Toggle SGML Header (+)


Section 1: 10-Q (FORM 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to         

 

Commission File Number        1-37836-1     

 

INTERNATIONAL SEAWAYS, INC.
(Exact name of registrant as specified in its charter)

 

MARSHALL ISLANDS   98-0467117
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

 

600 Third Avenue, 39th Floor, New York, New York    10016
(Address of principal executive offices)   (Zip Code)

 

(212) 578-1600    
Registrant's telephone number, including area code    

 

     
Former name, former address and former fiscal year, if changed since last report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                    YES x NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

YES x NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x Emerging growth company x
     
Non-accelerated filer ¨ Smaller reporting company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES x NO ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. The number of shares outstanding of the issuer’s common stock as of August 6, 2018: common stock, no par value 29,177,612 shares.

 

 

 

  

INTERNATIONAL SEAWAYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

DOLLARS IN THOUSANDS

(UNAUDITED)

  

   June 30,   December 31, 
   2018   2017 
         
ASSETS          
Current Assets:          
Cash and cash equivalents  $115,843   $60,027 
Voyage receivables, including unbilled of $59,015 and $54,701   62,408    58,187 
Other receivables, including pool deposits of $6,000 and $0   10,391    4,411 
Inventories   4,828    3,270 
Prepaid expenses and other current assets   8,573    5,881 
Current portion of derivative asset   1,738    16 
Total Current Assets   203,781    131,792 
Restricted cash   27,010    10,579 
Vessels and other property, less accumulated depreciation of $317,584 and $307,010   1,405,577    1,104,727 
Vessel held for sale, net   -    5,108 
Deferred drydock expenditures, net   21,810    30,528 
Total Vessels, Deferred Drydock and Other Property   1,427,387    1,140,363 
Investments in and advances to affiliated companies   275,034    378,894 
Long-term derivative asset   7,875    886 
Other assets   5,393    1,970 
Total Assets  $1,946,480   $1,664,484 
           
LIABILITIES AND EQUITY          
Current Liabilities:          
Accounts payable, accrued expenses and other current liabilities  $32,967   $22,805 
Payable to OSG   34    367 
Payable associated with acquisition of assets   20,954    - 
Current installments of long-term debt   48,492    24,063 
Total Current Liabilities   102,447    47,235 
Long-term debt   789,537    528,874 
Other liabilities   3,955    2,721 
Total Liabilities   895,939    578,830 
           
Commitments and contingencies          
           
Equity:          
Capital - 100,000,000 no par value shares authorized; 29,177,612 and 29,089,865          
shares issued and outstanding   1,307,645    1,306,606 
Accumulated deficit   (228,657)   (180,545)
    1,078,988    1,126,061 
Accumulated other comprehensive loss   (28,447)   (40,407)
Total Equity   1,050,541    1,085,654 
Total Liabilities and Equity  $1,946,480   $1,664,484 

 

 

 

See notes to condensed consolidated financial statements

 

  2

 

 

INTERNATIONAL SEAWAYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

(UNAUDITED)

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Shipping Revenues:                    
Pool revenues, including $16,355, $2,702, $29,125 and $8,416                    
received from companies accounted for by the equity method  $33,601   $42,339   $69,115   $92,112 
Time and bareboat charter revenues   6,608    14,442    14,521    31,792 
Voyage charter revenues   16,700    15,176    25,251    36,803 
    56,909    71,957    108,887    160,707 
                     
Operating Expenses:                    
Voyage expenses   6,897    2,677    10,074    7,295 
Vessel expenses   31,528    35,373    68,186    69,101 
Charter hire expenses   10,723    11,036    19,346    22,387 
Depreciation and amortization   16,804    19,099    34,428    37,715 
General and administrative   6,064    5,096    12,093    11,370 
Third-party debt modification fees   1,302    7,939    1,302    7,939 
Separation and transition costs   -    296    -    1,031 
Gain on disposal of vessels and other property, net of impairments   (6,740)   -    (167)   - 
Total operating expenses   66,578    81,516    145,262    156,838 
(Loss)/income from vessel operations   (9,669)   (9,559)   (36,375)   3,869 
Equity in income of affiliated companies   8,822    13,866    17,162    27,472 
Operating (loss)/income   (847)   4,307    (19,213)   31,341 
Other expense   (4,863)   (6,644)   (4,184)   (6,440)
(Loss)/income before interest expense and income taxes   (5,710)   (2,337)   (23,397)   24,901 
Interest expense   (13,086)   (9,278)   (24,707)   (18,445)
(Loss)/income before income taxes   (18,796)   (11,615)   (48,104)   6,456 
Income tax provision   -    (4)   (8)   (8)
Net (loss)/income  $(18,796)  $(11,619)  $(48,112)  $6,448 
                     
Weighted Average Number of Common Shares Outstanding:                    
Basic   29,130,230    29,194,240    29,118,271    29,187,286 
Diluted   29,130,230    29,194,240    29,118,271    29,221,779 
                     
Per Share Amounts:                    
Basic and diluted net (loss)/income per share  $(0.65)  $(0.40)  $(1.65)  $0.22 

 

 

 

See notes to condensed consolidated financial statements

 

  3

 

 

INTERNATIONAL SEAWAYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

DOLLARS IN THOUSANDS

(UNAUDITED)

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
                 
Net (Loss)/Income  $(18,796)  $(11,619)  $(48,112)  $6,448 
Other Comprehensive Income, net of tax:                    
Net change in unrealized losses on cash flow hedges   3,099    934    10,569    4,252 
Defined benefit pension and other postretirement benefit plans:                    
Net change in unrecognized prior service costs   77    (42)   36    (60)
Net change in unrecognized actuarial losses   1,743    (433)   1,355    (612)
Other Comprehensive Income, net of tax   4,919    459    11,960    3,580 
Comprehensive (Loss)/Income  $(13,877)  $(11,160)  $(36,152)  $10,028 

 

 

 

See notes to condensed consolidated financial statements

 

  4

 

 

INTERNATIONAL SEAWAYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

DOLLARS IN THOUSANDS

(UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2018   2017 
Cash Flows from Operating Activities:          
Net (loss)/income  $(48,112)  $6,448 
Items included in net (loss)/income not affecting cash flows:          
Depreciation and amortization   34,428    37,715 
Loss on write-down of vessels   948    - 
Amortization of debt discount and other deferred financing costs   2,651    3,930 
Deferred financing costs write-off   2,273    7,020 
Stock compensation, non-cash   1,525    1,733 
Earnings of affiliated companies   (17,548)   (27,243)
Other – net   233    130 
Items included in net (loss)/income related to investing and financing activities:          
Gain on disposal of vessels and other property, net   (1,115)   - 
Loss on extinguishment of debt   1,295    - 
Cash distributions from affiliated companies   35,863    10,103 
Payments for drydocking   (2,701)   (15,860)
Insurance claims proceeds related to vessel operations   3,528    5 
Changes in operating assets and liabilities:          
(Increase)/decrease in receivables   (4,221)   4,268 
Decrease in payable to OSG   (333)   (688)
Decrease in deferred revenue   (903)   (4,524)
Net change in inventories, prepaid expenses and other current assets and          
accounts payable, accrued expense, and other current and long-term liabilities   2,312    (9,243)
Net cash provided by operating activities   10,123    13,794 
Cash Flows from Investing Activities:          
Expenditures for vessels and vessel improvements   (128,925)   (18,583)
Proceeds from disposal of vessels and other property   126,504    - 
Expenditures for other property   (320)   (374)
Investments in and advances to affiliated companies, net   1,966    (104)
Repayments of advances from joint venture investees   93,142    8,397 
Net cash provided by/(used in) investing activities   92,367    (10,664)
Cash Flows from Financing Activities:          
Issuance of debt, net of issuance and deferred financing costs   72,924    486,302 
Extinguishment of debt   (60,000)   (458,416)
Payments on debt   (42,770)   (1,546)
Cash paid to tax authority upon vesting of stock-based compensation   (397)   (241)
Net cash (used in)/provided by financing activities   (30,243)   26,099 
Net increase in cash, cash equivalents and restricted cash   72,247    29,229 
Cash, cash equivalents and restricted cash at beginning of year   70,606    92,001 
Cash, cash equivalents and restricted cash at end of period  $142,853   $121,230 

 

 

 

See notes to condensed consolidated financial statements

 

  5

 

 

INTERNATIONAL SEAWAYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

DOLLARS IN THOUSANDS

(UNAUDITED)

 

           Accumulated     
           Other     
       Accumulated   Comprehensive     
   Capital   Deficit   Loss   Total 
                 
Balance at January 1, 2018  $1,306,606   $(180,545)  $(40,407)  $1,085,654 
Net loss   -    (48,112)   -    (48,112)
Other comprehensive income   -    -    11,960    11,960 
Forfeitures of vested restricted stock awards   (486)   -    -    (486)
Compensation relating to restricted stock awards   416    -    -    416 
Compensation relating to restricted stock units awards   695    -    -    695 
Compensation relating to stock option awards   414    -    -    414 
Balance at June 30, 2018  $1,307,645   $(228,657)  $(28,447)  $1,050,541 
                     
                     
Balance at January 1, 2017  $1,306,236   $(74,457)  $(52,267)  $1,179,512 
Net income   -    6,448    -    6,448 
Other comprehensive income   -    -    3,580    3,580 
Forfeitures of vested restricted stock awards   (242)   -    -    (242)
Compensation relating to restricted stock awards   447    -    -    447 
Compensation relating to restricted stock units awards   882    -    -    882 
Compensation relating to stock option awards   404    -    -    404 
Balance at June 30, 2017  $1,307,727   $(68,009)  $(48,687)  $1,191,031 

 

 

 

See notes to condensed consolidated financial statements

 

  6

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 — Basis of Presentation:

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of International Seaways, Inc. (“INSW”), a Marshall Islands corporation, and its wholly owned subsidiaries. The Company owns and operates a fleet of 53 oceangoing vessels, including six vessels that have been chartered-in under operating leases and six vessels in which the Company has interests through its joint ventures, engaged primarily in the transportation of crude oil and refined petroleum products in the International Flag trade through its wholly owned subsidiaries. Unless the context indicates otherwise, references to “INSW”, the “Company”, “we”, “us” or “our”, refer to International Seaways, Inc. and its subsidiaries.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

All intercompany balances and transactions within INSW have been eliminated. Investments in 50% or less owned affiliated companies, in which INSW exercises significant influence, are accounted for by the equity method.

 

Certain prior year amounts have been reclassified to conform to the current year presentation as described in Note 2, “Significant Accounting Policies.”

 

Dollar amounts, except per share amounts, are in thousands.

 

Note 2 — Significant Accounting Policies:

 

Cash, cash equivalents and Restricted cash Interest-bearing deposits that are highly liquid investments and have a maturity of three months or less when purchased are included in cash and cash equivalents. Restricted cash of $27,010 and $10,579 as of June 30, 2018 and December 31, 2017, respectively, represents legally restricted cash relating to the Company’s 2017 Term Loan Facility, Sinosure Credit Facility, ABN Term Loan Facility, and 10.75% Unsecured Subordinated Notes (as defined in Note 9, “Debt”). Such restricted cash reserves are included in the non-current assets section of the consolidated balance sheet.

 

Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are voyage receivables due from charterers and pools in which the Company participates. During the three and six months periods ended June 30, 2018 and 2017, the Company did not have any individual customers who accounted for 10% or more of its revenues apart from the pools in which it participates. The pools in which the Company participates accounted in aggregate for 86% and 89% of consolidated voyage receivables at June 30, 2018 and December 31, 2017, respectively.

 

Deferred finance charges Finance charges, excluding original issue discount, incurred in the arrangement and / or amendments resulting in the modification of debt are deferred and amortized to interest expense on either an effective interest method or straight-line basis over the life of the related debt. Unamortized deferred finance charges of $483 relating to the 2017 Revolver Facility are included in other assets in the condensed consolidated balance sheet as of June 30, 2018. Unamortized deferred financing charges of $30,194 relating to the 2017 Term Loan Facility, Sinosure Credit Facility, ABN Term Loan Facility, 8.5% Senior Notes and 10.75% Subordinated Notes and (as defined in Note 9, “Debt”) and $23,626 relating to the 2017 Term Loan Facility and the 2017 Revolver Facility are included in long-term debt in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively. Interest expense relating to the amortization of deferred financing charges amounted to $800 and $1,456 for the three and six months ended June 30, 2018, respectively, and $1,864 and $3,800 for the three and six months ended June 30, 2017, respectively.

 

  7

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Revenue and expense recognition — On January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from Contracts with Customers (ASC 606). The guidance provides a unified model to determine how revenue is recognized. In doing so, the Company makes judgments including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation. Revenues are recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company’s contract revenues consist of revenues from time charters, bareboat charters, voyage charters and pool revenues.

 

Revenues from time charters are accounted for as fixed rate operating leases with an embedded technical management service component and are recognized ratably over the rental periods of such charters. Bareboat charters are accounted for as operating leases and the associated revenue is recognized ratably over the rental periods of such charters.

 

Voyage charters contain a lease component if the contract (i) specifies a specific vessel asset; and (ii) has terms that allow the charterer to exercise substantive decision-making rights, which have an economic value to the charterer and therefore allow the charterer to direct how and for what purpose the vessel is used. Voyage charter revenues and expenses are recognized ratably over the estimated length of each voyage. For a voyage charter which contains a lease component, revenue and expenses are recognized based on a lease commencement-to-discharge basis and the lease commencement date is the latter of discharge of the previous cargo or voyage charter contract signing. For voyage charters that do not have a lease component, revenue and expenses are recognized based on a load-to-discharge basis. Accordingly, voyage expenses incurred during a vessel’s positioning voyage to a load port in order to serve a customer under a voyage charter not containing a lease are considered costs to fulfill a contract and are deferred and recognized ratably over the load-to-discharge portion of the contract.

 

Under voyage charters, expenses such as fuel, port charges, canal tolls, cargo handling operations and brokerage commissions are paid by the Company whereas, under time and bareboat charters, such voyage costs are paid by the Company’s customers.

 

For the Company’s vessels operating in pools, revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent (“TCE”) basis in accordance with an agreed-upon formula. Accordingly, the Company accounts for its agreements with commercial pools as variable rate operating leases with an embedded technical management service component. For the pools in which the Company participates, management monitors, among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of vessels in each of the respective pools, and assesses whether or not the Company’s participation interest in each of the pools is sufficiently significant so as to determine that the Company has effective control of the pool.

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

As the Company’s performance obligations are services which are received and consumed by its customers as it performs such services, revenues are recognized over time proportionate to the days elapsed since the service commencement compared to the total days anticipated to complete the service. The minimum duration of services is less than one year for each of the Company’s current contracts.

 

Demurrage earned during a voyage charter represents variable consideration. The Company estimates demurrage at contract inception using either the expected value or most likely amount approaches. Such estimate is reviewed and updated over the term of the voyage charter contract.

 

The Company has elected the practical expedient to expense costs to obtain a contract with a customer (e.g. broker commissions) as incurred rather than defer and amortize such costs as the amortization period would be expected to be one year or less.

 

See Note 14, “Revenue,” for additional disclosures on revenue recognition and the impact of adopting ASC 606 on January 1, 2018.

 

  8

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Adopted Accounting Standards — In January 2017, the FASB issued ASU 2017-01, Business Combinations (ASC 805), which revises the definition of a business and puts in place a new framework to assist entities in evaluating whether an acquired set of assets and activities should be accounted for as an acquisition of a business or as a group of assets. Under the current business combinations guidance, there are three elements of a business: inputs, processes, and outputs. ​The new framework adds an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. It removes the need to consider a market participant’s ability to replace missing elements when all of the inputs or processes that the seller used in operating a business were not obtained. What qualifies as an input and process remains substantially the same as in the prior guidance. While processes would typically be documented, the guidance clarifies that the intellectual capacity of an organized workforce could also qualify as a process. Administrative systems (e.g., billing, payroll) are typically not considered processes that significantly contribute to the creation of outputs. The new guidance narrows the definition of “outputs” to be consistent with how they are described in ASC 606. As a result, fewer sets will be considered to have outputs. The standard is effective for annual periods beginning after December 31, 2017 and interim periods within that reporting period. Upon adoption of this standard, the Company concluded that the acquisition of six VLCC tankers (see Note 5, “Vessels”) should be accounted for as an acquisition of a group of assets as substantially all of the fair value of the gross assets acquired was concentrated in vessel assets.

 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (ASC 718), which provides guidance in regards to a change to the terms or conditions of a share-based payment award. An entity is required to account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is to be applied prospectively to an award modified on or after the adoption date. The standard is effective for annual periods beginning after December 31, 2017 and interim periods within that reporting period. The adoption of this accounting policy had no impact on the Company’s consolidated financial statements since there were no stock award modifications during the six months ended June 30, 2018.

 

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASC 715), which requires that an employer classify and report the service cost component in the same line item or items in the statement of operations as other compensation costs arising from services rendered by the pertinent employees during the period and disclose by line item in the statement of operations the amount of net benefit cost that is included in the statement of operations. The other components of net benefit cost would be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. The standard is effective for interim and annual periods beginning after December 31, 2017. The standard requires application using a retrospective transition method and allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Such practical expedient was not utilized by the Company. The adoption of this accounting standard resulted in the reclassification of $116 and $234 of net actuarial gains and $202 and $404 of benefit obligation interest costs from the general and administrative expense line to the other expense and interest expense lines on the condensed consolidated statements of operations for the three and six months ended June 30, 2017, respectively. Net periodic pension costs comprised of $1,339 and $1,168 of net actuarial losses and $157 and $353 of benefit obligation interest costs, are included in the other expense and interest expense lines on the condensed consolidated statements of operations for the three and six months ended June 30, 2018, respectively.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (ASC 230): Restricted Cash, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after December 31, 2017 and interim periods within that reporting period. The adoption of this accounting standard resulted in the inclusion of restricted cash of $10,579 at December 31, 2017 in the beginning-of-period amounts shown on the statement of cash flows for the six months ended June 30, 2018.

