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Overseas Shipholding Group's (OSG) shares fell precipitously again yesterday after the company announced that it was contemplating filing for bankruptcy protection. The latest news came amid a dramatic disclosure from the company that a (yet-unexplained) tax issue involving its international operations had rendered it financial statements unreliable.

Until yesterday the main issue affecting the company's stock price appeared to be a funding gap between an expiring credit facility of $1,500 million (in February-2013), and a $900 million forward star credit facility.

Estimates from the company and analysts put the funding gap between $100 million to $300 million. But based on yesterday's news, I believe the funding gap may indeed be substantially higher.

The $900 million forward start credit facility will not be available to the company before February-2013. The facility is subject to an adverse materiality clause and compliance with financial covenants among other terms.

A bankruptcy filing will almost certainly trigger the adverse materiality clause.

In addition, OSG has alluded that the tax issue may run afoul of its existing financial covenants. Given that the forward start credit facility is subject to even more restrictive covenants starting on December 31st, 2012, I believe that OSG's capacity to meet these new covenants is sharply diminished.

Possession is nine-tenths of the law, and since the $900 million have not yet been disbursed, I am very skeptical that the banking syndicate behind the new facility will proceed with such loan, and it will probably have a very good legal argument not to.

Vulture investors may want to wait until more clarity is shed on the tax issue implications.

Source: Overseas Shipholding: Rumors Of Its Financial Demise May Not Be Greatly Exaggerated