Kroll removes Harley Marine whole-biz deal from downgrade watch

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A $455 million whole-business securitization sponsored by barge services firm Harley Marine Services – the focus of a controversial ownership tussle in the past year – no longer faces further downgrades of the outstanding bonds issued by its sponsoring trust.

Kroll Bond Rating Agency on Monday announced it was removing the downgrade watch on two classes of notes originally issued in May 2018, and affirmed the current ratings of $383.5 million in outstanding Class A-2 notes (BB-) and $50 million in Class B (B-).

Kroll removed the downgrade watch after determining there “is now less uncertainty around a permanent management structure and corporate governance,” the ratings agency reported.

Kroll in September had announced it would maintain a downgrade watch for Harley Marine Financing LLC Series 2018-1 despite an apparent resolution of a year-long legal fight between company founder and former chief executive Harley Franco and Australia-based Macquarie Capital and Arclight Capital Partners.

Macquarie and Arclight installed new senior management and a board of directors, but the company remained mired in costly multiple lawsuits dating back to 2017. In addition, the company had taken on additional debt that put more stress on the trust’s ability to repay the full principal and interest of the outstanding securities – which stand at $383.5 million for the Class A-2 notes and $50 million for Class B.

Kroll’s decision came after a December 2019 servicer report showed the securitization continues to receive sufficient funds to pay all the senior schedules principal and interest, fees and expenses. However, the company’s unpaid operating expenses continue to mount, standing at $15.86 million as of December – an increase of $2 million since the last quarterly report.

“The cash flow position at the manager is improving, through not to the level where the subordinated unpaid operating expenses are decreasing.”

Harley Marine’s deal has been downgraded twice since the original issuance. The Class A-2 notes originally rated BBB were lowered to BB in November 2018, and in March 2019 were further downgraded to BB-. The Class B notes have fallen from the original BB rating to the current B-.

Kroll never stated any concerns that the notes may default, but expressed worry that publicity from the management dispute could lead to cancelled contracts or other business-related issues that would hurt cash flow needed to pay down the notes. The notes are secured by all the assets of Harley Marine, including all income from the company’s lease, freight and leasing agreements, intellectual property and ownership of the original 122-tugboat fleet placed into the master trust.

The trust, in turn, pays Harley Marine to operate and manage the fleet.

Whole business securitizations are more typically used by franchise chains - quick-service dining operations in particular - which assign all operational and franchise-fee income into trusts in arrangements that provide companies with cheaper debt funding that traditional bank or bond-securities financing.

The initial downgrade occurred months after minority shareholder Macquarie filed a July 2018 civil lawsuit accusing Franco of misappropriating company funds and charging personal expenses to the firm. Franco alleged in a countersuit that Macquarie and another management executive conspired to oust him over his opposition to selling the company.

Macquarie failed to remove Franco in 2018, but in January 2019 Franco voluntarily relinquished operational control of the firm to chief operating officer Matthew Godden. Four months later, Harley Marine announced Franco had been terminated as CEO and replaced by Godden – actions that subsequently drew another lawsuit from Franco alleging wrongful termination.

The company still have an outstanding lawsuit filed in 2017 from a shipbuilder complaining the company reneged on the purchase of two tugboats.

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