Lykes Fights To Stay Alive Bankruptcy filing by Lykes raises many questions about the company's future
The bankruptcy of Lykes Bros. Steamship Co. is like the death of an aged but distant relative. While perhaps unexpected, nobody is very surprised that it finally happened. The bankruptcy court filing by Lykes, however, lacks the finality of death. The filing came under Chapter XI of the U.S. Bankruptcy Code, which could allow Lykes to reorganize and continue normal business operations. But a company spokesman also indicated the company had been forced into bankruptcy, and Lykes'many problems are well documented Additionally, there is no precedent for a U.S. shipping line emerging intact from Chapter XI. Only the bankruptcy reorganization of Waterman Steamship in the mid-1980s was successfully completed, but the circumstances were completely different and Waterman's independence was almost immediately lost when it was swallowed by a larger shipping line.
In any event, the bankruptcy action represents a sad milestone in the history of what had been one of the largest liner shipping companies in the nation. Prominent among U.S. steamship companies throughout the 20th Century, Lykes is now a shell of its former self. However, reports at press time indicate good news for the carrier, as major creditors appear prepared to back the shipper's reorganization plan.
The official word from Lykes is that it needs court protection while it completes a reorganization that began two years ago. According to the company, the reorganization has been proceeding well, but two factors have combined to prevent a fully successful effort.
First, the company is hampered by onerous debt-service payments arising from its 1984 decision to build six new containerships in Japanese shipyards. Under that deal, Lykes agreed to pay the construction costs in Japanese yen rather than in U.S. dollars. Due to the appreciation of the yen against the dollar in the intervening years, the direct cost to Lykes has zoomed upward.
In retrospect, it appears that the Japanese deal was a mistake. The original plan was to use the six ships in a trans-Pacific container service, but that idea was abandoned even before construction was complete.
Instead, Lykes canceled construction of two of the ships — at substantial penalties — and chartered out the completed vessels to American President Lines. The second factor forcing bankruptcy reorganization, according to Lykes, has been the continued failure of the U.S.
government to reform the ship subsidy system. Lykes has been a major beneficiary of the Operating D i f f e r e n t i a l Subsidy (ODS) system ever since its creation in 1936, but government inaction on renewal of the ODS system during the last five years has left Lykes with sharply restricted options for fleet renewal or realignment of its liner operations. ness to employ U.S.- flag vessels to carry Uncle Sam's own cargo. Such shipments have long been an important part of Lykes' cargo base, but the decline in East- West military tensions has produced a dramatic reduction in the amount of military cargo available to U.S.- flag carriers. Cuts in selected foreign food-aid programs have also reduced the amount of cargo set aside for U.S.- flag carriers.
These governmental issues have prompted Lykes in recent years to reduce the size of its U.S.-flag fleet. In 1990, the company operated more than 20 U.S.-flag ships. Now that number is down to seven (not including two barges converted from oceangoing ships), and Lykes does not even own all of them. Two, for example, are owned by the First American Bulk Carrier Corp., and chartered to Lykes.
While reducing the size of its U.S.-flag fleet, Lykes has been increasing the number of foreign-flag ships that it operates. Currently, Lykes operates four foreign-flag vessels and is scheduled to add two more in the near future.
At the same time, Lykes has been making ship-sharing deals with foreign ship operators. Currently, Lykes has such deals with Evergreen Marine (Taiwan), Mediterranean Shipping Co. (Switzerland), and Safbank Line (South Africa).
Further emphasizing the historic shift of Lykes from its status as a U.S.-flag company to an international operator was the disclosure in the bankruptcy filing that Lykes is contemplating a partnership with Forum Maritime SA of Piraeus, Greece. A spokesman for Lykes said a $10 million loan from Forum Maritime is expected to ease the reorganization of the company and pave the way for a partnership between Forum and Lykes, but all transactions leading to such a partnership will have to be approved by the bankruptcy court. Also likely to be involved is the U.S. Maritime Administration, the government agency that oversees ownership of the U.S.-flag fleet.
Lykes spokeswoman Lucille Lane added that the first meeting of unsecured creditors took place October 26, and the creditors were "very supportive" of the company's plan to continue containership operations between the U.S. and Northern Europe, and the Mediterranean and Africa. Among the biggest unsecured are stevedoring companies, port authorities, and ship repair yards.
The largest unsecured creditor is Ryan-Walsh Inc., a stevedoring company that is owed at least $1.5 million. A sister company, Ryan-Walsh Gulf, is owed $544,000. Another stevedoring company, New Orleans Marine Contractors, is reportedly owed $524,000.
Among port authorities, Virginia International Terminals is owed more than $1.1 million, the South Carolina State Ports is owed $537,000, and the Port of Houston is owed $509,000. Among ship repairers, Gulf Copper Manufacturing of Port Arthur, Texas, is owed $1.3 million. All told, there were more than 1,000 unsecured creditors at the time the Chapter XI filing was made. The total estimated debts were $229.7 million, while the company claimed assets of about $201 million. These figures were all estimates provided by Lykes, and it is normal in bankruptcy cases that such estimates include a margin for error.