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Executives

Jim Edelson - General Counsel and Secretary

Morten Arntzen - President and CEO

Myles Itkin - EVP and CFO

Lois Zabrocky - SVP and Head of International Product Carrier Strategic Business Unit

Analysts

Jon Chappell - JPMorgan

Gregory Lewis - Credit Suisse

Natasha Boyden - Cantor Fitzgerald

Urs Dur - Lazard Capital Market

Justine Fisher - Goldman Sachs

Rob MacKenzie - FBR Capital Markets

Overseas Shipholding Group, Inc. (OSG) Q1 2009 Earnings Call May 4, 2009 11:00 AM ET

Operator

Welcome to the Overseas Shipholding Group First Quarter 2009 Earnings Conference Call. (Operator Instructions).

I would now like to turn the conference over to Jim Edelson, General Counsel. Please go ahead.

Jim Edelson

Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets, the outcome of negotiations with American Shipping Company ASA, the completion of agreement with Bender Shipbuilding & Repair Company, changing oil trading patterns, anticipated levels of new building and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of the OSG gas transport business, estimated TCE rates achieved for the second quarter of 2009 and estimated TCE rates for the third and fourth quarters of 2009, projected scheduled drydock and off hire days for the second, third and fourth quarters of 2009, timely delivery of new buildings and conversion of vessels in accordance with contractual terms, credit risks of counterparties including charterers, suppliers, lenders and shipyards, locked-in charter revenue for 2009 and thereafter, estimated revenue and expense items for 2009, projected liquidity for 2009, 2010 and 2011, prospects of OSG's strategy being a market leader in the segments in which we compete, the projected growth of the world tanker fleet and the forecast of world economic activity and world oil demand, factors, risks and uncertainties that can cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K for 2008.

For this conference call, we've prepared and posted on OSG's website supporting slides that supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations Webcast and Presentation section on osg.com.

With that out of the way, I'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen.

Morten Arntzen

Let me introduce the management team. With me here in New York is Myles Itkin, EVP and Chief Financial Officer; Mats Berglund, the Head of our Crude SBU; Marc La Monte, the Head of our Gas SBU; Lois Zabrocky, Head of our Products SBU; Jennifer Schlueter, Head of Corporate Communications and Investor Relations. You've already heard from Jim Edelson. Joining us by phone from Tampa is Captain Bob Johnston, who is the Head of our US Flag SBU.

As Jim indicated, our remarks today will follow a presentation that is posted on our website, so if you will please turn to slide three. Overall, the first quarter results were solid. TCE revenues were $293 million, down 22% quarter-over-quarter. EBITDA was $176 million, roughly flat from a year earlier. Net income was $122 million, up 8% from last year's first quarter. Reported EPS was $4.53 per share, up 26% quarter-over-quarter.

The strong financial results in the quarter were due to continuing efforts on a number of fronts; continued active management of our assets, which resulted in $129.8 million in earnings through vessel sales. Tight cost control efforts drove a 27% or $10 million quarter-over-quarter decline in G&A. All other operating expense numbers were within or lower than guidance we previously provided as we continue to focus on controlling expenses throughout the company at sea and onshore.

As we indicated in our last earnings call, we took a charge of $36 million associated with terminating contracts with Bender, Tampa Bay SGR that was building our US Flag ATB. Finally, we had a strong performance from our tanker pools in a very difficult environment.

Now, rates across most of our vessel classes were in line with what I would call a normal first quarter rate environment, which is why we have shown the first quarter 2007 numbers along with the 2008 numbers. Quarter-over-quarter comparisons, however, are a bit more complicated because of the extraordinary strong first quarter last year.

Going back to the first quarter of 2008, many factors converged in our favor. OPEC increased production by 5%. The VLCC fleet contracted as a result of conversions and limited deliveries. Oil demand was up 1.5% and weather delays increased tanker utilization. China oil demand was up 12%. Finally, crude transportation markets reacted quickly to the Hebei Spirit accident off the coast of South Korea in the end of 2007, increasing the discrimination against single hull tankers and sending rates soaring.

That was then. First quarter of 2009 saw rates return to more historical ranges, even as world oil demand declined just under 4% or 3.2 million barrels from last year. The recession started to take hold worldwide. OPEC production cuts made in the fourth quarter largely in the Middle East resulted in a 10% decline from the first quarter 2008 levels. Refining utilization in the US dipped to the low 80s. Finally, the tanker fleet grew by a net 15 ships.

