Lawyer: For OSG, Bankruptcy Isn’t The Only Lifeline

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October 25, 2012

While Overseas Shipholding Group Inc. (OSG) has warned it may file for bankruptcy in light of a recently disclosed tax issue, a prominent bankruptcy lawyer says the oil-tanker owner, one of the world’s largest, has a few cards left to play that could help it avoid taking the plunge into a free-fall Chapter 11.

Speaking on a conference call organized by CRT Capital Group, a Connecticut investment firm that invests in distressed debt, Bracewell & Giuliani lawyer Evan Flaschen said while he thought an Overseas Shipholding bankruptcy filing was more likely than not at this point, the New York-based company has a few advantages, including $500 million in cash and receivables, that other shipping firms that have recently sunk into bankruptcy didn’t have.

“Here, there is a pile of cash,” to deal with vendors and charter counterparties, said Mr. Flaschen, whose work in the Chapter 11 cases of Marco Polo Seatrade BV and Omega Navigation Enterprises Inc. (ONAVQ) has helped make Bracewell & Giuliani one of the go-to firms for U.S. maritime bankruptcies.

And unlike a lot of other troubled shippers, Overseas Shipholding’s fleet, more than 100 vessels, isn’t completely “liened up,” Mr. Flaschen said. With some 70% of its fleet unencumbered, Overseas Shipholding is in a position to offer the banks liens in return for restructuring the debt or providing debtor-in-possession financing to fund a managed bankruptcy.

Overseas Shipholding and Cleary Gottlieb, which is representing Overseas Shipholding about a potential bankruptcy filing, didn’t respond to requests for comment.

The company’s tax issue notwithstanding, an Overseas Shipholding bankruptcy filing isn’t guaranteed. Mr. Flaschen pointed to the recent out-of-court restructuring involving Torm A/S (TORM.KO, TRMD). That deal saw the banks swap their debt for a majority stake in the business, with charter partners and shareholders getting smaller shares.

That deal could also serve as a model for Overseas Shipholding, Mr. Flaschen said. Despite drawing down the reminder of its $1.5 billon revolving loan in July, the company is in a relatively strong position because so much of its debt is unsecured.

“Security is the carrot,” said Mr. Flaschen. “I don’t know if there will be a pressing need by banks to force the company into Chapter 11.”

Of more immediate concern, Mr. Flaschen said is the company’s foreign vendors, who don’t always respect U.S. bankruptcy law, including the automatic stay provision that bars creditors from seizing ships until a debt is paid.

“You can explain Chapter 11 to them but they don’t always understand it,” said Mr. Flaschen to the group of listeners that included lenders, traders and reporters. “Even if they understand it, they don’t always respect it.”

He said February 2013, when Overseas Shipholding is facing a debt-maturity deadline, might be a more likely target date for a bankruptcy filing, probably in New York, than next week or next month.

Overseas Shipholding warned earlier this month it was considering bankruptcy after disclosing a tax issue related to interpretation of certain provisions contained in its loan agreements. In light of its tax issue, which also caused a company board member to resign, the publicly traded company said the last three years of financial statements were unreliable.

“Shipping companies, more than any industry in the world, are driven by tax issues,” said Mr. Flaschen. “That’s why the announcement about taxes was such a shocker.”

One hurdle Mr. Flaschen said that won’t stand in the way of a debt restructuring, either in bankruptcy court or out, is the Jones Act. That 1920 law requires that any shipment from one U.S. port to another be carried on vessels built in the U.S., owned by U.S. citizens, and operated by a U.S. crew.

“You can get around it,” said Mr. Flaschen, responding to a listener’s question. “I don’t want anyone to think Jones Act would preclude a restructuring. It’s a pain in the butt but that’s what lawyers are for.”

-By Patrick Fitzgerald. (c) 2012 Dow Jones & Company, Inc.

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