In connection with TORM A/S' Extraordinary General Meeting to be
held today, TORM hereby publishes the Board of Directors' report on
the restructuring of TORM which was completed on 5 November 2012
and related equity transactions including acquisition of treasury
shares.
Contact TORM A/S Jacob
Meldgaard, CEO, tel.: +45 3917 9200 Roland M. Andersen, CFO, tel.:
+45 3917 9200 C. Soegaard-Christensen, IR, tel.: +45 3076 1288 |
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Tuborg Havnevej 18 DK-2900
Hellerup, Denmark Tel.: +45 3917 9200 / Fax: +45 3917 9393
www.torm.com |
About TORM
TORM is one of the world's leading carriers of refined oil
products as well as a significant player in the dry bulk market.
The Company runs a fleet of approximately 110 modern vessels in
cooperation with other respected shipping companies sharing TORM's
commitment to safety, environmental responsibility and customer
service. TORM was founded in 1889. The Company conducts business
worldwide and is headquartered in Copenhagen, Denmark. TORM's
shares are listed on NASDAQ OMX Copenhagen (ticker: TORM) and on
NASDAQ in New York (ticker: TRMD). For further information, please
visit www.torm.com.
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Safe Harbor statements as to the
future
Matters discussed in this release may constitute forward-looking
statements. Forward-looking statements reflect our current views
with respect to future events and financial performance and may
include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and
statements other than statements of historical facts. The
forward-looking statements in this release are based upon various
assumptions, many of which are based, in turn, upon further
assumptions, including without limitation, management's examination
of historical operating trends, data contained in our records and
other data available from third parties. Although TORM believes
that these assumptions were reasonable when made, because these
assumptions are inherently subject to significant uncertainties and
contingencies which are difficult or impossible to predict and are
beyond our control, TORM cannot guarantee that it will achieve or
accomplish these expectations, beliefs or projections. Important
factors that, in our view, could cause actual results to differ
materially from those discussed in the forward- looking statements
include the conclusion of definitive waiver documents with our
lenders, the strength of the world economy and currencies, changes
in charter hire rates and vessel values, changes in demand for
"tonne miles" of oil carried by oil tankers, the effect of changes
in OPEC's petroleum production levels and worldwide oil consumption
and storage, changes in demand that may affect attitudes of time
charterers to scheduled and unscheduled dry-docking, changes in
TORM's operating expenses, including bunker prices, dry-docking and
insurance costs, changes in the regulation of shipping operations,
including requirements for double hull tankers or actions taken by
regulatory authorities, potential liability from pending or future
litigation, domestic and international political conditions,
potential disruption of shipping routes due to accidents and
political events or acts by terrorists. Risks and uncertainties are
further described in reports filed by TORM with the US Securities
and Exchange Commission, including the TORM Annual Report on Form
20-F and its reports on Form 6-K. Forward-looking statements are
based on management's current evaluation, and TORM is only under an
obligation to update and change the listed expectations to the
extent required by law.
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BOARD OF DIRECTORS' REPORT BY THE CHAIRMAN OF THE BOARD
N. E. NIELSEN
Introduction
I am going to elaborate on the restructuring agreement under
this item today. The agreement ensures TORM a substantial deferral
of its bank credit facilities, new liquidity and significant cost
savings from the restructuring of the fleet of chartered-in
vessels, which in itself is positive. This allows TORM to become
cash flow positive, even at the current freight rate levels. The
Company has thereby been given time to secure its future, long-term
capital structure.
I will provide a brief summary of the events leading up to the
Company's Annual General Meeting held on 23 April 2012, at which I
reported on the conditional agreement in principle between the bank
group, the time charter partners and TORM.
The summary will be followed by a report on the most significant
events leading up to the completion of the final restructuring
agreement on 5 November 2012 and the subsequent listing
prospectus.
Entering the conditional agreement in
principle
Since 2010, TORM has worked on improving the Company's capital
structure and liquidity situation by seeking to tap into different
corporate bond markets and through other measures. Mainly due to
the Company's strategic position as a spot-oriented company, low
freight rates and the generally challenging conditions in the
capital markets, TORM was unable to obtain this type of financing.
