Lenders in Overseas Shipholding Group (OSG) have cooked up yet another plan of reorganization (POR) — this one intended to compete with the latest plan pitched by shareholders and supported by management, said three sources with knowledge of the matter. In comparison to that plan, the new proposal from lenders offers a larger recovery to equity holders who do not participate in a rights offering, two of the sources added.
Under OSG’s current POR, which it filed on 2 May, equity holders would receive subscription rights to purchase 11.5 shares at USD 3 per share as part of a USD 1.5bn rights offering. Those that decline to put more money into the company, meanwhile, would receive an uncertain recovery by recouping one share of a new class B security for each current equity share that they own. The disclosure statement does not detail terms of those securities; it only allows that holders will receive 10% of the proceeds from OSG’s lawsuit against former counsel Proskauer Rose.
By comparison, an earlier plan submitted by lenders that management rebuffed in order to side with the shareholder plan offered USD 61.4m in reorganized stock to current shareholders. OSG equity traded at USD 8.18 today for a market capitalization of USD 250.9, implying a 24.5% recovery for shareholders under that plan.
The lenders’ new plan would likely increase the amount of reorganized equity offered to current shareholders who don’t put in new money, the sources said. “In the equity-backed POR, shareholders’ recovery comes through a rights offering,” said one of the sources. “But if you’re not participating in the rights offering, your recovery isn’t much better than it would be in the original lender plan — and would potentially be less.”
Ten hedge funds — Alden Global Capital, BHR Capital, BlueMountain Capital, Brownstone Investment Group, Caxton International, Cerberus Capital Management, Cyrus Capital Partners, Luxor Capital Group, Paulson & Co., and Silver Point Capital — have agreed to backstop the rights offering. Those funds are slated to receive 5% of the aggregate amount raised in the offering as a backstop fee, and are betting that Judge Peter Walsh will deem fair a plan that requires equity holders to put up more money in order to receive a recovery, while the company itself will have less recoveries to dole out.
“For the lenders to give something to equity, it has to come out of lenders’ own recovery,” one of the sources said. “In the shareholder plan, anything going to equity comes out of the shareholders’ left pocket and into the right.”
Fight for control
The argument over shareholders’ recovery is rooted in both camps’ desire to control the reorganized company.
Under the company’s current POR, holders of its USD 1.5bn unsecured revolving credit facility would be paid out in cash. But lenders are looking to receive the reorganized equity themselves. As such, the new lender-backed plan, expected to be introduced to the court before confirmation, will call for equitizing the revolver, similar to the machinations of the lenders’ previous proposal, the sources said.
The revolver is quoted 105.7/106.4 today, according to Markit.
Bondholders, meanwhile, had been coalescing at the start of this year on a plan of their own. That group dissipated, however, after the company adopted the original lender plan, which would have paid out the USD 85m 8.75% unsecured notes that matured in December while reinstating its two other bond issues, a USD 300m 8.125% unsecured note due 2018 and a USD 146m 7.5% unsecured note due 2024.
The shareholder plan currently on file and the new lender plan treat bondholders similarly, the sources noted.
The 8.75% notes that matured in December last traded in size at 117 on 8 May, according to MarketAxess, while the 7.5% notes due 2024 changed hands at 110 to yield 6.121%. The 8.125% notes due 2018 traded at 118.25 on 7 May.
With slim chance of collecting reorganized equity, a group of holders of the USD 146m notes due 2024 filed an objection on Friday (16 May) that argues they should be paid out at 101% of face value plus accrued and unpaid interest. The group, represented by Womble Carlyle Sandridge & Rice and Sullivan & Cromwell, maintains that the change of control clause in the bond’s indenture should apply to the shareholder plan, as shareholders would effectively be taking over the reorganized company.
“The intent of the Change of Control provision is to protect against new equity owners acquiring control of OSG and taking risks (such as incurring too much debt) that expose the bondholders to loss. That is precisely what is contemplated by the Debtors’ Proposed Plan,” states the document.
Emerging in excess
A further concern for the company and Judge Peter Walsh, who is scheduled to hear arguments and objections regarding OSG’s current disclosure statement at a hearing on Friday (23 May), is how levered the entity will be upon emergence. The shareholder-backed plan calls for USD 1.35bn in exit financing, provided by Jefferies, split between two USD 600m term loans and two USD 75m revolving credit facilities, with one of each at OSG’s domestic and international businesses. By comparison, the original lender plan would have put USD 935m of debt on the reorganized company, provided by Goldman Sachs, with USD 450m going to the international unit and USD 485m going to the domestic unit.
In court filings, OSG forecasts that 2014 EBITDA will come in at USD 217.4m, with USD 139.1m of that coming from its US flag ship business. Given those estimates, OSG would emerge from Chapter 11 with 8.3x leverage under its own plan, based on USD 1.35bn in new debt and USD 446m in reinstated bonds. Under the lenders’ original plan, the company would emerge 6.4x levered.
But because volatile shipping rates can cause EBITDA to swing sharply, leverage for companies such as OSG is often based on asset value, according to industry analysts. With USD 4.7bn in total assets as of 31 March, OSG would emerge from Chapter 11 with 3.8x leverage under its own plan and 2.9x leverage under the original lender plan using an asset value-based calculation.
“You don’t want to put that much leverage on a new company,” said a buysider following the case. “That’s the whole point of bankruptcy — to emerge with a clean cap structure.”
Still, counsel for the company has indicated during past hearings that it will spin off its Jones Act business post-emergence. That plan is still going forward, multiple sources said, and will most likely take the form of an MLP. In such a scenario, OSG would shed its international business and nearly half of its debt load.
Milbank Tweed, counsel for OSG’s lenders, did not return a call seeking comment.
Article originally appeared in Debtwire. Link here (paywall).
by Kim Lightbody