Interview With Aegean: From the Brink of Liquidation to Ambitions of Growth

Thursday January 10, 2019

Even by bunker industry standards, Aegean Marine Petroleum Network had an extraordinary year. 2018 was a year that, in the bunker supplier's own words, saw it go from the brink of liquidation to the final stages of a recapitalization process that promises to give it the necessary platform for growth.

Following the latest twists with the company's Chapter 11 reorganization, Ship & Bunker talked to Aegean director and board member Tyler Baron, and Global Director of Supply and Trading, Sal Drago, about where the bunker supplier is today, how it got here, and what its prospects are for the future.

A Year of Change

2018 began with a group of shareholders led by Baron publicly airing their unhappiness at how the company was being run and signalling their intent to nominate new directors at Aegean's annual shareholder meeting.

Political wrangling ensued, and the resulting battle ended in May with Baron - along with shareholder group allies Raymond Bartoszek and Donald Moore - joining the board as part of a wider management shakeup that also saw Aegean formally sever ties with its founder Dimitris Melisandidis.

But that was not before the group successfully blocked an attempt by Aegean to buy another one of Melisandidis' firms, HEC Europe.

"When the board was recomposed in early May the company was already in a liquidity crisis because lenders became concerned about the HEC transaction and receivables that were not pledged to them as collateral," said Baron.

An investigation by Aegean's newly appointed audit committee led to the June announcement that $200 million of accounts receivable would likely need to be written off due to dubious activity undertaken by former employees and affiliates.

"That further accelerated the liquidity crisis and by late June, early July the company was really on the brink of liquidation," said Baron.

"Open credit had all but evaporated in June and the company had no availability to borrow, so was unable to get incremental inventory."

From mid-June into July a number of its supply locations had run dry, and Aegean was left looking for alternative financing structures. Baron said the company explored a number of options before deciding to move forward on a deal with Mercuria Energy Group Ltd.

"That process was not easy, it was hard fought," Baron explained.

"Mercuria had intended to come in and support the business and credit wrap the exposure the banks had. But even then things were a challenge with the banks and Mercuria ultimately had to come in and buy them out, which was not their original intention."

That deal concluded in August and saw Mercuria take a 30% stake in Aegean and a seat on the board in exchange for a $1 billion financing deal and $30 million of additional liquidity.

The final hurdle was a $95 million payment to bondholders due on November 1. After refinance talks failed, alongside revealing that the previously suspected fraudulent activity had now grown to some $300 million, on November 6 Aegean filed for Chapter 11.

Courts then quickly gave Aegean a lift with the approval of Mercuria's $532 million debtor in possession (DIP) financing package, along with $40 million of incremental interim liquidity. But the deal was not to everyone's liking, most notably a group of creditors representing a significant slice of the unpaid notes, which opened the door for Oaktree Capital Management and Hartree Partners to make a bid for Aegean, which the board pivoted to as the more favourable option.

But with Mercuria quickly countering with an improved offer that, crucially, is now backed by the group of Aegean's creditors unsupportive of the initial offer, the Oaktree / Hartree offer was withdrawn.

The new plan seeks to enter into force no later than January 15, 2019 and envisages Aegean emerging from Chapter 11 in the next few months.

"These really are the final chapters of a recapitalization and restoration of the company's health that started over the summer and are coming to what we feel is a positive conclusion in the coming weeks," said Baron.

"The other side is one where the company has ample access to liquidity, and a better platform to grow and build the business than its had, really ever in the company's history.

"It's not been smooth getting here, and the company's shareholders and bondholders, the new board members included, have been harmed by the fraud and damage to the company as part of that. But as far as the company, its employees, its customers, and suppliers are concerned, this is fundamentally a very positive outcome."

Aegean Today

After an unquestionably tough year there are two things the company now wants to stress about where it is today.

Firstly, bunker operations are back to "business as usual" and Aegean is in a good place financially.

"All suppliers and vendors were paid in full pre-petition, and the DIP financing - which is $75 million of financing incremental to what the company has been drawing on pre-petition - will continue to pay vendors and suppliers in full in regular course as part of this process," said Baron.

"There are no issues with vendors or trade-facing counterparts not being paid."

And with oil prices on a wild ride at the end of 2018, having dropped 7% on two separate days and 30% overall during a seven-week period, Drago stresses that Aegean is fully hedged.

"When we talk to our customers they want to know the oil we own is ours, and it is; that we're paying all our barge companies and service providers, which we are; and we're fully hedged on all the oil we have in the tank, which we are," he said.

The second point is that Chapter 11 is a restructuring process and not a repeat of the 2014 collapse of OW Bunker.

"Mechanically there's no way for a repeat of the problems with OW because Aegean is a physical supplier," Baron told Ship & Bunker.

"Every molecule of oil that is delivered to a customer is a molecule that the company has already paid for. That has always been the case; that was the case pre-petition, and that will continue to be the case as we move through the Chapter 11 process."

Change

In addition to headline developments such as the Mercuria deal, there have also been a number of changes behind the scenes.

"The old guard is gone and now we have a completely new management team and a much more motivated staff from the place where we came from. So that's been very helpful for us moving the company forward," said Drago.

Perhaps one of most important differences is that following the DIP financing volumes have grown substantially.

"Enquiries are coming back and volumes are coming back - in some locations we've seen a three-fold increase in volume sold over the last three-month period," said Drago.

"It's an education process that we're undertaking and that's been very positive so far."

