Octave Specialty Group Inc (OSG) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Overseas Shipholding Group's first-quarter 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, May 4, 2009.

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

Thank you. 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 the agreement with Bender Shipbuilding & Repair Company; changing oil trading patterns; anticipated levels of newbuilding 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 offhire days for the second, third, and fourth quarters of 2009; timely delivery of newbuildings 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 of a market leader in the segments in which it competes; the projected growth of the world tanker fleet and the forecast of world economic activity and world oil demand. Factors, risks, and uncertainties that could cause the actual results to differ from the expectations reflect in these forward-looking statements are described in OSG's annual report on Form 10-K for 2008.

For this conference call we have 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 would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Thank you, Jim. Good morning and thank you for joining our conference call this morning. 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 have already heard from Jim Edelson. And joining us by phone from Tampa is Captain Bob Johnston, who is the head of our U.S. 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 3.

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 for 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 on shore.

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 U.S. Flag ATBs. 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've 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 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, the 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.

Well, 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. And 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 4. It's no secret that 2009 is going to be a tough year for ship owners irrespective of what segment you are operating in.

Having 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] and 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 is an investor I talk 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 in commercial pools benefits our customers and our partners and is a strategy we've 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 downmarket as cargo contracts keep our ships trading with cargo a greater percentage of the 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 5, weathering the storm. In a very difficult -- 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, but 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 can focus on running the business well, take advantage of opportunities that arise at prices that work for us, and continue our focus on reducing costs.

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

We have eliminated a number of redundant positions. We are renegotiating consultant and other third-party fees or eliminating some of these relationships 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 6. We expect good returns and cash flow on the FSO project to be significant. Bringing this project in 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 Products SBU from the 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, double 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 7. At OSG we are focused on running our business for the long term. We excel in bull markets 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 to take advantage of this uncertain market. We expect opportunities for well-funded and well-capitalized companies like OSG to arise.

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 turbulent and sometimes depressing days of single-digit rates. These are things we can do that are not market dependent.

Finally, in the medium term there are a number of market factors to consider which we think can lift the tanker market.

The single-hill phase-out acceleration. We expect all but 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 newbuilding order book destruction 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 shipyards 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.

Thank you, Morten, and good morning. Please turn to slide 9 for a discussion of OSG's liquidity. Our strong levels of liquidity position us well in this challenging business and credit environment. 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 a 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. So 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 an $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 2008, resulting from our previously announced companywide 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. This 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 of 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 year-end 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. Operator?

(Operator Instructions) Jon Chappell, JPMorgan.

Thank you. Good morning, guys. Morten, the use of the word opportunities was pretty prevalent in your presentation. Can you talk about what opportunities are out there today?

Then also, in past coverage calls you've made reference to not being in a rush, kind of waiting, I think, 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?

It's a complicated question. I will give you a rather lengthy answer on it.

Okay.

What we have said and 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. And 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 exposures -- reduce their portfolios, not increase them.

There is still a huge amount of unfinanced newbuildings at the world's shipyards. And depending on whose numbers you use, it is 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. But it is now that owners have to start putting down their third second and third installments for deliveries that come in 2010 and 2011. And if they don't have it, they're going to have a problem. And 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. So 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's very few sales. It is not a liquid market, and there is no financing for it.

So 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'd say would be a willing buyer-willing seller purchase or sale of the 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 think we will 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. And that, we believe, is going to happen. Does that answer the question, Jonathan?

Yes, extremely helpful. As a follow-up to that, on your use of cash, you guys had a huge cash buildup 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 your powder dry for those opportunities?

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

Okay. 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 realize gains associated with that as well. Is there any way to break that out in the first quarter?

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

All right. Thanks, Myles. Thanks a lot, Morten.

Gregory Lewis, Credit Suisse.

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

No, that is across the shipping world.

Okay, great. Then just a follow-up. What is your thought process or I'm curious to get your thought on the recent announcement by the Korean and Chinese governments that they are going to look to support their shipyard as aggressively as possible.

I think we have said all along that we expected both the Chinese government and the Korean would provide some support. I think the Chinese government probably has a greater capacity to support, to throw money at these, given the foreign reserves of China.

I think if you look at Korea, I think it is now about $7 billion they've pledged. That is 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 are 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. But on the other hand we do 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, that either 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. And we don't see them throwing money at holding up bankrupt Greek, Hong Kong, Norwegian, American shipping companies.

Okay, great. Then just a follow-up on the dispute. 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're actively looking at, at this point?

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 will continue to do that.

Okay, great, and then --

(multiple speakers) with regard to US Shipping we have no interest whatsoever in the older assets in the company, if that was the specific question.

