As shipping companies return to bonds as a source of funding, legal experts have warned of the potential pitfalls of using this kind of financing.
“When companies need to restructure their finances, bondholders are not always in agreement , which can lead to a difficult situation,” said Marius Moursund, partner at the Oslo-based law firm Wikborg & Rein, at the Nor-Shipping 2015 exhibition in Lillestrøm, Norway.
Furthermore, the fact that bonds can be traded means that in a case of corporate restructuring, it may occur that bondholders have reached an agreement about how to respond to a restructuring plan, but some bonds may change hands after such an agreement has been reached and the new owner of the sold bonds may not support the restructuring, said Charlotte Miller, partner at London law firm Reed Smith.
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On the plus side, however, bondholders have sometimes expressed a willingness to inject more money into a distressed company, she said.
Private equity funds sometimes buy large parts of a distressed company’s debt and later express a desire to convert their debt to equity. Such a move would strengthen the balance sheet of the company in question and still leave the existing shareholders with a small stake in it. The private equity group can later sell its shares in the restructured — and perhaps even enlarged — company at a profit.