Alongside the growth in volume there have also been some much needed structural and operations changes, including a revamp of the sales process that has also seen the promotion of Chris Roberts to Global Head of Sales.

"He's taken on a bigger role and is responsible for coordinating all our global sales, strategy, and looking at Terms and Conditions. We needed something more centralized for better global collaboration and control," said Drago.

"We're not working in silos any more, everyone is coordinating through one person and that has worked very well so far."

Baron also stresses that significant cost has been taken out of the business, to the tune of $30 million annually.

"We've restructured a lot of processes and work flow; there is more coordination, visibility, and harmony across the network and broader group, and that is reflected in how we now face our customers," he adds.

One change of note that did make headlines is the exit of Aegean's President, Jonathan McIlroy, who was set to leave the company effective November 15, 2018.

"He's still involved as a consultant for the time being. It's a process that is ongoing and it's an amicable separation," said Baron.

Life After Chapter 11 and the Potential Marriage with Mercuria

While a final deal is yet to be done, the attraction of a marriage between Mercuria and Aegean is obvious. The combination of IMO 2020, Aegean's network, and Mercuria's financial muscle could be a mouthwatering prospect.

"There are many ways that 2020 goes, and whether it's black oil or something cleaner in the beginning as we probably all think it will be, we offer the ability to do both. They would be using our assets and we would be using theirs. They have terminals and they have access to barrels; it's a good fit," said Drago.

"What Mercuria lacks is the end customer and a physical bunker blender, someone with experience to deliver physical fuel oil to the end user, and that is what Aegean brings to the table. I can't speak for Mercuria but they must be excited about the possibility of using our terminalling and delivery systems. Their move into the 2020 world and what we're all about fits nicely."

But as Aegean has experienced first hand, a world-class network is nothing without liquidity, a situation compounded by particularly tough market conditions for buyers and suppliers.

On the supply side it has prompted other big names such as Bomin and World Fuels Services to pull back and reevaluate their operations in certain markets. Others, such as Singapore top 20 ranked supplier Brightoil and Europe's Macoil, have hit the headlines recently due to their own financial difficulties.

And with IMO 2020 now less than a year away, buyers also face headwinds that will see them squeezed financially from all sides; credit terms will tighten due to the increase in risk, and at the same time the cost of fuel is expected to rise dramatically.

"Credit is part of the market dynamic that logically is of interest to Mercuria, and that has been challenged for a number of years. Trade credit is the lifeblood of this business, so in today's environment access to capital and competitive financing is a competitive advantage. It goes without saying that in a post-2020 world that strategic advantage will be dramatically more compelling," said Baron.

"Mercuria has a very attractive balance sheet, very attractive banking relations, and access to liquidity. And this industry is going to require a lot of liquidity to process the same amount of volume in a post 2020 world."

And while the lack of liquidity near-crippled the company last year, a positive is that it's really the only thing that has been holding Aegean back, says Baron.

"From an infrastructure, fixed asset base, and a human capital perspective, Aegean's issue is not that it has too little, it is that it has too much. We have 41 vessels, a global network, and a lot of talented people," he said.

"The issue we've had is we didn't have the liquidity and access to capital to spread enough volume and gross profit dollars across that very substantial fixed asset and cost base."

But with the Chapter 11 process now underway, the DIP financing facility in place, and the Mercuria deal on the table, the bunker supplier looks to finally have a platform to move forward.

Add in the structural and organizational changes that have been made and, despite being on the brink of liquidation only a few months ago, Baron and Drago now talk of growth.

"As we move forward through this process and we return to having liquidity, and significantly more liquidity that the company has operated with in the past, the whole strategy is to grow the business and spread a lot more volume and activity across the infrastructure and footprint that we currently have," said Baron.

And while Drago says that as part of its recent restructuring efforts it has had to rationalize some of its supply locations, Aegean still has ambitions of expanding its footprint.

"We just haven't have the liquidity to do that, so we're ready to go," he said.

NYSE

Whatever life after Chapter 11 looks like for Aegean, it looks set to be a life away from the public eye that its listing on the New York Stock Exchange (NYSE) has given it.

The bunker supplier was listed on December 7, 2006, trading at $14 following an IPO that raised some $200 million for the firm.

Over the following two years things went very well; the price rocketed in 2007, heading over $40 by October and in 2008 to all time highs over $44.

But after the financial collapse of 2008 had taken its toll, Aegean's share price never managed to fully recover. In fact the poor share performance was a key part of what prompted the Baron-led Committee for Aegean Accountability to finally take action in the first place.

"Since becoming public in 2006 shares have declined by 75%, underperforming the Russel 2000 Index by more than 200%," the shareholder group said in an open letter at the end of 2017.

When the Chapter 11 process began, shares were suspended at $0.655 with a 52-week high of $5.10, and NYSE immediately proposed that Aegean be delisted.

Having had 10 days to request the decision be reviewed but declining to do so, the bunker supplier was delisted from the NYSE on December 3.

Next Steps

Next week will mark a number of milestones in the Chapter 11 process, including the Restructuring Support Agreement being up for court approval as well as the company filing the plan of reorganization that paves the way for the company's emergence from bankruptcy and acquisition by Mercuria.

"2018 was a year of much challenge and change, concluding with two world-class institutions recognizing the value and potential of Aegean and seeking to become its new owner," said Baron. 

As we turn to 2019, our dedicated team is committed to quickly wrapping up the restructuring and emerging with a very strong balance sheet and all the resources with which to fulfill this potential."