 

  9

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASC 230), which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic with respect to (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The standard is effective for interim and annual periods beginning after December 31, 2017. The guidance requires application using a retrospective transition method. We adopted the standard for classification of distributions received from equity method investees using the cumulative equity earnings approach, which required the retrospective reclassification of distributions received from certain affiliated companies accounted for by the equity method, from investing activities to operating activities. As a result, $93,142 of the total distributions of $129,005 received from certain affiliated companies accounted for by the equity method during the six months ended June 30, 2018 is presented as a cash inflow from investing activities while the balance of $35,863 is presented as a cash inflow from operating activities, and $8,397 of the total distributions of $18,500 received from certain affiliated companies accounted for by the equity method during the six months ended June 30, 2017 is presented as a cash inflow from investing activities while the balance of $10,103 is presented as a cash inflow from operating activities. In addition, the adoption of this accounting standard resulted in the separate line presentation of $3,528 and $5 of insurance proceeds received for various claims arising from the normal operations of our vessel fleet, in the operating activities section of the condensed consolidated statement of cash flows for the six months ended June 30, 2018 and 2017, respectively.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), a standard that supersedes virtually all of the existing revenue recognition guidance in U.S. GAAP. The standard establishes a five-step model that applies to revenue earned from a contract with a customer. The standard’s requirements also apply to the sale of some non-financial assets that are not part of an entity’s ordinary activities (e.g., sales of property or plant and equipment). Extensive disclosures are required, including disaggregation of total revenue, information about performance obligations, changes in contract asset and liability account balances between periods and key judgments and estimates. The FASB has issued several amendments to the standard, including clarification of the accounting for licenses of intellectual property and identifying performance obligations. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard is effective for us beginning January 1, 2018 and we adopted the standard using the cumulative catch-up transition method. See Note 14, “Revenue,” for further information.

 

Recently Issued Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. In July 2018, the FASB issued ASU 2018-10, Leases (ASC 842), which provides clarifying guidance on ASU 2016-02.

 

Also, in July 2018, the FASB issued ASU 2018-11, Leases (ASC 842), which updates requirements related to transition relief on comparative reporting at adoption and separating components of a contract for lessors. This update provides another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date (January 1, 2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, this update provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (ASC 606) and both of the following are met: (1) the timing and pattern of transfer of the nonlease components and associated lease component are the same; and (2) the lease component, if accounted for separately, would be classified as an operating lease. If lease and nonlease components are aggregated under this practical expedient, a lessor would account for the combined component as follows: if the nonlease components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with the new revenue guidance; otherwise, the entity must account for the combined component as an operating lease in accordance with the new leases guidance. If elected, the practical expedient will need to be applied consistently as an accounting policy by class of underlying asset. Additional disclosures are also required. For entities that have not adopted ASC 842 before the issuance of this update, the effective date and transition requirements for the amendments in this update related to separating components of a contract are the same as the effective date and transition requirements in ASU 2016-02. Upon adoption of ASC 842, management expects that based on our current portfolio of leases, there will be an increase in assets and liabilities on the consolidated balance sheet due to the recognition of right-of-use assets (Vessels and other property) and corresponding lease liabilities which may be material. We are in the process of implementing changes to our systems and processes in conjunction with our review of lease agreements. We will adopt ASC 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients.

 

  10

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In September 2017, the FASB issued ASU 2017-13, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which allows certain public business entities (“PBEs”) that otherwise would not meet the definition of a public business entity except for a requirement to include its financial statements or financial information in another entity’s filings with the SEC, to elect to use non-PBE transition dates for the sole purpose of adopting ASU No. 2016-02, Leases (ASC 842), and ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). Accordingly, all financial statements or financial information of the Company’s FSO and LNG joint ventures that may be included in the Company’s filings with the SEC pursuant to SEC Regulation S-X Rule 4-08(g), Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, and/or SEC Regulation S-X Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, will not reflect the adoptions of ASC 606 and ASC 842 until January 1, 2019 and January 1, 2020, respectively.

 

Note 3 — Earnings per Common Share:

 

Basic earnings per common share is computed by dividing earnings, after the deduction of dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period.

 

The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units not classified as participating securities. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings per share pursuant to the two-class method.

 

Weighted average shares of unvested restricted common stock considered to be participating securities totaled 39,709 and 39,326 for the three and six months ended June 30, 2018, respectively, and 33,451 and 32,763 for the three and six months ended June 30, 2017, respectively. Such participating securities are allocated a portion of income, but not losses under the two-class method. As of June 30, 2018, there were 218,222 shares of restricted stock units and 400,785 stock options outstanding and considered to be potentially dilutive securities.

 

The components of the calculation of basic earnings per share and diluted earnings per share are as follows:

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net (loss)/income  $(18,796)  $(11,619)  $(48,112)  $6,448 
                     
Weighted average common shares outstanding:                    
Basic   29,130,230    29,194,240    29,118,271    29,187,286 
Diluted   29,130,230    29,194,240    29,118,271    29,221,779 

 

 

  11

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Reconciliations of the numerator of the basic and diluted earnings per share computations are as follows:

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net (loss)/income allocated to:                    
Common Stockholders  $(18,796)  $(11,619)  $(48,112)  $6,441 
Participating securities   -    -    -    7 
   $(18,796)  $(11,619)  $(48,112)  $6,448 

 

For the three and six months ended June 30, 2018 earnings per share calculations, there were no dilutive equity awards outstanding. For the three and six months ended June 30, 2017 earnings per share calculations, there were 0 and 34,493 dilutive equity awards outstanding, respectively. Awards of 611,246 and 304,710 for the three months ended June 30, 2018 and 2017, respectively, and 495,838 and 265,359 for the six months ended June 30, 2018 and 2017, respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.

 

Note 4 — Business and Segment Reporting:

 

The Company has two reportable segments: Crude Tankers and Product Carriers. The joint ventures with two floating storage and offloading service vessels are included in the Crude Tankers Segment. The joint venture with four LNG Carriers is included in Other. Adjusted (loss)/income from vessel operations for segment purposes is defined as (loss)/income from vessel operations before general and administrative expenses, third-party debt modification fees, separation and transition costs and gain on disposal of vessels and other property, net of impairments. The accounting policies followed by the reportable segments are the same as those followed in the preparation of the Company’s condensed consolidated financial statements.

 

Information about the Company’s reportable segments as of and for the three and six months ended June 30, 2018 and 2017 follows:

  

   Crude   Product         
   Tankers   Carriers   Other   Totals 
Three months ended June 30, 2018:                    
Shipping revenues  $41,154   $15,755   $-   $56,909 
Time charter equivalent revenues   34,385    15,627    -    50,012 
Depreciation and amortization   12,240    4,530    34    16,804 
Gain on disposal of vessels and other property,                    
 net of impairments   (4,055)   (2,685)   -    (6,740)
Adjusted (loss)/income from vessel operations   (5,198)   (4,149)   304    (9,043)
Equity in income of affiliated companies   4,709    -    4,113    8,822 
Investments in and advances to affiliated companies                    
at June 30, 2018   152,604    13,583    108,847    275,034 
Adjusted total assets at June 30, 2018   1,338,120    351,615    108,847    1,798,582 
                     
Three months ended June 30, 2017:                    
Shipping revenues  $47,914   $24,043   $-   $71,957 
Time charter equivalent revenues   45,745    23,535    -    69,280 
Depreciation and amortization   13,304    5,762    33    19,099 
Adjusted income/(loss) from vessel operations   7,136    (3,171)   (193)   3,772 
Equity in income of affiliated companies   10,258    -    3,608    13,866 
Investments in and advances to affiliated companies                    
at June 30, 2017   268,863    15,342    87,904    372,109 
Adjusted total assets at June 30, 2017   1,079,142    410,024    87,531    1,576,697 

 

 

  12

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

   Crude   Product         
   Tankers   Carriers   Other   Totals 
Six months ended June 30, 2018:                    
Shipping revenues  $73,519   $35,368   $-   $108,887 
Time charter equivalent revenues   63,605    35,208    -    98,813 
Depreciation and amortization   25,113    9,248    67    34,428 
Loss/(gain) on disposal of vessels and other property,                    
including impairments   5,933    (6,100)   -    (167)
Adjusted (loss)/income from vessel operations   (17,222)   (6,560)   635    (23,147)
Equity in income of affiliated companies   10,284    -    6,878    17,162 
Expenditures for vessels and vessel improvements   127,510    1,415    -    128,925 
Payments for drydockings   2,683    18    -    2,701 
                     
Six months ended June 30, 2017:                    
Shipping revenues  $107,806   $52,901   $-   $160,707 
Time charter equivalent revenues   101,790    51,622    -    153,412 
Depreciation and amortization   26,351    11,298    66    37,715 
Adjusted income/(loss) from vessel operations   25,495    (1,138)   (148)   24,209 
Equity in income of affiliated companies   20,173    -    7,299    27,472 
Expenditures for vessels and vessel improvements   17,807    776    -    18,583 
Payments for drydockings   12,160    3,700    -    15,860 

 

Reconciliations of time charter equivalent (“TCE”) revenues of the segments to shipping revenues as reported in the condensed statements of operations follow:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Time charter equivalent revenues  $50,012   $69,280   $98,813   $153,412 
Add: Voyage expenses   6,897    2,677    10,074    7,295 
Shipping revenues  $56,909   $71,957   $108,887   $160,707 

 

Consistent with general practice in the shipping industry, the Company uses time charter equivalent revenues, which represents shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP measure, provides additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure, because it assists Company management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance.

 

  13

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Reconciliations of adjusted (loss)/income from vessel operations of the segments to (loss)/income before income taxes, as reported in the condensed consolidated statements of operations follow:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Total adjusted (loss)/income from vessel operations                    
of all segments  $(9,043)  $3,772   $(23,147)  $24,209 
General and administrative expenses   (6,064)   (5,096)   (12,093)   (11,370)
Third-party debt modification fees   (1,302)   (7,939)   (1,302)   (7,939)
Separation and transition costs   -    (296)   -    (1,031)
Gain on disposal of vessels and other property, net of impairments   6,740    -    167    - 
Consolidated (loss)/income from vessel operations   (9,669)   (9,559)   (36,375)   3,869 
Equity in income of affiliated companies   8,822    13,866    17,162    27,472 
Other expense   (4,863)   (6,644)   (4,184)   (6,440)
Interest expense   (13,086)   (9,278)   (24,707)   (18,445)
(Loss)/income before income taxes  $(18,796)  $(11,615)  $(48,104)  $6,456 

 

Reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets follow:

  

As of June 30,  2018   2017 
Total assets of all segments  $1,798,582   $1,576,697 
Corporate unrestricted cash and cash equivalents   115,843    121,230 
Restricted cash   27,010    - 
Other unallocated amounts   5,045    3,163 
Consolidated total assets  $1,946,480   $1,701,090 

 

Note 5 — Vessels:

 

Vessel Impairments

 

The Company gave consideration as to whether events or changes in circumstances had occurred since December 31, 2017 that could indicate that the carrying amounts of the vessels in the Company’s fleet may not be recoverable as of June 30, 2018. Factors considered included declines in valuations during 2018 for vessels of certain sizes and ages, any negative changes in forecasted near term charter rates, and an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful lives in conjunction with the Company’s fleet renewal program. The Company concluded that the increased likelihood of disposal prior to the end of their respective useful lives constituted impairment triggering events for one Panamax and two Aframaxes that were being actively marketed for sale as of June 30, 2018. In regard to the vessels in the Company’s fleet that are not currently being marketed for sale, the Company determined that the negative market developments did not rise to the level of impairment triggering events as of June 30, 2018. If such declines continue for a protracted period of time or worsen, we will re-evaluate whether these changes in industry conditions constitute impairment triggers for additional vessels in the Company’s fleet.

 

In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, the Company utilized weighted probabilities assigned to possible outcomes for each of the three vessels for which impairment trigger events were determined to exist. The Company entered into a memorandum of agreement for the sale of the Panamax vessel in early July 2018. Accordingly, a 100% probability was attributed to the vessel being sold before the end of its useful life. As the Company is considering selling the other two vessels as a part of its fleet renewal program, 50% probabilities were assigned to the possibility that the two Aframax vessels will be sold prior to the end of their respective useful lives. In estimating the fair value of the vessels for the purposes of Step 2 of the impairment tests, the Company considered the market approach by using the sales price per the memorandum of agreement discussed above. Based on the tests performed, the sum of the undiscounted cash flows for each of the two Aframax vessels was more than its carrying value as of June 30, 2018 and the sum of the undiscounted cash flows for the Panamax vessel was less than its carrying value as of June 30, 2018. Accordingly, an impairment charge totaling $948 was recorded for the Panamax vessel to write-down its carrying value to its estimated fair value at June 30, 2018.

 

  14

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Vessel Acquisitions and Deliveries

 

On June 14, 2018 (the “Closing Date”), the Company completed its previously announced acquisition of six 300,000 DWT VLCCs including one 2015-built and five 2016-built. The Company purchased the outstanding shares of Gener8 Maritime Subsidiary VII, Inc., a corporation incorporated under the laws of the Marshalls Islands and the sole member of six limited liability companies each of which holds title to a VLCC tanker (collectively, the "Six VLCCs") (such purchase, the "Transaction"). The Transaction was completed pursuant to the terms of the Stock Purchase and Sale Agreement (the "SPA") dated as of April 18, 2018, by and among Seaways Holding Corporation, a corporation incorporated under the laws of the Marshall Islands and a wholly-owned subsidiary of the Company, Euronav NV ("Euronav"), a corporation incorporated and existing under the laws of the Kingdom of Belgium, and Euronav MI II Inc. (as successor to Euronav MI Inc.), a corporation incorporated under the laws of the Marshall Islands and a wholly-owned subsidiary of Euronav. In accordance with ASC 2017-01, Business Combinations (Topic 805), this acquisition did not constitute the acquisition of a business, and therefore was accounted for as an asset acquisition. The purchase price for the Transaction was $434,000, inclusive of assumed debt secured by the Vessels (see Note 9, “Debt”). On the Closing Date, the Company paid to Euronav cash consideration of approximately $120,025, with the difference reflecting assumed debt and accrued interest thereon through the Closing Date. The Company’s estimate of the balance payable to Euronav for the other assets and liabilities of Gener8 Maritime Subsidiary VII, Inc. acquired is approximately $20,954 and is included in current liabilities in the condensed consolidated balance sheet as of June 30, 2018. This amount is subject to a final true-up, which is expected to be finalized and paid in the third quarter of 2018.

 

Vessel Sales

 

During the six months ended June 30, 2018, the Company recognized a net aggregate gain on disposal of vessels of $1,114 relating to (i) the sale of a 2002-built MR which was held-for-sale as of December 31, 2017; (ii) the sale of two 2004-built MRs, a 2000-built VLCC, and a 2001-built Aframax; (iii) the sale and leaseback of two 2009-built Aframaxes, and (iv) the sale of a 2003-built ULCC in conjunction with the acquisition of Six VLCCs.

 

In July 2018, the Company entered into memorandum of agreement for the sale of a 2002-built Panamax, which is expected to be delivered to the buyer during the second half of 2018. The Company expects to recognize a loss on such sale.

 

Note 6 — Equity Method Investments:

 

Investments in affiliated companies include joint ventures accounted for using the equity method. As of June 30, 2018, the Company had an approximate 50% interest in three joint ventures. One joint venture operates four LNG carriers (the “LNG Joint Venture”). The other two joint ventures - TI Africa Limited (“TI Africa”) and TI Asia Limited (“TI Asia”) - operate two Floating Storage and Offloading Service vessels that were converted from two ULCCs (collectively the “FSO Joint Venture”).

 

On March 29, 2018, the FSO Joint Venture executed an agreement on a $220,000 secured credit facility (the “FSO Loan Agreement”). The FSO Loan Agreement is among TI Africa and TI Asia, as joint and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank N.V., as Agent and as Security Trustee. The FSO Loan Agreement provides for (i) a term loan of $110,000 (the “FSO Term Loan”), which is repayable in scheduled quarterly installments over the course of the two service contracts for the FSO Asia and FSO Africa with North Oil Company, maturing in July 2022 and September 2022, respectively, and (ii) a revolving credit facility of $110,000 (the “FSO Revolver”), which revolving credit commitment reduces quarterly over the course of the foregoing two service contracts. On April 26, 2018, the FSO Joint Venture drew down and distributed the entire $110,000 of proceeds of the FSO Term Loan to INSW, which has guaranteed the FSO Term Loan and which has used the proceeds for general corporate purposes, including to fund partially the agreement to purchase the Six VLCCs (See Note 5, “Vessels”). The FSO Joint Venture also borrowed the entire $110,000 available under the FSO Revolver and distributed the proceeds to Euronav on April 26, 2018, which has guaranteed the FSO Revolver. The FSO Term Loan and the FSO Revolver are secured by, among other things, a first preferred vessel mortgage on the FSO Africa and FSO Asia, an assignment of the service contracts for the FSO Africa and FSO Asia and the aforementioned guarantees of the FSO Term Loan by INSW and the guarantee of the FSO Revolver by Euronav. The FSO Loan Agreement has a financial covenant that the Debt Service Cover Ratio (as defined in the agreement) shall be equal or greater than 1.10 to 1.00. Approximately $104,402 was outstanding under the FSO Term Loan as of June 30, 2018. The FSO Joint Venture had no outstanding debt as of December 31, 2017. As of June 30, 2018, the maximum potential amount of future principal payments (undiscounted) that INSW could be required to make relating to equity method investees secured bank debt was $104,612 and the carrying value of the Company’s guaranty in the accompanying condensed consolidated balance sheet was $951.

