China Eximbank provides $389 million USD loan to Overseas Shipholding Group for the construction of three VLCC vessels and two oil tankers in China

Project narrative

On August 10, 2009, financial close was reached on a deal in which the Export-Import Bank of China entered into a $389 million USD secured loan agreement with Overseas Shipholding Group, Inc. (OSG) — a United States-based shipping company specializing in the transportation of crude oil, petroleum products, and renewable fuels listed on the New York Stock Exchange — to finance the construction of three Very Large Crude Carriers (VLCCs) and two Aframax crude oil tankers constructed in China. The loan carried a maturity period of 12 years, and an interest rate of LIBOR plus an applicable margin. This loan was secured by (i.e. collateralized by) for the construction of three VLCC vessels and two Aframax crude oil tankers. This facility is notable as the first financing arrangement that China Eximbank extended to a U.S. company. The proceeds were used by OSG to finance the construction of three VLCCs and two Aframax crude oil tankers constructed in China. The two Aframaxes are the Overseas Yosemite and Overseas Yellowstone, which were delivered in the first half of 2009. On November 14, 2012, OSG filed for Chapter 11 bankruptcy. By the petition date in 2012, OSG still owed nearly $312 million USD to China Eximbank on this loan. As a secured creditor, CEXIM had certain protections and rights during OSG’s Chapter 11 case. OSG needed to maintain the value of Eximbank's collateral (the five tankers) and obtain court permission to use any cash generated by those vessels (known as using “cash collateral”). Early in the bankruptcy, OSG received court orders allowing it to continue operating the ships, with adequate protection for Eximbank's interest. In practice, this meant OSG made periodic interest payments to China Eximbank during the case to protect the bank from depreciation of its collateral. These payments were initially applied to reduce principal, but later in the case OSG reclassified them as interest expenses once the plan negotiations clarified how the loan would be treated. Because OSG was in default under the loan (due to bankruptcy filing and failing loan-to-value covenants), China Eximbank was entitled to seek default interest and potentially could have moved to foreclose on the ships with court approval. A dispute arose over the amount of default interest China Eximbank could claim for the post-petition period. This “interest fight” was eventually resolved by a settlement: OSG agreed to pay an allowed amount of default interest as part of the plan, rather than the full contractual default rate China Eximbank initially sought. The settlement of the default interest claim was one of the legal conflicts resolved in the bankruptcy process, ensuring that China Eximbank's total allowed claim (principal plus some interest) was agreed upon for repayment. Initially, OSG and China Eximbank were unable to reach a consensual restructuring of the $312 million USD undersecured loan. OSG reported in court filings that it “had been unable to come to terms” with China Eximbank to right-size or refinance the debt in line with the vessels’ earning capacity. Facing this impasse, OSG pursued a dramatic step: it proposed to auction off the five tankers that served as China Eximbank's collateral. In early 2014, OSG asked the bankruptcy court for permission to sell the ships at auction, arguing that selling them was necessary to trim operations and reshape the balance sheet. According to OSG’s filings, the sale was warranted because the China Eximbank loan was undersecured – the company explicitly noted that the collateral was “not worth enough to cover the loans” owed to the Chinese bank. This implied that if the sale went forward, China Eximbank would receive the proceeds up to the value of the ships, but any shortfall (the unsecured portion of its claim) might only receive partial recovery alongside other unsecured creditors. Before the vessel auction could take place, OSG’s reorganization took a different turn. The company, in consultation with its major creditors, developed a Chapter 11 plan of reorganization that allowed OSG to retain its fleet (including the five China Eximbank-financed tankers) by raising fresh capital to pay off secured debts. In late February 2014, OSG entered into a Plan Support Agreement with key creditors and secured an equity commitment to back a new plan. Under the proposed plan, OSG would raise $300 million USD through a rights offering of new stock to certain creditors and arrange approximately $735 million USD in new secured exit financing. Together, these funds (over $1 billion in total new capital) would enable OSG to pay China Eximbank and its other secured lender, Danish Ship Finance (DSF), in full, in cash. This plan fundamentally restructured the treatment of China Eximbank's loan: rather than writing the debt down to collateral value or forcing the bank to take a loss, OSG would refinance and repay the entire China Eximbank loan as a condition of exiting bankruptcy. Because of this development, OSG no longer needed to sell the tankers. In fact, upon moving forward with the new funding plan, the company withdrew its motion to auction the five vessels that secured China Eximbank's debt. The China Eximbank loan was ultimately repaid in full rather than being only partially repaid or written off. The Chapter 11 process saw OSG first consider a partial recovery for China Eximbank (via collateral sale) when the loan was undersecured, but later pivot to a strategy of full repayment through refinancing. By securing new equity capital and loans, OSG was able to satisfy China Eximbank's entire debt. China Eximbank, as a secured creditor, thus received the full principal it was owed (approximately $312 million USD) and additional interest as negotiated.