In our favor was the contango effect resulting in an estimated 35 tankers being used for storage, which is resuming in strength in the second quarter.

Please turn to slide four. It's no secret that 2009 is going to be a tough year for ship owners irrespective of what segment you are operating in. I have been in this business for nearly 30 years, I've seen my share of volatility and weak tanker markets. With the highs come the lows. You can't always plan for them, but you have to be prepared for them.

OSG's balanced growth over the past several years has built a business that is prepared for times like these. As I have repeated many times, we have built the company to be prepared for the surprises that the shipping industry throws our way. Our financial strategy is centered on maintaining a strong balance sheet, maximizing returns on investment and having a liability structure and commitment levels that are manageable. This differentiates OSG from our peers.

We continue to actively manage our portfolio of assets, ordering new vessels when it makes sense both strategically and financially; selling profitably when we can and building in flexibility by chartering vessels. In the first quarter, asset sales generated $240 million in cash proceeds from the sale of the Overseas Donna for $127 million, the Mindoro sale leaseback for $65.5 million and $50 million from the sale of the TI Africa. As previously disclosed, another $58 million is expected in the second quarter from the sale of the Panamaxes, the Reginamar and Reinemar.

There isn't an investor I talked to that isn't interested in OSG's cash generation capabilities in any market. In 2008, asset sales generated $462 million cash, and in 2007, $224 million. When opportunities arise, you can expect us to take advantage of them.

Operating and commercial pools benefits our customers and our partners, and is a strategy we deployed to maximize returns. All of our commercial pools have and continue to build strong regional trading presence with key partners. On a relative basis, this will benefit OSG in a down market as cargo contracts keep our ships trading with cargo a greater percentage of time than most of our competitors, as you can see from the Laden to Ballast ratio in the slide and the high COA coverage in our main pool.

Please turn to slide five, weathering the storm. It is very difficult to forecast when the recession will end and how quickly energy markets will recover. Nonetheless, we are taking multiple actions at OSG that will strengthen the company in the long and short run. Each alone is not a transforming event, when added up together are significant contributors to the business.

It all starts with liquidity, which was $1.7 billion at quarter end. Our highly liquid position, combined with our strong balance sheet, means we could focus on running the business well, take advantage of opportunities that arrive at prices that work for us and continue our focus on reducing costs.

Through a company-wide process that commenced in 2008, we identified $20 million of G&A cut that we began to act on last year, and you'll see later in this presentation have reduced our annual G&A guidance. We restricted travel and put in place more economic travel guidelines. Unfortunately, we could not eliminate the corporate jet since we never had one in the first place.

We have a limited a number of redundant positions. We are renegotiating consultant and other third-party fee or eliminating some of these relations altogether. We revamped downward our incentive compensation and salary structures, and we continue to evaluate other areas where we think we can save money, both at shore and at sea. Moving on, the $278 million in locked-in revenues for the balance of 2009 is critical to our balanced approach. In addition, we are pleased with the decision we took back at the end of 2007 when we took FFA positions, which now look very well timed.

Please turn to slide six. We expect good returns and cash flow on the FSO project to be significant. Bringing this project on-time and on-budget is the single most important project for us right now. Losses eliminated, you've heard me talk about this before. The drag on earnings in our products SBU, remaining nine older MRs will be lifted by the beginning of the third quarter. This fleet replenishment program means Lois can improve profits by approximately 4,500 per day per vessel.

Our US Gulf lightering provides stability. Since purchasing Heidmar lightering in 2007, we have doubled the fleet, doubled the number of fixed rate contracts and doubled our market share. We entered this segment as a hedge to our Aframaxes. We expect to do just that in 2009 and into 2010.

Please turn to slide seven. At OSG, we are focused on running our business for long-term. We excel in bull market and will not only survive, but remain strong through troughs. Our Board holds us accountable for both short-term performance and long-term value creation.

The strength of our balance sheet and financial position will enable us take advantage of this uncertain market. We expect opportunities for well-funded and well-capitalized companies like OSG to arrive. Staying focused day-to-day and doing what we can to improve the business.

There are many actions we can take to build value that are not market dependent. We have an internal list of 25 priorities to help everyone stay focused despite the turbulence and sometimes depressing days of single digit rates. These are thing we can do that are not market dependent.

