Overseas Shipholding Group (OSG)
, the second largest publicly traded tanker company, said Monday in a filing with the U.S. Securities and Exchange Commission it is “evaluating its strategic options, including the potential voluntary filing of a petition for relief to reorganize under Chapter 11 of the Bankruptcy Code.”
The company said it is “in the process of reviewing a tax issue arising from the fact that the company is domiciled in the United States and has substantial international operations, and relating to the interpretation of certain provisions contained in the company’s loan agreements.
“As a result of that continuing process, on October 19, 2012, the Audit Committee of the board of directors of the company, on the recommendation of management, concluded that the company’s previously issued financial statements for at least the three years ended December 31, 2011 and associated interim periods, and for the fiscal quarters ended March 31 and June 30, 2012, should no longer be relied upon.
“The Audit Committee and authorized officers have informed the company’s independent registered public accountants of this conclusion. The company is continuing its review processes, including determining whether a restatement of those financial statements may be required, and the nature and amount of any potential restatement.”
The announcement by OSG referenced an Oct. 3 SEC filing in which the tanker company announced one of its directors, G. Allen Andreas III, had resigned because of a disagreement with the board about the tax issue.
OSG’s shares, traded on the New York Stock Exchange have been falling in value in recent weeks and yesterday plummeted 62 percent to close at $1.23, trading at one point for $1.02. The company’s 52 week high was $15.16 and back in 2007 the shares traded for as much as $90.
Urs Dur of Clarkson Capital Markets said for some time his firm had "held the position that OSG, despite challenging tanker markets, would be able to reach an accommodation with its banks regarding a financing gap between its existing unsecured debt facility which matures in 1Q13 and the new unsecured facility replacing it.
"We continue to believe that OSG has substantial unencumbered assets and the US flag assets, in particular, hold value. However the announcement today that OSG’s board has concluded that it cannot rely on the last 3 years of financial statements, that up to 3 years of financial results may have to be re-stated and that its strategic options include a Chapter 11 filing, substantially lowers the possibility of any favorable outcome," Dur said.
He added "valuing OSG today has become a starkly opaque process. While they still may get a solution, it is, in our view, nearly impossible to take a position as to what a solution might look like."
Dur expects "even the most speculative investors to stay on the sidelines for now."
Michael Webber, senior analyst at Wells Fargo Securities, said he believes the tax issue is related to unrecognized deferred U.S. income tax of $770 million related to $2.2 billion in undistributed earnings.
"From our understanding, keeping this liability off OSG's books is permissible, provided that there is no intent to repatriate the income," he said. "We believe that by potentially pledging liens or having foreign subsidiaries pledge debts raised from a U.S. borrower (i.e. OSG looking to secure additional secured debt to plug is liquidity gap), the likelihood that repatriation has at least increased to the point that it cannot be ignored."
Webber said "this is clearly a complex issue that the market is still struggling to get its arms around."
As of July 30, OSG had 112 ships in its fleet, 67 owned and 45 chartered, and had two under construction. It operates a highly diversified fleet that encompasses crude, product, and gas tankers across a wide range of sizes—VLCCs, Aframax, Suezmax, Panamax, Handysize, and includes vessels used for lightering and floating storage offshore as well. Ninety of those ships operate with foreign registries, but 22 are U.S.-flag tankers or articulated tug barges units (ATBs). In 2006, OSG acquired the U.S.-flag tanker and barge company Maritrans.
OSG been a bulwark for U.S. shipbuilding industry. In 2005, it ordered 10 tankers from the Aker Philadelphia Shipyard, and eventually acquired a dozen tankers built by the yard. - Chris Dupin