 

  15

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Interest payable on the FSO Term Loan and on the FSO Revolver is three month, six month or twelve month LIBOR, as selected by the FSO Joint Venture, plus a 2.00% margin. The FSO Joint Venture has entered into swap transactions which fix the interest rate on the FSO Loan Agreement at a blended rate of approximately 4.858% per annum, effective as of June 29, 2018. The FSO Joint Venture has agreed to pay a commitment fee (“FSO Commitment Fee”) of 0.7% on any undrawn amount under the FSO Revolver. INSW has agreed to pay Euronav an amount equal to the first 0.3% of the 0.7% FSO Commitment Fee and, to the extent the FSO Revolver is fully drawn, to pay Euronav an amount equal to the first 0.3% of the amount of loan interest payable under the FSO Revolver. The interest rate swap covers a notional amount of $208,803 as of June 30, 2018. As of June 30, 2018, the FSO Joint Venture had a liability of $392 for the fair value of the swaps associated with the FSO Joint Venture. The Company’s share of the effective portion of such amounts, aggregating $196 at June 30, 2018 is included in accumulated other comprehensive loss in the accompanying balance sheet.

 

Investments in and advances to affiliated companies as reflected in the accompanying condensed consolidated balance sheet as of June 30, 2018 consisted of: FSO Joint Venture of $143,800, LNG Joint Venture of $108,847 and Other of $22,387 (which primarily relates to working capital deposits that the Company maintains for commercial pools in which it participates).

 

A condensed summary of the results of operations of the joint ventures follows:

  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Shipping revenues  $53,535   $61,691   $106,322   $122,660 
Ship operating expenses   (26,038)   (26,406)   (54,330)   (52,601)
Income from vessel operations   27,497    35,285    51,992    70,059 
Other income   389    935    701    2,452 
Interest expense   (10,386)   (9,465)   (18,766)   (19,425)
Income tax provision   (832)   -    (1,827)   - 
Net income  $16,668   $26,755   $32,100   $53,086 

 

See Note 11, “Related Parties,” for additional disclosures on guarantees INSW has issued in favor of its joint venture partners, lenders and/or customers.

 

Note 7 — Variable Interest Entities (“VIEs”):

 

As of June 30, 2018, the Company participates in seven commercial pools and three joint ventures. One of the pools and the two FSO joint ventures were determined to be VIEs. The Company is not considered a primary beneficiary of either the pool or the joint ventures.

 

The following table presents the carrying amounts of assets and liabilities in the condensed consolidated balance sheet related to the VIEs as of June 30, 2018:

  

  

Condensed

Consolidated

Balance Sheet

 
Investments in Affiliated Companies  $148,047 

 

In accordance with accounting guidance, the Company evaluated its maximum exposure to loss related to these VIEs by assuming a complete loss of the Company’s investment in these VIEs. The table below compares the Company’s liability in the condensed consolidated balance sheet to the maximum exposure to loss at June 30, 2018:

  

  

Condensed

Consolidated

Balance Sheet

  

Maximum

Exposure to
Loss

 
Other Liabilities  $951   $252,659 

 

 

  16

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In addition, as of June 30, 2018, the Company had approximately $16,492 of trade receivables from the pool that was determined to be a VIE. These trade receivables, which are included in voyage receivables in the accompanying condensed consolidated balance sheet, have been excluded from the above tables and the calculation of INSW’s maximum exposure to loss. The Company does not record the maximum exposure to loss as a liability because it does not believe that such a loss is probable of occurring as of June 30, 2018.

 

Note 8 — Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures:

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash and cash equivalents— The carrying amounts reported in the condensed consolidated balance sheet for interest-bearing deposits approximate their fair value.

 

Debt— The fair value of borrowings under the 2017 Term Loan Facility and the 8.50% Senior Notes is estimated based on quoted market prices. The carrying amount of the borrowings under Sinosure Credit Facility, the ABN Term Loan Facility and the 10.75% Subordinated Notes approximates the fair value based on the fact that these facilities closed during June 2018.

 

Interest rate swaps and caps— The fair values of interest rate swaps and caps are the estimated amounts that the Company would receive or pay to terminate the swaps or caps at the reporting date, which include adjustments for the counterparty’s or the Company’s credit risk, as appropriate, after taking into consideration any underlying collateral securing the swap or cap agreements. For interest rate caps and swaps, fair values are derived using valuation models that utilize the income valuation approach. These valuation models take into account contract terms such as maturity, as well as other inputs such as interest rate yield curves and creditworthiness of the counterparty.

 

ASC 820, Fair Value Measurements and Disclosures, relating to fair value measurements defines fair value and established a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company's own credit risk.

 

The levels of the fair value hierarchy established by ASC 820 are as follows:

 

Level 1- Quoted prices in active markets for identical assets or liabilities

 

Level 2- Quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3- Inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

  17

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The estimated fair values of the Company’s financial instruments, other than derivatives that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

 

   Fair Value   Level 1   Level 2 
June 30, 2018:               
Cash and cash equivalents (1)  $142,853   $142,853   $- 
2017 Term Loan Facility   (479,688)   -    (479,688)
ABN Term Loan Facility   (28,463)   -    (28,463)
Sinosure Credit Facility   (305,073)   -    (305,073)
8.5% Senior Notes   (23,500)   (23,500)   - 
10.75% Subordinated Notes   (30,000)   -    (30,000)
                
December 31, 2017:               
Cash and cash equivalents (1)  $70,606   $70,606   $- 
2017 Term Loan Facility   (550,689)   -    (550,689)
2017 Revolver Facility   (30,227)   -    (30,227)

 

(1) Includes non-current restricted cash of $27,010 and $10,579 at June 30, 2018 and December 31, 2017, respectively.

 

Derivatives

 

The Company manages its exposure to interest rate volatility risk by using derivative instruments.

 

Interest Rate Risk

 

The Company uses interest rate caps and swaps for the management of interest rate risk exposure associated with changes in LIBOR interest rate payments due on its credit facilities. INSW is party to an interest rate cap agreement (“Interest Rate Cap”) with a major financial institution covering a notional amount of $300,000 to limit the floating interest rate exposure associated with the 2017 Term Loan. The Interest Rate Cap agreement is designated and qualified as a cash flow hedge and contains no leverage features. The Interest Rate Cap has a cap rate of 2.5% through the termination date of December 31, 2020. In July 2018, the Company amended the Interest Rate Cap agreement described above to increase the notional amount to $350,000 and increase the cap rate to 2.605%, effective July 31, 2018. The maturity date remained unchanged.

 

In June 2018, in conjunction with the Transaction (as described in Note 5, “Vessels”), the Company acquired a pay-fixed, receive-variable interest rate swap agreement (“Interest Rate Swap”) with a major financial institution that effectively fixes the interest rate on the entire variable interest rate borrowings outstanding under the Sinosure Credit Facility, which was $305,073 as of June 30, 2018. The Interest Rate Swap contains no leverage features and has a fixed rate of 2.047% through the termination date of March 21, 2022. In July 2018, the Company amended the interest rate swap agreement to increase the fixed rate to 2.99%, effective September 21, 2018. The maturity date of March 21, 2022 remained unchanged. In conjunction with such amendment, the Company received a cash settlement of $7,677 from the counterparty to the transaction.

 

The Company has elected to apply hedge accounting and designated its interest rate cap and interest rate swap as cash flow hedges.

 

Tabular disclosure of derivatives location

 

Derivatives are recorded on a net basis by counterparty when a legal right of offset exists. The following table presents information with respect to the fair values of derivatives reflected in the June 30, 2018 and December 31, 2017 balance sheets on a gross basis by transaction:

 

  18

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

   Asset Derivatives  Liability Derivatives
   Balance Sheet      Balance Sheet    
   Location  Amount   Location  Amount 
June 30, 2018:                
Derivatives designated as hedging instruments:                
Interest rate cap:                
Current portion  Current portion of derivative asset  $317   Current portion of derivative liability  $- 
Long-term portion  Long-term derivative asset   2,130   Long-term derivative liability   - 
                 
Interest rate swaps:                
Current portion  Current portion of derivative asset   1,420   Current portion of derivative liability   - 
Long-term portion  Long-term derivative asset   5,744   Long-term derivative liability   - 
Total derivatives designated as hedging instruments     $9,611      $- 
                 
December 31, 2017:                
Derivatives designated as hedging instruments:                
Interest rate cap:                
Current portion  Current portion of derivative asset  $16   Current portion of derivative liability  $- 
Long-term portion  Long-term derivative asset   886   Long-term derivative liability   - 
Total derivatives designated as hedging instruments     $902      $- 

 

 

The following tables present information with respect to gains and losses on derivative positions reflected in the condensed consolidated statements of operations or in the condensed consolidated statements of other comprehensive (loss)/income. 

 

The effect of cash flow hedging relationships recognized in other comprehensive income excluding amounts reclassified from accumulated other comprehensive loss (effective portion), including hedges of equity method investees, for the three and six months ended June 30, 2018 and 2017 follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Interest rate swaps  $367   $(2,122)  $4,221   $(2,392)
Interest rate cap   534    -    1,546    - 
Total  $901   $(2,122)  $5,767   $(2,392)

 

  19

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The effect of cash flow hedging relationships on the unaudited condensed consolidated statement of operations is presented excluding hedges of equity method investees. The effect of INSW’s cash flow hedging relationships on the unaudited condensed consolidated statement of operations for the six months ended June 30, 2018 and 2017 follows and there were no such activities for the three months ended June 30, 2018 and 2017:

  

   Statement of Operations
  

Effective Portion

of Gain/(Loss)

   
   Reclassified from   
   Accumulated Other   
For the six months ended  Comprehensive Loss  Ineffective Portion
      Amount of      Amount of 
   Location  Gain/(Loss)   Location  Gain/(Loss) 
June 30, 2018:                
Interest rate cap  Interest expense  $-   Interest expense  $- 
Interest rate swaps  Interest expense   -   Interest expense   - 
Total     $-      $- 
                 
June 30, 2017:                
Interest rate cap  Interest expense  $(131)  Interest expense  $- 
Total     $(131)     $- 

 

See Note 13, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.

 

Fair Value Hierarchy

 

The following table presents the fair values, which are pre-tax, for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):

  

   Fair Value   Level 1   Level 2 
Assets/(Liabilities) at June 30, 2018:               
Derivative Assets (interest rate cap and swaps)  $9,611   $-   $9,611(1)
                
Assets/(Liabilities) at December 31, 2017               
Derivative Assets (interest rate cap)  $902   $-   $902(1)

 

(1)For interest rate caps and swaps, fair values are derived using valuation models that utilize the income valuation approach. These valuation models take into account contract terms such as maturity, as well as other inputs such as interest rate yield curves and creditworthiness of the counterparty and the Company.

 

  20

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table summarizes the fair values of assets for which an impairment charge was recognized for the three and six months ended June 30, 2018:

  

Description  Fair Value   Level 2  

Total

Impairment

Charges

 
Assets:               
                
Crude Tankers - Vessels held and used (1)(2)  $7,025   $7,025   $(948)

 

  (1) Pre-tax impairment charge of $948 related to one vessel in the International Crude Tanker segment was recorded during the three-month period ended June 30, 2018.
  (2) The fair value measurement of $7,025 at June 30, 2018 used to determine the impairment was based upon a market approach, which considered the expected sale price of the vessel based on an executed memorandum of agreement as discussed in Note 5, "Vessels". Because sales of vessels occur somewhat infrequently the expected sales prices are considered to be Level 2.

 

Note 9 — Debt:

 

Debt consists of the following:

  

   June 30,   December 31, 
   2018   2017 
2017 Term Loan, due 2022, net of unamortized discount          
and deferred costs of $22,795 and $23,074  $456,893   $523,489 
2017 Revolver Facility, net of unamortized deferred finance costs of $552   -    29,448 
ABN Term Loan, due 2023, net of unamortized deferred          
finance costs of $954   27,509    - 
Sinosure Credit Facility, due 2027 - 2028, net of unamortized deferred          
finance costs of $2,861   302,212    - 
8.5% Senior Notes, due 2023, net of unamortized          
deferred finance costs of $1,616   23,384    - 
10.75% Subordinated Notes, due 2023, net of          
unamortized deferred finance costs of $1,969   28,031    - 
    838,029    552,937 
Less current portion   (48,492)   (24,063)
Long-term portion  $789,537   $528,874 

 

Capitalized terms used hereafter have the meaning given in these condensed consolidated financial statements or in the respective transaction documents referred to below, including subsequent amendments thereto.

 

2017 Debt Facilities

 

The 2017 Debt Facilities include a revolving credit facility of $50,000 (the “2017 Revolver Facility”) and (ii) a term loan of $550,000 (the “2017 Term Loan Facility” and together with the 2017 Revolver Facility, the “2017 Debt Facilities”). The 2017 Debt Facilities are secured by a first lien on substantially all of the assets of the Administrative Borrower and certain of its subsidiaries.

 

The 2017 Term Loan Facility matures on June 22, 2022, and the 2017 Revolver Facility matures on December 22, 2021. The maturity dates for the 2017 Debt Facilities are subject to acceleration upon the occurrence of certain events (as described in the credit agreement).

 

On March 21, 2018, the $30,000 outstanding balance under the 2017 Revolver Facility was repaid in full using proceeds from the sale of vessels sold during December 2017 and the first quarter of 2018.

 

  21

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On June 14, 2018, the Company entered into an amendment of the 2017 Debt Facilities (the “2017 Debt Facilities Second Amendment”). The amendment (i) increased the interest rate margin from 4.50% per annum to 5.00% per annum for loans determined by the Alternate Base Rate (as defined in the 2017 Debt Facilities) and from 5.50% per annum to 6.00% per annum for any loan determined by reference to the Adjusted LIBOR Rate (as defined in the 2017 Debt Facilities) and (ii) allowed a dividend of $110,000 to be made from the Company's FSO Joint Venture to the Company without incorporating such funds into the cash sweep provisions of the 2017 Debt Facilities, (iii) permitted the acquisition of Gener8 Maritime Subsidiary VII, Inc. and its subsidiaries as Unrestricted Subsidiaries (as defined in the 2017 Debt Facilities) and permitted those entities and their assets to be subject to the Sinosure Credit Facility (as defined below) and be subject to its liens and permitted the funding of the certain liquidity and other accounts in connection with that acquisition and (iv) made certain other amendments to covenants under the 2017 Debt Facilities. As a condition to the effectiveness of the 2017 Debt Facilities, the Company prepaid $60,000 of the amount outstanding under the 2017 Term Loan Facility together with a premium equal to 1% of the $60,000 prepayment and paid a fee to the lenders of 1% of the 2017 Debt Facilities outstanding after that repayment.

 

The 2017 Term Loan Facility amortizes in quarterly installments equal to 0.625% of the original principal amount of the loan for the quarterly installment due June 30, 2018 (paid July 2, 2018) and equal to 1.25% of the original principal amount of the loan reduced by the $60,000 prepayment described above for all quarterly installments thereafter. The 2017 Term Loan Facility is subject to additional mandatory annual prepayments in an aggregate principal amount of 75% of Excess Cash Flow, as defined in the credit agreement.

 

Management estimated that it will have no Excess Cash Flow under the 2017 Term Loan Facility for the year ended December 31, 2018 based on the actual results of the six months ended June 30, 2018 and the projection for the remainder of 2018. Accordingly, there is currently no mandatory prepayment expected during the first quarter of 2019.

 

As set forth in the 2017 Debt Facilities credit agreement, the 2017 Debt Facilities contain certain restrictions relating to new borrowings and INSW’s ability to receive cash dividends, loans or advances from ISOC and its subsidiaries that are Restricted Subsidiaries. As of June 30, 2018, permitted cash dividends that can be distributed to INSW by ISOC under the 2017 Term Loan Facility was $12,500.

 

The 2017 Debt Facilities have covenants to maintain the aggregate Fair Market Value (as defined in the credit agreement) of the Collateral Vessels at greater than or equal to $300,000 at the end of each fiscal quarter and to ensure that at any time, the outstanding principal amounts of the 2017 Debt Facilities and certain other secured indebtedness permitted under credit agreement minus the amount of unrestricted cash and cash equivalents does not exceed 65% of the aggregate Fair Market Value of the Collateral Vessels (as defined in the 2017 Debt Facilities) plus the aggregate Fair Market Value of certain joint venture equity interests and Gener8 Maritime Subsidiary VII, Inc. The Company had substantial headroom under this covenant as of June 30, 2018, with an estimated ratio of 42%.

