The ratings of NYSE-listed tanker owner and operator Overseas Shipholding Group, Inc. (OSG) have been downgraded in anticipation of the spin-off of its international business/subsidiary, International Seaways, Inc. (INSW), previously named OSG International, Inc, according to Moody’s rating agency.
This includes a downgrade of the company’s Corporate Family Rating (CFR) to B3 from B2 and Probability of Default Rating (PDR) to B3-PD from B2-PD, Moody’s said.
The separation is expected to be completed on November 30, 2016. Concurrently, Moody’s downgraded the first lien senior secured bank facility to B2 (LGD3) from B1 (LGD3) and OSG’s senior unsecured notes due 2021 and 2024 to Caa2 (LGD5) from Caa1 (LGD6).
Moody’s also confirmed the Caa1 (LGD5) rating on the company’s senior unsecured notes due 2018. The ratings of the first-lien bank credit facilities borrowed by INSW (and guaranteed by OSG prior to the separation) will be withdrawn as those debts will accompany INSW upon separation. The SGL-2 Speculative Grade Liquidity rating was affirmed.
Moody’s said that the ratings downgrade reflects the combination of the company’s higher financial leverage pro-forma for the separation as well as the highly cyclical nature of demand and softening freight environment anticipated in the Jones Act market over the next year. The rating action also considers the smaller size of the post-spin company, as well as the loss of business diversification from the higher margin, albeit more volatile, international operations (INSW), which contributed EBITDA that supported OSG’s existing debt obligations.
The negative ratings outlook is driven by Moody’s expectation of a deterioration in credit metrics, amidst anticipated challenging business conditions in the Jones Act market, and contract renewal risk as charters on certain vessels expire in a market with higher supply.
“The negative outlook considers the age of the fleet, which reduces the company’s competitiveness against players with younger more agile vessels,” Moody’s said.