the projected EBITDA level). TSL could therefore absorb an additional €27,360,000 in Net Debt before breaching the Leverage Ratio Covenant, assuming EBITDA remains constant.
We note that an earlier preliminary estimate, prepared in connection with the initial material litigation disclosure in September 2022, cited headroom of approximately €18.4 million based on TSL's FY2021 reported financial figures. The updated projection presented herein reflects greater headroom due to improved trailing EBITDA performance in the second half of 2022, driven primarily by strong container throughput volumes at the Piraeus terminal concession and favorable freight rate conditions in the Aegean short-sea shipping segment. The improvement in EBITDA underscores the importance of using current projections, rather than stale historical data, for covenant compliance analysis.
For broader context, TSL's annual consolidated revenue for FY2021 was €387.2 million, and the revolving credit facility total committed amount is €75,000,000. TSL's fleet comprises twenty-three owned vessels (primarily container feeder vessels and dry bulk carriers in the 10,000–35,000 DWT range) and two long-term terminal concessions (Piraeus Container Terminal — South Quay Extension, and Thessaloniki Intermodal Container Facility).
IV. LIABILITY SCENARIOS AND COVENANT IMPACT ANALYSIS
A. Summary of AADE Assessment Components
To facilitate the scenario modeling presented in this Section, we first provide a reference table summarizing the component elements of the AADE assessment. These components are analyzed in detail in the companion Customs Classification and Valuation Analysis Memorandum; the summary below is intended for covenant impact modeling purposes only and should not be treated as a comprehensive statement of the legal issues.
Several clarifying notes are warranted with respect to individual components:
VAT Adjustments. The €2,740,416 import VAT adjustment reflects the VAT payable on the increased customs value base (including both the classification-related and valuation-related adjustments). Critically, TSL may recover this amount as an input VAT credit under the standard VAT deduction mechanism, since the imported equipment is used for TSL's taxable business activities (terminal operations and logistics services). The net cash impact of the VAT adjustment is therefore a timing difference — TSL would be required to pay the additional import VAT to AADE upon assessment but could subsequently recover it as an input VAT credit in its periodic VAT returns. However, AADE demands full payment pending verification of TSL's input VAT credit eligibility, and there is a risk of delay or dispute regarding the input credit claim (particularly if AADE questions whether the imported equipment is used exclusively for taxable supplies). For conservative covenant modeling purposes, we assume the full €2,740,416 as a cash outflow in each adverse scenario, with a notation that subsequent VAT credit recovery would partially reverse the impact.
Valuation Adjustment Breakdown. The €9,940,000 valuation adjustment consists of three elements that AADE contends should have been included in the customs value of the imported equipment under Article 71 of the Union Customs Code and Article 136 of Commission Implementing Regulation (EU) 2015/2447:
(a) Technology license fee payable to Helios Automation GmbH: €4,900,000;
(b) Nereus Maritime Solutions procurement coordination fee: €2,940,000; and
(c) Commissioning and integration services provided by Helios Automation GmbH engineers at the Piraeus and Thessaloniki terminals: €2,100,000.
The aggregate additional duty on these valuation components is €218,680 (€9,940,000 × 2.2%). Each component raises distinct legal issues regarding dutiability, as discussed in the companion memoranda.
B. Scenario Modeling
The following table presents seven scenarios modeling the customs dispute's potential impact on TSL's Net Debt and covenant compliance under Section 7.3(a) of the Facility Agreement. Each scenario builds on TSL's projected December 31, 2022 financial position as presented in Section III above.
The scenarios are discussed individually below.
C. Detailed Discussion of Key Scenarios
Scenario 1 — Full TSL Victory
Under this scenario, TSL prevails on all contested classification and valuation issues. The AADE assessment notices are annulled in their entirety through the administrative objection process, through a favorable outcome in the DG TAXUD consultation on classification, or through judicial proceedings before the Greek Administrative Court of First Instance. All assessed additional duties, VAT adjustments, penalties, and interest are extinguished, and the bank guarantee is released by AADE without any draw.
This is the best-case outcome and would result in no financial impact whatsoever on TSL's covenant position. Net Debt remains at €132,300,000, the ratio remains at 2.9×, and the full €27,360,000 of headroom is preserved. However, this outcome requires favorable resolution of both the classification dispute (where TSL has strong but not conclusive arguments, particularly with respect to the STS cranes, but faces greater uncertainty on the ASC systems) and the valuation dispute (where AADE's position on the Nereus procurement fee presents material risk). Moreover, a complete victory through the DG TAXUD consultation process has an uncertain timeline of approximately 12 to 24 months, and there is no assurance that DG TAXUD will issue a classification opinion favorable to TSL's position on all equipment categories.