 

Sinosure Credit Facility

 

As part of the Transaction, the Company financed the acquisition price of $434,000 with the assumption of debt secured by the six vessels under a China Export & Credit Insurance Corporation ("Sinosure") credit facility funded by The Export-Import Bank of China, Bank of China (New York Branch) and Citibank, N.A. The Company acceded as a guarantor to the Sinosure Credit Facility agreement originally dated November 30, 2015, as supplemented by a supplemental agreement dated December 28, 2015, as amended and restated by an amending and restating deed dated June 29, 2016, as supplemented by a supplemental agreement dated November 8, 2017, as supplemented by a consent, supplemental and amendment letter, dated April 2, 2018 (the facility agreement as of such date, the "Original Sinosure Facility") and as amended and restated by an amending and restating agreement dated June 13, 2018 (the "2018 Amending and Restating Agreement"), by and among Gener8 Maritime Subsidiary VII, Inc., Seaways Holding Corporation, a wholly owned subsidiary of the Company, the Company, Citibank, N.A. (London Branch), the Export-Import Bank of China and Bank of China (New York Branch) (and its successors and assigns) and certain other parties thereto (the "Sinosure Credit Facility"). The Sinosure Credit Facility is a term loan facility comprised of six loans, each secured by one of the six VLCCs. As of the Closing Date, it had a principal amount outstanding of $310,968 and bears interest at a rate of 3-month LIBOR plus a margin of 2%. Each loan under the Sinosure Facility requires quarterly amortization payments of 12/3% (based on the original outstanding amount of each Vessel loan) together with a balloon repayment payable on the termination date of each loan. Each of the loans under the Sinosure Credit Facility will mature 144 months after its initial utilization date. The 2018 Amending and Restating Agreement effects certain amendments to the Original Sinosure Facility as agreed between the parties thereto and necessitated by the Transaction. The Sinosure Credit Facility is guaranteed by the Company and Seaways Holding Corporation.

 

  22

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On the Closing Date, the Company paid to Euronav cash consideration of approximately $120,025, with the difference reflecting assumed debt and accrued interest thereon through the Closing Date. Supplemental cash flow information for the six months ended June 30, 2018 associated with the aforementioned non-cash assumption of debt in relation to the acquisition of six VLCCs aggregating $310,968 were non-cash investing activities and financing activities.

 

Under the Sinosure Credit Facility, the Obligors (as defined in the Sinosure Credit Facility) are required to comply with various collateral maintenance and financial covenants, including with respect to:

(i)minimum security coverage, which shall not be less than 135% of the aggregate loan principal outstanding under the Sinosure Credit Facility. Any non-compliance with the minimum security coverage shall not constitute an event of default so long as within thirty days of such non-compliance, Gener8 Maritime Subsidiary VII, Inc. has either provided additional collateral or prepaid a portion of the outstanding loan balance to cure such non-compliance;
(ii)maximum consolidated leverage ratio, which shall not be greater than 0.60 to 1.00 on any testing date occurring on or after June 30, 2018;
(iii)minimum consolidated liquidity, under which unrestricted consolidated cash and cash equivalents shall be no less than $25,000 at any time and total consolidated cash and cash equivalents (including cash restricted under the Sinosure Credit Facility) shall not be less than the greater of $50,000 or 5.0% of Total Indebtedness (as defined in the Sinosure Credit Facility) or $9,000 (i.e., $1,500 per each VLCC securing the Sinosure Credit Facility); and
(iv)interest expense coverage ratio, which for Seaways Holding Corporation, shall not be less than 2.00 to 1.00 during the period commencing on July 1, 2018 through June 30, 2019 and will be calculated on a trailing six, nine and twelve-month basis from December 31, 2018, March 31, 2019 and June 30, 2019, respectively. For the Company, the interest expense coverage ratio shall not be less than 2.25 to 1:00 for the period commencing on July 1, 2019 through June 30, 2020 and no less than 2.50 to 1:00 for the period commencing on July 1, 2020 and thereafter and shall be calculated on a trailing twelve-month basis. No event of default under this covenant will occur if the failure to comply is capable of remedy and is remedied within thirty days of the Facility Agent giving notice to the Company or (if earlier) any Obligor becoming aware of the failure to comply, and (i) if such action is being taken with respect to a Test Date falling on or prior to December 31, 2019, then such remedy shall be in the form of cash and cash equivalents being (or having been) deposited by Seaways Holding Corporation to the Minimum Liquidity Account within the thirty day period mentioned above in the manner and in the amounts required to remedy such breach as tested at the Seaways Holding Corporation level and (ii) if such action is being taken with respect to a Test Date falling on or after January 1, 2020, then any such remedy and the form of the same shall be considered and determined by the Lenders in their absolute discretion.

 

The Sinosure Credit Facility also requires the Company to comply with a number of covenants, including the delivery of quarterly and annual financial statements, budgets and annual projections; maintaining required insurances; compliance with laws (including environmental); compliance with ERISA: maintenance of flag and class of the collateral vessels; restrictions on consolidations, mergers or sales of assets; limitations on liens; limitations on issuance of certain equity interests; limitations on transactions with affiliates; and other customary covenants and related provisions.

 

As of June 30, 2018, the Company was in compliance with all such covenants that were in effect on such date.

 

ABN Term Loan Facility

 

On June 7, 2018, the Company entered into a credit agreement, secured by the Seaways Raffles, a VLCC tanker, by and among, inter alia, Seaways Shipping Corporation, a Marshall Islands corporation and wholly-owned indirect subsidiary of the Company, the Company (as a guarantor), another guarantor which is an indirect subsidiary of the Company, the lenders named therein and ABN AMRO Capital USA LLC as mandated lead arranger and facility agent (the "ABN Term Loan Facility"), for an aggregate principal amount of up to the lesser of (i) $29,150, and (ii) 55% of the fair market value of the Seaways Raffles. On June 12, 2018, the Company drew down approximately $28,463. The ABN Term Loan Facility bears interest at a rate of 3-month LIBOR plus a margin of 3.25% and is repayable in 19 quarterly installments of approximately $869 with a final balloon payment due on the maturity date in the second quarter of 2023. Additionally, the ABN Term Loan Facility includes certain financial covenants and is guaranteed by the Company. The Company's guarantee is unsecured. The Company used the proceeds from the ABN Term Loan Facility to fund a portion of the Transaction.

 

  23

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The ABN Term Loan Facility requires Seaways Shipping Corporation to maintain a minimum unrestricted cash balance of $825 per vessel and a balance of $2,500 and up to $2,100 in a debt service reserve accounts and a dry dock reserve account, respectively, and provides for a restriction on dividends unless minimum unrestricted cash levels are maintained and Seaways Shipping Corporation is in compliance with its covenants. The ABN Term Loan Facility also has a vessel value maintenance clause that requires the Company to ensure that the fair market value of the Seaways Raffles is at all times not less than 150% of the outstanding principal amount of the loan. The Company was in compliance with these covenants as of June 30, 2018.

 

The ABN Term Loan Facility also requires that the loan agreement be amended as soon as reasonably practical following the effective date of the loan to incorporate financial covenants (other than the vessel value maintenance covenant) included in other loan facilities or agreements evidencing indebtedness (with principal balances in excess of $50,000) to which the Company becomes a party, that are deemed to be materially more advantageous to the lenders under such agreements than those currently required by the ABN Term Loan Facility. The Company expects to execute such an amendment during the third quarter of 2018.

 

The ABN Term Loan Facility also requires the Company to comply with a number of covenants, including the delivery of quarterly and annual financial statements, budgets and annual projections; maintaining required insurances; compliance with laws (including environmental); compliance with ERISA: maintenance of flag and class of the Seaways Raffles; restrictions on consolidations, mergers or sales of assets; limitations on liens; limitations on issuance of certain equity interests; limitations on the payment of dividends or other distributions; limitations on transactions with affiliates; and other customary covenants and related provisions.

 

8.5% Senior Notes

 

On May 31, 2018, the Company completed a registered public offering of $25,000 aggregate principal amount of its 8.5% senior unsecured notes due 2023 (the “8.5% Senior Notes”), which resulted in aggregate net proceeds to the Company of approximately $23,363, after deducting commissions and estimated expenses. The Company used the net proceeds to fund the Transaction, to repay a portion of its outstanding 2017 Debt Facility and for general corporate purposes.

 

The Company issued the Notes under an indenture dated as of May 31, 2018 (the “Base Indenture”), between the Company and The Bank of New York Mellon, as trustee (the “Trustee”), as supplemented by a supplemental indenture dated as of May 31, 2018 (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), between the Company and the Trustee. The Notes will mature on June 30, 2023 and bear interest at a rate of 8.50% per annum. Interest on the Notes will be payable in arrears on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2018. The terms of the Indenture, among other things, limit the Company’s ability to merge, consolidate or sell assets.

 

The Company may redeem the Notes at its option, in whole or in part, at any time on or after June 30, 2020 at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. In addition, if the Company undergoes a Change of Control (as defined in the Indenture) the Company may be required to repurchase all of the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest (including additional interest, if any), to, but excluding, the repurchase date.

 

The Indenture contains certain restrictive covenants, including covenants that, subject to certain exceptions and qualifications, restrict our ability to make certain payments if a default under the Indenture has occurred and is continuing or will result therefrom and require us to limit the amount of debt we incur, maintain a certain minimum net worth and provide certain reports. The Indenture also provides for certain customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace or cure periods).

 

Pursuant to the limitation on borrowings covenant, the Company shall not permit Total Borrowings (as defined in the Indenture) to equal or exceed 70% of Total Assets (as defined in the Indenture). The Company shall also ensure that Net Worth (defined as Total Assets, less Intangible assets and Total Borrowings, as defined in the Indenture) exceeds $600,000 pursuant to the Minimum Net Worth covenant.

 

  24

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company was in compliance with financial covenants under the 8.5% Senior Notes as of June 30, 2018.

 

10.75% Subordinated Notes

 

On June 13, 2018, the Company completed the sale of $30,000 of its 10.75% subordinated step-up notes due 2023 (the "10.75% Subordinated Notes") in a private placement to certain funds and accounts managed by BlackRock, Inc. ("BlackRock") (the "Private Placement"). The 10.75% Subordinated Notes are unsecured and rank junior to the 8.5% Senior Notes, the Company's guarantees of the 2017 Debt Facilities, the ABN Term Loan Facility and Sinosure Credit Facility and other unsubordinated indebtedness of the Company. The Private Placement resulted in aggregate proceeds to the Company of approximately $28,003, after deducting fees paid to the purchasers of those notes and estimated expenses. The Company used the net proceeds from the Private Placement to fund a portion of the Transactions and the offer to prepay $60,000 of the 2017 Debt Facilities pursuant to the Second Amendment.

 

The 10.75% Subordinated Notes were issued under an indenture dated as of June 13, 2018 (the "Subordinated Notes Indenture"), between the Company and GLAS Trust Company LLC, as trustee (the "Subordinated Notes Trustee").

 

The 10.75% Subordinated Notes bear interest from June 13, 2018 at an annual rate of 10.75%; provided that the 10.75% Subordinated Notes shall bear interest at the rate of 13.00% per annum beginning on the earlier of (i) December 15, 2020 and (ii) if the Refinance Date (as defined below) has occurred, the later of the Refinance Date and June 15, 2020. Interest on the 10.75% Subordinated Notes is payable quarterly in arrears on the 15th day of March, June, September and December of each year, commencing on September 15, 2018.

 

The stated maturity date of the 10.75% Subordinated Notes is June 15, 2023; provided that in certain circumstances after the indebtedness outstanding under the 2017 Debt Facilities (as amended by the Second Amendment) ceases to be outstanding (such date, the "Refinance Date"), the stated maturity of the 10.75% Subordinated Notes will become June 15, 2022. The 10.75% Subordinated Notes may be redeemed, in whole or in part, at any time prior to June 15, 2020, at a redemption price equal to 100% of the aggregate principal amount of the 10.75% Subordinated Notes being redeemed, plus accrued and unpaid interest to, but not including, the date of redemption, plus a "make-whole" premium. On or after June 15, 2020, the 10.75% Unsecured Subordinated Notes may be redeemed at par, plus accrued and unpaid interest. The 10.75% Subordinated Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.

 

The Subordinated Notes Indenture contains covenants requiring the Company to maintain a minimum net worth similar to that required by the 8.5% Senior Notes. The Subordinated Notes Indenture also contains covenants restricting the ability of the Company and its subsidiaries to incur additional indebtedness, sell assets, incur liens, amend the 2017 Debt Facilities, enter into sale and leaseback transactions and enter into certain extraordinary transactions. In addition, the Subordinated Notes Indenture prohibits the Company from paying any dividends unless certain financial and other conditions are satisfied. The Subordinated Notes Indenture also contains events of default consistent with those under the 2017 Debt Facilities.

 

The Company was in compliance with the covenants under the Subordinated Notes Indenture as of June 30, 2018.

 

Interest Expense

 

Total interest expense, including amortization of issuance and deferred financing costs (for additional information related to deferred financing costs see Note 2, “Significant Accounting Policies”), commitment, administrative and other fees for all of the Company’s debt facilities, including the INSW Facilities (which were terminated in accordance with their terms on June 22, 2017), for the three and six months ended June 30, 2018 was $12,797 and $24,157, respectively, and for the three and six months ended June 30, 2017 was $8,982 and $17,717, respectively. Interest paid for the Company’s debt facilities, including the INSW Facilities for the three and six months ended June 30, 2018 was $13,633 and $23,591, respectively, and for the three and six months ended June 30, 2017 was $10,033 and $16,732, respectively.

 

  25

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Debt Modifications, Repurchases and Extinguishments

 

During the three and six months ended June 30, 2018, the Company incurred issuance costs aggregating $14,499 in connection with ABN Term Loan Facility, Sinosure Credit Facility, 8.5% Senior Notes, 10.75% Subordinated Notes, and 2017 Debt Facilities Second Amendment. Issuance costs paid to all lenders and third-party fees associated with the ABN Term Loan Facility, Sinosure Credit Facility, 8.5% Senior Notes, and 10.75% Subordinated Notes aggregating $7,486 were capitalized as deferred finance charges. Issuance costs paid to lenders and third-party fees associated with 2017 Debt Facilities Second Amendment totaled $7,013, of which $4,489 associated with lenders’ fees paid that were deemed to be a modification and third-party fees paid that were deemed to be an extinguishment were capitalized as deferred finance charges and the remaining $2,524 were expensed, of which $1,229 associated with third-party fees paid that were deemed to be a modification were included in third-party debt modification fees and $1,295 associated with lender fees paid that were deemed to be an extinguishment were included in other expense in the unaudited condensed consolidated statement of operations. In addition, an aggregate net loss of $2,273 for the three and six months ended June 30, 2018 recognized on the modification of the Company’s debt facilities, is included in other expense in the unaudited condensed consolidated statement of operations. The net loss reflects a write-off of unamortized original issue discount and deferred financing costs associated with the prepayment of $60,000 made in connection with the 2017 Debt Facilities Second Amendment, which was treated as a partial extinguishment. Issuance costs incurred and capitalized as deferred finance charges have been treated as a reduction of debt proceeds.

 

During the three and six months ended June 30, 2017, the Company incurred issuance costs aggregating $22,006 in connection with the 2017 Debt Facilities. Issuance costs paid to all lenders and third-party fees associated with lenders of the 2017 Debt Facilities who had not participated in the INSW Facilities aggregating $14,067 were capitalized as deferred finance charges. Third party fees associated with the First Amendment and with lenders of the 2017 Debt Facilities who had participated in the INSW Facilities aggregating $7,939 were expensed and are included in third-party debt modification fees in the unaudited condensed consolidated statement of operations. In addition, an aggregate net loss of $7,020 realized on the modification of the Company’s debt facilities for the three and six months ended June 30, 2017 is included in other expense in the unaudited condensed consolidated statement of operations. The net loss reflects a write-off of unamortized original issue discount and deferred financing costs associated with the INSW Facilities, which were treated as partial extinguishments.

 

Note 10 — Taxes:

 

The Company derives substantially all of its gross income from the use and operation of vessels in international commerce. The Company’s entities that own and operate vessels are primarily domiciled in the Marshall Islands, which do not impose income tax on shipping operations. The Company also has or had subsidiaries in various jurisdictions that perform administrative, commercial or technical management functions. These subsidiaries are subject to income tax based on the services performed in countries in which their offices are located; current and deferred income taxes are recorded accordingly.

 

A substantial portion of income earned by the Company is not subject to income tax. With respect to subsidiaries not subject to income tax in their respective countries of incorporation, no deferred taxes are provided for the temporary differences in the bases of the underlying assets and liabilities for tax and accounting purposes.

 

As of June 30, 2018, the Company believes it will qualify for an exemption from U.S. federal income taxes under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and U.S. Treasury Department regulations for 2018, because less than 50 percent of the total value of the Company’s stock is held by one or more shareholders who own 5% or more of the Company’s stock for more than half of the days of 2018.

 

The Marshall Islands impose tonnage taxes, which are assessed on the tonnage of certain of the Company’s vessels. These tonnage taxes are included in vessel expenses in the accompanying condensed consolidated statements of operations.

 

As of June 30, 2018, and December 31, 2017, the Company has recognized a reserve for uncertain tax positions of $81 and $153, respectively, and accrued interest of $29 and $51, respectively, in accounts payable, accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets.

 

Note 11 — Related Parties:

 

Transition Services Agreement and Other Spin-off Related Activity

 

During the three and six months ended June 30, 2017, INSW earned fees totaling $6 and $61, respectively, for services provided to its former parent, Overseas Shipholding Group, Inc. (“OSG”) and incurred fees totaling $202 and $731, respectively, for services received from OSG including INSW’s share of the compensation costs of former OSG corporate employees providing services to one or both companies during the defined transitional period, which ended on June 30, 2017.

 

  26

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Payable to OSG aggregating $34 as of June 30, 2018 was related to a guarantee provided by OSG as described below. Payables to OSG aggregating $367 as of December 31, 2017 were primarily in relation to the spin-related agreements (Transition Services, Separation and Distribution and Employee Matters Agreements) between INSW and OSG and were paid in full during the first quarter of 2018.

