January 21, 2009
S&P cuts OSG ratings outlook
Standard & Poor's Ratings Services has revised its outlook on Overseas Shipholding Group Inc. (OSG) to negative from stable. It affirmed the 'BB' long-term corporate credit and senior unsecured debt ratings.
"The outlook revision reflects our expectations that, over the next year, earnings and cash flow will come under increasing pressure due to declining tanker rates caused by the sharp global economic slowdown and exacerbated by multiple production cuts by OPEC [an attempt to curtail the decline in crude oil prices]," said Standard & Poor's credit analyst Funmi Afonja.
S&P notes that the volatile spot market accounted for approximately 64% of revenues at Sept. 30, 2008, after taking into account the use of forward freight agreements to fix a portion of the revenues from the spot market. OSG has been shifting increasingly to fixed-rate time-charters, which provide more stable and predictable revenues, and is also diversifying into less volatile businesses, such as LNG shipping, where its exposure is managed through a strategic partnership with an experienced gas shipping company and supported by long-term time charter contracts.
S&P says that OSG's credit profile also benefits from its solid market position in the U.S. domestic shipping trade, which is protected from foreign-flagged competition.
"Despite OSG's diversification efforts and ongoing shift toward a more stable revenue base," says S&P, "we believe earnings will remain vulnerable to market conditions."
Ratings on New York, N.Y.-based OSG reflect risks of the competitive and capital-intensive shipping industry and the company's aggressive financial policy characterized by share repurchases and increased dividends. Positive credit factors include satisfactory liquidity and a well-established market position in the ocean transportation of crude oil and petroleum products. The shipping company had about $3.3 billion of lease-adjusted debt outstanding at Sept. 30, 2008.
"The negative outlook," says S&P, "reflects our expectations that tanker rates will continue to decline over the next year and could cause a meaningful deterioration in the company's cash generation and financial profile. If this were to happen, causing debt to EBITDA to increase to 6.0x for a sustained period, we could lower the ratings. We could revise the outlook to stable if tanker rates become materially more favorable than our 2009 expectations and we expect that improvement to be sustained."
Ratings take into account the company's high exposure to spot market and incorporate an expectation of some volatility to its credit measures due to market conditions.
Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com.