Scenario 2 — Low-End Settlement
This scenario models a negotiated settlement at approximately 30% of the AADE mid-case assessment, reflecting a compromise in which TSL concedes certain valuation elements (most likely the Nereus procurement coordination fee, where TSL's defense is weakest) while prevailing on classification and the remaining valuation issues. The resulting additional Net Debt impact of approximately €2,645,586 would increase Net Debt to approximately €134,945,586 and the ratio to approximately 2.96×, well within the covenant threshold with approximately €24.7 million of remaining headroom.
A settlement at this level is plausible if TSL achieves a favorable outcome on classification and is able to negotiate a reduction on the valuation components. However, settlement discussions are premature at this stage, as the administrative objection process and the DG TAXUD consultation have not yet concluded. This scenario is included for analytical completeness and to demonstrate that even a partially adverse outcome at the lower end of the exposure range would have a modest impact on TSL's covenant position.
Scenario 3 — Partial Adverse (Classification Only — ASC Systems)
Under this scenario, AADE prevails on the classification of the eight Automated Stacking Crane ("ASC") systems (which would be reclassified from CN 8426 to CN 8428, attracting a higher duty rate), while TSL prevails on the classification of the twelve Ship-to-Shore ("STS") gantry cranes and on all valuation issues. The estimated financial impact of approximately €4,000,000 reflects the reduced duties applicable to the ASC systems only, together with proportional penalties and interest. This is a realistic scenario, given that the German BTI ruling (DE-BTI-2019-00784) supports AADE's classification of the ASC systems, while the Dutch BTI ruling (NL-BTI-2018-01233) supports TSL's classification of the STS cranes. A split outcome — adverse on ASC systems, favorable on STS cranes — is a plausible resolution that would leave TSL comfortably within the covenant at approximately 2.99×.
Scenario 4 — Mid-Case (Most Likely Adverse Outcome)
This scenario models the realization of AADE's full mid-case assessment of approximately €8,818,620, including the total additional duties of €1,697,080 (both classification and valuation), the import VAT adjustment of €2,740,416, the 30% administrative penalty of €509,124 (reflecting the "good-faith error" classification, which is the penalty level most consistent with the facts as we understand them), and estimated late-payment interest of €3,872,000 through August 2022.
Under this scenario, Net Debt increases to approximately €141,118,620 and the ratio rises to 3.09×. Headroom is reduced from approximately €27.4 million to approximately €18.5 million — a reduction of approximately one-third. While this represents a meaningful diminution of TSL's financial cushion, the ratio remains well below the 3.5× covenant maximum, and TSL retains substantial capacity to absorb additional debt or volatility.
This scenario assumes that AADE maintains the 30% administrative penalty level applicable to good-faith errors under Article 42(2) of the Greek Customs Code, rather than escalating to the 100% penalty level applicable to negligence under Article 42(3) or the 300% penalty level applicable to fraud or willful non-compliance under Article 42(4). We consider the 30% penalty level to be the most likely adverse outcome, given the genuine classification ambiguity evidenced by the divergent BTI rulings issued by customs authorities in the Netherlands and Germany, and the absence of any evidence suggesting that TSL's customs declarations were made with knowledge that they were incorrect or with reckless disregard for their accuracy.
Scenario 5 — High-End Liability
This scenario models the full high-end exposure of approximately €14,700,000, which includes all elements of the mid-case assessment plus escalated penalties at 100% of additional duties (€1,697,080 rather than €509,124, a difference of approximately €1,188,000) and a compounding interest methodology that increases the total interest component to approximately €5,060,000 (compared to approximately €3,872,000 under the simple interest methodology applied in the mid-case).
Under this scenario, Net Debt increases to approximately €147,000,000 and the ratio rises to 3.22×. Headroom is reduced to approximately €12,660,000 — sufficient to maintain compliance but with significantly less cushion than under the current baseline. This scenario would represent a material, though not critical, reduction in TSL's financial flexibility.
This outcome would require AADE to escalate from the good-faith error penalty classification to the negligence classification under Article 42(3) of the Greek Customs Code. We assess this escalation as unlikely given the circumstances — the classification dispute involves genuinely ambiguous tariff nomenclature, and TSL relied on professional customs broker advice (through Aegean Customs Brokerage S.A.) in preparing its declarations. Nevertheless, we model this scenario to capture the upper boundary of realistic exposure.
Scenario 6 — High-End Liability Plus Bank Guarantee Draw
This scenario combines the full high-end liability of approximately €14,700,000 with a draw on the €5,000,000 bank guarantee (CMB-BG-2023-0291, to be issued by Compass Maritime Bank). A guarantee draw could occur if the standstill arrangement with AADE terminates — either by expiration, by mutual agreement, or by AADE's exercise of its termination right upon 60 days' notice — and AADE proceeds to enforce the Assessment Notices by drawing on the guarantee as partial satisfaction of the assessed amounts.