 

Guarantees

 

The FSO Joint Venture is a party to a number of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among, the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the ‘‘Guarantee Facility’’); (b) the FSO Joint Venture is party to two service contracts with NOC (the ‘‘NOC Service Contracts’’) and (c) the FSO Joint Venture is a borrower under a $220,000 secured credit facility by and among TI Africa and TI Asia, as joint and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank N.V., as Agent and as Security Trustee.

 

INSW severally guarantees the obligations of the FSO Joint Venture pursuant to the Guarantee Facility and severally guaranteed the obligations of the FSO Joint Venture to Maersk Oil Qatar AS (“MOQ”) under the MOQ service contracts, which contracts were novated to NOC in July 2017 (the ‘‘MOQ Guarantee’’) and severally guarantees the obligations of the FSO Joint Venture under the NOC Service Contracts. In addition, INSW continues the MOQ Guarantee for the period ended on the novation date of the service contracts for MOQ, which period will end when the Qatari authorities determine that the FSO Joint Venture has paid all Qatari taxes owed by the FSO Joint Venture under such service contracts for tax periods through the novation date.

 

The FSO Joint Venture drew down on a $220,000 credit facility in April 2018 (See Note 6, “Equity Method Investments”). The Company provided a guarantee for the $110,000 FSO Term Loan portion of the facility, which amortizes over the remaining terms of the NOC Service Contracts, which expire in July 2022 and September 2022. INSW’s guarantee of the FSO Term Loan has financial covenants that provide (i) INSW’s Liquid Assets shall not be less than the higher of $50,000 and 5% of Total Indebtedness of INSW, (ii) INSW shall have Cash of at least $30,000 and (iii) INSW is in compliance with the Loan to Value Test (as such capitalized terms are defined in the Company guarantee or in the case of the Loan to Value Test, as defined in the credit agreement underlying the Company’s 2017 Debt Facilities (see Note 9, “Debt”). As of June 30, 2018, the maximum potential amount of future principal payments (undiscounted) that INSW could be required to make relating to equity method investees secured bank debt was $104,612 and the carrying amount of the liability related to this guarantee was $951.

 

INSW maintains a guarantee in favor of Qatar Liquefied Gas Company Limited (2) (‘‘LNG Charterer’’) relating to certain LNG Tanker Time Charter Party Agreements with the LNG Charterer and each of Overseas LNG H1 Corporation, Overseas LNG H2 Corporation, Overseas LNG S1 Corporation and Overseas LNG S2 Corporation (such agreements, the ‘‘LNG Charter Party Agreements,’’ and such guarantee, the ‘‘LNG Performance Guarantee’’). INSW will pay QGTC an annual fee of $100 until such time that QGTC ceases to provide a guarantee in favor of the LNG charterer relating to performance under the LNG Charter Party Agreements.

 

OSG continues to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantees, the ‘‘OSG LNG Performance Guarantee’’). INSW will indemnify OSG for liabilities arising from the OSG LNG Performance Guarantee pursuant to the terms of the Separation and Distribution Agreement. In connection with the OSG LNG Performance Guarantee, INSW pays a $135 fee per year to OSG, which will increase to $145 per year in 2019 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.

 

Note 12 — Capital Stock and Stock Compensation:

 

The Company accounts for stock-based compensation expense in accordance with the fair value method required by ASC 718, Compensation – Stock Compensation. Such fair value method requires share-based payment transactions to be measured according to the fair value of the equity instruments issued.

 

  27

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Information regarding share-based compensation awards granted by INSW during 2018 follows:

 

Director Compensation - Restricted Common Stock

 

The Company awarded a total of 41,887 restricted common stock shares during the six months ended June 30, 2018 to its non-employee directors. The weighted average fair value of INSW’s stock on the measurement date of such awards was $18.62 per share. Such restricted share awards vest in full on the earlier of the next annual meeting of the stockholders or May 24, 2019, subject to each director continuing to provide services to INSW through such date. The restricted share awards granted may not be transferred, pledged, assigned or otherwise encumbered prior to vesting. Prior to the vesting date, a holder of restricted share awards otherwise has all the rights of a shareholder of INSW, including the right to vote such shares and the right to receive dividends paid with respect to such shares at the same time as common shareholders generally.

 

Management Compensation - Restricted Stock Units and Stock Options

 

During the six months ended June 30, 2018, the Company granted 55,536 time-based restricted stock units (“RSUs”) to certain senior officers. The weighted average grant date fair value of these awards was $17.46 per RSU. Each RSU represents a contingent right to receive one share of INSW common stock upon vesting. Each award of RSUs will vest in equal installments on each of the first three anniversaries of the grant date.

 

During the six months ended June 30, 2018, the Company awarded 55,534 performance-based RSUs to its senior officers. Each performance stock unit represents a contingent right to receive RSUs based upon the covered employees being continuously employed through the end of the period over which the performance goals are measured and shall vest as follows: (i) one-half of the target RSUs shall vest on December 31, 2020, subject to INSW’s return on invested capital (“ROIC”) performance in the three-year ROIC performance period relative to a target rate (the “ROIC Target”) set forth in the award agreements; and (ii) one-half of the target RSUs shall vest on December 31, 2020, subject to INSW’s three-year total shareholder return (“TSR”) performance relative to that of a performance peer group over a three-year performance period (“TSR Target”). Vesting is subject in each case to the Human Resources and Compensation Committee of the Company’s Board of Directors’ certification of achievement of the performance measures and targets no later than March 15, 2021. As of June 30, 2018, INSW management believes the ROIC Target performance condition is not probable of being achieved. Accordingly, no compensation costs has been recognized for these awards during the three months ended June 30, 2018. The weighted average grant date fair value of the awards with performance conditions was determined to be $17.46 per RSU. The weighted average grant date fair value of the TSR based performance awards, which have a market condition, was estimated using a Monte Carlo probability model and determined to be $18.87 per RSU.

 

In addition, in April 2018, the Company awarded an executive officer, 11,882 performance-based restricted stock units, representing 2018 tranche of the award originally made on February 14, 2017. The grant date fair value of the performance award was determined to be $17.46 per RSU. Each performance stock unit represents a contingent right to receive RSUs based upon certain performance related goals being met and the covered employees being continuously employed through the end of the period over which the performance goals are measured. These performance awards shall vest on December 31, 2018, subject to INSW’s ROIC performance for the year ended December 31, 2018 relative to a target rate (the “2018 ROIC Target”) set forth in the award agreement. Vesting is subject to INSW’s Human Resources and Compensation Committee’s certification of achievement of the performance measure and target no later than March 31, 2019. As of June 30, 2018, achievement of the performance condition in this award was determined to be not probable, and accordingly, compensation cost has not been recognized.

 

During the six months ended June 30, 2018, the Company awarded to certain of its senior officers an aggregate of 124,955 stock options. Each stock option represents an option to purchase one share of INSW common stock for an exercise price of $17.46 per share. Each stock option will vest in equal installments on each of the first three anniversaries of the award date. The weighted average grant date fair value of the options was $7.76 per option. The fair values of the options were estimated using the Black-Scholes option pricing model with inputs that include the INSW stock price, the INSW exercise price and the following weighted average assumptions: risk free interest rates of 2.67%, dividend yields of 0.0%, expected stock price volatility factor of .42, and expected lives at inception of six years. Stock options may not be transferred, pledged, assigned or otherwise encumbered prior to vesting. The stock options expire on the business day immediately preceding the tenth anniversary of the award date. If a stock option grantee’s employment is terminated for cause (as defined in the applicable Form of Grant Agreement), stock options (whether then vested or exercisable or not) will lapse and will not be exercisable. If a stock option grantee’s employment is terminated for reasons other than cause, the option recipient may exercise the vested portion of the stock option but only within such period of time ending on the earlier to occur of (i) the 90th day ending after the option recipient’s employment terminated and (ii) the expiration of the options, provided that if the optionee’s employment terminates for death or disability the vested portion of the option may be exercised until the earlier of (i) the first anniversary of employment termination and (ii) the expiration date of the options.

 

  28

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Share Repurchases

 

In connection with the settlement of vested restricted stock units, the Company repurchased 6,678 and 22,424 shares of common stock during the three and six months ended June 30, 2018, respectively, at an average cost of $17.84 and $17.71, respectively, per share (based on the market prices on the dates of vesting) from certain members of management to cover withholding taxes. The Company repurchased 787 and 12,992 shares of common stock during the three and six months ended June 30, 2017, respectively, at an average cost of $18.63 and $18.59, respectively, per share (based on the market prices on the dates of vesting) from certain members of management to cover withholding taxes.

 

On May 2, 2017, the Company’s Board of Directors approved a resolution authorizing the Company to implement a stock repurchase program. Under the program, the Company may opportunistically repurchase up to $30,000 worth of shares of the Company’s common stock from time to time over a 24-month period, on the open market or otherwise, in such quantities, at such prices, in such manner and on such terms and conditions as management determines is in the best interests of the Company. Shares owned by employees, directors and other affiliates of the Company will not be eligible for repurchase under this program without further authorization from the Board. No shares were repurchased under such program during the six months ended June 30, 2018.

 

Note 13 — Accumulated Other Comprehensive Loss:

 

The components of accumulated other comprehensive loss, net of related taxes, in the condensed consolidated balance sheets follow:

  

   June 30,   December 31, 
   2018   2017 
Unrealized losses on derivative instruments  $(18,420)  $(28,989)
Items not yet recognized as a component of net periodic benefit cost (pension plans)   (10,027)   (11,418)
   $(28,447)  $(40,407)

 

  29

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The changes in the balances of each component of accumulated other comprehensive loss, net of related taxes, during the three and six months ended June 30, 2018 and 2017 follow: 

 

   Unrealized losses on cash flow hedges   Items not yet recognized as a component of net periodic benefit cost (pension plans)   Total 
                
Balance as of March 31, 2018  $(21,519)  $(11,847)  $(33,366)
Current period change, excluding amounts reclassified               
from accumulated other comprehensive loss   901    141    1,042 
Amounts reclassified from accumulated other               
comprehensive loss   2,198    1,679    3,877 
Total change in accumulated other comprehensive loss   3,099    1,820    4,919 
Balance as of June 30, 2018  $(18,420)  $(10,027)  $(28,447)
                
Balance as of March 31, 2017  $(36,999)  $(12,147)  $(49,146)
Current period change, excluding amounts reclassified               
from accumulated other comprehensive loss   (2,122)   (475)   (2,597)
Amounts reclassified from accumulated other               
comprehensive loss   3,056    -    3,056 
Total change in accumulated other comprehensive loss   934    (475)   459 
Balance as of June 30, 2017  $(36,065)  $(12,622)  $(48,687)

 

 

   Unrealized losses on cash flow hedges   Items not yet recognized as a component of net periodic benefit cost (pension plans)   Total 
             
Balance as of December 31, 2017  $(28,989)  $(11,418)  $(40,407)
Current period change, excluding amounts reclassified from               
accumulated other comprehensive loss   5,767    (288)   5,479 
Amounts reclassified from accumulated other               
comprehensive loss   4,802    1,679    6,481 
Total change in accumulated other comprehensive loss   10,569    1,391    11,960 
Balance as of June 30, 2018  $(18,420)  $(10,027)  $(28,447)
                
Balance as of December 31, 2016  $(40,317)  $(11,950)  $(52,267)
Current period change, excluding amounts reclassified from               
accumulated other comprehensive loss   (2,392)   (672)   (3,064)
Amounts reclassified from accumulated other               
comprehensive loss   6,644    -    6,644 
Total change in accumulated other comprehensive loss   4,252    (672)   3,580 
Balance as of June 30, 2017  $(36,065)  $(12,622)  $(48,687)

 

 

  30

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Amounts reclassified out of each component of accumulated other comprehensive loss follow:

 

   Three Months Ended   Six Months Ended    
   June 30,   June 30,    
Accumulated Other Comprehensive Loss Component  2018   2017   2018   2017   Statement of
Operations
Line Item
                    
Unrealized losses on cash flow hedges:                       
Interest rate swaps entered into by the Company's                      Equity in income of
equity method joint venture investees  $(2,198)  $(3,056)  $(4,802)  $(6,513)   affiliated companies
                        
Interest rate caps entered into by the Company's                       
subsidiaries   -    -    -    (131)  Interest expense
                        
Items not yet recognized as a component of net                       
periodic benefit cost (pension plans):                       
Net periodic benefit costs associated with                       
pension and postretirement benefit plans for                       
shore-based employees   (1,679)   -    (1,679)   -   Other income
                       Total before and
   $(3,877)  $(3,056)  $(6,481)  $(6,644)  after tax

 

At June 30, 2018, the Company expects that it will reclassify $6,357 (gross and net of tax) of net losses on derivative instruments from accumulated other comprehensive loss to earnings during the next twelve months due to the payment of variable rate interest associated with floating rate debt of INSW’s equity method investees and the interest rate cap and swaps held by the Company.

 

See Note 8, “Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures,” for additional disclosures relating to derivative instruments.

 

Note 14 — Revenue:

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were in progress as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

 

Upon adoption of ASC 606, the timing and recognition of earnings from the pool arrangements and time charter/bareboat charter-out contracts to which the Company is party did not change significantly from previous practice. Depending on whether or not the underlying voyage charter has been determined to be a service only contract or a lease contract with a service component, there may be a change in the timing of revenue recognition under voyage charter contracts. Such change in timing of revenue recognition may have a material impact on the Company’s consolidated financial statements, depending on the number of voyage charters that are in progress at a reporting period end. As of December 31, 2017, only one of the Company’s vessels was operating on a voyage charter. A review of the terms of the voyage charter agreement resulted in the determination that it was a short-term lease contract because the charterer had substantive decision-making rights with respect to the load and discharge ports. We concluded there was no material cumulative catch up adjustment for this contract as the adoption of ASC 606 did not materially change the timing or the amount of the non-lease component of the revenue recognized ratably between contract signing date in November 2017 and the discharge of cargo in January 2018. As a result, there was no cumulative catch up adjustment recognized on January 1, 2018.

 

The adoption of ASC 606 had no impact to revenues for the three and six months ended June 30, 2018 as there was no non-lease voyage charter in progress as of June 30, 2018.

 

  31

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Revenue Recognition

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of or consumes promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. See Note 2, “Significant Accounting Policies,” for additional detail on the Company’s accounting policies regarding revenue recognition and costs to obtain or fulfill a contract.

 

Disaggregation of Revenue

 

For purposes of determining the standalone selling price of the vessel lease and technical management service components of the Company’s contracts with customers, the Company concluded that the residual approach would be the most appropriate method to use given that vessel lease rates are highly variable depending on shipping market conditions, the duration of such charters, and the age of the vessel. The Company believes that the standalone transaction price attributable to the technical management service component is more readily determinable than the price of the lease component and, accordingly, the service component is estimated using observable data (such as fees charged by third-party technical managers) and the residual transaction price is attributed to the vessel lease.

 

The following table presents the Company’s revenue disaggregated by revenue source for the three and six months ended June 30, 2018.

 

   Crude   Product         
   Tankers   Carriers   Other   Totals 
Three months ended June 30, 2018:                    
Pool revenues                    
Vessel lease component  $5,207   $2,950   $-   $8,157 
Technical management services component   13,189    12,255    -    25,444 
                     
Time and bareboat charter revenues                    
Vessel lease component   1,767    501    -    2,268 
Technical management services component   4,340    -    -    4,340 
                     
Voyage charter revenues                    
Vessel lease component   6,160    49    -    6,209 
Technical management services component   1,569    -    -    1,569 
Lightering services component   8,922    -    -    8,922 
                     
Total shipping revenues  $41,154   $15,755   $-   $56,909 
                     
Six months ended June 30, 2018:                    
Pool revenues                    
Asset lease component  $9,081   $7,938   $-   $17,019 
Technical management services component   25,715    26,381    -    52,096 
                     
Time and bareboat charter revenues                    
Asset lease component   4,043    996    -    5,039 
Technical management services component   9,482    -    -    9,482 
                     
Voyage charter revenues                    
Asset lease component   8,840    53    -    8,893 
Technical management services component   2,337    -    -    2,337 
Lightering revenues   14,021    -    -    14,021 
                     
Total shipping revenues  $73,519   $35,368   $-   $108,887 

 

  32

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Contract Balances

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers, and significant changes in contract assets and liabilities balances.

 

   Voyage receivables - Billed receivables   Contract assets (Unbilled voyage receivables)   Contract liabilities (Deferred revenues and off hires) 
             
Opening balance as of January 1, 2018  $3,486   $54,701   $(1,775)
Closing balance as of June 30, 2018   3,393    59,015    (904)
                
Revenue recognized in the period from:               
Amounts included in contract liability at the beginning               
of the period  $-   $-   $918 

 

We receive payments from customers based on a distribution schedule, as established in our contracts. Contract assets relate to our conditional right to consideration for our completed performance under contracts and are recognized when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under contracts and are recognized when performance under the respective contract has been completed. Deferred revenues allocated to unsatisfied performance obligations will be recognized over time as the services are performed, which is expected to take place in 2018.

 

Performance Obligations

 

All of the Company's performance obligations, and associated revenue, are generally transferred to customers over time. The expected duration of services is less than one year.

 

Revenues from performance obligations satisfied in previous periods aggregating $2,213 and $2,503 was recognized during the three and six months ended June 30, 2018, respectively, and related to: (i) pool adjustments; (ii) change in estimate of performance obligations related to voyage charters; (iii) off hire adjustments related to time and bareboat charters; and (iv) recoveries in excess of insurance claims receivables accrued for in prior periods, which accounted for $1,748 of the activity during the three months ended June 30, 2018. These are all normal course adjustments that are common in the shipping industry when pool voyages are closed out and disputes or claims are settled.

