Tuesday, January 21, 2014

New direction in the OSG Chapter 11 reorganization

Collapse of blue chip OSG was one of the biggest stories last year in the shipping space. OSG management got itself in such a corner, overwhelmed by evolving events, that they were forced into Chapter 11 reorganization proceedings without any clear exit plan. 

Now their options for potential exit are becoming clearer. Unsecured bondholders are likely to be a driving force, making an equity investment through back-stopped rights offering estimated at US$ 430 million. This will be used to refinance OSG lenders under the original revolving credit facility, pay off the IRS claim and give OSG some operating cash to emerge back into business

One of the biggest catalysts of the fall of OSG was their unexpected problems with the US Internal revenue on tax liabilities, but this appears to be heading for a happy end with an agreed settlement for US$ 267 million from the original IRS claim of US$ 463 million even below OSG provisions for US$ 308 million. This is very significant because it resolves one of the biggest sources of uncertainty around OSG and allows them to confront the remaining issues in an orderly fashion. 

Another positive development albeit indirect is the Kinder Morgan acquisition of the American Petroleum Tanker fleet as it sets a market benchmark for the value of their US flag tanker fleet, which is presently their most valuable asset. 

From press reports, the major thrust in the OSG reorganization plan will be a debt for equity exchange with the unsecured bond holders. This will result in massive dilution for existing OSG shareholders, who will be luck to retain about 10% of the company. This appears to be the major source of needed recapitalization. 

The bond and notes holders of distressed OSG debt are likely to have recoveries of 115% and 128-171% respectively, putting the noteholders in an especially profitable position. Conversely, the OSG senior debt holders, who are now mainly hedge funds with lenders having disposed of their debt holding, are likely to be repaid in cash as opposed to receiving any equity. This would certainly be a disappointment for the hedge funds, who bought into OSG debt, depending on their discount entry price.

All this presupposes that negotiated agreements that get OSG out of Chapter 11 are finalized by June this year.

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