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January 1, 2013 5:38 pm
The November bankruptcy filing of New York-based Overseas Shipping Group, one of the largest tanker companies in the world, offers a glimpse into the high-stakes game of investing in the shipping industry.
OSG, which owns an international tanker business as well as a US service that benefits from a law requiring that domestic oil shipments be carried by domestic ships, was once so highly rated it received unusually easy terms when it borrowed $1.5bn from banks and issued $500m in bonds.
But amid the current downturn in shipping, it said in October that it faced uncertain tax liabilities of up to $750m and could not guarantee the reliability of its accounts for the past three years.
By last month, the company was seeking protection from its creditors. A Standard & Poor’s report said bondholders – who would get paid after bank lenders – could expect recoveries of 60-70 per cent. However, if the tax bill comes in at the high end, it said, recoveries could drop to 10 cents on the dollar.
This sounded like an opportunity to executives in the alternative investment industry, where the slow pace of leveraged buyouts has left many companies with a lot of money to put to work and few places to deploy it.
Before and after the OSG filing, Jeff Aronson, co-founder of Centerbridge, accumulated the company’s bank debt at a deep discount to compensate for the uncertainty on the tax front and the plight of the industry.
Among those taking an interest in OSG’s fortunes is Wilbur Ross, the veteran distressed investor. He is part of an investment group, which includes China’s sovereign wealth fund, that has been buying ships from distressed Korean shipyards through a vehicle called Diamond S. Some of those ships have been chartered to OSG.
Some analysts say Mr Ross and his group overpaid for the ships and agreed to charter terms that are way above market. They assume OSG will take advantage of its bankruptcy filing to reject those contracts. Mr Ross, though, says he has received payments through December, as well as assurances that OSG has no intention to reject the contracts. At worst, he said: “They may renegotiate.”
Alternative investors such as Mr Aronson and Mr Ross are looking to do deals in the capital-intensive shipping world as the sector’s traditional lenders – a small group of European banks – are pulling back.
These banks are reluctant to extend more money, or to sell loans at a discount or mark them down. Bankruptcy lawyers dealing with banks as creditors said the lenders fear that if they mark down one loan, they will also have to mark down others.
The shipping industry turned down in 2008, leaving the world with too many ships. “The strong run-up has made the hangover worse,” says Mark Long, the London-based global head of transport and services for HSBC. “There was too much capacity and everyone hoped everyone else would take out capacity.”
When much of that supply was commissioned last decade, China was sucking in much of the world’s commodities, accounting for 60 per cent of iron ore shipping and 30 per cent of container shipping. But China has slowed and the rate of growth of those imports has also slowed.
The industry’s fate depends in large part on China’s actions. Its shipyards employ many people, an important consideration for officials who worry about social stability. Its policy banks, China Export-Import Bank and China Development Bank, offer attractive financing to shipbuilders.
“Shipping is a high fixed-cost, low-margin industry,” says Flip Huffard, who works on shipping restructurings for Blackstone’s advisory group. “Governments view shipbuilding as strategic and worth subsidising. It is job intensive. Everyone keeps production going.”
Predictions that supply and demand will come into balance are being made by people close to the private equity arm of Oaktree. It has formed a partnership with industry veteran Peter Georgiopoulos in Genmar, which signed a strategic agreement with Unipec, cargo shipping arm of China’s energy enterprise, Sinopec.
“Already you can see a lot of smaller shipyards closed, or turned into repair centres. They are scrapping a lot,” says one of these people.
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