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Overseas Shipholding Group's Corporate Bonds

|Includes: Overseas Shipholding Group, Inc. (OSGB)

Short interest in Overseas Shipholding Group (NYSE:OSG) is holding steady but the average daily share volume has increased tenfold in the last few weeks. Institutional investors hold about 90% of the company but I'm not sure if minority shareholders are buying OSG at the moment. In my recent article, I advised a 'wait and see approach', ie. for news about whether or not OSG will take refuge via Chapter 11 bankruptcy protection.

Yesterday, OSG declared a delay with the SEC in filing its quarterly results - which may lead to a significant revision to OSG's previous financial statements - while the number of lawyers circulating OSG has increased dramatically. I've lost count ...

Lloyd's List recently reported that banks are clashing over OSG's restructuring proposals. Several banks have provide conventional ship finance using mortgages against individual vessels. Whereas other debt holders own the corporate bonds against OSG. Lloyd's List reported that "unsecured lenders are set for a haircut" and that "their debt is now worth only a fraction of nominal value". OSG's revolving unsecured credit line (overdraft) expires in February and I've read reports that some banks have already offloaded their individual tranches at discounts of up to 10-20%.

On the 22 October, S&P downgraded OSG's unsecured debt to speculative grade (to "CCC-") and placed OSG on CreditWatch Negative on probability of default. 'CCC'in other words means that OSG is "currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments".

If you're interested OSG as a distressed debt investor, I suggest you read the CNBC article about investment tactics and finding the 'fulcrum security'. One of OSG's corporate bonds currently trades with a running yield of over 15%. This represents a fraction of the face value. There is a storm raging and few of the invested parties will have aligned interests.

Ship financiers have been kicking the can down the road, trying to keep companies alive with the hope of prosperous times ahead. OSG may be a turning point for ship finance in the tanker sector. This is a tragedy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.