Thu 05/09/2019 11:31 AM
Relevant Items:
Presentation
Auditors Report
Supplemental Information
Financial Report
7.75% Senior Secured Notes due 2023 Prospectus
Tearsheet and Financials on Reorg’s Analysis Page
F.lli Armatori 2017 Report


Investors are scrutinizing a series of related-party transactions outlined in Moby’s 2018 report concerning some advance payments to the chairman of the group, Vincenzo Onorato, and to the company F.lli Onorato Armatori Srl. Reorg Debt Explained's legal analysis has also raised concerns about the company’s asset sale covenant, which may permit the group to use proceeds from asset disposals toward repaying solely its bank debt facility without having to proportionately repay the bonds. Bond and loans are otherwise pari passu.


F.lli Onorato Armatori Srl is a limited liability company established in September 2017. It is equally shared by the directors of the parent group Achille Onorato and Alessandro Onorato, according to Moby’s 2018 report. Achille Onorato, Moby’s CEO and vice chairman, is described as sole director or amministratore unico of F.lli Onorato Armatori Srl, according to the company’s 2017 report.


In Moby's 2018 accounts, the company indicates €4.99 million of other receivables which were paid to the chairman of the parent company Vincenzo Onorato “relating to the advance on the fees for 2019 and part of 2020.” The company paid a fee of €3.097 million to the chairman in 2018 consisting mostly of his remuneration, according to the OM definition of “fees.”


In July 2016, Moby’s parent company also granted the chairman a €1 million loan bearing a 2% interest rate which was due on April 2018. However, the company decided to postpone the receivable until April 30, 2021.


Related-party transactions also concern the lease of a number of vessels to Moby from F.lli Onorato Armatori Srl. In December 2018 and January, Moby paid €5.37 million to F.lli Onorato Armatori Srl for “the long-term lease of two vessels under construction, whose delivery is scheduled during 2021 and 2022,” according to the 2018 report. The company will have to pay additional charters of €20.2 million in 2019, €30.2 million in 2020 and €5 million in 2021 for these vessels, as outlined in the chart below.


Moby is therefore paying more than €50 million in 2019 and 2020 for vessels which are going to be delivered in 2021 and 2022.


In terms of existing ships, in January and October 2018, Moby made an advance hire payment of €5.7 million to F.lli Onorato Armatori Srl “relating to the 8 year lease of the vessels Alf Pollak and Maria Grazia Onorato.”


Moby has to pay €45.5 million and €45.7 million on an eight-year bareboat charter for Alf Pollak and Maria Grazia Onorato, respectively. It’s unclear whether the leases paid by Moby on these ships are at competitive market value rates.


Details on payments made to F.lli Onorato Armatori Srl by Moby’s parent company are below:

 




In 2018, Moby’s operating leases ballooned to €55.7 million compared with €44.3 million in 2017. The leases jumped as CIN chartered four new vessels in 2018 replacing three vessels used in 2017, two vessels were used for full-year 2018 which were only partially used in 2017. CIN also charted Alf Pollak in October 2018 which contributed to the increase in rental expenses.


During its latest earnings’ call with, Moby’s management came under fire as investors sought an explanation as to why the Italian ferry operator’s EBITDA declined substantially year over year in the fourth quarter, even when excluding gains from two vessel sales in 2017. Management first responded that the fourth quarter is always negative for the company due to seasonality, and then added that the fourth-quarter EBITDA was mainly affected by lower revenue and higher bunker prices. Moby’s recurring EBITDA in the fourth quarter was negative €20.6 million compared with positive €16.9 million same period last year.


Reorg reported on April 17 that Moby was in talks with Carlyle for a potential debt deal to redefine the Italian shipping group debt structure. Talks were still at an early stage and could result in a potential capital structure rejig and/or the refinancing of the group’s debt. The fund may also be involved into a direct lending operation using Moby’s ships as collateral.


Moby’s 7.75% €300 million bonds are quoted at about 38, sources said. Bondholders include PGIM, York Capital and Cheyne Capital, sources said. The company’s capital structure is below:

 


Repayment of Bank Debt vs Bonds


The asset sale covenant allows the group to opt to apply all proceeds from asset dispositions towards capital expenditure. Notably, it also permits repayment of “indebtedness secured by a lien on the collateral which ranks pari with the liens securing the note”, without proportionate repayment of the bonds (if such indebtedness is not “public debt”). It has been noted that the credit facility may not fall within the definition of “public debt” in the offering memorandum, therefore the group may be able to apply proceeds from asset disposals solely in repayment of the credit facility.


There is a further carve-out from the definition of asset disposition in the offering memorandum which permits the sale of the assets of CIN or its restricted subsidiaries for the purpose of paying state aid repayments or similar fines incurred in respect of the ongoing state aid investigation up to €100 million.


The offering memorandum for the notes contains an asset sale covenant which dictates what the restricted group can do with proceeds from asset dispositions.


The covenant prescribes:

 
  1. The disposing entity must receive consideration for the asset that is at least at a fair market value;

     

  2. The consideration received must comprise at least 75% in cash or in cash equivalents which could include any non-cash consideration capped at greater of either €20 million and 2.1% total assets;

     

  3. The cash received is applied towards one of the following (or in any combination of them:

- To repay:


indebtedness of a non-guarantor restricted subsidiary; or


indebtedness that is secured by assets that are not collateral, or


to repay indebtedness secured by a lien on the collateral which ranks pari with the liens securing the note;
within 365 days of the later of receipt of proceeds or the asset disposal, provided that, if the debt repaid is “Pari Passu Indebtedness” that is “Public Debt”, the group also applies a proportionate amount to repayment of the bonds, by reference to the principal amount of such public debt and such bond debt outstanding, or


- To make an offer to repay the notes at 100% of principal outstanding, plus accrued and unpaid interest, or


 


- To make a capital expenditure or invest in or commit to invest in additional assets within 365 days of the later of receipt of proceeds or the asset disposal.