Okay, great. Then just one last follow-up question, I guess maybe for Myles. In the press release you talk about VLCC fixed days that are open. I'm sort of a little bit confused in what that means. There's 461 fixed VLCC days that are open.

(inaudible) covers (inaudible).

Is that related to bunkering, not being fixed?

It's just 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.

Okay, so those 461 fixed days are not related to potential FFA contracts?

Yes.

Yes, they are related to FFA contracts.

The 44 a day is covered by FFAs.

To the point in time (multiple speakers) April 17.

Yes, up until this point when we reported; and the 37 a day is the spot that is fixed up until that date (multiple speakers)

Okay, so unless there is -- so in other words, what you are saying -- in other words, there's 461 open VLCC fixed days that have contracts for $44,000 a day?

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. But they are covered by FFAs, the 461.

Okay, great. Thank you.

The Natasha Boyden, Cantor Fitzgerald.

Thank you, operator. Good morning, everybody. I wanted to ask a question and I suppose it has 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?

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

Okay, great. Then I wanted to talk about your U.S. 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.

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

Okay, and do you at this point in time anticipate any further delays or charges?

No, not beyond that which we've already disclosed.

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

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

Okay. And speaking of layups, 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 layup? Or have you seen any evidence of that?

Natasha, it's Lois. No, we have not seen anybody considering layup. You certainly see people considering going at economical speed and taking that choice when it is appropriate. We have 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 are still seeing some lagging of the market in the East.

But essentially the returns have come back up in the recent -- maybe in the last 10 days.

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

I think, actually, Morten, if I could ask you a very, very large macro question, that would be helpful. We've had -- 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? And in particular, what a more normalized shipping cycle would like look like, perhaps for those of us who haven't been in the market longer than since say 2001 or 2002, and how you think this is going to play out over the next two, three years?

I've only been in it for 30 years.

Well, then, that should give us a lot of good insight, then.

Though I did help with some of the Norwegian Guarantee Institute's bailouts of some of the companies that went bust during the first tanker crisis in the early '70s.

If you look at the three really 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 has changed. Today, we're in a completely different game because of nonfunctioning bank market. We do not expect the ship financing market to turn around for two or three years.

This is sort of 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, though a lot more painful for others than it is for OSG because of our balanced strategy, it is 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 deliver in 2010, '11, 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 2006-2007 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.

And that 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 the economy -- 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.

So while I sound optimistic, I don't sleep at night; but I think in the long run I am going to be sleeping better.

Okay, great. Well, thank you very much. That was very helpful.

Urs Dur, Lazard Capital Market.

Good morning, everybody. 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 for you guys, which I think is attractive.

Can you give us commentary on dividend outlook going forward? Obviously it is reviewed every quarter, but are you under any pressure? I know you've mentioned you're well within all of your covenants.

Urs, you know I'm just 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 will continue to do the same.

Okay, all right. I think it's encouraging anyway. Thank you for that. Everything else has been asked.

Justine Fisher, Goldman Sachs.

Good morning. 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 debt that they had borrowed. But 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?

I could answer facetiously and say there's a couple that we thought the Justice Department would be after. But in all honesty, if you went back -- and it goes to the earlier question -- the mid-'80s and the early '70s, when the shipping markets collapse 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 is 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.

But 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, and banks just haven't learned sometimes 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.

Okay, and so if you, I guess this is almost -- this is a tough one to answer. But 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 -- I mean, how would you characterize that? Are we just at the beginning or are we farther along?

I think we're just 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 shiplenders in the world. And yet a number of the other prominent ones have said they will 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 just 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% or 80% to buy a long-life asset like a VLCC or a Capesize bulk carrier or a container ship, they are going to struggle.

So we're just at the beginning, which is why we are being patient.

Okay. Along those lines, do you guys have in place facilities to fund the rest of your newbuilds? Or what 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?

No, there is a contractual commitment on the unsecured facility. So although there might be a desire, we are 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.

Okay. Sorry, last question. I promise, last question. 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, they have either -- 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 an additional longer-term liquidity? Are these things that you guys would consider? Or are you just focusing on using the revolver right now?

I tell you, 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.

Great. Thanks so much.

(Operator Instructions) Rob MacKenzie, FBR Capital Markets.

Good morning, guys. FBR. Housekeeping question follow-up 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 ml. This quarter you had a great run rate, $27 million.

Are you expecting costs to actually go up from here, or -- and how should we think about how that plays out quarter-to-quarter?

We have 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.

Okay. Thanks. I'll turn it back.

Just one point. I just want to welcome you guys to stay. I thought that first research [tune] you guys did was first-rate work.

Well, thanks for that.

Welcome to the area.

Thank you.

Thank you and we show no further questions. I would now like to turn the conference back to Mr. Arntzen. Please go ahead.

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

Please join us then, and thank you for joining the call today.

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