Finally, in the medium term there are number of market factors to consider, which we think can lift the tanker market. The single hull phase-out acceleration, we expect all the five of the remaining single hull VLCCs to exit the fleet by 12/31/2010. This means the VLCC fleet will contract next year.

We expect significant new building order book disruption due to deteriorating shipping credit markets. There have been no new orders of tankers since August 2008, and until the ship financing markets recover, there is little likelihood of any new ordering. Finally, the recession will winnow out weak shipyard and companies, which will both create opportunities and strengthen the long-term prospects for the tanker industry.

That concludes my introductory remarks. Let me turn the call now over to Myles, and then we will take questions.

Myles Itkin

Please turn to slide nine for a discussion of OSG's liquidity. Our strong levels of liquidity position us well in this challenging business and credit environment, and we are not facing any liquidity challenges. Our liquidity position enables us to maintain significant financial flexibility and to consider strategic opportunities as and when they arise.

Net working capital of $774 million includes nearly $600 million in cash and cash equivalents. Our cash position is augmented by $1.1 billion in availability under credit facilities, $950 million of which is available on an unsecured basis. All of our debt agreements have uniform covenants and not one contains a collateral maintenance clause. Our corporate debt covenants provide substantial room for additional borrowings currently in excess of $1 billion, and our covenants provide enough room to navigate VLCC through.

Our long-term debt outstanding totals $1.38 billion and net debt totals less than $800 million. With scheduled debt amortization over the next three years of $21 million, $30 million and $33 million respectively, we have minimal refinancing requirements, allowing us to stand on the sidelines of a contracting ship financing market.

Substantial cash resources, high levels of committed availability under unsecured credit facilities and small scheduled debt amortization through 2011 enables us to act on opportunities as they present themselves without the need to access debt or equity markets for new funding.

Please turn to slide 10 for a review of our capital commitments. Our funding requirements for newbuildings aggregate $828 million through 2011. Drydock expenditures during the same period total $99 million. Even without reference to cash flow from operations, our $1.7 billion in liquidity comfortably handles our $927 million of capital requirements over the next three years with $700 million in liquidity remaining.

Slide 11 shows that 71% of our remaining 2009 cash expenses are covered by fixed revenues. Despite the recent rate decline, our cash flow breakeven point for 2009 remains very manageable. Our VLCCs need to earn only $2,000 per day over the balance of the year, Panamaxes $1,000 per day; Aframaxes $18,000 per day and Suezmaxes $44,000 per day, although we only have three Suezmaxes in the fleet in 2009.

Please turn to slide 12 for a highlight of certain income statement line items. Despite challenging market conditions, we generated EBITDA of $176 million for the first quarter of 2009. Although the drop in rates resulted in $83 million decrease in TCE revenues for the first quarter, this was compensated for by $130 million in gains realized through the forward sale agreement of two vessels and is reflective of our portfolio optimization strategy.

As part of our overall effort to respond to current market conditions, our general and administrative expenses decreased by $10 million to $27 million in the first quarter of 2009 from $37 million in the first quarter of 2008, resulting from our previously announced company-wide cost control efforts. This decrease was driven primarily by a reduction of $6 million in compensation and benefits for shore side staff and from lower legal, consulting and travel and entertainment expenses.

Interest expense decreased by $7 million during the first quarter of 2009, primarily as a result of the 300 basis point decline on floating rate debt to 2% from 5% and from lower outstanding average debt balances, which decreased to $1.4 billion in 2009 from $1.6 billion in 2008. The redemption of our $176 million 8.25% senior notes during the second quarter of 2008 continues to reduce interest expense by about $7 million per annum through 2013.

Please turn to slide 13 for a discussion of two changes in balance sheet presentation. During the first quarter of 2009, the company adopted FAS 161, an accounting standard requiring additional derivative instruments disclosure. To facilitate transparency, we have changed our prospective presentation of derivatives on the balance sheet.

These results in the assets and liabilities associated with derivative positions being aggregated by counterparty and classified between current and long-term portions. Collateral pledged to or by counterparties have also been reclassified to current assets and current liabilities for the first quarter 2009 to correspond to the derivative assets or liabilities to which they relate.

