Overseas Shipholding ends Q3 with nearly $900 million of liquidity

By Paul Deckelman

New York, Nov. 1 - Overseas Shipholding Group, Inc. encountered some rough seas, financially speaking, during the third quarter. But while the New York-based oil tanker operator lost even more money than it did last year during the period, it closed the quarter with a life raft of ample liquidity.

However, the company's chief financial officer warned of potential problems on the horizon, should tanker industry conditions fail to improve.

"The company remains in compliance with the financial covenants contained in our debt agreements," CFO Myles R. Itkin told analysts on a conference call following the release of the quarterly results - but he added that "if, however, the current poor operating environment were to continue, the headroom under these financial covenants would significantly contract."

That having been said, though, Itkin said that Overseas Shipholding "expects to maintain compliance with all of our financial covenants during the next 12 months."

Ample liquidity

Itkin said that as of the end of the quarter ended Sept. 30 - when the company booked a net loss of $71.1 million, or $2.35 per diluted share, more than double the year-earlier red ink of $31.7 million, or $1.06 per share - the company's cushion of cash and short-term investments stood at $182 million, while its availability under its revolving credit facility maturing was $711 million.

And overall borrowing power stands to increase. In May, the company announced that its banks had agreed to a $900 million unsecured forward-start revolver, which will mature in December 2016. The company can start borrowing from it after the February 2013 expiration of the current revolver.

The new facility contains the same financial covenant package as the existing facility and also incorporates an accordion feature, which would permit an increase in total availability up to $1.25 billion through additional bank subscriptions entered into before Feb. 8, 2013.

"We had expectations [at the time the new revolver deal was inked] and still do, of having discussions surrounding that [use of the accordion feature] sometime toward the end of the fourth quarter of this year," the CFO said.

The company's president and chief operating officer, Morten Arntzen, said that "I assume that as we work through this [accordion] process, there would be a normal due diligence, and consideration would be given to where the capital of the company stands at that time."

Overseas, like other American-flag shipping companies, also has access to relatively low-cost financing under the Title XI Federal Ship Financing Program, which provides for a full faith and credit guarantee by the U.S. government to promote the growth and modernization of the U.S. merchant marine and American shipyards.

However, Arntzen noted that "three years ago, when we first mentioned Title XI on these calls," one of the company's competitors told him that that it would take "at least two years" to sail through all of the Washington red tape and get such financing done. Arntzen said he was initially skeptical about such a lengthy timeframe, but "here we are - and it will be three years later.

"Has dealing with the U.S. government been different that dealing with Goldman Sachs or UBS or J.P. Morgan, or DnB? The answer is yes."

Company bought back bonds

As of Sept. 30, the company had total long-term debt of $2.13 billion, up from $1.94 billion at the end of 2010. It consisted of $691 million of secured term loan debt, plus $1.44 billion of unsecured debt - $929 million under the revolver, plus $510 million of bonds.

The company currently has outstanding $300 million of 8 1/8% notes due 2018, $146 million of 7¾% bonds due 2024 and about $65 million of 8¾% notes due 2013, following its open-market purchase of $9.6 million of the latter bonds in August.

Itkin told an analyst that the bond buyback "was purely an economic transaction and with a 2013 maturity, it fell within the timeframe of our existing revolver, more or less. So it was the economic benefit of an open-market purchase" that was the motivating factor. He did not say whether the company plans more bond repurchases.

Cautious about more leverage

An analyst asked whether Overseas Shipholding plans any kind of acquisitions, such as other ships, given the depressed prices for used vessels, or any other kind of assets - even other companies - and if so, what kind of financing it might use.

Arntzen said that Overseas Shipholding would have to have "incremental debt financing in place...we would not go out and do anything if we did not have the requisite financing raised, on terms that make sense, on terms that can handle a continued stressed market, and with approval of our existing lenders, so they accept whatever incremental leverage we would have to take on."

He said that "we are already seeing opportunities" on chartering vessels, but said that the company would not want to enter into any short-term arrangements, but rather, would look for longer-term arrangements at favorable prices.

Addressing the question of what kind of leverage level the company would want to shoot for in the event it was interested in buying ships or any other kind of assets, Itkin said that "it would depend on the composition. It's possible that you could do relative exchanges today that could work for our shareholders, but you'd have to do the math. I think we all think that we're move levered than we'd like to be right now - so if we're going to take on an incremental acquisition, the financing is going to have to be long-term and sensible for what we're doing."

He said Overseas Shipholding would not want to go beyond a maximum debt to capital ratio of 70%. Currently, the company has a ratio of liquidity-adjusted debt to capital of 54.1%, and funded indebtedness to total capitalization of 47%.

"We've been approached by banks who are encouraging other owners to divest of assets; the discussions have really addressed principal holidays, non-recourse financing. So it will really be a function of the nature of the financing that's supporting the asset," he said.

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