November 6, 2018 - Aegean Marine Petroleum Network and 74 affiliated Debtors (“Aegean Marine” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 18-13374 [Docket No.1]. The Company, an international marine fuel logistics company and a leading independent physical supplier of marine fuel and lubricants to vessels around the globe, is represented by Jonathan S. Henes of Kirkland & Ellis. Further board-authorized engagements include Moelis & Company as financial advisor and Ernst & Young LLP as restructuring advisor. The Company’s petition notes between 5,000 and 10,000 creditors; estimated assets between $1 billion and $10 billion; and estimated liabilities between $500 million and $1 billion. Documents filed with the Court list the Company's three largest unsecured creditors as (i) USBNA on behalf of holders of the Company’s 4.25% Convertible Notes due 2021 ($172.5 million), (ii) Deutsche Bank Trust Company Americas on behalf of holders of the Company’s 4.00% convertible unsecured notes due 2018 ($94.5 million) and (iii) American Express Travel Related Services ($20.0 million).
Mercuria Energy Group Limited (“Mercuria”): Makes stalking horse bid and offers debtor-in-possession (“DIP”) lifeline
In a press release announcing the Chapter 11 filing, The Company further announced that Mercuria, a key strategic partner and one of the world’s largest independent energy and commodity companies had agreed to serve as a stalking horse bidder in a section 363 sale process. Mercuria has also agreed to provide more than $532 million in DIP financing to fund the chapter 11 process and the Company’s working capital needs.
Audit Committee Investigation
On November 2, 2018, the Company announced that its audit committee (“Audit Committee”) had completed an investigation into certain accounting-related matters and its intention to restate certain historical financial statements as a result of the findings of the investigation. In a Form 6-K filed on October 2, 2018, the Company stated in respect of the Audit Committee’s findings, “Based on the findings to date, the Audit Committee and Board of Directors have concluded as follows:
"The Audit Committee believes up to US$300 million of Company cash and other assets were misappropriated through fraudulent activities. The Audit Committee believes that the principal beneficiary of the misappropriation is OilTank Engineering & Consulting Ltd. (‘OilTank’) a company based in Fujairah and incorporated on March 15, 2010 in the Marshall Islands. On March 31, 2010 OilTank entered into a contract with Aegean's subsidiary to oversee the construction of the Fujairah Oil Terminal Facility (the ‘Fujairah Facility’). The Audit Committee believes that this contract was used to misappropriate Company funds through inflated contracts and fraudulent pricing. The Audit Committee has reason to believe that OilTank is controlled by a former affiliate of the Company (the ‘Former Affiliate’)….The Investigation also uncovered additional actions to defraud the Company and/or its subsidiaries, including prepayment for future oil deliveries that were never made. These fraudulent activities appear to have commenced as early as 2010.
The misappropriation of Company assets, and the fraudulent accounting entries and fictitious documentation designed to conceal it, involved over a dozen Company employees, including members of senior management. The employees who directed the scheme, which involved the creation of falsified and forged documents, including bank statements, audit confirmations, contracts, invoices and third party certifications, among others, have been terminated …..The Audit Committee believes that this misconduct occurred in part because the Former Affiliate has exerted significant control over Company personnel and assets through various inappropriate means, including threats of economic retaliation and physical violence. In addition, the Former Affiliate continues to have access to and control over the Company's electronic and physical files.”
Events leading up to the Chapter 11 filing
In a declaration in support of the Chapter 11 filing (the “Baron Declaration”), Tyler Baron, a director of the Company and Chair of its Audit Committee detailed the events leading to Aegean Marine’s Chapter 11 filing. The Baron Declaration recounts a now familiar tale in the energy sector of operational shortfalls leading to a liquidity crisis as lenders tighten the screws; and the descent in an unvirtuous cycle into bankruptcy. The Baron Declaration, however, is no ordinary tale of woe and it describes a breathtaking collapse as the Company’s operational and liquidity problems are accelerated by a $300 million fraud.
The Baron Declaration narrates, “Aegean’s financial performance and operational metrics began to deteriorate in the third quarter of 2017 and continued in the fourth quarter of 2017 with a sharp decline in bunker sales volumes, an operating loss, and negative EBITDA. Aegean attributed the slowdown to certain factors, including strong competitive headwinds in all core supply markets as industry majors increased their worldwide presence and smaller local operators further penetrated regional and single port markets….Limitations imposed by lenders under the U.S. Credit Facility and Global Credit Facility severely hindered Aegean’s ability to purchase fuel at volumes sufficient to maintain operations at historic levels. These lenders reduced the size of each facility during March and April 2018, from a peak of $1 billion to $600 million by May 5, 2018….By reducing the size of these facilities, lenders severely constricted Aegean’s access to necessary working capital to purchase inventory and meet customer demand. The impact of these reductions were further exacerbated by an increase in fuel prices, which meant that Aegean had reduced credit availability with which to purchase increasingly expensive fuel. The result was a decline in Aegean’s volumes to levels well below break-even. At the same time, certain fuel suppliers that had previously provided open credit began requesting that Aegean post a letter of credit or even prepay when purchasing fuel; an impossible request given Aegean’s lack of liquidity.
Concerns over Aegean’s credit quality became a contagion when credit insurance companies serving the marine fuels space cancelled their coverage of Aegean due to its inability to file audited financials. This also spread to Aegean’s customer base, as inquiries to quote and purchase bunkers dropped precipitously during May 2018….These issues had a cascading effect down the borrowing base, eroding its availability first via reduced fuel inventory levels and later by reduced accounts receivable, which in turn reduced the borrowing base and eliminated Aegean’s ability to secure letters of credit to purchase fuel. As volumes fell, gross profit could not cover fixed costs leading to negative free cash flow,,,,On June 4, 2018, Aegean Marine disclosed that $200 million of accounts receivable would likely be written off because the underlying transactions were likely without economic substance. Aegean Marine’s stock, publicly traded on the NYSE, closed down approximately 75% that day. Following this disclosure, Aegean experienced additional deterioration in customer activity and was operating without enough liquidity to procure additional stocks of fuel. In fact, on multiple business days during June 2018, the company had zero borrowing base availability and thus no liquidity, causing fuel inventories in certain critical supply hubs to virtually run dry….Lenders required Aegean to submit to extensive and ongoing financial reporting requirements, and urgently pursue strategic alternatives and contingency planning initiatives by certain milestones, and these lenders formally reduced the size of the credit facilities yet further from $600 million to $455 million on an aggregate basis on June 29, 2018. Virtually all of this reduction came from the Global Credit Facility ($440 million to $300 million), the Debtors’ main source of working capital for worldwide operations.”