An additional point to highlight is our adoption of FAS 160, an accounting standard addressing the presentation of non-controlling interest. Total equity for yearend 2008 has been recast to include the non-controlling interest amount previously referred to as minority interest and recorded in the mezzanine section between liability and shareholders equity.

On slide 17 of the appendix, you will see that we have lowered our full year expense guidance on time and bareboat charter hire expense, D&A expense and interest expense. Finally, before opening it up to questions, we would like to invite all our institutional investors and analysts to our Annual Investor event on May 21 in New York. Please be good enough to contact Jennifer Schlueter to register for this event.

Now, we will open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jon Chappell with JPMorgan.

Jon Chappell - JPMorgan

The use of the word "opportunities" was pretty prevalent in your presentation. Can you talk about what opportunities are out there today?

Also, in past conference calls, you've made reference to not being in a rush, waiting a little bit longer. Can you talk about your views on asset prices, and therefore, how that translates to opportunities? Do you think that better pricing points might come in somewhere down the road?

Morten Arntzen

What we have said pretty consistent is that we think that the banking markets clearly are still very troubled and the ship financing markets have been hit relatively harder than the overall banking markets. That hasn't changed. There is almost no new money available for ship financing in the world, no more mortgage lending new money. If you looked at the sum total of the top 10 shipping banks, they are trying to reduce their portfolios, not increase them.

There is still a huge amount of unfinanced newbuildings at the world's shipyards. Depending on whose numbers you use, it's somewhere between $70 billion and $100 billion worth of unfinanced newbuildings. Those are going to require a combination of equity, which exists in some amounts, but not enough to finance that, and debt financing, which does not exist. It's that combination of lack of bank financing, expensive newbuilding commitments relative to where values are today and the fact that you have poor markets in practically every segment in shipping.

We always expected that most of the 2009 deliveries would get built, though that number would slip into 2010. It is now that owners have to start putting down their second and third installments for deliveries that come in 2010 and 2011. If they don't have it, they're going to have a problem. If they need to go to a bank to get money, they can't get it.

So, what is going to happen is that that combination of newbuilding commitments, lack of bank financing, in some cases refinancing risk or covenant risk is going to create distress sales. We have started to see small amounts of this. There may have been one last week that we saw.

Compare that to the secondhand market, I could give you what's happening in the secondhand market, but the reality is there is no secondhand market right now. There are very few sales, it's not a liquid market and there is no financing for it. The sales you're going to see are going to be distressed sales that come out of yards and banks.

Now, they won't be reflective of what I would say would be a willing buyer, willing seller purchase or sale of a ship, but it will create very interesting levels, easily 40% below where values were 12 months ago and improving. There will be deals that we would only enter into if we could be certain that they were accretive and they made sense on long-term historical rates and levels.

Those are starting to come. We'll see a lot more of them as we move into the second half of the year and the shipping industry goes through some very creative destruction. That, we believe, is going to happen. Does that answer the question, Jonathan?

Jon Chappell - JPMorgan

Yes, extremely helpful. As a follow-up to that, on your use of cash, you guys had a huge cash build-up to the first quarter because of the asset sales. Would it be safe to assume that you're just going to keep that cash liquid and you're not going to pay down any debt right now, just keep your powder dry for those opportunities?

Morten Arntzen

I think this is a time to stay liquid and we intend to stay liquid. Since we continue to generate cash from operations and other things, we will continue to build cash.

Jon Chappell - JPMorgan

I have one follow-up question just for Myles on the modeling. You put in one of the appendices that the unrealized gain from the FFAs was about $0.04 per share. I'm assuming there were some realized gains associated with that as well. Is there any way to break that out in the first quarter?

Myles Itkin

I will provide that to you separately. I will give you a call after the conference call.

Operator

Our next question comes from the line of Gregory Lewis with Credit Suisse.

Gregory Lewis - Credit Suisse

Morten, when you mentioned the $70 billion to $100 billion of unfinanced newbuilding, is that exclusive to the tanker market?

Morten Arntzen

No, that's across the shipping world.

Gregory Lewis - Credit Suisse

I'm curious to get your thought on the recent announcement by the Koreans and Chinese governments that they are going to look to support their shipyard as aggressively as possible.