The combined impact is €19,700,000 (€14,700,000 + €5,000,000), increasing Net Debt to approximately €152,000,000 and the ratio to 3.33×. Headroom is reduced to approximately €7,660,000 — a 72% reduction from the current baseline and a level that provides only limited margin for error.
We note an important analytical caveat: the bank guarantee draw and the liability payment may overlap rather than being fully additive. Specifically, if AADE draws on the €5,000,000 guarantee, the drawn amount would be applied against the total assessed liability, reducing the remaining amount owed. The total cash outflow to AADE would remain approximately €14,700,000 (in this scenario), not €19,700,000. However, the covenant impact could be additive in the following manner: the guarantee draw converts the contingent guarantee obligation to a direct borrowing under the revolving facility (increasing financial indebtedness by €5,000,000), while the remaining €9,700,000 of the assessed liability would need to be funded from cash reserves (reducing unrestricted cash) or from additional facility draws (further increasing financial indebtedness). For conservative modeling purposes, we treat the full €19,700,000 as additive Net Debt impact to capture the worst-case cash flow and balance sheet effect during the period between the guarantee draw and the ultimate liability settlement.
Even under this conservative treatment, TSL remains within the 3.5× covenant threshold, though with minimal headroom.
Scenario 7 — Extreme Adverse (Unlikely but Modeled for Completeness)
This scenario contemplates the convergence of the high-end customs liability, a bank guarantee draw, and adverse operational or macroeconomic developments affecting TSL's core business. Such developments could include a decline in container throughput volumes at the Piraeus or Thessaloniki terminals, an adverse movement in freight rates affecting the short-sea shipping segment, an impairment of fleet assets, or the need for additional borrowing to fund capital expenditures or working capital requirements.
Under this scenario, if EBITDA were to decline by more than approximately 5% from the projected €45,600,000 (i.e., to below approximately €43,320,000), or if Net Debt were to increase by an additional approximately €7,660,000 beyond the Scenario 6 level (i.e., to above approximately €159,660,000), the 3.5× covenant threshold would be breached. The triggering conditions for this scenario are not implausible — global container shipping markets are subject to cyclical volatility, and TSL's Piraeus terminal concession is dependent on continued trade flows between the Eastern Mediterranean and Northern Europe — but the convergence of all adverse factors simultaneously is considered unlikely in the near term.
This scenario is included not as a prediction but as a stress test, highlighting the importance of monitoring TSL's operational performance alongside the customs dispute resolution process. If TSL's EBITDA trends downward or if additional material indebtedness is contemplated, the covenant headroom analysis must be updated promptly.
D. Insurance Recovery Offset
TSL maintains a Financial Lines insurance policy with Oceanos Underwriters SA, Policy No. OCU-FIN-2021-GR-0487, effective January 1, 2021 through December 31, 2023, which includes a customs and excise duty disputes sublimit of €3,000,000, subject to a retention (deductible) of €250,000 per claim. If Oceanos provides coverage under this policy, the maximum net recovery available to TSL would be €2,750,000 (being the €3,000,000 sublimit less the €250,000 retention).
Based on our review of the policy wording (conducted in connection with the separate Insurance Coverage Analysis Memorandum), we anticipate that coverage would likely extend to defense costs incurred in contesting the AADE assessments and to the amount of any customs duties ultimately assessed and paid. However, coverage is likely to exclude administrative penalties (which are typically characterized as "fines" excluded under standard Financial Lines policy exclusions) and late-payment interest (which is similarly excluded as a penalty or punitive charge rather than an insured loss). These exclusions, if applied, would limit the practical utility of the coverage to the duty component of the liability, rather than the full assessed amount.
The application of insurance recovery to each adverse scenario is as follows:
Mid-case scenario (Scenario 4): Net impact after maximum insurance recovery = €8,818,620 − €2,750,000 = €6,068,620. This would result in Net Debt of approximately €138,368,620 and a ratio of approximately 3.03×.
High-end scenario (Scenario 5): Net impact after maximum insurance recovery = €14,700,000 − €2,750,000 = €11,950,000. This would result in Net Debt of approximately €144,250,000 and a ratio of approximately 3.16×.
Insurance recovery, if obtained, would meaningfully reduce the covenant pressure in each adverse scenario but would not eliminate the financial impact entirely, particularly in the high-end scenarios.
We note that the insurance claim process is currently at an early stage and subject to significant uncertainty. TSL filed a claim notice with Oceanos on October 15, 2022, through Aether Insurance Brokers (contact: Fiona Hartwell, Account Director). Oceanos issued a reservation of rights letter on November 22, 2022, reserving its position on coverage on two principal grounds: (a) that the AADE assessment may reflect "willful non-compliance" with customs regulations, which would be excluded under the policy's intentional acts exclusion; and (b) that TSL may have engaged in "deliberate undervaluation" of imported goods, which Oceanos contends would constitute a dishonest act excluded under the policy. TSL, through Calderwood & Harkness LLP, has responded to the reservation of rights letter, asserting that neither the willful non-compliance nor the deliberate undervaluation exclusion is applicable on the facts, and that the classification dispute involves a genuine interpretive ambiguity — not intentional misconduct. The insurance coverage dispute is addressed in detail in the separate Insurance Coverage Analysis Memorandum and is not further discussed herein.