With the continuously low freight rates and cyclically low vessel
values since fall 2011, TORM's Board of Directors did not find it
prudent to inject new equity in the Company at the time without
substantial amendments to the existing credit facilities. In
October 2011, TORM therefore presented a proposal to the banks that
combined an equity injection of USD 100 million with subscription
rights for existing shareholders and a bank moratorium. The
proposal was not accepted by the banks, but the Company achieved a
standstill agreement with the banks, which was extended several
times during 2012 to ensure that a long-term, comprehensive
financing solution was found and implemented.
Throughout the whole process, TORM's Board of Directors and
Executive Management have worked on avoiding bankruptcy or other
in-court solutions in Denmark or abroad in order to best preserve
value and put all stakeholders in the best possible position.
However, the process also involved detailed negotiations and
preparations for a suspension of payments, including under the US
"Chapter 11" rules. In the spring of 2012, TORM also succeeded in
obtaining conditional offers from reputable, international shipping
investors as well as institutional investors, who were prepared to
make new investments in the Company provided that substantially
amended bank terms were agreed. However, the banks chose not to
enter into substantive negotiations with any of these investors as
they did not find the investor proposals sufficiently
attractive.
Since the fourth quarter of 2011 the Company's liquidity
situation has been very tight, and the total bank debt could be
called at any time at the banks' discretion due to non-compliance
with certain financial covenants. Through negotiations with the
bank group during 2012 it became clear that the only achievable
solution with the bank group would not provide immediate debt
relief in the balance sheet nor any new liquid equity contribution.
A solution could be found where TORM gained time for a potential
general market improvement in order to best preserve shareholder
value. Therefore, TORM signed a conditional agreement in principle
with the banks and the major time charter partners regarding a
long-term financing solution as stated in announcement no. 14 dated
4 April 2012 and elaborated in announcement no. 20 dated 23 April
2012 and at the Annual General Meeting.
Completion of the restructuring agreement
The conditional agreement in principle formed the basis of the
restructuring agreement, which is very comprehensive and contains a
number of supplementary agreements with individual parties,
including amendments to TORM's existing financing agreements.
During the period from April to November 2012, the final
contractual framework was detailed, documented and completed by the
banks, the group of time charter partners and the Company. This
prolonged process, including the period leading up to this, was
very costly to the Company, but it was preferable to the
alternative. I will now explain the details of the
restructuring.
Content of the restructuring agreement -
Banks
New facility
As part of the restructuring, TORM has secured new working
capital of USD 100 million until 30 September 2014 with first lien
in the majority of the Company's vessels.
Amended terms and conditions
Through the implementation of the restructuring, the Company's
group of banks has aligned key terms and conditions and financial
covenants across all existing debt facilities, and all maturities
on existing credit facilities have been adjusted to 31 December
2016.
The bank debt remained unchanged at USD 1,794 million as of 30
September 2012. The book value of the fleet excluding vessels under
finance leases as of 30 September 2012 was USD 2,167 million.
TORM's quarterly impairment test as of 30 June 2012 supported the
carrying amount of the fleet based on the same test and principles
as used by the Company since the Annual Report for 2009. Based on
broker valuations, TORM's fleet excluding vessels under finance
leases had a market value of USD 1,316 million as of 30 September
2012, which was USD 851 million lower than the carrying amount. The
recognized equity amounted to USD 358 million as of 30 September
2012.
Going forward, interest on the existing debt will only be paid
if the Company has sufficient liquidity, and otherwise the
remainder will be accumulated until at least 30 June 2014 with
potential extension until 30 September 2014. On average the
interest margin will increase to approximately 240 basis points on
the bank debt. The Company will pay interest on the new working
capital facility until 30 September 2014.
The new financing agreements provide for a deferral of
installments on the bank debt until 30 September 2014, in which
period rescheduled principal amortizations will only be payable if
the Company has sufficient liquidity. Provided that the Company
generates sufficient positive cash flows, certain cash sweep
mechanisms will apply. Annualized minimum amortizations of USD 100
million will commence with effect from 30 September 2014 until 31
December 2016. If vessels are sold, the related secured debt will
fall due.
Changed legal group structure
As part of the restructuring agreement, TORM has implemented
substantial changes to the Company's internal legal group
structure, including transfers of vessels to separate legal
entities in Denmark and Singapore based on the individual loan
facilities. All legal entities are ultimately owned by TORM
A/S.
