Overseas Shipholding Group (OSG) is doubling its debt load for the acquisition of Athens, Greece-based Stelmar Shipping. The company is financing the acquisition with cash on hand and its existing credit facility, according to Myles Itkin, cfo of the independent bulk shipping company. OSG is also assuming about $500 million of Stelmar's debt.
The company is currently in the process of evaluating how it intends to address the debt, Itkin said. Including the debt, the transaction is valued at $1.3 billion. OSG currently has about $600 million available under its existing credit facilities which are led by a series of different banks as well as individual, bilateral and small club transactions. UBS advised OSG and Morgan Stanley and Jefferies & Co. advised Stelmar.
Both Moody's Investors Service and Standard & Poor's placed OSG on review for possible downgrade following the acquisition as it will significantly increase the company's debt. "We have not as yet met with either S&P or Moody's and once we provide them with our plan we'll review those issues with them," Itkin responded. "It's merely a typical question they would ask about any sizeable acquisition." The S&P corporate credit rating is BB+ and the Moody's senior implied is Ba1.
The transaction will reduce OSG's financial flexibility, according to Kenneth Farer, an analyst with S&P. "To what extent we'll have to determine based on how much they actually fund," he added. While the company's debt load will be almost doubled, the expanded business will benefit the company. "We'll be looking to try to balance out some of the benefits that they'll be getting in terms of expanding into a business that has fixed term contracts that generate stable revenues and cash flow and also expanding their overall market share and scope of operations but also taking on a significant amount of new debt," noted Phillip Baggaley, head of S&P's aerospace, defense and transportation team. "There is substantial cash flow being generated from the transaction itself and it deleverages itself very nicely over the next 12 months," Itkin noted.
Additionally, the company is now using a more aggressive strategic and financial policy than in the past. "Management stated that they'll continue to look at acquisitions. The financial policy may be a little more aggressive now," Farer said. Last month the company announced a joint venture with Qatar Gas Transport Co. to order four 216,000 cubic meter large liquefied natural gas vessels. Over the last few years the company has chosen to build ships and buy ships to revitalize its fleet into modern double-hulled vessels. "This is very much a different path," he noted.
Stelmar, a publicly traded company, had announced a planned acquisition by Fortress Investment Group in September. But in November shareholders turned down that deal, a Stelmar spokesman said. "Following that shareholder vote a special committee of the board of directors initiated a process to solicit other proposals to purchase Stelmar and over the course of the last several weeks the board has had discussion with a number of parties... and the board feels the merger proposal from OSG was the best proposal for shareholders, he added." The transaction is expected to close in January.