May 15, 2008
Joint venture says $500 million still in place for NASSCO tankers
USS Products Investor LLC, a joint venture formed and financed by affiliates of the Blackstone Group, other investors and U.S. Shipping Partners L.P. (NYSE:USS) to finance the construction of five 49,000dwt Jones Act tankers by NASSCO confirmed today that the $500 million of financing committed by the parties remains in place.
USS Products Investor LLCsays it has obtained charters for four of the five NASSCO newbuilds and is actively pursuing additional charters. Construction is currently on time and on budget. NASSCO is currently scheduled to deliver the first tanker in the second quarter of 2009, the second tanker later in 2009, two tankers in 2010 and one tanker in 2011. In addition, the joint venture has the option to obtain U.S. Shipping Partners' rights to have NASSCO construct an additional four tankers.
The joint venture, which is 60% owned by affiliates of the Blackstone Group and other investors, and managed and 40% owned by U.S. Shipping Partners, says it has $500 million of committed debt and equity financing, including $430 million of committed debt and equity financing from affiliates of the Blackstone Group and other third party investors, and $70 million of equity from U.S. Shipping Partners that is already funded and secured by a letter of credit.
The joint venture's business operations and the construction of the five product tankers is continuing as planned.
Moody's said it believes that the weak fundamentals currently affecting USS' petroleum and chemical tanker operations are likely to continue into the second half of 2008. Funds from operations are likely to continue to be stressed over the near term because five of the six ITB (integrated tug-barge) vessels are now trading in the spot market. Spot rates have significantly weakened since the beginning of 2008 and decreased demand for cargoes has decreased utilization rates. This will likely challenge USS to maintain compliance with one or more of the financial covenants of the $350 million first lien senior secured credit facility ("Credit Facility"), as USS management disclosed on the company's Q1 2008 earnings call held on May 13, 2008.
Moody's also believes that the trading prospects of USS' integrated tug-barge units ("ITB's") are limited relative to those of modern, double-hulled vessels, because of the increasing excess capacity of Jones Act tanker tonnage and charterers' preference for modern, double-hulled vessels.
Additionally, the planned dry-docking of three of the company's four chemical tankers in the second half of 2008 will result in an about $15 million call on cash at a time when earnings from that fleet will diminish. The revolver may be needed to fund these dry-docks. However, USS might not maintain access to the revolver if it is not able to maintain compliance with the covenants.
The Caa3 rating reflects Moody's belief that the probability of default has increased since the previous rating action of December 13, 2007, as USS has been unable to arrange time-charter cover for the ITB fleet and 2008 market conditions, including in the chemical trades, have weakened more than anticipated at that time.
Moody's said that it "expects earnings and cash flows in sequential quarters to weaken from the levels reported in Q1 2008 because it does not expect a sustained recovery of spot rates over the near term. Significant uncertainty remains about the contributions to earnings and cash flows of ATB's three and four as time charters have yet to be arranged for either of these vessels; or about whether USS will obtain control of the NASSCO products tankers given its weakening credit profile and the high cost of these tankers. Liquidity is weak, notwithstanding the suspension of the distribution to the subordinated unitholders."
Moody's said the negative outlook reflects the uncertainty as to whether USS can maintain compliance with financial covenants to maintain access to the revolver. The ratings could be downgraded further if USS lost access to the revolver, or it became apparent that a negotiated debt restructuring was to occur. The ratings or outlook could be favorably affected if the trading prospects of the ITB fleet unexpectedly improve, such that positive earnings on these vessels would be expected and USS was certain to maintain compliance with the financial covenants of the Credit Facility.