New financial covenants
New financial covenants will apply uniformly across the bank
debt facilities and will include:
- Minimum liquidity: Cash plus the available part of the new USD
100 million working capital facility must exceed USD 50 million to
be tested from 31 December 2012. This will later be adjusted to a
cash requirement of USD 30 million by 30 September 2014 and USD 40
million by 31 March 2015.
- Loan-to-value ratio: A senior loan tranche of USD 1,020 million
has been introduced out of the total bank debt of USD 1,793 million
as of 30 June 2012. The senior tranche must have an initial agreed
ratio of loan to TORM's fleet value based on broker valuations
(excl. vessels under finance leases) at 85% to be confirmed from 30
June 2013. This will gradually be stepped down to 65% by 30 June
2016. The remaining bank debt of USD 773 million has been divided
into two additional debt tranches, both with collateral in the
Company's fleet.
- Consolidated total debt to EBITDA: Initial agreed ratio of a
maximum of 30:1 to be tested from 30 June 2013, gradually stepped
down to a 6:1 ratio by 30 June 2016.
- Interest cover ratio: Agreed EBITDA to interest ratio of
initially a minimum of 1.4x by 30 June 2014, gradually stepped up
to 2.5x by 31 December 2015.
Additional material covenants
The terms of the credit facilities will include a catalogue of
additional covenants, including amongst others:
- A change-of-control provision with a threshold of 25% of shares
or voting rights.
- No issuance of new shares or dividend distribution without
consent from the banks.
Specific information on option rights for banks
As part of the restructuring, certain specific option rights
were agreed that may result in a sales process to be defined by
TORM prior to 31 January 2013 for up to 22 vessels and repayment of
the related secured debt. The options given to three bank
consortiums, which are subject to certain agreed terms and
conditions, have a duration until 31 July 2014. One bank consortium
has given notice on five of the vessels. TORM will seek to maintain
the vessels' association with the Company. I will revert to this
subject later.
Content of the restructuring agreement - Chartered-in
tonnage
As part of the restructuring agreement, the time charter
partners have accepted that the existing time charter contracts
will either be permanently changed and rates will be aligned to
market level with upside/downside split or allow for termination of
the contracts with return of vessels. These amendments will result
in a significant reduction of the Company's future time charter
commitments. TORM estimates that the changes in time charter
contracts correspond to a total positive nominal mark-to-market
impact on TORM of approximately USD 270 million. A small number of
owners of chartered-in tonnage do not take part in the
restructuring. As part of the restructuring, TORM will return 22
vessels to the time charter partners ahead of the original contract
schedule.
Effective from 5 November 2012, the date of the restructuring,
TORM's future time charter commitments were reduced by
approximately USD 590 million, from USD 818 million to USD 228
million, due to the freight rates being aligned to market level, as
mentioned, or by redelivery of the vessels.
As a result of the agreement, the Tanker Division has reduced
the expected average time charter costs for the first quarter 2013
from USD/day 18,848 to USD/day 12,141, equal to a 36%
reduction.
In the same period, the Bulk Division will reduce the average
time charter costs from USD/day 16,286 to USD/day 13,755, equal to
a 16% reduction.
Overall, the restructuring agreement has provided TORM with a
moratorium on its bank debt and new liquidity, and it has reduced
the time charter costs to the prevailing market level, against the
banks and the time charter partners becoming shareholders of TORM
holding an aggregate of 90% of the shares.
New ownership structure as a result of the restructuring
agreement
The receivable that the time charter partners were given as a
consequence of the amended contractual conditions as well as a fee
to the banks, estimated at a total net present value of USD 200
million, has been converted into shares in the Company,
corresponding to 90% of the Company. In this way, the existing
shareholders retained an ownership interest of 10.0% against the
7.5% announced at the Annual General Meeting held in April 2012.
The equity allocation between the banks and the time charter
partners has been agreed between them and is part of the
restructuring agreement.
The conversion into new share capital will be described shortly.
First, however, I will explain the basis of the Board of Directors'
resolution to accept the restructuring agreement including the
supplementary agreements.