For covenant modeling purposes, we present the scenarios both with and without insurance recovery. TSL should not rely on insurance recovery as a certainty in its covenant compliance planning, given the reservation of rights and the potential for coverage litigation.
V. MATERIAL ADVERSE CHANGE (MAC) CLAUSE ANALYSIS
A. Applicability Assessment
The central question presented by the MAC clause analysis is whether the AADE customs liability, even at the high-end exposure of approximately €14.7 million, constitutes a "Material Adverse Change" as defined in Section 8.1(g) of the Facility Agreement. If the customs dispute does constitute a MAC, Compass Maritime Bank would be entitled to declare an Event of Default and exercise its remedies under Article IX, including acceleration of all outstanding amounts, termination of undrawn commitments, and enforcement of security interests over TSL's assets — a potentially devastating outcome for TSL that would far exceed the direct financial impact of the customs dispute itself.
We have assessed this question by considering both the arguments supporting the conclusion that the dispute does not constitute a MAC and the arguments that Compass Maritime Bank could potentially advance in asserting that it does.
Arguments that the customs dispute does NOT constitute a Material Adverse Change:
Proportionality to TSL's overall business. TSL is a substantial enterprise with FY2021 consolidated revenue of €387.2 million and projected FY2022 EBITDA of €45.6 million. Even the high-end customs liability of approximately €14.7 million represents approximately 3.8% of annual revenue and approximately 32% of annual EBITDA. While significant, this level of exposure is within the range that a shipping and logistics company of TSL's size and sophistication can absorb without existential or transformative impact on its business. Courts and arbitral tribunals interpreting MAC clauses in the banking context have generally required a showing of fundamental and durable impairment of the borrower's business or financial condition, not merely a meaningful but manageable adverse development.
Covenant compliance maintained. Under all foreseeable scenarios — including the high-end liability plus bank guarantee draw (Scenario 6) — TSL remains within the 3.5× Net Debt / EBITDA covenant threshold established by Section 7.3(a) of the Facility Agreement. The fact that TSL can absorb the full potential liability and still comply with its financial covenants is strong evidence that the dispute does not constitute a material adverse change in TSL's financial condition.
Contingent and disputed nature of the liability. The AADE assessment is actively contested through administrative objections filed by Vassilakis & Triantafyllou (Alexandros Vournas) on TSL's behalf, and a BTI application has been submitted to DG TAXUD to resolve the classification dispute at the EU level. The outcome is uncertain, and the liability may be reduced substantially or eliminated entirely. A contingent, disputed liability that has not been adjudicated or settled should not, by itself, constitute a MAC — particularly where the borrower has meritorious defenses and is actively pursuing administrative remedies.
Insurance mitigation. Up to €2,750,000 may be recovered from Oceanos Underwriters under Policy No. OCU-FIN-2021-GR-0487, further reducing the net financial impact of any adverse outcome. Although the insurance claim is subject to a reservation of rights, the existence of potentially applicable coverage reduces the ultimate exposure.
Standstill agreement. AADE has agreed to suspend enforcement of the Assessment Notices during the pendency of the DG TAXUD consultation, pursuant to the standstill letter agreement executed on March 1, 2023 (with a 60-day termination notice period). This means that there is no immediate cash outflow or enforced payment obligation — the liability remains contingent and deferred. The standstill arrangement mitigates the near-term financial impact and provides TSL with time to pursue resolution of the dispute.
Operational continuity. The customs dispute has no impact on TSL's ongoing business operations. TSL's fleet continues to operate without restriction, its terminal concessions at Piraeus and Thessaloniki remain in full force and effect, its customer relationships are unaffected, and its revenue-generating capacity is unimpaired. The dispute is a discrete financial contingency arising from historical import transactions, not a structural impairment of TSL's business model or earning power.
Arguments that the customs dispute COULD support a MAC finding (potential Compass Maritime Bank position):
The high-end exposure of approximately €14.7 million substantially reduces TSL's covenant headroom from approximately €27.4 million to approximately €12.7 million (or approximately €7.7 million in the Scenario 6 case), diminishing TSL's financial resilience and increasing the risk that subsequent adverse developments could trigger a covenant breach. A lender could argue that this reduction in financial flexibility, rather than the absolute amount of the liability, is the material adverse effect.
The dispute could take 12 to 24 months or longer to resolve, during which period statutory interest continues to accrue at approximately €12,389 per month on the total additional duties of €1,697,080 (at 0.73% per month under Article 114 UCC). This ongoing accrual increases the ultimate liability over time, potentially adding €300,000 to €450,000 to the total exposure by the projected resolution date.
