Today marks the start of an exciting new chapter for OSG. We are now a more sharply focused company with a leading and diversified position in the Jones Act market…we are confident that this focus will allow us to leverage our trusted operating franchise and strong balance sheet to address growth opportunities and drive shareholder value. We will continue to focus on the quality of our operations so as to ensure the delivery of safe, clean, reliable, incident-free transportation services to our customers
Apparently, investors felt the same way as OSG shares have moved up nicely, ~20%, since the spinoff. I guess they feel a bit more comfortable owning the regulated piece of the business, especially given the incoming administration’s attitudes on areas such as trade and protectionism. From a credit perspective, Moody’s was a bit more negative on the transaction and downgraded the now smaller company further into junk territory:
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 B3 corporate family rating reflects Moody’s expectation that debt to EBITDA, anticipated at about 4 times (inclusive of Moody’s standard adjustments) at separation, will likely deteriorate with earnings and cash flows under pressure as continuing supply-demand imbalances drive lower freight rates at which maturing contracts are renewed or vessels enter the spot market, increasing earnings volatility. Moody’s also views the company’s largely fixed cost structure and limited asset coverage as tempering factors. Moody’s believes that funded debt could increase should the company replace its fleet, which seems likely given the advanced average age of its vessels, particularly the articulated tug barges (ATBs), of which the majority are over 35 years. The rating also considers OSG’s leading position in its transportation markets and the relatively stable dynamics afforded by the Jones Act, including high barriers to entry. The company’s good liquidity profile and mostly contracted revenue base lend additional support to the ratings, even with new vessels entering the market, at least through 2017. The rating does not anticipate any dividends or new debt at separation, but anticipates that OSG will maintain financial policies and a capital structure that support the B3 CFR.
…and it only goes on from there. To be fair, there is a little paragraph at the end on factors that could lead to an upgrade such as paying down debt and improving its leverage profile.
Rough, but at least OSG’s shareholders witnessed some positive momentum whereas the International spinoff is down nearly 16% over the same period. That number even takes into account a huge gain on Tuesday following the release of its Q3 earnings report. To be fair, the spinoff is less than a week old so the data is pretty meaningless, but the expectation is that the international business will be more volatile. Although it is a big player, its fate is expected to be tied to the overall macro industry – if the overall shipping market improves then shareholders will reap the rewards, especially given the amount of leverage on the company. Of course, leverage is a proverbial double edged sword meaning that the stock could quickly tumble towards zero if the market takes a prolonged turn for the worse. This should be an interesting one to watch.
Disclosure: Author holds no position in any stock mentioned.
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