By Tiffany Kary and Michael McDonald
(Bloomberg) — A fund linked to Harvard University kept sinking money into a dry-bulk shipping business even while losses persisted, as the investor tried innovative ways to avoid troubles that have plagued the ocean transport industry since the financial crisis.
Cayman Islands-based Francolin invested in Global Maritime Investments as part of a 2011 joint venture and spent the next four years advancing money to the transport company, restructuring its debt and trying to turn a profit in the difficult business of moving goods such as coal, ore and grain during a global shipping glut. Francolin has an indirect stake of 48 percent in Global Maritime, according to court papers.
It didn’t work. Global Maritime and most of its units filed for bankruptcy this week in New York seeking to wind down the business.
“While the investors thought they had hit the bottom in 2011, that was not nearly it,” John P. Melko, a lawyer for units of the bankrupt shipper, told U.S. Bankruptcy Judge Shelley Chapman at a hearing Thursday in Manhattan.
According to Harvard Management Co.’s tax filings, Francolin is a vehicle the university used to invest some of its $36.4 billion endowment. Paul Andrew, a spokesman for the endowment, declined to comment on the Global Maritime case or Francolin. The Wall Street Journal reported earlier on the Harvard connection.
How much of Francolin’s money came from Harvard wasn’t specified in court filings. The fund is listed in court papers under a Cayman Islands post office box, along with a “harvard.edu” e-mail address. The firm didn’t immediately respond to a request for comment sent to the address. Attorney James Wilton of Ropes & Gray LLP, listed as Francolin’s counsel in court filings, didn’t immediately return a call and e-mail seeking comment.
The Ivy League fund isn’t the first to run into trouble in the shipping industry. WL Ross & Co., Oaktree Capital Group LLC and other private-equity firms bought vessels since 2010 in the hopes a global recovery would boost the business. Instead, private-equity investments in the sector plunged, and IPOs were called off.
Francolin owns 48 percent of Slipway, a holding company that owns 100 percent of the shares in the main Global Maritime unit in bankruptcy, according to a court document. Harvard tax filings show that it had an investment in Francolin since the year beginning July 1, 2011.
That was an inauspicious time to get into the shipping business. In 2011, both Korea Line Corp., South Korea’s second- largest operator of dry-bulk vessels, and General Maritime Corp., the second-largest U.S. owner of oil tankers, filed for bankruptcy protection.
At Global Maritime’s inception, Francolin agreed to fund a $90 million unsecured credit facility, according to court papers. Over time, Francolin tried to change Global Maritime’s business, Melko told the judge.
For example, it ran a trading desk on freight forward agreements — contracts that allow ship owners to hedge against rate volatility — closing that book after a 2014 restructuring. It also chartered vessels on long-term contracts to subcontract them for better rates. Just this year, the company started a business that manages a pool of ships owned by outside parties as well as Global Maritime. The manager gets a commission and daily management fee, according to Melko.
Global Maritime has lost money every year, including $93 million in 2012. Management agreed to restructure its joint venture and certain debt and equity in June 2013, Chief Restructuring Officer Justin Knowles said in court filings.
In 2014, Global Maritime restructured its debt and equity again, court papers show. In connection with that restructuring, Francolin agreed to make advances under a new credit agreement to fund the acquisition of dry-bulk ships.
Early this year, Francolin agreed to make two $5 million advances. Despite the attempt to restructure, net losses in fiscal 2015 were $67.5 million.
Francolin and other investors formed a pooling unit to which the company and outside parties would contribute vessels, according to court papers. Owners of vessels that transport liquid natural gas started a similar project this August, known as “The Cool Pool.”
Still the losses continued, and last month Francolin stopped advancing money.
Under a $2 million loan proposed by Francolin, the company can’t use loan proceeds to pursue lawsuits against certain parties, including Harvard Management Co.
The loan is needed to avoid getting ships, including those owned by outside companies, stuck in foreign ports and seized.
“This market is going to turn, it’s just not going to turn soon enough,” Melko told the judge.
The case is In re GMI USA Management Inc., 15-12552, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
–With assistance from Alaric Nightingale and Naomi Christie in London.
©2015 Bloomberg News