The €5,000,000 bank guarantee ties up a meaningful portion of the revolving facility capacity, reducing TSL's operational liquidity and financial flexibility. A lender could argue that this reduction in available facility capacity, in combination with the contingent liability, constitutes a material adverse change in TSL's financial condition.
If the customs dispute is combined with other adverse developments — such as a downturn in the container shipping market, vessel impairments, the loss or non-renewal of a terminal concession, or unforeseen capital expenditure requirements — the aggregate effect could cross the materiality threshold, even if the customs dispute alone would not.
B. Assessment
On balance, we conclude that the customs dispute alone is unlikely to constitute a Material Adverse Change under Section 8.1(g) of the Facility Agreement, given the considerations set forth above. The proportionality of the exposure to TSL's overall financial profile, the continued covenant compliance under all foreseeable scenarios, the contingent and disputed nature of the liability, the availability of insurance coverage (subject to the reservation of rights), and the absence of any impact on TSL's operations collectively weigh against a finding of material adverse change.
However, we emphasize that the MAC analysis is inherently fact-specific and subject to the exercise of judgment. The risk of a MAC assertion increases materially if the customs dispute is combined with other adverse developments affecting TSL's financial condition or operational performance. Compass Maritime Bank could argue that the cumulative effect of the customs dispute and one or more additional adverse events — even if each event would not independently constitute a MAC — crosses the "individually or in the aggregate" threshold in the MAC definition.
Importantly, Compass Maritime Bank has not, to date, asserted that the customs dispute constitutes a Material Adverse Change or an Event of Default under the Facility Agreement. The material litigation disclosure provided by TSL on October 3, 2022 was acknowledged by Mr. Papathanasiou without objection, and Compass Maritime Bank has not requested additional information, restricted TSL's access to the revolving facility, or taken any other adverse action in connection with the dispute. This constructive response is encouraging but does not preclude Compass Maritime Bank from asserting MAC rights in the future, particularly if the dispute intensifies or if TSL's financial condition deteriorates for other reasons.
TSL should take care to manage the customs dispute and its broader financial profile in a manner that minimizes the risk of a MAC assertion. In particular, TSL should: (a) avoid taking on additional material indebtedness during the pendency of the dispute; (b) maintain adequate cash reserves and liquidity; (c) continue to provide timely and transparent disclosures to Compass Maritime Bank; and (d) pursue the insurance claim and standstill arrangement diligently.
VI. IAS 37 — PROVISION RECOGNITION AND ACCOUNTING TREATMENT
A. IAS 37 Framework
The accounting treatment of the customs dispute liability is governed by IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), which establishes the criteria for recognizing provisions on the balance sheet and distinguishes between provisions (which are recognized) and contingent liabilities (which are disclosed but not recognized). The accounting treatment has implications for both TSL's financial reporting to Compass Maritime Bank and the calculation of certain financial metrics under the Facility Agreement.
Under IAS 37, a provision shall be recognized when, and only when, all three of the following conditions are satisfied:
(a) The entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable (interpreted under IFRS as meaning "more likely than not," i.e., a probability of greater than 50%) that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are met, the provision is recognized at the best estimate of the expenditure required to settle the present obligation at the reporting date. Where there is a range of possible outcomes, the best estimate is the amount that represents the most likely outcome, or, where no single outcome is more likely than any other, the midpoint of the range. If a large population of items is being measured, the obligation is estimated using a probability-weighted expected value methodology.
If it is not probable that an outflow will be required, or if a reliable estimate cannot be made, the liability is disclosed as a contingent liability in the notes to the financial statements (unless the possibility of outflow is remote, in which case no disclosure is required).
B. Application to the Customs Dispute
We apply each element of the IAS 37 recognition test to the customs dispute as follows:
Present obligation. This condition is satisfied. AADE has issued Assessment Notices AADE/ADAN/2022/0073 and AADE/ADAN/2022/0074, creating a legal obligation on TSL to pay the assessed amounts. Although TSL has filed administrative objections contesting the assessments, the existence of the objections does not extinguish the underlying obligation — it merely suspends enforcement and creates uncertainty as to the ultimate amount that may be required to settle it. Under IAS 37, the relevant inquiry is whether a present obligation exists, not whether it will ultimately be confirmed; a contested assessment constitutes a present obligation subject to measurement uncertainty.
Probable outflow. This is the critical and most debatable element. TSL's defenses to the AADE assessment are meritorious but not certain to succeed in full. Our legal team's assessment of the probability of TSL success on each contested issue is as follows:
Classification — STS gantry cranes (12 units): TSL has a moderately strong to strong defense, supported by the Dutch BTI ruling (NL-BTI-2018-01233) classifying equivalent equipment under CN 8426. Estimated probability of TSL success: 75–80%.
