Overseas Shipholding Group Inc.'s warning that it may file for bankruptcy protection has companies that lease ships to the world's No. 2 tanker operator scrambling to find alternative customers and writing down the value of their OSG contracts.
Nearly 35 percent of OSG's 112-vessel fleet is leased, with contracts ending between 2013 and 2018.
"We are in contact with willing alternative operators should OSG fail to retain the bareboat charters, but we think this is an unlikely outcome so far," said Leigh Jaros, chief financial officer of Oslo-based American Shipping Company ASA, which has leased 10 tankers to OSG.
The book value of those tankers was about $932 million in the second quarter.
OSG, which has a stock market value of about $36 million, said last week that it was evaluating options including filing for bankruptcy protection as a result of a tax issue that could force it to restate results for at least the last three years.
OSG's main credit line, a $1.5 billion fully drawn facility, is set to expire in February, leaving it with few options other than to restructure, shipping and restructuring experts said.
The troubles at New York-based OSG could also ensnare Diamond S Shipping, backed by billionaire Wilbur Ross, which has eight vessels on lease to the company.
"The issue is that those charters (with OSG) were calculated as being good cash performers for Diamond S Shipping," said Paul Slater, chief executive of financial consulting firm First International Corp, which helps companies operate under the protection of a bankruptcy court.
Any loss of OSG charters could also affect the delivery of eight new Suezmax, or mid-sized tankers, that Diamond has ordered from South Korean yards, Slater said.
Deliveries were to have started in 2012, according to the private company's website.
OSG spin-off DHT Holdings Inc has already written down the carrying value of its fleet by $92.5 million, citing the four ships it has on charter to OSG as well as weak market conditions.
"With so much uncertainty about our future cash flow due to the OSG situation, we are going to play it very cautiously in the near future," Eirik Uboe, DHT's chief financial officer, said on a post-earnings conference call last week.
Daily rates for DHT's tankers chartered to OSG range from $20,700 to $33,500.
Companies that have leased ships to OSG said it had not defaulted on payments and that no charters have been withdrawn.
"The vessel charters are performing as per the terms of the time charter party," Diamond S Shipping Chief Executive Craig Stevenson told Reuters in an email.
DHT Chief Executive Svein Harfjeld said OSG had not sought to renegotiate any charter contracts. "They are current on payments to us," he said, while declining to speculate on how an OSG bankruptcy would affect his company.
OSG can cancel its charter-in contracts -- those that cover vessels a firm leases, as opposed to those it charters to others -- once it filed for bankruptcy, restructuring experts said.
"Charter-in contracts are an enormous problem in shipping companies these days," said Albert Stein, managing director at AlixPartners, a restructuring firm. "They can hold up the restructuring process."
Citing the example of Danish shipping group Torm A/S , First International's Slater said OSG would have to renegotiate chartering contracts for any reorganization to be successful.
Torm, which mainly operates dry bulk vessels, said last month it had renegotiated contracts with shipowners to align charter rates with market levels or had arranged to cancel them.
OSG would likely cancel the 10 ships it has chartered for its U.S.-flag fleet, Slater said.
Those ships are chartered from a unit of American Shipping Co, and were earning an average of $57,800 per day as of June 30, according to an OSG regulatory filing.
Kirby Corp, which has replaced OSG in the Dow Jones Transportation Average, has expressed interest in this fleet.
"We are watching the OSG fleet ... They control equipment which certainly is very attractive," Kirby Corp CEO Joe Pyne said on a post-earnings call last week.
OSG's shares have tumbled more than 80 percent in the past month. The stock, which traded for as much as $88.57 in 2007, ended at $1.20 on the New York Stock Exchange Thursday.
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