Morten Arntzen

I think we've said all along that we expected both the Chinese government and the Korean would provide some support. The Chinese government probably has a greater capacity to support, to throw money at these given the foreign reserves of China. If you look at Korea, it's now about $7 billion they've pledged. That's both first to support Korean shipping companies, so they can both stay afloat and take delivery of newbuildings, and some support for the yards. If you look at the Chinese, they've announced that they're going to do similar support. We've always expected that the big yard groups, the northern and southern yard groups in China would get supported.

On the other hand, we did not expect either the Korean government or the Chinese government to provide financing so that yards can build ships that have been either walked on by clients. They walk because they choose to or walk because they go bankrupt. So, I think that money will provide and ensure that some ships will get built that we wish wouldn't, but the hole is so big that we don't see it being filled by those two. We don't see them throwing money at holding up bankrupt Greek, Hong Kong, Norwegian, American shipping companies.

Gregory Lewis - Credit Suisse

You talked about distressed sales. US Shipping finally filed for bankruptcy. When you sort of look at their assets whether they be on the water or their joint venture with private equity firms is that something you are actively looking at, at this point?

Morten Arntzen

I think that's too close to our backyard for me to give a perspective on. We constantly monitor all the opportunities in our four segments and we'll continue to do that. With regard to US Shipping we have no interest whatsoever in the older assets in the company, if that was the specific question.

Gregory Lewis - Credit Suisse

In the press release, you talk about VLCC fixed days that are open. I'm a little bit confused in what that means. There are 461 fixed VLCC days that are open. Is that related to bunkering, not being fixed?

Morton Arntzen

It's the ships that are subject to the spot market for whom we have not locked-in a voyage yet for the balance of the quarter.

Gregory Lewis - Credit Suisse

So those 461 fixed days are not related to potential FFA contracts?

Myles Itkin

Yes, they are related to FFA contracts.

Morton Arntzen

The 44 a day is covered by FFAs.

Myles Itkin

Yes, up until this point when we reported. And the 37 a day is the spot that's fixed up until that date.

Gregory Lewis - Credit Suisse

In other words, there's 461 open VLCC fixed days that have contracts for $44,000 a day?

Myles Itkin

No, it's the other way around. 358 are final and done and concluded as of April 17. The 461 are still open. We have FFA contracts against them, but we don't disclose the rate because of basis risk factors. The 461 are covered by FFAs.

Operator

Our next question comes from the line of Natasha Boyden with Cantor Fitzgerald.

Natasha Boyden - Cantor Fitzgerald

I wanted to ask a question, I suppose it's been pretty prevalent, about counterparty risk. Given how rates have been cratering recently, have any of your charterers indicated that they may not be able to fulfill any of their contractual obligations given recent market instability?

Myles Itkin

No, not at all. We monitor counterparty risk on a regular basis. There has been no evidence of that to-date.

Natasha Boyden - Cantor Fitzgerald

I wanted to talk about your US Flag business, specifically regarding the cancellation of the flag vessels of Bender. Which alternative yard did you choose to have the other vessels built at? I think you may have mentioned it before, but if you could just remind me.

Myles Itkin

The first vessel was being constructed at Halter and the second one is under negotiation.

Natasha Boyden - Cantor Fitzgerald

At this point in time, do you anticipate any further delays or charges?

Myles Itkin

No. Not beyond that which we've already disclosed.

Natasha Boyden - Cantor Fitzgerald

I think you noted in the press release that you currently have three of your US Flag vessels in lay-up due to the weak market. What is your sense of how long you intend to keep those vessels in lay-up? Obviously, haven spoken to other of your peers that the market is pretty weak, but can you give us your thoughts on that matter?

Myles Itkin

We are currently planning for lay-up of a six-month duration.

Natasha Boyden - Cantor Fitzgerald

Speaking of lay-ups, given the product market where it stands right now, moving back over to the international side, are you hearing any rumblings of owners thinking about putting their ships into lay-up, or have you seen any evidence of that?

Lois Zabrocky

No, we have not seen anybody considering lay-up. You certainly see people considering going at economical speed and taking that choice when it is appropriate. We've been tracking lists of vessels and seeing how many ship you have sitting in each of your major markets, such as the Arabian Gulf or the US Gulf. We've seen a picking up of the market in the west, we're still seeing some lagging of the market in the east, but essentially the returns have come back up maybe in the last 10 days.

Natasha Boyden - Cantor Fitzgerald

Myles, if I could also get that realized gain number that would be very helpful.