The basis of the Board of Directors'
decision
Since September 2011, TORM has retained the assistance of the
international financial advisor Evercore Group LLC. In addition,
the Board of Directors has obtained a valuation opinion letter from
the international investment advisor Moelis & Company UK LLP
and a valuation report from the accounting firm Ernst & Young
with respect to the debt conversion and the issue of the new shares
to the banks and the time charter partners in connection with the
restructuring.
Having carefully considered the financial and operational
position of the Company and the opinion letter from Moelis &
Company UK LLP, the Board of Directors assessed that it would be in
the best interests of the Company, its shareholders, creditors,
other stakeholders and other interested parties to issue the new
shares in the Company against conversion of the total consideration
of USD 200 million from time charter partners and banks to allow
TORM to continue its operations without bankruptcy or similar
in-court proceedings.
The new shares were issued under the authorization given to the
Board of Directors at the Annual General Meeting held on 23 April
2012.
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I will now provide an account of the changes to the share
capital that took place on 5 November 2012.
Capital decrease
At TORM's Annual General Meeting held on 23 April 2012 it was
decided to reduce the share capital of TORM by a nominal value of
DKK 363,272,000 from DKK 364,000,000 nominal value to DKK 728,000
nominal value by transfer of the reduction amount to a special
reserve fund and by changing the nominal amount per share
(denomination) from DKK 5.00 to DKK 0.01 in accordance with section
188(1)(3) of the Danish Companies Act. One of the reasons for this
was that new shares could not be issued at a price below the
nominal value. Accordingly, TORM was unable to issue new shares
prior to the capital reduction, as the share price was below DKK
5.
By publication of the resolution to reduce the Company's share
capital via the IT system of the Danish Business Authority on 23
April 2012, TORM's creditors were notified of the resolution and
given the statutory four-week period for filing claims from 23
April 2012 under section 192(1) of the Danish Companies Act. By the
end of the statutory creditor notice period, TORM had not received
notice of any claims outside the ordinary course of business which
were not waived or settled in connection with the completion of the
restructuring.
On 5 November 2012, as part of the restructuring, the Board of
Directors decided to complete the capital reduction pursuant to the
resolution passed at TORM's Annual General Meeting held in April
2012.
Capital increase
At TORM's Annual General Meeting held on 23 April 2012 the Board
of Directors was also among others also authorized to increase the
share capital of TORM by up to a total nominal value of DKK
2,400,000,000 by payment in cash, conversion of debt or
contribution of assets other than cash without pre-emptive
subscription rights for the existing shareholders at a rate
discounted to the market price, as per article 2.14 of the Articles
of Association.
Following the decision to reduce the share capital as described
above, the Board of Directors decided to exercise the authorization
in article 2.14 of the Articles of Association to increase the
share capital of TORM by a nominal value of DKK 6,552,000 by
issuance of 655,200,000 shares of a nominal value of DKK 0.01
each.
The capital increase comprised a directed issue of new shares by
conversion of debt of DKK 1,174,100,581 in total (approximately USD
200 million) pursuant to the terms of the restructuring agreement
and supplementary agreements to TORM's banks and time charter
partners or their assignees. The capital increase was fully
subscribed for the aggregate of 655,200,000 new shares of a nominal
value of DKK 0.01 each, at a subscription price of DKK 1.79 per
share of DKK nominal value 0.01 each (approximately USD 0.31 per
share). The new shares issued corresponded to 90% of TORM's
registered share capital and votes following the registration of
the capital increase with the Danish Business Authority. TORM's
issued share capital now amounts to DKK 7,280,000 nominal value,
equal to 728,000,000 shares of a nominal value of DKK 0.01
each.
The same rights apply to the new shares as to the existing
shares including that the new shares are also negotiable
instruments, and no special restrictions apply to the
transferability of the new shares under Danish company law.
TORM's existing share option programs were subsequently adjusted
in accordance with the capital increase, but exercise prices still
remain significantly higher than the current share price, and the
share option programs are therefore "under water".
Acquisition of own shares
On 27 September 2012, in connection with the restructuring, TORM
signed a separate agreement to acquire own shares from certain time
charter partners, who were also parties to the restructuring. The
agreement concerned the acquisition of 3,739,840 shares in TORM
with an aggregate nominal value of DKK 37,398.40, corresponding to
0.5% of TORM's total share capital.