 


Under the terms of the offering memorandum, “pari passu indebtedness” means indebtedness of the company or any guarantor that ranks equally in right of payment to the notes and which, in each case, is secured by liens on the collateral, including the credit agreement.


The definition of “public debt” refers to bonds, private placements and similar debt instruments issued by the Moby group.

It could be argued that the group’s credit facilities do not fall into this definition, meaning that the proceeds from an asset sale could be applied in repayment to solely in repayment of the bank debt as it is indebtedness secured by a lien on the collateral which ranks pari with the liens securing the note.


The restricted group may also temporarily reduce indebtedness using the asset disposition proceeds until the proceeds are finally applied.


The excess proceeds threshold is set at €20 million (so any proceeds received from a disposition or series of related disposition) which are not applied pursuant to the above waterfall, within 365 days of the receipt of the net proceeds, must be used to make an offer to repurchase notes and pari passu indebtedness (as the company elects) at par. If the proceeds received are less than €20 million, the proceeds can be used for general corporate purposes.


Within the definition of “Asset disposition”, carved out are dispositions with considerations less than €7.5 million and also, disposition of assets of CIN or its restricted subsidiaries of up to €100 million to satisfy any state aid repayments, interest in respect thereof, fines, penalties or similar amounts owing to Italian national, regional or other governmental or administrative agencies, other regulators or authorities or pursuant to court orders, judgments, decisions, settlements or resolutions in respect of the “Ongoing State Aid Investigation.”

Debt Incurrence


Sources told Reorg that several funds are considering lending new money to Moby in a broader redefinition of the company’s capital structure.


The group would be able to incur debt if the pro forma fixed charge coverage ratio for the restricted group for the most recently ended four full fiscal quarters is at least 2x.


The group may also incur secured debt that could rank ahead of the notes if the group’s consolidated senior secured net leverage ratio over the last four quarters is less than 3x.


If Moby is unable to meet the above thresholds, it may still incur the following categories of debt:

 
  • Credit facility debt capped at greater of (x) €300.0 million and (y) 31.0% of total assets;

  • Uncapped hedging for non speculative purposes;

  • Uncapped acquisition debt subject to either meeting category (A) above or FCCR pro forma for the acquisition is no worse than before the transaction;

  • Uncapped acquisition debt in the context of senior secured indebtedness subject to either meeting category (B) above or consolidated senior secured net leverage ratio pro forma for the acquisition is no worse than before the transaction;

  • Capex and financing (including mortgage financings and purchase money obligations) in similar line of business capped at greater of (x) €50.0 million and (y) 5.2% of total assets;

  • General basket capped at greater of (x) €60 million and (y) 6.2% of total assets;

  • Debt financed through equity contributions or subordinated shareholder funding capped at 100% of the net cash proceeds received; and

  • Uncapped qualified receivables financing.

     

Background


In February Moby repaid €50 million of its senior facility due under the terms of the credit facility agreement. In April, the group agreed with its lenders of the credit facility agreement to set new financial leverage covenant ratios for 2019 and 2020. The leverage ratio will be 5.5:1 for June, 4.5:1 for December and 4.0 to 4.5:1 for 2020. Lenders also agreed to waive the leverage covenant ratio compliance requirement for December 2018.


The company faces a series of challenges ahead including a potential €150 million to €180 million fine from the European Commission, a potential €29 million fine from the Italian Antitrust and the already announced rejection by the Italian antitrust authority to extend the concession between the Italian state and Tirrenia di Navigazione for certain Sardinian routes.


On April 12, a seller auctioned €60 million of Moby’s 7.75% €300 million bonds, of which just a small portion traded, sources said.


At the end of March, PwC completed its independent business review of Moby’s 2018-2023 business plan. The IBR was commissioned at the start of February.


In mid-March, the Italian antitrust authority rejected the extension of the concession between the Italian state and Tirrenia di Navigazione for certain Sardinian routes. The concession represents €72.7 million, or 12.3%, of Moby's revenue, and expires on July 18, 2020.


The antitrust authority’s decision may further complicate the reverse merger between Moby and CIN, sources said. According to the regulator, the reverse merger may be subject to the extension of the Tirrenia concession to 2022/2023. “It seems that one of the prerequisites for the Moby-CIN reverse merger is the extension of the Tirrenia concession to at least 2022/2023,” the authority said.


Separately, Tirrenia di Navigazione’s administrators have requested a seizure preservation order of Moby’s vessels and state subsidies after the latter company failed to pay the first €55 million installment of its €180 million deferred payment, Italian shipping newswire ship2shore reported. The measure has a preservation intent, to maintain the status quo preventing the factual situation from changing.


Investors are continuing to review Moby’s security package to decide whether to buy into the Italian shipping group’s 7.75% notes. The ferry operator’s notes and credit facility agreement are guaranteed by sister company Tirrenia-CIN, giving creditors recourse to its vessels for an amount of up to €77 million in the event of an enforcement, according to an expert report filed along with Moby’s 2018-2023 business plan.


Questions remain over whether a successful Moby-CIN reverse merger, which has been challenged by Tirrenia’s judicial commissioners, would extend those guarantees beyond the €77 million, sources close told Reorg.


Moby values its fleet at above €1 billion, according to the company’s presentation:

 

 

 
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