Sea Containers uncertain about making $115 million Oct. 15 payment on 10¾% notes

By Caroline Salls

Pittsburgh, June 12 - Sea Containers Ltd. said it is not sure whether it will be able to pay the $115 million principal amount due on its 10¾% senior notes on Oct. 15 amid discussions on increasing available free cash and short-term liquidity, according to a company news release.

Payment may not be made unless the company expects that it will also be able to pay its public notes maturing in 2008, 2009 and 2012 and all other unsecured creditors in full when due.

The company also remains in default under many of its secured credit facilities because of breaches of financial covenants and other requirements.

Sea Containers said it is continuing discussions with its lenders regarding waivers, amendments and forbearances to address pending and prospective defaults.

No lender has taken any action to exercise remedies on any events of default, and many lenders have signed forbearance agreements effective through the end of June.

The company said it is considering various options to increase its available free cash, and the short-term liquidity of Sea Containers is dependent on the successful completion of the proposed $594 million sale of its Silja Oy Ab Baltic ferry subsidiary's core business, a proposed refinancing of container assets, and/or other potential non-operational sources of funds.

Sufficient short-term liquidity is also dependent on there continuing to be no acceleration of repayment of debt facilities in default and for the present, at least, the retention of part of the Orient Express Hotel share sale proceeds.

Sea Containers said its management continues to explore a range of appropriate strategic and financial alternatives, which may include a restructuring of the company's obligations under the public notes.

Financials filing delay

As announced on May 1, the company said it is still unable to file its 2005 10-K annual report, including its audited 2005 consolidated financial statements, because it has not completed its internal processes with respect to applicable certifications.

The filing of the company's first-quarter 2006 10-Q has also been delayed.

The company said its public note indentures contain a covenant requiring it to maintain consolidated tangible net worth of at least $175 million.

Because the consolidated tangible net worth calculation is based on the delayed financial statements, Sea Containers said it will not be able to confirm whether it has been in compliance with this covenant until the financial statements are finalized.

The public note indentures also contain a covenant requiring that net proceeds from asset sales be applied to the payment of debt or the investment in replacement assets within six months of receipt of the net proceeds.

Thereafter, any remaining net proceeds must be applied to an offer to purchase outstanding public notes.

In addition, the company's indenture for the public notes maturing in 2012 contains a specific covenant for the application of the proceeds of sale of the Orient Express Hotel shares.

Of the net proceeds received from the sale of the shares, the company said it has applied about $200 million as required in the indentures, and estimates that it will have about $100 million of excess proceeds at the time the indenture covenant requires it to make an excess proceeds offer.

The $52 million balance of the company's free cash at May 31, however, includes these $100 million excess proceeds.

As a result, the company said it has decided to retain the Orient Express share sale proceeds unless it determines that they are not needed to fund operations during the coming months.

A failure to make an excess proceeds offer would constitute a default under the public note indentures.

Subsidiary sale details

Sea Containers entered into a definitive agreement to sell the core business of its Baltic ferry subsidiary Silja Oy Ab to AS Tallink Grupp for about $594 million in cash and shares, and has withdrawn from its joint bid with the MTR Corp. for the new South Western passenger rail franchise in light of the company's current challenges and the need to divert senior specialist personnel from the bid to support Great North Eastern Railway Ltd.'s legal challenge against the Office of Rail Regulation.

Sea Containers and subsidiary Great North Eastern have also decided to seek permission from the High Court in Britain for a judicial review of the decision made by the U.K. Office of Rail Regulation on March 23 regarding track access applications granting open access to Grand Central Railway Co. Ltd. and Hull Trains Co. Ltd.

Great Northern said it believes these open access operators unfairly compete for passenger traffic on portions of its routes.

According to the release, the consideration for the sale of Silja's core business is €450 million cash and 5 million ordinary shares in Tallink.

The shares closed at €3.77 per share Friday on the Tallinn stock exchange. The dollar equivalent values are about $570 million in cash and $24 million in total share value, for a total of about $594 million.

The shares cannot be sold within 12 months of the completion of the Silja sale without permission of Tallink.

The Silja sale is subject to customary conditions, including the receipt of regulatory approvals from the relevant competition authorities, corporate approval of Tallink's shareholders and a further condition that the sale be completed by July 28.

Upon completion of the Silja sale, the company said it expects that after working capital adjustments and transaction fees it will receive net cash proceeds of about $60 million and repay roughly $510 million of related bank debt.

The transaction with Tallink includes six of the eight ships held for sale by Sea Containers as part of the Silja core business.

Joint venture agreement

Under a decision issued on April 28, in the arbitration between Sea Containers and GE Capital Corp. relating to their container leasing joint venture, GE SeaCo, the parties were directed to attempt to reach agreement regarding both the amount due to GE SeaCo as a result of service agreement breaches and the amount to be paid to GE Capital as reimbursement of its arbitration costs.

On June 2, Sea Containers and GE Capital entered into a settlement agreement under which Sea Containers agreed to pay GE SeaCo $16.3 million, in addition to the amounts Sea Containers had previously paid to GE SeaCo in 2005 to cure then alleged breaches of the services agreement.

Under the settlement agreement, Sea Containers will also pay GE Capital $1.75 million toward its arbitration costs.

Along with the execution of the settlement agreement, Sea Containers paid a total of $4 million to GE SeaCo and GE Capital. The balance, together with interest from June 2, will be paid in subsequent monthly installments of $2 million each.

If the sale of the Silja ferry business is completed before Sea Containers has paid the full amount due GE SeaCo, the remaining balance will be paid out of the net proceeds received from the Silja sale.

Under the arbitration decision and the settlement agreement, the services agreement was terminated effective May 28, but Sea Containers will continue to supply some services to GE SeaCo on a temporary basis and be compensated accordingly.

Under the agreements establishing the GE SeaCo joint venture, GE Capital appointed a ninth member of the GE SeaCo board of directors on April 13, leaving, a majority of the GE SeaCo board composed of GE Capital appointees.

GE Capital is therefore in a position to elect GE SeaCo's officers and to control and manage GE SeaCo's business affairs.

GE SeaCo has withdrawn from the pension plan maintained by Sea Containers for U.K. employees and is establishing its own pension plan specifically for GE SeaCo employees.

Sea Containers is a Hamilton, Bermuda-based provider of passenger and freight transport and marine container leasing.

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