Very Quick Commentary on OSG

As all readers are aware, OSG filed for bankruptcy protection in the District of Delaware yesterday. First day motions and affidavit were filed yesterday. I am still going through most of the documents. During the day, the OSG bonds were quoted much lower but rallied hard and finished the day actually higher on the day before bankruptcy (bonds trading in the low 30s flat) with many dealers putting out quotes bid without. The revolver also finished the day quoted higher.

Driving some of this optimism (on bonds side at least) are things that were first publicly disclosed in the first day filings as the apparent lack of concern in the filings for the ultimate IRS liability that swings recoveries every which way (how much? are they priority claims per 507(a)8?, etc). To me by far the most important disclosure was on page 39 of the First Day Affidavit:

"In order to ensure uninterrupted business operations during the initial stages of restructuring and to formalize the intercompany transactions and transfers, OSG, OSM-UK, OIN, and OBS have recently entered into several revolving loan agreements. These revolvers are secured by pledges of equity, cash, accounts, general intangibles, and intercompany receivables. Under the Intercompany Revolvers, OSM-UK may borrow up to $150 million at any time from OIN (approximately $75 million was outstanding as of the Petition Date); OIN may borrow up to $150 million at any time from OSG (approximately $75 million was outstanding as of the Petition Date); and OBS may borrow up to $150 million at any time from OSG (approximately $50 million was outstanding as of the Petition Date)."

Two things are important here:

1. OSG, the holding company, will now have a secured claim against OIN and OBS to the extent the revolvers are drawn down. While this doesn't "prime" the unsecured revolvers as the unsecured revolvers also benefit from any value at OSG, it does layer in additional claims to which OSG bonds benefit
2. A big question is where the revolver was drawn down on prior to bankruptcy. Because cash doesn't just come from thin air, and OSG has down streamed capital in forms of loans, that capital had to come from somewhere. It probably came from the drawing down of the unsecured revolver at holdco. This is important because if the cash had resided at an intermediate holding company, the bonds would have been structurally subordinated in terms of recovery

To me Docket #16 (and the myriad of exhibits) is a fantastic read that gives a better understanding of the corporate structure and flow of monies (for example the disclosure that OSG owned money market funds had $320M on the petition date). 

I will be continuing to work through the first day filings and plan to post something further today or tomorrow as more information comes out of the hearing (3:00PM today in Delaware).