The "topic du jour" in many distressed circles is Overseas Shipping Group ("OSG"). I wrote about shipping a little over a year ago when I discussed value traps. Since that time, the shipping industry (specifically tanker market) has gotten considerably worst. Which brings us to OSG.
Before I begin this post, I would like to make a fairly significant disclaimer. Frankly, I do not know if OSG will file even file for bankruptcy. We will know soon though the fate of the company as its unsecured $1.5b revolving credit facility matures in February of 2013 and will be replaced by a $900M "forward start" facility with "more restrictive" covenants. Given the price of the bonds, the IO value is substantial and the longer the bonds stay the current the better the investment.
With that said, at this juncture, using public information, the OSG bonds are uninvestable with any reasonable margin of safety. The bank debt could be compelling but at lower prices and with a few things going your way (and technicals not ripping your face off).
The second caveat I have is that I am probably one of the more bullish people on tanker market in the long term. The supply / demand equation reeks of overcapacity in the market and with the U.S. producing an enormous about of crude domestically, one would think that the prospects for tankers will not be robust. While these are legitimate concerns, I believe that as the influx of new ships as a percentage of existing fleets decreases combined with global economic growth, tanker rates across the board will move up to reasonable levels versus today's rates where ships may be losing money on a week to week basis depending on bunker prices.
I am looking at OSG in a number of ways. From talking to a number of buy siders a general consensus has emerged:
- A diligent investor can get comfortable with the asset value of OSG
- It is incredibly difficult to forecast with any certain the claims pool at various boxes in the corporate structure
- What EBITDA and what multiple to apply to US flag business? Comps include KEX, MATX, HRZL
- What is the market value of the unencumbered fleet?
- What is the equtiy value of the FPSO JVs?
- How much cash will be on the balance sheet the day the company files? Probably more important, where does that cash sit and what entity drew down on the revolver?
- I have assumed the tax claim will be administrative in nature. But is there way based on where that claim is located (ultimate holdco) for it to get adverse treatment relative to the bank facilities?
- What interest rate will the IRS charge on tax in arrears?
- Will OSG try to negotiate with the IRS to lower the actual amount of put together a schedule whereas it will be drain on cash flow in the emergence years?