| NEW YORK, July 20
NEW YORK, July 20 Overseas Shipholding Group
, one of the largest publicly traded oil tanker
companies, faces a growing funding gap and a new set of tighter
covenants in the fourth quarter that could bring lenders back to
the negotiating table. Despite last week's downgrade by Standard
& Poor's to CCC+ and a 74 percent decline in the company's stock
price in the last year, the company should have access to a
number of capital raising options.
While the company eliminated its dividend earlier this year
to preserve cash, the current $1.5 billion unsecured revolver
expires next February with a smaller $900 million replacement
waiting in the wings. To buy time and help finance two new ship
deliveries next year, the company borrowed an additional $229
million from its current credit line last quarter, bringing
total debt that must be repaid by February 2013 to at least $1.1
"The company's downgrade reflects our belief that OSG may
not generate enough internal cash flow to meet debt maturities
and capital commitments in 2013," said S&P analyst Funmi Afonja.
"While potential liquidity raising options could come to pass,
the company has not yet executed on any particular course of
action. The company has big exposure to the international spot
market, and while OSG's US Flag business and liquid natural gas
joint ventures are performing well, OSG's credit profile remains
OSG currently is in compliance with its covenants, enabling
the company to keep lenders at bay. However, the new covenants
that set in later this year preclude factoring treasury stock,
which totaled $836 million last quarter, into net worth
calculations. If OSG incurs significant fleet value writedowns
or deepens its streak of 12 consecutive quarters of negative
earnings, the company may find itself requesting covenant relief
from lenders. The lenders can also expand the new facility by
$325 million but that would require a negotiated amendment.
Lenders may welcome the opportunity to modify a credit line
that is priced at 2.75 percent over Libor with no pledged
collateral. By contrast, OSG's unsecured bonds are currently
trading at over 16 percent yields, though the bonds do offer
less legal protection. The flexible bond indentures purposefully
provide OSG management with several paths to shore up liquidity.
"There is no limit on dividends, asset sales, or debt. There
is not even a limit on sale-leasebacks, which would be normal
for a high-grade covenant package," said Chris Chaice, a legal
expert at Covenant Review. "Any loans can also be secured. The
issuer can generally do as it pleases to favor equity over
Although OSG can pledge over 70 percent of its fleet as loan
collateral, the unencumbered ships are generally not new and
older vessels are less valuable due to lower fuel efficiency and
higher maintenance costs. Drewry Maritime Research reports
secondhand prices for five-year VLCC and Suezmax class tanker
vessels to be $65 million and $47 million, respectively. Similar
10-year old vessels are priced at $40 million and $32 million.
OSG's public documents suggest over 70 percent of its
unpledged ships are older than five years with over 30 percent
older than 10 years. This, however, is not out of line with
industry averages. According to a Dahlman Rose research report
published this week, the age of global crude and product tankers
fleet average eight years. In addition, much of the company's
well-performing US Flag vessels can serve as collateral or be
Future lenders would need to weigh extending and repricing
the company's credit lines against depressed fleet values and
high leverage that could worsen if a shipping downturn
continues. After spot day rates for large crude carriers
(VLCCs), which comprise about a third of OSG's fleet, ran above
$30,000 earlier this year, rates are now back in the mid-teens
due to higher global oil inventories.
Besides evaluating asset pledges and sales, OSG management
has signaled some willingness to sell junior debt by a $500
million shelf registration it filed in February.
The prominent, Israeli-based Recanati family and
privately-owned Continental Grain control over 25 percent of the
company and have been involved with the company for over a
decade. The next three-largest shareholders own close to 30
percent of OSG's stock, suggesting that a shareholder bloc
exists with whom OSG management can negotiate.
And despite drawing down on the revolver recently, OSG ended
last quarter with $213 million in cash. It has generated
positive operating EBITDA over the last year.
"OSG management has built a long track record and operate a
fleet of good ships," said Urs Dur, Director of Equity Research
at Clarkson Capital Markets. "The company is likely working on
many options without letting the different interested parties
communicate with the other."