Monday, August 18, 2014

Suspense in the OSG Chapter 11 resolved with remarkable recoveries for both debt and equity holders.

OSG has scrapped the original reorganization plan with its lenders for an enhanced plan from its equity holders that involves a larger rights offering, increased from US$ 430 million to an incredible US$ 1,5 billion for institutional investors and a much larger refinancing of US$ 1,35 billion by a record breaking deal from Jefferies in the ‘term loan b’ market as opposed to the US$ 935 million financing from Goldman Sachs. This increased minimum recovery for equity holders from US$ 2 per share to US$ 3 per share whilst repaying debt holders at par. The outcome sets a very high industry bar in Chapter 11 reorganization. 

Both OSG debt and equity holders are large institutional investors and hedge funds. 

Leading the equity group is the Boston-based Brown Rudnick. Among others signing on behalf of the group: Alden Global Capital, BHR Capital, Blue Mountain Capital, Brownstone Investment Group, Caxton International Ltd, Cerberus Capital Management, Cyrus Capital Partners, Luxor Capital Group, Paulson & Co and Silver Point Capital. 

The rights offering is divided into Class A and Class B stock. Any holder than is deemed an accredited investor or qualified institutional buyer is eligible to purchase 11.5 Class A shares or warrants for $3 per security. Each holder that does not fall into one of those categories or choose not to support the plan is to receive one Class B share or warrant per existing share held. 

Jefferies underwrote the ‘term loan b’ facility in four separate facilities and syndicated it to more than 100 institutional investors. Terms on amortization and covenants are said to be liberal, but finance costs are considerably higher than bank finance with spreads of 425 and 475 basis points respectively for its domestic and international fleet. Minimum LIBOR is 1% per annum. Some recent conventional loans have been in the order of 250 basis points over Libor, but these are not companies coming out of Chapter 11 reorganization. Helping to drive the ‘B’ market is a revival of collateralized debt and loan obligations (CDO’s and CLO’s) popular before the 2008 global financial crisis. 

Demand is so strong currently in this market that OceanRig originally planning a ‘term B’ worth US$ 800 million plus a bond issue of US$ 500 million to meet liquidity needs, simply upsized the ‘term B’ facility to US 1,3 billion and scrapped the bond issue. 

Consequently Jefferies may be setting a new trend for shipping companies looking for secured debt that replaces traditional bank finance. 

Where OSG goes after coming out of Chapter 11 is still an intriguing issue. Whilst its US flag fleet is profitable, the international tanker fleet is still losing money. Indeed, OSG recorded a hefty loss of US$ 204.11 for the first three months to the end of June up from a loss of US$ 24,15 million in 2013. Total losses in bankruptcy have been US$ 959 million. The lengthy Chapter 11 proceedings have been very costly. 

Erik Nikolai Stavseth of Arctic Securities seems to share my original views that there remains the likelihood of a separation of OSG’s domestic and international assets at a later stage. Stavseth feels that a pure Jones Act focused company should attract significant investor interest and also put AMSC in play should OSG wish to acquire the 10 MRs in order to obtain control over the vessels. 

It is also possible that the international assets (47 vessels ranging from VLCC to Handysize) will also evolve as a candidate for either splitting up through sales or creating a separate listed entity offering cross-class exposure to both crude and products. These are decisions for the present investors and new management team ahead.

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