$1.275 billion of new credit facilities rated B1, $75 million super priority revolver rated Ba2
New York, June 12, 2014 -- Moody's Investors Service assigned new ratings to Overseas Shipholding
Group, Inc. ("OSG"): Corporate Family Rating
(CFR) of B2, Probability of Default Rating (PDR) of B2-PD,
first lien senior secured of B1, 36-LGD3, first lien
super priority senior secured of Ba2, 1-LGD1 and Speculative
Grade Liquidity of SGL-3. The outlook is stable.
The ratings are being assigned in anticipation of the completion of OSG's
Chapter 11 restructuring following the plan confirmation hearing scheduled
for July 18, 2014. OSG has arranged two separate credit facilities
on which its intermediate holding company subsidiaries, OSG Bulk
Ships, Inc. ("OBS") and OSG International,
Inc. ("OIN") are the respective primary obligors.
These facilities will have guarantees from certain respective operating
subsidiaries and from OSG but not from each other or from the other's
subsidiaries. We base our ratings analysis on OSG's consolidated
financial statements and projected performance given the parent guarantee.
The closing and funding of these credit facilities is predicated on a
number of conditions including that there is a final and non-appealable
order confirming OSG's plan of reorganization.
Each facility provides a $600 million term loan and a $75
million revolving credit facility. The $1.2 billion
of term loan proceeds and $1.51 billion of new equity raised
via a rights offering will fund the settlement of the various claims pursuant
to the company's plan of reorganization. The OIN revolver
will have a super priority lien in the OIN collateral, which results
in the up-notching relative to the B1 ratings of the OBS facility
and the OIN term loan. The plan also provides for the reinstatement
of two issues of unsecured notes that were outstanding when the company
filed for bankruptcy: the $300 million of 8.125%
unsecured notes due March 30, 2018 and the $146 million of
7.5% unsecured notes due February 15, 2024.
Moody's has not re-rated these instruments.
RATINGS RATIONALE
The B2 Corporate Family rating considers OSG's leading position
in the ocean freight markets in which it trades its vessels, the
U.S. Jones Act and international crude and refined petroleum
products. The rating recognizes the future financial benefits of
the reduction in fixed overhead that the company achieved while in bankruptcy,
primarily by cancelling charter-in contracts for 25 international
tankers, outsourcing the technical management of the international
fleet and reducing shore-side headcount. These actions provide
a more flexible cost structure for the international operations,
which should reduce pressure on profits during future periods of weak
freight rates, whether because of weak economic activity or sustained
excess industry capacity, or both. Moody's anticipates
that credit metrics will become more supportive of the B2 rating through
2016. With no planned capital investment for growth, projected
free cash flow exceeds $100 million per year. Debt to EBITDA
is projected at about 6.0 times and FFO + Interest to Interest
at about 2.4 times at year end 2015, somewhat weak for the
B2 rating. Moody's believes the projected financial performance
through 2015 is achievable because the company's freight rate assumptions
for its international tankers are reasonable, reflecting nominal
increases above current levels. The terms of the new credit agreements
will incorporate excess cash flow sweeps, so Moody's expects
a portion of the free cash flow to be applied to debt reduction.
The favorable fundamentals of the U.S. Jones Act market
support the ratings assignment. Moody's believes that the
good conditions will continue, even when newly-built Jones
Act product tankers begin to enter the market in 2016 and as incremental
barge capacity (articulated tug barges or ATBs) enters the fleet in upcoming
years. Moody's expects continuing demand for movement of
shale oil and refined products to and from the Louisiana Gulf Coast refineries,
as well as across the other U.S. coastal trades, the
contracted nature of the company's operations in this sector and
the quality of its relatively young product tanker fleet to support earnings
and cash flow generation over the five-year terms of the new credit
facilities.
Adequate liquidity further supports the rating assignment. The
company expects to not need the revolvers to meet operating expenses or
for working capital. There are no debt maturities until 2018 and
compliance with maintenance financial covenants should not be an issue.
The B2 rating also incorporates Moody's expectation that the company
will seek to grow the international fleet, notwithstanding that
the financial plan contemplates very little capital spending and is devoid
of investment for growth, let alone replacement of vessels that
retire from either of the subsidiaries' fleets. "In
Moody's view, OSG did not reorganize to execute what would
be an orderly liquidation of the fleet as vessels reach retirement age,"
said Senior Credit Officer, Jonathan Root. "Moody's
believes that under the direction of the new hedge fund and private equity
owners that will participate in the rights offering, management
will grow the fleet in an attempt to enhance the company's return
on equity," continued Root. Based on Moody's
assumptions that the company will acquire five year old vessels,
rather than order new ships, credit metrics still improve,
though at a slower pace than in the company's no growth plan.