Classification — ASC systems (8 units): TSL's defense is less certain, as the German BTI ruling (DE-BTI-2019-00784) supports AADE's reclassification of equivalent systems under CN 8428. Estimated probability of TSL success: 40–45% (corresponding to 55–60% probability of AADE success).
Valuation — technology license fees (€4,900,000): The question is whether the license fees constitute part of the customs value under Article 71(1)(c) UCC. AADE's position has some merit, as the license fees relate to the use of proprietary automation software embedded in the imported equipment. Risk of AADE success: 55–65%.
Valuation — Nereus procurement coordination fee (€2,940,000): This is TSL's most challenging defense. AADE contends that the procurement fee, paid to Nereus Maritime Solutions (a related party to TSL), constitutes a buying commission that should be included in the customs value as part of the price actually paid for the goods. TSL's position — that Nereus acted as an independent procurement agent and the fee is a non-dutiable buying commission — faces significant factual challenges, particularly given the corporate relationship between TSL and Nereus. Risk of AADE success: 70–80%.
Valuation — commissioning services (€2,100,000): TSL's defense — that the commissioning services were performed after importation and are therefore post-importation costs excluded from the customs value — has moderate to strong support under the UCC and the implementing regulations. Risk of AADE success: 35–45%.
Taking these probabilities into account, it is more likely than not that TSL will be required to make some outflow of resources to settle the customs dispute, even if the full assessed amount is not ultimately owed. The "probable outflow" condition under IAS 37 is therefore satisfied with respect to some portion of the assessed amount — though not necessarily the full mid-case or high-end exposure.
Reliable estimate. This condition is satisfied. The AADE Assessment Notices specify precise amounts for each component of the assessment, and the various legal and factual issues are sufficiently defined to permit probability-weighted estimation of the expected liability. The assessment does not present the type of inherent measurement uncertainty that would preclude recognition under IAS 37.
C. Recommended Provision Amount
Given that all three IAS 37 recognition conditions are met, TSL should recognize a provision in its December 31, 2022 financial statements for the probability-weighted expected outcome of the customs dispute. The provision should not be set at the full mid-case or high-end exposure, nor should it be set at zero (which would be appropriate only if TSL were virtually certain to prevail on all issues). Rather, the provision should reflect the best estimate of the expenditure required to settle the obligation, taking into account the legal team's assessment of the probability of success or failure on each contested issue.
The following table presents a component-by-component analysis of the probability-weighted expected liability:
Based on this analysis, and taking into account the proportional penalties and interest that would apply to the probability-weighted duty amounts and the potential (but uncertain) recovery of the VAT adjustment through input credit claims, we recommend that TSL recognize a provision in the range of €4,000,000 to €6,000,000 in its December 31, 2022 consolidated financial statements.
This range reflects the probability-weighted mid-case estimate of the aggregate liability, including proportional penalties and interest, net of the likely (but not certain) recovery of the VAT input credit. The lower end of the range (€4,000,000) corresponds to a more optimistic assessment of TSL's classification defense on the STS cranes and the commissioning services valuation issue, while the upper end (€6,000,000) corresponds to a more conservative assessment that gives greater weight to the risk of AADE success on the ASC systems classification and the technology license fee and Nereus procurement fee valuation issues.
This provision range should be discussed with Kestrel & Palladian LLP (Spyros Makris, Partner, Athens office) in their capacity as TSL's statutory auditor, to ensure alignment between the legal team's risk assessment and K&P's independent audit view. K&P will form its own judgment regarding the adequacy of the provision under IAS 37 and may require adjustments based on their assessment of the evidence and the applicable accounting standards.
Important caveat: The provision amount for financial reporting purposes must reflect a genuine best estimate of the expected liability under IAS 37. It must not be a strategic figure chosen for the purpose of managing TSL's covenant compliance ratio or minimizing the apparent financial impact of the dispute. K&P, as TSL's independent statutory auditor, will independently assess the provision's adequacy and will not permit the provision to be set at a level that does not reflect the underlying risk assessment. Any attempt to manipulate the provision for covenant management purposes would be inappropriate and could expose TSL to restatement risk and loss of auditor confidence.
D. Impact on Covenant Calculation
The relationship between the IAS 37 provision and TSL's covenant compliance under the Facility Agreement requires careful analysis, as the two operate under different frameworks and serve different purposes.
If a provision of €4–6 million is recognized in TSL's December 31, 2022 financial statements, the provision would reduce TSL's retained earnings and net equity on the balance sheet, and would appear as a non-current or current liability (depending on the expected timing of settlement). The key question is whether this provision, as a non-cash accounting entry, directly affects the calculation of "Net Debt" as defined in the Facility Agreement.
