Moody’s Confirms All Ratings of OMI

Wednesday, October 27, 2004
OMI's ratings had been placed on review for possible downgrade following the announcement by the company of its proposed purchase of vessels from Athenian Carriers Ltd. for approximately $585 million. At the time of the announcement, Moody's was concerned about the increased levels of debt associated with this acquisition and its effect on near term liquidity, the timing and levels of shipyard payments related to the acquired newbuilding commitments and the success of OMI's integration of these vessels into its current fleet operations. Since then, Moody's has monitored the progress of the acquisition and related financing, and has assessed the company's financial strength relative to evolving tanker market conditions. As the result, Moody's believes that the cash flows that the acquired assets contribute to OMI's consolidated performance is adequate to maintain the company's credit fundamentals over the near term, especially considering the continued strong tanker charter rate environment.

The ratings have a stable outlook, reflecting Moody's expectations of continued smooth integration of Athenian's vessels, both existing tonnage and newbuilding commitments, as well as other vessels in OMI's newbuilding program into OMI's operations. These vessels are of a similar technical and commercial nature to that of OMI's existing medium-size crude oil and product tanker businesses. Considering the company's history of successfully launching and operating new tonnage in the past, Moody's believes that the number and class of vessels acquired poses little integration risk. Moody's notes, however, the higher risk that is associated with newbuilding commitments, due to long lead times to delivery in a historically volatile sector. Ratings or their outlook may be subject to downward revision if the company were to undertake additional large, levered acquisitions, or if Suezmax charter rates were to fall below $20,000/day (on average, fleet-wide) or if product carrier rates fall below $15,000/day for a protracted period, such that the company's ability to rapidly reduce debt incurred with this acquisition were impaired. Conversely, ratings may be subject to upward revision if the company were to repay substantial levels of debt, demonstrating the ability to maintain leverage of under 3.5x debt/EBITDA even under softer market conditions, after having taken delivery of all vessels in its newbuilding program.

As a result of the acquisition, which closed July 2004, OMI paid a total of $391 million to acquire five Suezmax and one product tanker, delivered in July and August of 2004. To fund the purchase, the company incurred $250 of debt by way of a bridge loan, which will be replaced by ship mortgage debt secured by these vessels. The company will also make a total of $192 million in progress payments towards seven newbuildings that are associated with this acquisition. Total debt of $837 million as of September 30 2004, which represents a 45% increase over June 2004 levels, represents leverage of 3.5x LTM EBITDA, which is somewhat low for this rating category, and does not take into account full year operations of acquired vessels for which debt has been raised. Interest coverage is likewise strong, with LTM EBIT/interest of about 6.8x. Moody's notes that the entire shipping industry, the tanker sector in particular, is experiencing a historically-strong rates environment with greater longevity than most market upturns. In addition, Moody's believes the tanker market supply and demand fundamentals support expectations that this strong market should continue at least through 2005.

However, Moody's is concerned about the potential affects that such investments, made at the height of the tanker market cycle, could potentially have on the company's credit fundamentals when market conditions deteriorate in a cyclical downturn. As a result of the company's vessel investment program, OMI's free cash flow has been negative ($402 million) through the first nine months of 2004, and is expected to be thin through 2005 as the company will make about $136 million in progress payments relating to all of OMI's newbuilding commitments. The company expects to increase debt over the near term to help fund these progress payments, which will hinder OMI's ability to improve credit metrics, despite Moody's expectations for a continued strong tanker rate environment through 2005. Moreover, as five of the 13 vessels on order (including orders placed by the company prior to the Athenian acquisition) will not be delivered until 2006, OMI bears considerable risk that the historically-volatile tanker markets will soften at about the time these vessels are delivered, reducing the return on investment provided by these vessels and, considering incremental debt that will be borne with these deliveries, possibly weakening credit fundamentals.

The ratings continue to reflect the company's historical record of free cash generation which should result in debt reduction once the newbuilding program is completed and an increasing market position that OMI will hold in the Suezmax and product tanker sectors during an extended strong tanker market. The latest acquisition further increases OMI's asset base, about $1.7 billion as of September 2004 (approximately $1.5 billion of fixed assets alone, mostly vessels), suggesting substantial coverage to all debt, including the $200 million of senior unsecured notes.

OMI Corporation, a Marshall Islands incorporated company, is headquartered in Stamford, CT. Through its subsidiaries, the company is a leading seaborne transporter of crude oil and refined petroleum products. The company fleet comprises Suezmax tankers (crude sector) and product carriers, operating 41 vessels totaling 3.5 million DWT with 13 newbuildings on order. For LTM September 2004, the company had revenues of $437 million.

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