Implementation of a fleet growth strategy would lead to weaker free cash
flow generation than planned and increases in funded debt via the starter
basket and or purchase money credit facilities that would be arranged
in compliance with the incurrence covenants of the new rated credit agreements.
However, at current freight rates, projected Debt to EBITDA
and interest coverage under this scenario do not meaningfully weaken as
compared to the company's no growth plan.
The stable outlook reflects Moody's view that the fundamentals of
the U.S. Jones Act petroleum transportation market will
remain supportive, helping OSG to comfortably service the mostly
interest-only debt service of its debt capital following its reorganization.
The outlook also reflects that downside risk to freight rates in the company's
international tanker markets should remain contained in upcoming years
as the unfavorable gap between ton-mile demand and vessel supply
does not meaningfully increase.
There will be little upwards pressure on the ratings until the company
demonstrates the efficacy of its reorganization strategy by strengthening
credit metrics following its exit from Chapter 11. Clarity on its
fleet plan will identify the extent to which funded debt might increase
and the related effect on credit metrics. FFO + Interest to
Interest that approaches 3.5 times, Retained Cash Flow to
Net Debt in excess of 13% and Debt to EBITDA that approaches 4.5
times could support an upgrade. Application of free cash flow to
repayments of the new term loans will be the primary driver of the improving
metrics profile in the near term.
The ratings could be downgraded if unrestricted cash is sustained below
$50 million or the company becomes reliant on at least one of the
revolvers to meet working capital needs. Debt to EBITDA sustained
above 6.5 times, FFO + Interest to Interest that approaches
2.0 times, a decline in the EBIT margin to the 12%
range, Retained Cash Flow to Net Debt that approaches 8%
or sustained negative free cash flow generation could pressure the ratings
as could fleet growth or returns to shareholders that are funded with
debt. Additionally, the ratings could be downgraded if the
negotiated terms of the credit agreements differ from Moody's expectations
as of the date of this press release such that the company has greater
ability to increase funded debt or make restricted payments under incurrence
tests, or the priority of the OIN revolver is changed.
We use a consolidated waterfall for our Loss Given Default analysis.
We ranked the OIN revolving credit facility ahead of the other first lien
credit facilities because of its planned super priority claim against
the collateral that secures OIN's obligations under the OIN credit
facility. Doing so reflects the extensive over-collateralization
of this facility given the more than $1.3 billion of appraised
fair market value of OIN's vessels and results in the Ba2 rating
on the OIN revolver, which is three notches above the Corporate
Family rating.
The principal methodology used in this rating was the Global Shipping
Industry published in February 2014. Other methodologies used include
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
Overseas Shipholding Group, Inc., a Delaware Corporation
headquartered in New York, New York, is one of the larger
players in the ocean transportation of crude oil and petroleum products.
The company operates separate fleets of internationally-flagged
tankers trading in international markets and US Jones Act qualified vessels
trading mainly in US coastal markets. The company has been operating
under Chapter 11 of the US Bankruptcy Code since its filing on November
14, 2012.
Assignments:
..Issuer: OSG Bulk Ships, Inc.
....Senior Secured Bank Credit Facility,
Assigned B1, 36-LGD3
..Issuer: OSG International, Inc.
....Super Priority Senior Secured Bank Credit
Facility, Assigned Ba2, 1-LGD1
....Senior Secured Bank Credit Facility,
Assigned B1, 36-LGD3
Reinstatements:
..Issuer: Overseas Shipholding Group, Inc.
.... Corporate Family Rating, Reinstated
to B2
.... Probability of Default Rating,
Reinstated to B2-PD
.... Speculative Grade Liquidity Rating,
Reinstated to SGL-3
Outlook Actions:
..Issuer: Overseas Shipholding Group, Inc.
....Outlook, Changed To Stable From
Rating Withdrawn
..Issuer: OSG Bulk Ships, Inc.
....Outlook, To Stable
..Issuer: OSG Bulk Ships, Inc.
....Outlook, To Stable
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Michael J Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's rates Overseas Shipholding Group; B2 CFR, stable outlook