Morten, if I could ask you a very, very large macro question that would be helpful. The last four or five years there has been a phenomenal cycle for tanker markets in general. I think China played a huge part in that. Can you give us your outlook in terms of what you think is a more normalized cycle, what it looks like, whether or not you think '09 or '10 will be the trough? In particular, what a more normalized shipping cycle would like look like for those of us who haven't been in the market longer than since 2001 or 2002 and how you think this is going to play out over the next two, three years?

Morten Arntzen

I've only been in it for 30 years.

Natasha Boyden - Cantor Fitzgerald

That should give us a lot of good insight then.

Morten Arntzen

No, I did help with some of the Norwegian guarantee institutes' bailouts of some of the companies that went bust during the first tanker crisis in the early '70s. If you look at the three dramatically down periods, it was '72, '73, the first tanker collapse, then it was the '81 to '84 period, and now it's been this last 12 months. All of them have really substantial differences.

The first tanker boom collapsed when oil went from $2 to $11 to $24, and all of a sudden the world discovered that there was oil in places like Mexico, the North Sea, Venezuela, West Africa and ton mile demand collapsed and that stayed for a while. In '81, it was a function of overbuilding and a collapse in world trade. The big differences between now and those two is you had viable banking systems in the mid '80s and in the '70s. So while the shipping markets were weak, you had banks that could provide liquidity.

That's changed. Today, we're in a completely different game because of nonfunctioning bank market, and we do not expect the ship financing market to turn around for two or three years. This is my macro perspective. There is no question that if this boom had continued into 2009, 2010 that I think collectively the shipbuilding world would have built more shipyards and more ships than we needed.

While this period we're in right now is extremely painful, a lot more painful for others than it is for OSG because of our balanced strategy, it's probably the best thing that could have happened collectively to almost all the shipping markets, because it's going to take a lot of the shipyards out of business. It's going to mean that a lot of shipyard expansion projects that were going to happen won't. It's going to mean a lot of ships that were scheduled to be delivered in 2010, 2011, either won't get delivered at all or will get pushed back.

So, in fact, you need to have obviously OPEC levels for the tanker industry to get back to sort of 2006-, 007 levels to have a good strong tanker market. I think the collective view of the people on the call here is as good as ours. We think the energy markets will recover as the world economy recovers, If you then look at the forward order book and make some reasonable assumptions about cancellations, you have a very possibility that you could have another very strong three to five year cycle in our business once the world comes out of this recession, and the oil markets recover.

So, while painful, this in many ways is the best thing that could have happened to us. Having three or six more months like this is going to weed out a lot of players and it's going to make decisions about cancellation a lot easier. While I sound optimistic, I don't sleep at night; but I think in the long run I'm going to be sleeping better.

Operator

Our next question comes from the line of Urs Dur with Lazard Capital Market.

Urs Dur - Lazard Capital Market

Most of my questions have been answered. I think though of interest is the position of the dividend, since even after your nice run the last few days, you're at a historic high yield, which I think is attractive. Can you give us commentary on dividend outlook going forward? Obviously, it's reviewed every quarter, but are you under any pressure? I know you've mentioned you are well within all of your covenants.

Morten Arntzen

I'm going to give the same answer we give every quarter. Our Board reviews the dividend every quarter, takes into account opportunities, the banking market, the overall health of the tanker market, execution of our business plans, and we'll continue to do the same.

Operator

Our next question comes from the line of Justine Fisher with Goldman Sachs.

Justine Fisher - Goldman Sachs

The first question that I have is about the smaller/distressed companies going bankrupt. It seems that there have been a lot of companies both in and outside of shipping that, I guess, people thought should have filed either because they had poor capital structures or because they were going to run into issues with the debt that they had borrowed. Because the banks themselves don't want to actually own the assets, they've given them relief on covenants or other ways in which to free-up liquidity for these guys, so have you been surprised?

Are there any companies that you've been surprised haven't filed because the banks have stepped in? Do you see the lack of the banks line to actually take on those assets is one thing that might forego such filings?

Morten Arntzen

I could answer (inaudible) and say there's a couple other that we thought the Justice Department would be after. In all honesty, if you went back to the mid '80s and the early '70s, when the shipping markets collapsed the way they have and asset values fall off, if you went back to both the other problem periods, when the problems first arise, the bank are very reluctant to take early losses. They would rather work things out, and usually it won't be until the owner is completely out of cash and the banks are confronted with the possibility of having to pay for bunkers or crew changes or port charges or whatever that things start getting out of hand. That's one.