The shares were transferred immediately after the completion of
TORM's restructuring on 5 November 2012, against the release of a
claim of an estimated value of USD 0.6 million according to
independent valuation. TORM's shares closed at DKK 2.72 and DKK
2.56 on NASDAQ OMX Copenhagen A/S on the date of the completion of
the agreement and on the date of the share transfer,
respectively.
Following prolonged negotiations, and supported by statements
from various advisers, the Board of Directors assessed that the
agreement to acquire own shares was the Company's only real
opportunity of securing participation by the involved parties in
the overall restructuring and thus avoid the serious and imminent
detrimental effects to TORM and its stakeholders of a potential
bankruptcy or other insolvency proceedings, cf. section 199 of the
Danish Companies Act.
Listing prospectus
The new shares were issued and registered with the Danish
Business Authority on 5 November 2012 at the completion of the
restructuring. The shares were issued under a temporary ISIN code,
which was combined with the ISIN code for the existing shares after
the publication of a listing prospectus in early December 2012.
This prospectus describes in detail the Company's current
situation after the restructuring agreement and provides an
in-depth description of risk factors.
Among other things, the prospectus states that with the
restructuring TORM has gained time for a potential market
improvement and to secure the Company's future, long-term capital
structure. However, TORM currently has a considerable bank
financing and in the absence of substantial market and rate
improvements TORM will most likely continue to generate losses,
thus eroding the equity. Moreover, the existing capital structure
does not provide the necessary basis for the financing of TORM's
operations and growth in the medium to long term, and additional
financing, remission of debt or alternative actions will be
required.
Based on broker valuations, the market value of TORM's fleet,
excluding finance leases, of USD 1,316 million at 30 September 2012
was significantly lower than TORM's bank debt of USD 1,906 million
at the completion of the restructuring. If the underlying market
conditions do not improve, there is a risk that the gap between the
debt and the fleet market value will widen, simply because the
vessels age. In case the freight rates remain low over a longer
period, there will be a considerable risk of an impairment of the
Company's fleet values. The same may apply in case the assumptions
for the quarterly impairment test are changed. This is described in
detail in note 2 of the Company's quarterly reports as well as in
the listing prospectus.
The prospectus also describes that TORM's financing agreements
entered into in connection with the restructuring contain financial
and operational covenants. If the difficult market conditions
experienced during 2012 continue, TORM expects that the credit
agreements may be breached at the time of testing of the financial
covenants on 30 June 2013 and, under certain scenarios, before or
after this date. In case of a risk of breach of covenants, TORM
plans to initiate renegotiations with the secured lenders to obtain
the necessary waivers and amendments.
The prospectus also provides a detailed description of the
individual option rights that I mentioned earlier for the lenders
under three of the Company's bank facilities to request the sale of
vessels being financed by the bank facilities in question. The
options relate to bank facilities financing thirteen, five and four
vessels, respectively. Under the options, the Company will be
required to propose a sales strategy to be agreed with the relevant
lenders for the vessels comprised by the options. The lenders under
the bank facility financing five vessels have exercised their
option and thus initiated the process set out in relation to these
five vessels.
The total outstanding debt relating to the bank facility
financing five vessels was USD 121 million as of the restructuring.
The carrying amount of the five vessels was USD 210 million at 30
September 2012 and the market value based on broker valuations was
USD 141 million at 30 September 2012. The average age of the five
vessels was two years as of the restructuring. Based on the
above-mentioned broker valuations, a sale of the five vessels would
result in P&L loss of approx. USD 69 million.
The complete listing prospectus is available at the Company's
website www.torm.com.
Substantial contact with public authorities
As mentioned earlier, completing the contractual framework and
finalizing preparations for the technical completion of the
restructuring agreement has been a long, drawn-out process. Due to
the complexity of the agreements, it was necessary to maintain
substantial concurrent contact with, in particular, the Danish
Business Authority, the Danish Securities Council and the Danish
FSA, which have contributed very efficiently.