Under most credit agreement definitions — and we believe this is the case under the Facility Agreement, subject to confirmation upon detailed review of the relevant provisions — a provision for a contingent liability is not treated as "financial indebtedness" or included in the Net Debt calculation. Financial indebtedness typically encompasses drawn credit facilities, term loans, capitalized lease obligations, and similar obligations that represent actual borrowings or binding payment commitments, rather than accounting estimates of potential future obligations. A provision under IAS 37 is an accounting recognition of a liability whose amount or timing is uncertain — it is not a drawn obligation or a binding commitment to pay a specific sum on a specific date.
Accordingly, the booking of the provision should not, by itself, increase TSL's Net Debt or adversely affect the leverage ratio covenant calculation. The actual covenant impact occurs when and if cash payments are made to AADE (for duties, penalties, or interest) or when the bank guarantee is drawn — events that either reduce unrestricted cash and cash equivalents (increasing Net Debt) or convert contingent obligations to actual financial indebtedness (also increasing Net Debt).
However, the provision is not without covenant significance. First, the provision will appear on TSL's balance sheet and will be visible to Compass Maritime Bank in connection with the quarterly compliance certification and financial reporting. Even if the provision does not mechanically affect the Net Debt calculation, it may influence Compass Maritime Bank's subjective assessment of TSL's financial condition under the MAC clause. Second, the provision reduces TSL's net equity and could affect other financial metrics or covenants, if any, that are tested on a balance sheet basis. Third, the provision serves as an indicator of management's assessment of the probable liability — and a significant upward revision of the provision in a subsequent reporting period could signal a deterioration in TSL's dispute position.
We recommend that TSL review the specific definitions of "financial indebtedness" and "Net Debt" in the Facility Agreement — ideally in consultation with James Prentice — to confirm that provisions for disputed tax and customs liabilities are excluded from the Net Debt calculation. If there is any ambiguity in the definitions, TSL may wish to seek clarification from Compass Maritime Bank or to address the issue proactively in the quarterly compliance certificate.
VII. BANK GUARANTEE IMPACT ON FACILITY AVAILABILITY
The proposed €5,000,000 bank guarantee to be issued by Compass Maritime Bank as CMB-BG-2023-0291 will reduce the undrawn available capacity under the €75,000,000 revolving credit facility by an equivalent amount. This reduction in available capacity occurs upon issuance of the guarantee, regardless of whether the guarantee is subsequently drawn by AADE. For purposes of TSL's liquidity management, the guarantee effectively "reserves" €5,000,000 of the facility for the benefit of AADE, rendering that amount unavailable for operational borrowing, working capital needs, or other purposes.
Current facility utilization — including drawn amounts and outstanding guarantees — should be confirmed with Ms. Papadimitriou and Mr. Papathanasiou. If TSL's facility utilization is already at or near capacity, the allocation of €5,000,000 to the AADE guarantee could create operational liquidity constraints and should be carefully managed in conjunction with TSL's treasury function.
As discussed in Section IV.C above, the guarantee itself does not increase Net Debt for covenant calculation purposes, as it is a contingent obligation that has not been drawn. However, the guarantee reduces the practical liquidity cushion available to TSL and limits its financial flexibility during the pendency of the customs dispute. If the guarantee is drawn by AADE — which could occur upon termination of the standstill arrangement or upon a final adverse determination of the customs dispute — the drawn amount would automatically convert to a direct borrowing by TSL under the revolving facility, bearing interest at the applicable margin plus the reference rate, and would be treated as financial indebtedness for all purposes under the Facility Agreement, including the Net Debt calculation. This conversion would increase TSL's Net Debt by €5,000,000, with the corresponding covenant impact as modeled in Scenario 6 above.
The standstill letter agreement executed with AADE on March 1, 2023 provides for a termination notice period of sixty (60) days. This advance notice provision gives TSL meaningful lead time to prepare for a potential guarantee draw — including the opportunity to arrange alternative funding sources, increase cash reserves, or engage in discussions with Compass Maritime Bank regarding a covenant waiver or amendment if necessary. TSL should monitor the standstill status closely and ensure that it receives prompt notice of any AADE communication regarding standstill termination or modification.
VIII. INTEREST ACCRUAL MONITORING
The financial impact of the customs dispute is not static. Statutory interest on underpaid customs duties continues to accrue at the rate of 0.73% per month (approximately 8.76% per annum) under Article 114 of the Union Customs Code and the corresponding Greek implementing provisions. This interest accrues on the total additional duties assessed by AADE (€1,697,080), and the rate is applied on a simple interest basis (though AADE has asserted a compounding methodology in the high-end scenario, which is contested).
AADE estimated accrued interest at approximately €3,872,000 through August 12, 2022, the date of the Assessment Notices. This figure reflects interest accrued from the dates of original customs entry for each of the imported shipments (spanning approximately 2018 through 2021) through the date of assessment. The interest calculation methodology and the relevant original entry dates are set forth in Annex III to the Assessment Notices.