The second one is if somebody is so big and the banks are so exposed, and you can go back to something like OOCL in the mid '80s where they owed the banks $3.5 billion and their asset value was about $500 million at the time, then the banks are going to stretch because it's in their interests. You need to get the owners really at the brink of running out of cash or you need to have a shipyard with a 40% completed or 60% completed ship and nobody there to pay the balance.

We're headed in that direction now. Banks haven't learned that sometimes the first loss is the best loss. The situation will get worse, the losses will get worse and that's when you'll see the distressed situation. So nothing surprises me so far.

Justine Fisher - Goldman Sachs

If you were to characterize either how far along we are in terms of getting rid of the riffraff or how many companies, whether it's a few, a decent amount or a lot, that are both small and close to running out of cash or both small and close to running out of cash such that the banks wouldn't want to rescue them, how would you characterize that? Are we just at the beginning or are we farther along?

Morten Arntzen

I think we're at the beginning, but the magnitude of the financing shortfall dwarfs what we had in the mid '80s. In the mid '80s, it was more about rolling over existing debt and providing working capital and such. The hold of finance there is much greater, and then you mentioned a couple banks, RBS has said they want to reduce their shipbuilding book by 40%. I think HSH has publicly said 50%. These are two of the three biggest ship lenders in the world, and yet a number of the prominent ones have said they'll keep their book flat.

If you take those numbers, and recognize that there is no secondhand market today so banks are not getting repaid because somebody sells the ship, and they are allowing skip maturities or postponing debt repayments for a couple of years, that shortfall is going to start hitting companies big and small all over the globe.

I think in the journal today they talked about investment grade revolving credit facilities now being cut to one year. When you see investment grade global multinationals being cut back by their banks to 364 day revolvers it tells you that the financing challenge for somebody who is used to borrowing 70%, 80% to buy a long-life asset like a VLCC or Capesize bulk carrier, container ship, they're going to struggle. So we're just at the beginning, which is why we're being patient.

Justine Fisher - Goldman Sachs

Along those lines, do you guys have in place facilities to fund the rest of your new builds, or when are you guys planning to do in terms of that? Have you guys heard from your bank that they are looking to cut the duration of your unsecured facility?

Myles Itkin

No. There is a contractual commitment on the unsecured facility. So although there might be a desire, we're well protected within that regard. If you take a look at what we have in terms of cash and ready availability under the unsecured revolver, we have more than a sufficient amount to fund our total capital requirements, which aggregate over the next three years under $1 billion.

Justine Fisher - Goldman Sachs

A lot of the investment grade companies, if they are getting their revolvers cut or if they did raise bank debt that put them in a tough position heading into this market, a lot of them are bringing new deals now in both the investment grade and the high yield bond market. Are we seeing companies do converts as well to lock additional longer term liquidity? Are these things that you guys would consider or are you just focusing on using the revolver right now?

Myles Itkin

What we find reasonably attractive is ECA-related markets that have longer durations attached to them at attractive funding costs. So, both the US marketplace through Title XI as well as ECA financing through China and Korea offer more attractive opportunities to us than the high yield market today.

Operator

(Operator Instructions). Your next question comes from the line of Rob MacKenzie with FBR Capital Markets.

Rob MacKenzie - FBR Capital Markets

A housekeeping follow-up question for you here, most of the macro ones have been answered. In your presentation, you guys guided G&A this year of $125 million to $130 million. This quarter you had a great run rate, $27 million. Are you expecting costs to actually go up from here or how should we think about how that plays out quarter-to-quarter?

Myles Itkin

We've taken down our guidance on G&A. You could expect us to come in at the lower end of our guidance, so circa $120 million.

Operator

Thank you. We show no further questions. I would now like to turn the conference back to Mr. Arntzen.

Morten Arntzen

Thank you all for joining, and I hope that as many of you can, will join us on the 21. We will go into a lot more detail about our business and we'll answer more questions and we'll have a little bit of fun in an otherwise depressing CNN world. Please join us then and thank you for joining the call today.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: Overseas Shipholding Group, Inc. Q1 2009 Earnings Call Transcript
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