 

Costs to Obtain or Fulfill a Contract

 

As of June 30, 2018, there were no unamortized deferred costs of obtaining or fulfilling a contract.

 

Note 15 — Leases:

 

1. Charters-in:

 

As of June 30, 2018, INSW had commitments to charter in four MR and two Aframax vessels. All of the charters-in, of which two are bareboat charters with expiry dates ranging from December 2023 to March 2024 and four are time charters with expiry dates ranging from December 2018 to June 2019, are accounted for as operating leases. Lease expense relating to charters-in is included in charter hire expenses in the condensed consolidated statements of operations. The future minimum commitments and related number of operating days under these operating leases are as follows:

 

Bareboat Charters-in:        
         
At June 30, 2018  Amount   Operating Days 
2018  $3,165    368 
2019   6,278    730 
2020   6,295    732 
2021   6,278    730 
2022   6,278    730 
Thereafter   6,828    794 
Net minimum lease payments  $35,122    4,084 

 

  33

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Time Charters-in:        
         
At June 30, 2018  Amount   Operating Days 
2018  $13,219    1,341 
2019   4,683    353 
Net minimum lease payments  $17,902    1,694 

 

The future minimum commitments for time charters-in exclude amounts with respect to vessels chartered-in where the duration of the charter was one year or less at inception but include amounts with respect to workboats employed in the Crude Tankers Lightering business which are cancellable upon 180 days’ notice. Time charters-in commitments have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock because INSW does not pay charter hire when time chartered-in vessels are not available for its use. Certain of the charters in the above tables provide INSW with renewal and purchase options.

 

2. Charters-out:

 

At June 30, 2018, the future minimum revenues, before reduction for brokerage commissions, expected to be received on non-cancelable bareboat and time charters and the related revenue days (revenue days represent calendar days, less days that vessels are not available for employment due to repairs, drydock or lay-up) are as follows:

 

Time Charters-out:        
         
At June 30, 2018  Amount   Revenue Days 
2018  $4,580    415 
Future minimum revenues  $4,580    415 

 

Future minimum revenues do not include (1) the Company’s share of time charters entered into by the pools in which it participates, and (2) the Company’s share of time charters entered into by the joint ventures, which the Company accounts for under the equity method. Revenues from a time charter are not generally received when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future charter revenues, an estimated time off-hire to perform periodic maintenance on each vessel has been deducted, although there is no assurance that such estimate will be reflective of the actual off-hire in the future.

 

Note 16 — Contingencies:

 

INSW’s policy for recording legal costs related to contingencies is to expense such legal costs as incurred. 

 

Multi-Employer Plans

 

The Merchant Navy Officers Pension Fund (“MNOPF”) is a multi-employer defined benefit pension plan covering British crew members that served as officers on board INSW’s vessels (as well as vessels of other owners). The trustees of the plan have indicated that, under the terms of the High Court ruling in 2005, which established the liability of past employers to fund the deficit on the Post 1978 section of MNOPF, calls for further contributions may be required if additional actuarial deficits arise or if other employers liable for contributions are not able to pay their share in the future. As the amount of any such assessment cannot currently be reasonably estimated, no reserves have been recorded for this contingency in INSW’s condensed consolidated financial statements as of June 30, 2018. The next deficit valuation is due March 31, 2019.

 

  34

INTERNATIONAL SEAWAYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Merchant Navy Ratings Pension Fund (“MNRPF”) is a multi-employer defined benefit pension plan covering British crew members that served as ratings (seamen) on board INSW’s vessels (as well as vessels of other owners) more than 20 years ago. Participating employers include current employers, historic employers that have made voluntary contributions, and historic employers such as INSW that have made no deficit contributions. Calls for contributions may be required if additional actuarial deficits arise or if other employers liable for contributions are unable to pay their share in the future. Based on the latest estimated deficit valuation using a measurement date of March 31, 2017, which was distributed to employers in February 2018, INSW recorded a reserve of £240 ($318) as of June 30, 2018 for a potential assessment by the trustees of the MNRPF. The Company expects to make a deficit payment in the second half of 2018.

 

Galveston Accident

 

In late September 2017, an industrial accident at a leased facility in Galveston resulted in fatalities to two temporary employees. In accordance with law, an investigation of the accident is currently underway by the Occupational Safety and Health Administration and local law enforcement. In addition, lawsuits relating to the accident, each of which claims damages in excess of $25,000 were filed in state court in Texas (Harris County District Court) and identified a subsidiary of the Company as one of several defendants. The lawsuits have been settled as to most of the original defendants, with the exception of the subsidiary, and the remaining disputes were removed to federal court in Texas (Southern District) in January 2018. The subsidiary has filed its answer to those complaints, generally denying the allegations and stating certain affirmative defenses, and separately filed an action for declaratory judgment in federal court in Texas (Southern District) seeking judgment that it does not owe contractual indemnification obligations to certain of the other original defendants (the “T&T Defendants”). The federal court overseeing the declaratory judgment action recently issued an order dismissing the case on the basis that it lacked subject-matter jurisdiction to hear the dispute. This was not a decision on the merits of the underlying contractual dispute. The subsidiary and its excess insurers, who are co-plaintiffs in the action, are preparing to file an appeal in the U.S. Fifth Circuit Court of Appeals. If successful, the case would return to federal court, while in the meantime, the T&T defendants may seek to initiate an action in a Texas state court to assert their contractual claims. The Company intends to vigorously defend these suits. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. Accordingly, the Company is currently unable to predict the ultimate timing or outcome of, or to reasonably estimate the possible loss or a range of possible loss resulting from, these matters.

 

Legal Proceedings Arising in the Ordinary Course of Business

 

The Company is a party, as plaintiff or defendant, to various suits in the ordinary course of business for monetary relief arising principally from personal injuries, wrongful death, collision or other casualty and to claims arising under charter parties and other contract disputes. A substantial majority of such personal injury, wrongful death, collision or other casualty claims against the Company are covered by insurance (subject to deductibles not material in amount). Each of the claims involves an amount which, in the opinion of management, should not be material to the Company’s financial position, results of operations and cash flows.

 

  35

INTERNATIONAL SEAWAYS, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward looking statements. Such forward-looking statements represent the Company’s reasonable expectation with respect to future events or circumstances based on various factors and are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors, many of which are beyond the control of the Company, that could cause the Company’s actual results to differ materially from those indicated in these statements. Undue reliance should not be placed on any forward-looking statements and consideration should be given to the following factors when reviewing any such statement. Such factors include, but are not limited to:

 

the highly cyclical nature of INSW’s industry;
fluctuations in the market value of vessels;
declines in charter rates, including spot charter rates or other market deterioration;
an increase in the supply of vessels without a commensurate increase in demand;
the impact of adverse weather and natural disasters;
the adequacy of INSW’s insurance to cover its losses, including in connection with maritime accidents or spill events;
constraints on capital availability;
changing economic, political and governmental conditions in the United States and/or abroad and general conditions in the oil and natural gas industry;
changes in fuel prices;
acts of piracy on ocean-going vessels;
terrorist attacks and international hostilities and instability;
the impact of public health threats and outbreaks of other highly communicable diseases;
the effect of the Company’s indebtedness on its ability to finance operations, pursue desirable business operations and successfully run its business in the future;
the Company’s ability to generate sufficient cash to service its indebtedness and to comply with debt covenants;
the Company’s ability to make additional capital expenditures to expand the number of vessels in its fleet, and to maintain all of its vessels and to comply with existing and new regulatory standards;
the availability and cost of third party service providers for technical and commercial management of the Company’s fleet;
fluctuations in the contributions of the Company’s joint ventures to its profits and losses;
the Company’s ability to renew its time charters when they expire or to enter into new time charters;
termination or change in the nature of the Company’s relationship with any of the commercial pools in which it participates and the ability of such commercial pools to pursue a profitable chartering strategy;
competition within the Company’s industry and INSW’s ability to compete effectively for charters with companies with greater resources;
the loss of a large customer or significant business relationship;
the Company’s ability to realize benefits from its past acquisitions or acquisitions or other strategic transactions it may make in the future;
increasing operating costs and capital expenses as the Company’s vessels age, including increases due to limited shipbuilder warranties or the consolidation of suppliers;
the Company’s ability to replace its operating leases on favorable terms, or at all;
changes in credit risk with respect to the Company’s counterparties on contracts;
the failure of contract counterparties to meet their obligations;
the Company’s ability to attract, retain and motivate key employees;
work stoppages or other labor disruptions by employees of INSW or other companies in related industries;
unexpected drydock costs;

 

  36

INTERNATIONAL SEAWAYS, INC.

 

the potential for technological innovation to reduce the value of the Company’s vessels and charter income derived therefrom;
the impact of an interruption in or failure of the Company’s information technology and communication systems upon the Company’s ability to operate;
seasonal variations in INSW’s revenues;
government requisition of the Company’s vessels during a period of war or emergency;
the Company’s compliance with complex laws, regulations and in particular, environmental laws and regulations, including those relating to the emission of greenhouse gases and ballast water treatment;
any non-compliance with the U.S. Foreign Corrupt Practices Act of 1977 or other applicable regulations relating to bribery or corruption;
the impact of litigation, government inquiries and investigations;
governmental claims against the Company;
the arrest of INSW’s vessels by maritime claimants;
changes in laws, treaties or regulations; and
the impact that Brexit might have on global trading parties;

 

The Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q and written and oral forward-looking statements attributable to the Company or its representatives after the date of this Quarterly Report on Form 10-Q are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the Securities and Exchange Commission.

 

General:

 

We are a provider of ocean transportation services for crude oil and refined petroleum products. We operate our vessels in the International Flag market. Our business includes two reportable segments: Crude Tankers and Product Carriers. For the three and six months ended June 30, 2018, we derived 69% and 64%, respectively, of our TCE revenues from our Crude Tankers segment, compared with 66% for the three and six months ended June 30, 2017. Revenues from our Product Carriers segment constituted the balance of our TCE revenues for both periods.

 

As of June 30, 2018, we owned or operated an International Flag fleet of 53 vessels aggregating 7.7 million deadweight tons (“dwt”) and 864,800 cubic meters (“cbm”), including six vessels that have been chartered-in under operating leases. Our fleet includes VLCC, Suezmax, Aframax and Panamax crude tankers and LR1, LR2 and MR product carriers. Through joint ventures, we have ownership interests in two FSO service vessels and four LNG Carriers (together the “JV Vessels”).

 

The Company’s revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by the Company and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products from which the Company earns a substantial majority of its revenues are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported, and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy, levels of U.S. domestic and international oil production and OPEC exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, scrappings or conversions. The Company’s revenues are also affected by the mix of charters between spot (voyage charter) and long-term (time or bareboat charter). Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, the Company manages its vessels based on TCE revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved. Other than the JV Vessels, the Company’s revenues are derived predominantly from spot market voyage charters and those vessels are predominantly employed in the spot market via market-leading commercial pools. We derived 87% and 86% of our total TCE revenues in the spot market for the three and six months ended June 30, 2018, respectively, compared with 80% for the three and six months ended June 30, 2017.

 

  37

INTERNATIONAL SEAWAYS, INC.

 

The following is a discussion and analysis of our financial condition as of June 30, 2018 and results of operations for the three and six months periods ended June 30, 2018 and 2017. You should consider the foregoing when reviewing the condensed consolidated financial statements and this discussion and analysis. You should read this section together with the condensed consolidated financial statements, including the notes thereto. This Quarterly Report on Form 10-Q includes industry data and forecasts that we have prepared based, in part, on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from internal market studies and research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on our management's beliefs, internal studies and management's knowledge of industry trends.

 

All dollar amounts are in thousands, except daily dollar amounts and per share amounts.

 

Operations and Oil Tanker Markets:

 

The International Energy Agency (“IEA”) estimates global oil consumption for the second quarter of 2018 at 98.9 million barrels per day (“b/d”) an increase of 1.0 million b/d, or 1.0%, over the same quarter in 2017. The estimate for global oil consumption for all of 2018 is 99.1 million b/d, an increase of 1.4% over 2017. OECD demand in 2018 is estimated to increase by 0.6% to 47.7 million b/d, while non-OECD demand is estimated to increase by 2.0% to 51.4 million b/d.

 

Global oil production in the second quarter of 2018 reached 99.2 million b/d, an increase of 2.3% from the second quarter of 2017. OPEC crude oil production averaged 32.2 million b/d in the second quarter of 2018, a decrease of 0.2 million b/d from the first quarter of 2018, and a decrease of 0.1 million b/d from the second quarter of 2017. Non-OPEC production increased by 2.3 million b/d to 60.1 million b/d in the second quarter of 2018 compared with the second quarter of 2017. Oil production in the U.S. increased by 0.5 million b/d from 10.0 million b/d in the first quarter of 2018 to 10.5 million b/d in the second quarter of 2018, which was 1.4 million b/d higher than in the second quarter of 2017.

 

U.S. refinery throughput decreased by about 0.2 million b/d to 17.1 million b/d in the second quarter of 2018 compared with the comparable quarter in 2017. U.S. crude oil imports increased by about 0.1 million b/d in the second quarter of 2018 compared with the comparable quarter of 2017, with imports from OPEC countries decreasing by 0.3 million b/d, a 7.8% decrease from the comparable quarter in 2017.

 

Chinese imports of crude oil continued to increase and reached a record 9.6 million b/d in April, declining to 9.2 million b/d and 8.4 million b/d in May and June, respectively, as teapot refiners began to slow down production.

 

During the second quarter of 2018, the International Flag tanker fleet of vessels over 10,000 deadweight tons (“dwt”) increased by 0.1 million dwt as the crude fleet decreased by 0.1 million dwt, with VLCCs and Suezmaxes each growing by 0.1 million dwt and Aframaxes declining by 0.3 million dwt. The product carrier fleet expanded by 0.2 million dwt. Year over year, the size of the tanker fleet increased by 6.6 million dwt with the largest increases in the Suezmax and MR sectors.

 

During the second quarter of 2018, the International Flag crude tanker orderbook decreased by 2.9 million dwt overall led by declines in the VLCC orderbook of 1.3 million dwt, with Suezmaxes and Aframaxes showing declines of 0.8 million dwt each. The product carrier orderbook increased by 0.5 million dwt.

 

From the end of the second quarter of 2017 through the end of the second quarter of 2018, the total tanker orderbook declined by 2.4 million dwt. The VLCC order book increased by 5.3 million dwt, a decline from the year-over-year increase at the end of the first quarter of 2018. The Panamax orderbook remained flat, while all other segments declined due to a combination of vessel deliveries combined with relatively fewer new orders placed during the period.

 

VLCC freight rates were poor during the quarter, generally below $10,000 per day throughout the quarter with a brief spike in June. Other crude segments were similarly weak during the quarter. This was primarily attributable to increased newbuilding deliveries further exacerbating the oversupply situation coupled with the reduced OPEC exports discussed above. The high current oil prices are also responsible for higher bunker prices, which has a negative effect on earnings, and for a market in backwardation, which eliminates storage opportunities for older tonnage in particular. Higher oil prices stemming from reduced OPEC production and strong demand have reduced inventories to below 5-year averages. OPEC’s announced intention to increase production has not yet impacted the tanker markets.

 

  38

INTERNATIONAL SEAWAYS, INC.

 

Update on Critical Accounting Policies:

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a description of all of the Company’s material accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements as of and for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K. See Note 2, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements for any changes or updates to the Company’s critical accounting policies for the current period.

 

Results from Vessel Operations:

 

During the second quarter of 2018, results from vessel operations decreased by $110 to a loss of $9,669 from a loss of $9,559 in the second quarter of 2017. This decrease primarily resulted from reduced TCE revenues, offset to a large degree by a net gain on vessel disposals during the period of $6,740, as well as decreases in third-party debt modification fees, vessel expenses and depreciation and amortization.

 

TCE revenues decreased in the current quarter by $19,268, or 28%, to $50,012 from $69,280 in the second quarter of 2017. Approximately $17,660 of this decrease was due to a decline in average daily rates across the majority of INSW’s fleet sectors.

 

During the first six months of 2018, income from vessel operations decreased by $40,244 to a loss of $36,375 from income of $3,869 in the first six months of 2017. This decrease resulted primarily from a decline in TCE revenues, partially offset by reductions in third-party debt modification fees, depreciation and amortization and charter hire expense.

 

The decrease in TCE revenues in the first six months of 2018 of $54,599, or 36%, to $98,813 from $153,412 in the corresponding period of the prior year primarily reflected lower average daily rates across INSW’s fleet sectors, which accounted for approximately $49,871 of the overall decrease.

 

See Note 4, “Business and Segment Reporting,” to the accompanying condensed consolidated financial statements for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations of (i) time charter equivalent revenues to shipping revenues and (ii) adjusted (loss)/income from vessel operations for the segments to (loss)/income before income taxes, as reported in the condensed consolidated statements of operations.