Interest continues to accrue during the standstill period, as the standstill letter suspends enforcement of the Assessment Notices but does not toll or waive the statutory interest obligation. The ongoing monthly interest accrual on the total additional duties of €1,697,080 is approximately €12,389 (€1,697,080 × 0.73%), or approximately €148,668 per year.
Projected additional interest accrual from the date of the Assessment Notices through selected future dates is as follows:
August 2022 through December 2022 (approximately 4 months): approximately €49,556.
August 2022 through August 2023 (12 months): approximately €148,668.
August 2022 through Q1 2024 (approximately 18–20 months, estimated early resolution of DG TAXUD consultation): approximately €223,000–€248,000.
August 2022 through Q1 2025 (approximately 30–32 months, estimated late resolution of DG TAXUD consultation): approximately €371,000–€396,000.
This ongoing accrual increases the ultimate liability and should be factored into scenario modeling updates. While the incremental annual amount of approximately €149,000 is not, by itself, material to TSL's financial position, it adds cumulatively to the total exposure over the projected dispute resolution timeline and underscores the importance of seeking timely resolution.
We recommend that TSL instruct Vassilakis & Triantafyllou (Alexandros Vournas) to explore whether Greek customs practice permits cessation or reduction of interest accrual upon the posting of the €5,000,000 bank guarantee. Under Article 114(3) of the Union Customs Code, interest may cease accruing on amounts that are secured by a guarantee, as the purpose of the interest charge is to compensate the customs authority for the time value of money on unpaid duties — a purpose that is arguably served by the provision of a guarantee that ensures ultimate collectibility. However, the application of Article 114(3) in this context depends on Greek domestic implementing provisions and administrative practice, which should be confirmed with V&T. If interest cessation can be achieved, the ongoing accrual would be eliminated or reduced, providing both a financial benefit and a simplification of the covenant impact analysis.
IX. RECOMMENDATIONS
Based on the analysis set forth in this memorandum, we make the following recommendations for TSL's management of the customs dispute in the context of the Compass Maritime Bank Facility Agreement:
1. Maintain proactive communication with Compass Maritime Bank. TSL should continue to provide periodic updates to Andreas Papathanasiou regarding the status of the customs dispute. The material litigation disclosure was provided on October 3, 2022, satisfying TSL's initial notification obligation under Section 6.2(d) of the Facility Agreement. However, ongoing transparency is advisable — both to maintain the constructive relationship with Compass Maritime Bank and to reduce the risk that Compass Maritime Bank could later assert that TSL withheld material information or failed to keep the lender adequately informed. We recommend that TSL provide a status update to Mr. Papathanasiou at the following junctures: (a) following the submission of the BTI application to DG TAXUD (anticipated February 2023); (b) following the execution of the standstill letter agreement with AADE (March 2023); and (c) at each subsequent quarterly compliance certification date. The updates should be prepared in coordination with Calderwood & Harkness LLP to ensure consistency with the legal strategy and to preserve privilege over work product communications to the extent possible.
2. Coordinate provision recognition with Kestrel & Palladian LLP. TSL should discuss the appropriate IAS 37 provision amount with Spyros Makris (Partner, Kestrel & Palladian LLP, Athens office) at the earliest opportunity, and in any event before the finalization of TSL's December 31, 2022 consolidated financial statements. A provision in the range of €4,000,000 to €6,000,000 reflects the probability-weighted expected outcome based on the legal team's current risk assessment and would not create undue covenant pressure under the Facility Agreement. It is essential that the provision be developed through a genuine and independent assessment process, and that the legal team's risk assessments be communicated to K&P in a manner that enables K&P to form its own audit judgment. Any divergence between the legal team's assessment and K&P's audit view should be resolved collaboratively and documented.
3. Monitor Net Debt / EBITDA ratio quarterly. TSL's finance function should monitor the leverage ratio on a quarterly basis and alert senior management and Calderwood & Harkness LLP if the ratio approaches 3.2× or higher. A ratio at or above 3.2× would indicate that TSL's headroom has been reduced to approximately €13.7 million or less, leaving limited cushion for the customs liability's ultimate resolution and for operational volatility. The current projected ratio of 2.9× provides adequate headroom under all scenarios except the extreme Scenario 7, but ongoing monitoring is essential to identify adverse trends early and to enable timely corrective action.
4. Consider whether a covenant waiver or amendment may be needed. If the customs dispute is not resolved before the next covenant compliance certification — which will cover the fiscal quarter ending December 31, 2022 and is expected to be delivered on or before March 1, 2023 — TSL should assess whether a proactive approach to Compass Maritime Bank, seeking a limited waiver or covenant holiday, is advisable. At present, no waiver appears necessary, as TSL is projected to remain comfortably within the 3.5× covenant threshold under all foreseeable scenarios. However, the situation should b