Liquidity steals the spotlight

Wall Street analysts are growing increasingly concerned about the status of a leading US tanker owner’s cash reserves following the withdrawal of an application for government funding.

Overseas Shipholding Group (OSG) says the failed petition for $211m of Title XI loan guarantees from the US Maritime Administration (Marad), a division of the US Department of Transportation, will not affect its financial position but not everyone is convinced.

Jonathan Chappell of Evercore Partners says the axed application is “not a game-changer in the immediate term” but admits the development raises questions about how the company will improve liquidity “as arrows continue to be removed from the quiver”.

He told clients: “This news is important as it was widely expected that OSG would receive approval for the full $426m in financing associated with this application, which would have gone a long way to improving OSG's liquidity position at a time when it is continuing to suffer large losses and a shrinking cash balance.

“And it also comes just one week after the suspension of OSG's dividend. Although OSG's financial flexibility is hurt by the loss of this potential financing, the company presently remains in compliance with its covenants, and we look for OSG to pursue other options to improve liquidity in the very near term.”

Chappell believes the owner “could survive 2012” and remain solvent without asset sales and equity offerings, exercises that would risk the dilution of earnings power and share price, provided freight rates and vessel values hover at or near current levels.

If tanker rates and asset values continue to deteriorate further, however, the analyst says OSG may be forced to consider these steps as a prolonged market downturn would necessitate a new plan to mprove liquidity and the maintain compliance with its loan covenants.

“Following the suspension of its dividend and loss of part of the Title XI option, OSG's alternatives are shrinking,” he added. “OSG is still aiming to attain a $350m accordion option to its $900m forward-start credit facility that begins in early 2013. If this financing option also proves to be elusive, though, OSG may be forced to consider asset sales and/or capital raises through the $500m mixed shelf filed last Monday.”

Share price

Chappell believes OSG’s New York-quoted shares will remain under pressure until questions surrounding liquidity issues “can be answered with some transparency”, sentiment shared by Wells Fargo Securities analyst Michael Webber.

He told clients: “While OSG has both time and additional levers to pull in order to enhance its liquidity through the eventual syndication of its $350m accordion feature of its $900m forward start facility or other financing options (additional equity, securing its debt), we believe the latest news will resonate negatively with investors, considering that both tranches of the Title XI had already been discounted into the stock.

“OSG is scheduled to report fourth-quarter 2011 results on 28 February 2012, at which point we hope to get a more detailed update on its long-term financing options and potential changes to its capital structure.”

On Friday, OSG used an after-market filing with the US Securities and Exchange Commission to update investors about the status of the Title XI claim, which it withdrew following indications from Marad that the application “would not be approved in the form in which it was submitted”, but failed to elaborate on the government's reasoning.

As TradeWinds has reported, the guarantees would have covered debt secured by a pair of Jones Act shuttle tankers, which hit the water in 2010 and 2011, respectively. Analysts say proceeds would have likely been used to repay draw-downs linked to one of its revolving credit facilities.

Equity analysts were quick to note that OSG has not yet tapped the first tranche of a $211m Title XI bond guarantee, which is secured by two articulated tug-barges (ATBs).

Shares of OSG, which is headquartered in New York and led by chief executive Morten Arntzen, slipped by less than a percent before hitting $10.37 in the hours following theopening bell, which signalled the end of a three-day Wall Street weekend.

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