 

Crude Tankers  Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
TCE revenues  $34,385   $45,745   $63,605   $101,790 
Vessel expenses   (22,144)   (21,605)   (47,760)   (42,101)
Charter hire expenses   (5,199)   (3,700)   (7,954)   (7,843)
Depreciation and amortization   (12,240)   (13,304)   (25,113)   (26,351)
Adjusted (loss)/income from vessel operations (a)  $(5,198)  $7,136   $(17,222)  $25,495 
Average daily TCE rate  $14,644   $22,976   $13,785   $25,173 
Average number of owned vessels (b)   24.7    24.0    25.7    24.0 
Average number of vessels chartered-in under operating leases   2.6    0.8    1.5    0.6 
Number of revenue days: (c)   2,348    1,991    4,614    4,044 
Number of ship-operating days: (d)                    
Owned vessels   2,251    2,184    4,653    4,344 
Vessels bareboat chartered-in under operating leases   182    -    210    - 
Vessels time chartered-in under operating leases (e)   6    -    6    - 
Vessels spot chartered-in under operating leases (e)   49    68    57    117 

 

(a)Adjusted (loss)/income from vessel operations by segment is before general and administrative expenses, third-party debt modification fees, separation and transition costs and gain on disposal of vessels and other property, net of impairments.
(b)The average is calculated to reflect the addition and disposal of vessels during the period.
(c)Revenue days represent ship-operating days less days that vessels were not available for employment due to repairs, drydock or lay-up. Revenue days are weighted to reflect the Company’s interest in chartered-in vessels.
(d)Ship-operating days represent calendar days.
(e)Vessels spot chartered-in under operating leases are related to the Company’s Crude Tankers Lightering business.

 

  39

INTERNATIONAL SEAWAYS, INC.

 

The following tables provide a breakdown of TCE rates achieved for the three and six months ended June 30, 2018 and 2017, between spot and fixed earnings and the related revenue days. The information in these tables is based, in part, on information provided by the commercial pools in which the segment’s vessels participate, and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies. 

 

   2018   2017 
   Spot   Fixed   Spot   Fixed 
   Earnings   Earnings   Earnings   Earnings 
Three Months Ended June 30,                    
ULCC:                    
Average rate  $-   $-   $-   $32,176 
Revenue days   4    -    -    91 
VLCC:                    
Average rate  $12,242   $9,660   $26,657   $42,389 
Revenue days   813    9    648    90 
Suezmax:                    
Average rate  $13,070   $-   $-   $- 
Revenue days   182    -    -    - 
Aframax:                    
Average rate  $11,061   $-   $12,962   $- 
Revenue days   526    -    628    - 
Panamax:                    
Average rate  $14,861   $11,323   $12,266   $17,914 
Revenue days   182    528    299    167 
                     
Six Months Ended June 30,                    
ULCC:                    
Average rate  $-   $-   $-   $37,352 
Revenue days   94    -    -    181 
VLCC:                    
Average rate  $12,537   $12,783   $32,306   $42,266 
Revenue days   1,430    97    1,212    178 
Suezmax:                    
Average rate  $13,993   $-   $-   $- 
Revenue days   362    -    -    - 
Aframax:                    
Average rate  $10,494   $-   $14,299   $- 
Revenue days   1,079    -    1,213    - 
Panamax:                    
Average rate  $13,782   $11,444   $13,614   $19,767 
Revenue days   362    1,066    793    351 

 

  40

INTERNATIONAL SEAWAYS, INC.

 

During the second quarter of 2018, TCE revenues for the Crude Tankers segment decreased by $11,360, or 25%, to $34,385 from $45,745 in the second quarter of 2017. Approximately $15,400 of such decrease resulted from the impact of lower average blended rates earned in all of the Crude Tanker fleet sectors, particularly in the VLCC fleet sector, which accounted for $13,280 of the overall decrease. Approximately $6,124 of the reduction in TCE revenues represents the impact of the Company’s only ULCC being idle for the entirety of the current quarter ahead of its sale at the end of June 2018 and a 2000-built VLCC being held-for-sale as of the end of January 2018 through its sale in April 2018. There was a larger disparity in the spot market rates earned by the Company’s modern and non-modern VLCCs in the current period versus in the second quarter of 2017. VLCCs aged 15 years or less earned an average daily rate of $15,407 per day as compared to the overall VLCC rate of $12,242 in the current period, while in the prior year’s period the VLCCs under 15 years of age earned an average daily rate of $27,496 per day as compared to the overall VLCC rate of $26,657 per day. The decline in TCE revenues also reflects a $976 decrease in revenue in the Crude Tankers Lightering business during the current quarter. Serving to partially offset the declines in revenue was a 540-day increase in VLCC, Suezmax and Panamax revenue days; such increases had the effect of increasing revenue during the current quarter by a total of $8,780 and reflected the acquisitions of two 2017-built Suezmaxes, each of which delivered to the Company in July 2017, one 2010-built VLCC which delivered to the Company in November 2017, and a 2015-built and five 2016-built VLCCs which delivered to the Company in June 2018. Also contributing to the increase in revenue days was a 255-day reduction in drydock days in the Panamax fleet as compared to the prior year’s period.

 

Vessel expenses increased by $539 to $22,144 in the current quarter from $21,605 in the second quarter of 2017. An increase of approximately $2,449 was attributable to the Suezmax and VLCC acquisitions discussed above. Such increase was offset to a large extent by decreases in average daily vessel expenses primarily relating to the timing of the delivery of spares, lube oils and stores and the Company’s ULCC being idle for the entire quarter. Charter hire expenses increased by $1,499 to $5,199 in the second quarter of 2018 from $3,700 in the second quarter of 2017 principally as a result of the Company executing sale and lease back transactions for two 2009-built Aframaxes in March 2018. The associated bareboat charters are for periods ranging from 70 to 73 months and contain purchase options executable by the Company, commencing at the end of the third year. Depreciation and amortization decreased by $1,064 to $12,240 in the second quarter of 2018 from $13,304 in the second quarter of 2017, principally due to the impact of reductions in vessel bases that resulted from impairment charges on thirteen vessels recorded in the third and fourth quarters of 2017. The vessel sales and sale and leaseback transactions described above also contributed to the decrease. Such declines were offset to a large degree by the deliveries of the Suezmaxes and VLCCs noted above and increased drydock amortization.

 

Excluding depreciation and amortization, and general and administrative expenses, operating income for the Crude Tankers Lightering business was $1,718 for the second quarter of 2018 compared to $2,609 for the second quarter of 2017. The decrease in the current quarter’s operating income as compared to prior year’s period primarily reflects lower margins earned on full service lighterings in the current period.

 

During the first six months of 2018, TCE revenues for the Crude Tankers segment decreased by $38,185, or 38%, to $63,605 from $101,790 in the first six months of 2017 principally as a result of significantly lower average blended rates in the VLCC, Aframax and Panamax sectors aggregating approximately $40,230. The decreases in revenue associated with the ULCC and 2000-built VLCC described above totaled $11,746 during the year-to-date period. Further contributing to the decrease was a $4,469 decrease in revenue in the Crude Tankers Lightering business during the current period. Partially offsetting the revenue decreases was an 825-day increase in revenue days for the VLCC, Aframax and Panamax sectors, which accounted for a revenue increase of approximately $14,862, and was driven by the same factors that resulted in the increased revenue days for such fleets in the quarter-to-date period described above.

 

Vessel expenses increased by $5,659 to $47,760 in the six months ended June 30, 2018 from $42,101 in the corresponding period of 2017. Approximately $4,830 of the increase was attributable to the Suezmax and VLCC acquisitions discussed above. The balance of the increase was primarily related to an increase in hull and machinery damage repairs and routine repairs, partially offset by lower drydock deviation costs and the timing of the delivery of spares. Charter hire expenses increased by $111 to $7,954 in the first six months of 2018 from $7,843 in the first six months of 2017 resulting from the impact of the Aframax sale and leaseback transactions discussed above, offset to a large degree by a decrease of $1,825 in the Crude Tankers Lightering business reflecting a lower number of full service lighterings. Depreciation and amortization decreased by $1,238 to $25,113 in the six months ended June 30, 2018 from $26,351 in the prior year’s period, principally resulting from the same factors which impacted the quarter-to-date period detailed above.

 

  41

INTERNATIONAL SEAWAYS, INC.

 

Excluding depreciation and amortization, and general and administrative expenses, operating income for the Crude Tankers Lightering business was $1,838 for the first six months of 2018 and $4,599 for the first six months of 2017. The decrease in the current period’s operating income as compared to prior year’s period primarily reflects fewer service-only and full service lighterings performed in the first quarter of 2018 as compared to the first quarter of 2017 as well as lower margins on full service lighterings.

 

Product Carriers  Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
TCE revenues  $15,627   $23,535   $35,208   $51,622 
Vessel expenses   (9,722)   (13,608)   (21,129)   (26,918)
Charter hire expenses   (5,524)   (7,336)   (11,391)   (14,544)
Depreciation and amortization   (4,530)   (5,762)   (9,248)   (11,298)
Adjusted (loss)/income from vessel operations  $(4,149)  $(3,171)  $(6,560)  $(1,138)
Average daily TCE rate  $9,841   $10,616   $10,335   $11,831 
Average number of owned vessels   13.3    18.0    13.9    18.0 
Average number of vessels chartered-in under operating leases   5.3    6.8    5.7    6.7 
Number of revenue days   1,588    2,217    3,407    4,363 
Number of ship-operating days:                    
Owned vessels   1,208    1,638    2,518    3,258 
Vessels bareboat chartered-in under operating leases   122    273    302    543 
Vessels time chartered-in under operating leases   363    342    723    674 

 

The following tables provide a breakdown of TCE rates achieved for the three and six months ended June 30, 2018 and 2017, between spot and fixed earnings and the related revenue days. The information is based, in part, on information provided by the commercial pools in which the segment’s vessels participate and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies.

 

   2018   2017 
   Spot   Fixed   Spot   Fixed 
   Earnings   Earnings   Earnings   Earnings 
Three Months Ended June 30,                    
LR2:                    
Average rate  $12,585   $-   $10,149   $- 
Revenue days   91    -    91    - 
LR1:                    
Average rate  $16,001   $-   $10,889   $16,239 
Revenue days   364    -    107    247 
MR:                    
Average rate  $8,613   $5,294   $10,697   $5,294 
Revenue days   1,043    91    1,682    91 
                     
Six Months Ended June 30,                    
LR2:                    
Average rate  $13,245   $-   $13,926   $- 
Revenue days   181    -    181    - 
LR1:                    
Average rate  $13,852   $-   $13,854   $17,692 
Revenue days   718    -    197    515 
MR:                    
Average rate  $10,060   $5,294   $11,620   $5,391 
Revenue days   2,327    181    3,289    182 

 

 

  42

INTERNATIONAL SEAWAYS, INC.

 

During second quarter of 2018 TCE revenues for the Product Carriers segment decreased by $7,908, or 34%, to $15,627 from $23,535 in the second quarter of 2017. A 639-day decrease in MR revenue days in the current period, arising primarily as a result of the sales of five MRs between August 2017 and April 2018 and the redelivery of three MRs to their owners between December 2017 and June 2018 at the expiry of their respective bareboat charters, resulted in a $6,322 decline in TCE revenue. Declining average daily blended rates earned in the MR fleet also contributed $2,291 to the overall decrease. Serving to partially offset such declines was an aggregate $603 increase in revenue which resulted from increased daily rates earned in the LR1 and LR2 fleets.

 

Vessel expenses decreased by $3,886 to $9,722 in the current quarter from $13,608 in second quarter of 2017. The decrease was primarily driven by a 581-day decrease in owned and bareboat chartered-in days, which resulted from the vessel sales and redeliveries described above. Charter hire expenses decreased by $1,812 to $5,524 in the second quarter of 2018 from $7,336 in the second quarter of 2017. The decrease was due to the redeliveries discussed above along with decreases in the daily charter rates for the Company’s time chartered-in MR fleet, which were effective beginning in the third quarter of 2017. Depreciation and amortization decreased by $1,232 to $4,530 in the second quarter of 2018 from $5,762 in the second quarter of 2017. The decrease reflected the vessel sales noted above and reductions in vessel bases that resulted from impairment charges on two vessels recorded in the third quarter of 2017.

 

During the first six months of 2018, TCE revenues for the Product Carriers segment decreased by $16,414, or 32%, to $35,208 from $51,622 in the first six months of 2017. A 963-day decrease in MR revenue days driven by the sales and redeliveries discussed above contributed approximately $10,404 of the overall decrease. Period-over-period decreases in average daily blended rates earned by all Product Carrier fleet sectors, also accounted for a decrease in revenue of approximately $6,077.

 

Vessel expenses decreased by $5,789 to $21,129 in the first six months of 2018 from $26,918 in the first six months of 2017. Such variance was principally attributable to a 981-day decrease in owned and bareboat chartered-in days, as detailed above. Charter hire expenses decreased by $3,153 to $11,391 in the first six months of 2018 from $14,544 in the first six months of 2017, reflecting the redeliveries and rate decreases discussed above. Depreciation and amortization decreased by $2,050 to $9,248 in the first six months of 2018 from $11,298 in the first six months of 2017, resulting from the vessel sales and reductions in vessel bases described above.

 

General and Administrative Expenses:

 

During the second quarter of 2018, general and administrative expenses increased by $968 to $6,064 from $5,096 in the second quarter of 2017. This increase reflects (i) an increase of approximately $334 in compensation and benefits related costs resulting primarily from base salary increases and headcount increases between July 2017 and January 2018, (ii) a $254 increase in accounting, legal and consulting fees primarily due to the timing of a true-up of over-accrued accounting fees expense recognized during the second quarter of 2017 in conjunction with the transition to a new audit firm, and (iii) a decrease in foreign currency exchange gains.

 

For the six months ended June 30, 2018, general and administrative expenses increased by $723 to $12,093 from $11,370 for the same period in 2017. Increased compensation and benefits related costs associated with year-over-year increases in headcount and base salary increases for continuing employees account for $636 of the increase. The balance of the increase primarily relates to a decrease foreign currency exchange gains offset by a year-over-year decrease in accounting, legal and consulting fees of approximately $299.

 

Third-Party Debt Modification Fees

 

During the three and six months ended June 30, 2018, third-party legal and consulting fees associated with 2017 Debt Facilities Second Amendment totaling $1,302 were incurred and expensed. Third-party legal and consulting fees associated with the refinancing of the INSW Facilities aggregating $7,939 were incurred and expensed during the three and six months ended June 30, 2017. Such costs were expensed in accordance with the relevant accounting guidance which stipulates that third-party costs incurred in relation to debt modifications are to be expensed as incurred.

 

  43

INTERNATIONAL SEAWAYS, INC.

 

Equity in Income of Affiliated Companies:

 

During the second quarter of 2018, equity in income of affiliated companies decreased by $5,044 to $8,822 from $13,866 in the second quarter of 2017. This decrease was principally attributable to decreases in earnings from the two FSO joint ventures of $5,549, partially offset by an increase in earnings for the LNG joint venture of $505. Revenue generated by the FSO joint ventures during the second quarter of 2018 was lower than revenue generated during the second quarter of 2017, as charter rates in the five-year service contracts that commenced in the third quarter of 2017 are lower than the charter rates included in the service contracts under which the FSO joint ventures operated during the second quarter of 2017. In addition, interest expense for the two FSO joint ventures increased in the second quarter of 2018 as compared to the second quarter of 2017 as a result of drawdowns on debt facilities aggregating $220,000 during April 2018. Refer to Note 6, “Equity Method Investments,” to the accompanying condensed consolidated financial statements for additional information on the debt facilities entered into by the FSO joint ventures.

 

During the first six months of 2018, equity in income of affiliated companies decreased by $10,310 to $17,162 from $27,472 in the first six months of 2017. This decrease was principally attributable to decreases in earnings from the two FSO joint ventures and the LNG joint venture of $9,978 and $421, respectively. The decreases for the FSO joint ventures were driven by factors consistent with the items discussed above, and the decreased LNG joint venture earnings primarily related to reimbursements received from the joint venture’s charterer that were recognized during the six months ended June 30, 2017 for drydock expenditures incurred in years prior to 2017.

 

Interest Expense:

 

Interest expense was $13,086 for the three months ended June 30, 2018 compared with $9,278 for the three months ended June 30, 2017. Interest expense incurred on the debt facilities entered into by the Company during the second quarter of 2018 (as discussed in Note 9, “Debt,” in the accompanying condensed consolidated financial statements) accounted for $1,221 of the increase, and the balance of the increase was primarily due to the higher average interest rates and average outstanding principal balances under the 2017 Debt Facilities, which replaced the INSW Facilities in June 2017. Such increases were partially offset by a $550 reduction in amortization of deferred finance costs due to the lower average balance of unamortized deferred financing costs during the second quarter of 2018 compared to the second quarter of 2017.

 

Interest expense was $24,707 and $18,445 for the six months ended June 30, 2018 and 2017, respectively. The increase of $6,262 resulted from the same factors that drove the quarter-over-quarter variance described above.

 

Interest expense is expected to increase during the third quarter of 2018 over the second quarter of 2018, as the debt facilities entered into towards the end of the second quarter of 2018 will be outstanding for a full quarter.

 

Taxes:

 

The Company qualifies for an exemption from U.S. federal income taxes under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and U.S. Treasury Department regulations for the 2018 calendar year as less than 50 percent of the total value of the Company’s stock has been held by one or more shareholders who own 5% or more of the Company’s stock for more than half of the days of 2018. There can be no assurance at this time that INSW will continue to qualify for the Section 883 exemption during and beyond calendar year 2018. Should the Company not qualify for the exemption in the future, INSW will be subject to U.S. federal taxation of 4% of its U.S. source shipping income on a gross basis without the benefit of deductions. Shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the U.S. will be considered to be 50% derived from sources within the United States. Shipping income attributable to transportation that both begins and ends in the U.S. will be considered to be 100% derived from sources within the United States, but INSW does not engage in transportation that gives rise to such income.

 

  44

INTERNATIONAL SEAWAYS, INC.