For example, the banks and certain of the time charter partners
behind the restructuring of TORM requested the Danish FSA to grant
an exemption from the Danish rules on mandatory takeover bids in
line with the advance indications to this effect previously
received from the FSA. On 3 December 2012, TORM was informed that
the FSA had issued exemption from the obligation to submit a
takeover offer to the shareholders in TORM.
The Danish Securities Council was asked to make a ruling on the
planned accounting treatment of the restructuring with the
Company's banks and time charter partners. The ruling is described
in a separate company announcement dated 15 November 2012, and its
net effects in the fourth quarter of 2012 are as follows: The
capital increase of USD 200 million by conversion of debt will be
recognized as an increase in equity. A net loss of approx. USD 150
million mainly related to cancelled time charter agreements
(operating leases) and finance lease time charter agreements will
be recognized in the income statement. Accordingly, the net impact
on equity is an increase of USD 50 million. There is no impact on
liquidity.
TORM hereafter forecasts a loss before tax for 2012 of USD
500-530 million including the accounting effects of the
restructuring and excluding further vessel sales and potential
impairment charges and any consequences if the sales options are
exercised.
The significance of freight rates for TORM's
future
As everybody is well aware, shipping is a cyclical industry with
very volatile freight rates. Looking back at the past decade, it
was characterized by major freight rate fluctuations which gave us
some five years with very high earnings, but also the past four
years with very low freight rates resulting in significant
losses.
If the difficult tanker and bulk market conditions experienced
in 2012 continue for an extended period, the Company expects to
breach the new financial covenants during the course of 2013.
If, however, the recent freight rate levels seen in the product
tanker market in the fourth quarter of 2012 are maintained over a
number of years, the Company will be able to meet its new financial
covenants and in the future be able to service its debt as it falls
due. If freight rates reach the ten-year historical average, TORM
will be in a position of generating profits and it will be able to
make considerable repayments on its bank debt.
Simply put: With a substantial and fast improvement in freight
rates, TORM will be able to service all its debt. Alternatively, a
future agreement with TORM's lenders regarding a significant change
in the capital structure of the Company is a necessity.
TORM going forward
The comprehensive restructuring agreement provides a financial
safety net under TORM. This is in the interest of all concerned.
The shareholders avoid losing all their assets. The banks avoid
incurring the major losses that a potential bankruptcy would
entail. TORM will remain a going concern based on the existing
employees. A group of owners consisting of Nordic and international
banks with large ownership interests can only be seen as an asset
for the Company. At the beginning of 2014, TORM's owned fleet
consisted of 65 product tankers and two dry bulk vessels. In
addition to the owned vessels, TORM had chartered-in 12 product
tankers and 28 dry bulk vessels.
TORM will once again be able to focus 100% on operations and its
collaboration with customers and other important stakeholders. TORM
has thus gained time to await improved market conditions and
freight rates and to secure a final capital structure solution.
I am confident that, under the new ownership, with a new Board
of Directors and a continuously dynamic management and staff in
Denmark, abroad and onboard vessels, TORM will be able to define a
new strategy that will ensure the Company's ability to benefit from
the economic recovery, when it comes, and continue to make TORM an
interesting and challenging place to work. Please give the new
Board of Directors together with the management and employees time
to present their plan for the future.
On behalf of the Board of Directors, I am pleased and content
that the time charter partners and our banks have shown their
confidence in TORM. I am certain that the Company will honor these
expectations by delivering the best possible results for customers
in terms of quality and costs, and thereby the owners.
Proposals for the amendments to the Articles of
Association
The proposals for the amendments to the Articles of Association
are a consequence of the restructuring. Proposal 2.a. will cancel
the authorizations to increase the share capital, which were given
at the Annual General Meeting in 2012 in order to conclude a
restructuring agreement. Proposal 2.b. is editorial in nature due
to the name change of the Danish Business Authority. Proposals 2.c.
to 2.e. concern minority protection, which is a part of the
agreement between the banks and the owners of the chartered-in
tonnage. This can of course be a good thing, but may prove
difficult to handle when TORM's final capital structure is to be
determined. Proposal 2.f. to change the term of office of board
members is part of the restructuring agreement.
Thank you
On behalf of all the members of the Board of Directors, I would
like to conclude this report by thanking all our stakeholders for
their cooperation and strong commitment to finding a joint solution
through this highly challenging period for the Company.