July 20, 2012 / 1:11 PM / 5 years ago

RLPC: OSG seeks more liquidity amid downgrade

NEW YORK, July 20 (Reuters) - 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 billion.

“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 very weak.”

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 debt.”

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 sold.

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.”

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