3 OSG's bonds are trading currently at 36 cents, 28cents and 25 cents on a dollar. So the market does expect much recovery for the debt holders in a case of chap 11. Do the bonds have to trade on par or near par with the face value for the common shareholders to have any glimmer of hope?
Not necessarily. It depends on how the assets are valued during BK.
A recent quote of a source at Lloyd's estimated that the OSG fleet needs to be written down by $1 billion. Even if that number is increased by 25% - the fleet must be written down by $1.25b - that would, theoretically, leave some equity value.
The open question is how much of that equity value the debt holders will require in BK as the price for agreeing to roll-over their loans and bonds.
They aren't going to agree to a restructure for "free". The alternative for them is to put the company into liquidation which, (again) theoretically, could return to them 100 cents on their dollar.. It would be immaterial to them if a couple hundred million in equity value was vaporized because of a distressed sale as long as the loan principal is repaid in full.
The future is looking bleak for ship owners. In the case of OSG, the lenders have a chance to get out without a loss of principal. The ONLY question is whether they force a liquidation or agree to do a restructure that leaves OSG as an operating entity but with the lenders taking the majority equity position as the "price" for their agreement to the arrangement.
My guess is that they force a liquidation. That would permit the lenders to accomplish two things.
First, they get their loan principal back intact.
Second, there would probably be a number of ships going the breakers as part of the arrangement. Assuming that OSG's lenders also have loans outstanding to other tanker owners, forced scrapping would improve the risk profile of their other loans in that it would improve the competitive position of the remaining operators.
It would be brutal, but it would improve the overall health of the industry.
IMO the banks recapitalize this company and let the common holders keep a 10-20% stake to avoid the lawsuits. Nobody wants to sell the ships in these market conditions and currently OSG operations are able the create a positive EBITDA to pay the interests.
Most of the loans are unsecured debt from the banks. The bondholders are worried that the senior debt they are holding would be subordinated if any new loan guarantees are given.. this can explain why the bonds are trading so low.