 

EBITDA and Adjusted EBITDA:

 

EBITDA represents net (loss)/income before interest expense, income taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income or cash flows from operations determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:

 

  EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
  EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
  EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

 

While EBITDA and Adjusted EBITDA are frequently used by companies as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

 

The following table reconciles net (loss)/income, as reflected in the condensed consolidated statements of operations, to EBITDA and Adjusted EBITDA:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
                 
Net (loss)/income  $(18,796)  $(11,619)  $(48,112)  $6,448 
Income tax provision   -    4    8    8 
Interest expense   13,086    9,278    24,707    18,445 
Depreciation and amortization   16,804    19,099    34,428    37,715 
EBITDA   11,094    16,762    11,031    62,616 
Third-party debt modification fees and costs associated                    
with extinguishment of debt   1,302    7,939    1,302    7,939 
Separation and transition costs   -    296    -    1,031 
Gain on disposal of vessels, net of impairments   (6,740)   -    (167)   - 
Write-off of deferred financing costs   2,273    7,020    2,273    7,020 
Loss on extinguishment of debt   1,295    -    1,295    - 
Adjusted EBITDA  $9,224   $32,017   $15,734   $78,606 

 

 

Liquidity and Sources of Capital:

 

Our business is capital intensive. Our ability to successfully implement our strategy is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business to meet near-term and long-term debt repayment obligations is dependent on maintaining sufficient liquidity.

 

Liquidity

 

Working capital at June 30, 2018 was approximately $101,000 compared with $85,000 at December 31, 2017. Current assets are highly liquid, consisting principally of cash, interest-bearing deposits and receivables. Our cash and cash equivalents balances generally exceed Federal Deposit Insurance Corporation insured limits. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies, floating rate and variable demand notes of U.S. and foreign corporations, commercial paper rated in the highest category by Moody’s Investor Services and Standard & Poor’s, certificates of deposit and time deposits, asset-backed securities, and repurchase agreements.

 

  45

INTERNATIONAL SEAWAYS, INC.

 

The Company’s total cash increased by approximately $72,200 during the six months ended June 30, 2018. This increase reflects net proceeds from the sale of vessels of $126,504, net returns of capital and deposits received from affiliated companies of $95,108, proceeds from the issuance of debt, net of issuance costs, of $72,924, and cash provided by operating activities of $10,123. Such cash inflows were partially offset by $129,245 in expenditures for vessels and other property, $60,000 in prepayments of the 2017 Term Loan in conjunction with the 2017 Debt Facilities Second Amendment, $30,000 in repayment of the 2017 Revolver facility, $6,875 in scheduled amortization of the 2017 Term Loan, and $5,895 in scheduled amortization of the Sinosure Credit Facility.

 

As of June 30, 2018, we had total liquidity on a consolidated basis of $192,853 comprised of $142,853 of cash (including $27,010 of restricted cash) and $50,000 of undrawn revolver capacity.

 

Restricted cash of $27,010 as of June 30, 2018 represents legally restricted cash relating to the Sinosure Credit Facility, ABN Term Loan Facility, and the 10.75% Subordinated Notes. Such facilities stipulate that cash accounts be maintained which are limited in their use to pay expenses related to drydocking the vessels and service the debt facilities.

 

As of June 30, 2018, we had total debt outstanding (net of original issue discount and deferred financing costs) of $838,029 and a total debt to total capitalization of 44.4%, which compares with 33.7% at December 31, 2017.

 

Sources, Uses and Management of Capital

 

Net cash provided by operating activities in the six months ended June 30, 2018 was $10,123. In addition to future operating cash flows, our other current sources of funds are proceeds from issuances of equity securities, additional borrowings as permitted under our loan agreements and proceeds from the opportunistic sales of our vessels.

 

Our current uses of funds are to fund working capital requirements, maintain the quality of our vessels, purchase vessels, comply with international shipping standards and environmental laws and regulations, repurchase our outstanding shares and repay or repurchase our outstanding loan facilities. Seventy-five percent of Excess Cash Flow (as defined in the 2017 Debt Facilities credit agreement) must be used to prepay the outstanding principal balance of 2017 Term Loan Facility. To the extent permitted under the terms of the 2017 Debt Facilities we may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.

 

As set forth in the 2017 Debt Facilities credit agreement, the 2017 Debt Facilities contain certain restrictions relating to new borrowings and INSW’s ability to receive cash dividends, loans or advances from ISOC and its subsidiaries that are Restricted Subsidiaries. As of June 30, 2018, the permitted cash dividends that can be distributed to INSW by ISOC under the 2017 Term Loan Facility was $12,500.

 

As discussed in Note 5, “Vessels,” to the accompanying condensed consolidated financial statements, on April 18, 2018, the Company, entered into a stock purchase and sale agreement with Euronav for the purchase of the holding companies for six VLCCs from Euronav for an aggregate price of $434,000, inclusive of any assumed debt, in connection with the closing of Euronav’s acquisition of Gener8 Maritime, Inc. (the ‘Transaction”). In connection with the Transaction and in order to finance portions of the consideration in connection therewith, and for other general corporate purposes, as applicable, the Company completed the following transactions during the six months ended June 30, 2018:

 

(i)Sale of five of its vessels comprising one VLCC tanker, one Aframax tanker, and three MR tankers (one of which the Company agreed to sell in 2017) for approximately $54,850 in net proceeds;
(ii)Entry into sale-leaseback transactions yielding approximately $39,300 in net proceeds in respect of two Aframax tankers in the first quarter of 2018;
(iii)Refinancing of its FSO Joint Venture – on March 29, 2018, the FSO Joint Venture entered into a $220,000 Senior Secured Credit Facility. Such agreement is made up of a term loan of $110,000 and a revolving credit facility of $110,000 available to the FSO Joint Venture. The FSO Joint Venture drew down the facility in full on April 26, 2018 and distributed $110,000 of the loan proceeds to the Company;
(iv)Sale of $25,000 of its 8.50% notes (the "8.50% Senior Notes") in an SEC-registered offering in May 2018 (the "Public Offering");
(v)Sale of $30,000 of its 10.75% subordinated step-up notes due 2023 (the "10.75% Subordinated Notes") in a private placement to certain funds and accounts managed by BlackRock, Inc. ("BlackRock") on June 13, 2018;
(vi)Entry into a credit agreement, secured by the Seaways Raffles, a 2010-built VLCC tanker, and dated as of June 7, 2018, by and among Seaways Shipping Corporation, a Marshall Islands corporation and wholly-owned subsidiary of the Company, the Company (as a guarantor), certain other guarantors which are subsidiaries of the Company, lenders named therein and ABN AMRO Capital USA LLC as lead arranger and facility agent (the "ABN Term Loan Facility"), and the related drawdown thereunder on June 12, 2018;

 

  46

INTERNATIONAL SEAWAYS, INC.

 

(vii)Entry into a second amendment (the "2017 Debt Facilities Second Amendment") of the Credit Agreement dated as of June 22, 2017 (as amended by that certain First Amendment to Credit Agreement dated as of July 24, 2017 and by the 2017 Debt Facilities Second Amendment, the "2017 Term Loan Facility"), by and among the Company, International Seaways Operating Corporation ("ISOC"), OIN Delaware LLC, the Subsidiary Guarantors from time to time party thereto, the Lenders from time to time party thereto, Jefferies Finance LLC, as administrative agent for the Lenders and as collateral agent and mortgage trustee for the Secured Parties, Skandinaviska Enskilda Banken AB (publ), as swingline lender with effect as of the Closing Date;
(viii)The assumption of outstanding debt under the Sinosure Credit Facility (as defined below) with effect as of June 14, 2018; and
(ix)Sale of the Seaways Laura Lynn, to Euronav in late June 2018 for approximately $32,300 in net proceeds.

 

ABN Term Loan Facility

 

On June 7, 2018, the Company entered into the ABN Term Loan Facility. Subsequently on June 12, 2018, the Company borrowed approximately $28,463 secured by the Seaways Raffles vessel. The ABN Term Loan Facility bears interest at a rate of 3-month LIBOR plus a margin of 3.25% and is repayable in 19 quarterly installments of approximately $869 with a balloon repayment payable on the maturity date in 2023. Additionally, the ABN Term Loan Facility includes certain financial covenants and is guaranteed by the Company. The Company's guarantee is unsecured. The Company used the proceeds from the ABN Term Loan Facility to fund a portion of the Transaction.

 

2017 Debt Facilities Second Amendment

 

On June 14, 2018, the Company entered into the 2017 Debt Facilities Second Amendment. The amendment (i) increased the interest rate margin from 4.50% per annum to 5.00% per annum for loans determined by the Alternate Base Rate (as defined in the 2017 Term Loan Facility) and from 5.50% per annum to 6.00% per annum for any loan determined by reference to the LIBOR Rate and (ii) allowed a dividend of $110,000 to be made from the Company's FSO Joint Venture to the Company without incorporating such funds into the cash sweep provisions of the 2017 Term Loan Facility, (iii) permitted the acquisition of the holding companies of the six VLCCs as Unrestricted Subsidiaries and permitted those entities and their assets to be subject to the Sinosure Credit Facility and be subject to its liens and permitted the funding of the certain liquidity and other accounts in connection with that acquisition and (iv) made certain other amendments to covenants under the 2017 Term Loan Facility. As a condition to the effectiveness of the 2017 Debt Facilities Second Amendment, the Company prepaid $60,000 of the amount outstanding under the facility together with a premium equal to 1% of the $60,000 prepayment and paid a fee to the lenders of 1% of the 2017 Term Loan Facility debt outstanding after that repayment.

 

Sinosure Credit Facility

 

As part of the Transaction, the Company acceded as a guarantor to that certain China Export & Credit Insurance Corporation ("Sinosure") facility agreement originally dated November 30, 2015, as supplemented by a supplemental agreement dated December 28, 2015, as amended and restated by an amending and restating deed dated June 29, 2016, as supplemented by a supplemental agreement dated November 8, 2017, as supplemented by a consent, supplemental and amendment letter, dated April 2, 2018 (the facility agreement as of such date, the "Original Sinosure Facility") and as amended and restated by an amending and restating agreement dated June 13, 2018 (the "2018 Amending and Restating Agreement"), by and among Gener8 Maritime Subsidiary VII, Inc., Seaways Holding Corporation, a wholly owned subsidiary of the Company, the Company, Citibank, N.A. (London Branch), The Export-Import Bank of China and Bank of China (New York Branch) (and its successors and assigns) and certain other parties thereto (the "Sinosure Credit Facility"). The Sinosure Credit Facility is a term loan facility comprised of six loans, each secured by one of the six VLCCs acquired. As of the June 14, 2018, it had a principal amount outstanding of approximately $310,968 and bears interest at a rate of LIBOR plus a margin of 2%. Each loan under the Sinosure Credit Facility requires quarterly amortization payments of 12/3% (based on the original outstanding amount of each Vessel loan) together with a balloon repayment payable on the termination date of each loan. Each of the loans under the Sinosure Credit Facility will mature 144 months after its initial utilization date. Additionally, the Sinosure Credit Facility contains certain financial covenants. The 2018 Amending and Restating Agreement effects certain amendments to the Original Sinosure Facility as agreed between the parties thereto and necessitated by the Transaction. The Sinosure Credit Facility is guaranteed by the Company and Seaways Holding Corporation.

 

  47

INTERNATIONAL SEAWAYS, INC.

 

8.5% Senior Notes

 

On May 31, 2018, the Company completed a registered public offering of $25,000 aggregate principal amount of its 8.50% senior unsecured notes due 2023 (the “8.5% Senior Notes”), which resulted in aggregate net proceeds to the Company of approximately $23,363, after deducting commissions and estimated expenses. The Company used the net proceeds to fund the Transaction, to repay a portion of its outstanding 2017 Term Loan Facility and for general corporate purposes.

 

The Company issued the Notes under an indenture dated as of May 31, 2018 (the “Base Indenture”), between the Company and The Bank of New York Mellon, as trustee (the “Trustee”), as supplemented by a supplemental indenture dated as of May 31, 2018 (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), between the Company and the Trustee. The Notes will mature on June 30, 2023 and bear interest at a rate of 8.50% per annum. Interest on the Notes will be payable in arrears on March 30, June 30, September 30 and December 30 of each year, commencing on September 30, 2018. The terms of the Indenture, among other things, limit the Company’s ability to merge, consolidate or sell assets.

 

The Company may redeem the Notes at its option, in whole or in part, at any time on or after June 30, 2020 at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. In addition, if the Company undergoes a Change of Control (as defined in the Indenture) the Company may be required to repurchase all of the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest (including additional interest, if any), to, but excluding, the repurchase date.

 

The Indenture contains certain restrictive covenants, including covenants that, subject to certain exceptions and qualifications, restrict our ability to make certain payments if a default under the Indenture has occurred and is continuing or will result therefrom and require us to limit the amount of debt we incur, maintain a certain minimum net worth and provide certain reports. The Indenture also provides for certain customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace or cure periods).

 

10.75% Subordinated Notes

 

On June 13, 2018, the Company completed the Private Placement to certain funds and accounts managed by BlackRock. The 10.75% Subordinated Notes are unsecured and rank junior to the 8.5% Senior Notes, the Company's guarantees of the 2017 Term Loan Facility, the ABN Term Loan Facility and Sinosure Credit Facility and other unsubordinated indebtedness of the Company. The Private Placement resulted in aggregate proceeds to the Company of approximately $28,003, after deducting fees paid to the purchasers of those notes and estimated expenses. The Company used the net proceeds from the Private Placement, together with the net proceeds from the Public Offering, to fund a portion of the Transaction and the offer to prepay a portion of the obligation of ISOC under the Term Loan B Facility.

 

The 10.75% Subordinated Notes were issued under an indenture dated as of June 13, 2018 (the "Subordinated Notes Indenture"), between the Company and GLAS Trust Company LLC, as trustee (the "Subordinated Notes Trustee").

 

The 10.75% Subordinated Notes bear interest from June 13, 2018 at an annual rate of 10.75%; provided that the 10.75% Subordinated Notes shall bear interest at the rate of 13.00% per annum beginning on the earlier of (i) December 15, 2020 and (ii) if the Refinance Date (as defined below) has occurred, the later of the Refinance Date and June 15, 2020. Interest on the 10.75% Subordinated Notes is payable quarterly in arrears on the 15th day of March, June, September and December of each year, commencing on September 15, 2018.

 

The stated maturity date of the 10.75% Subordinated Notes is June 15, 2023; provided that in certain circumstances after the indebtedness outstanding under the 2017 Term Loan Facility (as amended by the 2017 Debt Facilities Second Amendment) ceases to be outstanding (such date, the "Refinance Date"), the stated maturity of the 10.75% Subordinated Notes will become June 15, 2022. The 10.75% Subordinated Notes may be redeemed, in whole or in part, at any time prior to June 15, 2020, at a redemption price equal to 100% of the aggregate principal amount of the 10.75% Subordinated Notes being redeemed, plus accrued and unpaid interest to, but not including, the date of redemption, plus a "make-whole" premium.  On or after June 15, 2020, the Subordinated Notes may be redeemed at par, plus accrued and unpaid interest.

 

  48

INTERNATIONAL SEAWAYS, INC.

 

The Subordinated Notes Indenture contains covenants restricting the ability of the Company and its subsidiaries to incur additional indebtedness, sell assets, incur liens, amend the 2017 Term Loan Facility, enter into sale and leaseback transactions and enter into certain extraordinary transactions. In addition, the Subordinated Notes Indenture prohibits the Company from paying any dividends unless certain financial and other conditions are satisfied. The Subordinated Notes Indenture also contains events of default consistent with those under the 2017 Term Loan Facility.

 

The 10.75% Subordinated Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.

 

Outlook

 

We believe our strong balance sheet continues to give us flexibility to actively pursue fleet renewal or potential strategic opportunities that may arise within the diverse sectors in which we operate and at the same time positions us to generate sufficient cash to support our operations over the next twelve months. We or our subsidiaries may in the future complete transactions consistent with achieving the objectives of our business plan.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2018, the FSO Joint Venture and the LNG Joint Venture had total bank debt outstanding of $784,050, of which $679,648 was nonrecourse to the Company.

 

The FSO Joint Venture is a party to a number of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among, the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the ‘‘Guarantee Facility’’); (b) the FSO Joint Venture is party to two service contracts with NOC (the ‘‘NOC Service Contracts’’); and (c) the FSO Joint Venture is a borrower under a $220,000 secured credit facility by and among TI Africa and TI Asia, as joint and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank N.V., as Agent and as Security Trustee.

 

INSW severally guarantees the obligations of the FSO Joint Venture pursuant to the Guarantee Facility and severally guarantees the obligations of the FSO Joint Venture to Maersk Oil Qatar AS (“MOQ”) under the MOQ service contracts, which contracts were novated to NOC in July 2017 (the ‘‘MOQ Guarantee’’) for the period beginning on the novation date and severally guarantees the obligations of the FSO Joint Venture under the NOC Service Contracts. In addition, INSW continues the MOQ Guarantee to MOQ for the period ended on the novation date of the service contracts for MOQ, which guarantee for such period will end when Qatari authorities determine that the FSO Joint Venture has paid all Qatari taxes owed by the FSO Joint Venture under such service contracts through the novation date.

 

The FSO Joint Venture drew down on a $220,000 secured credit facility on April 26, 2018 (See Note 6, “Equity Method Investments” to the accompanying condensed consolidated financial statements). The Company provided a guarantee for the $110,000 FSO Term Loan portion of the facility, which has an interest rate of LIBOR plus two percent and amortizes over the remaining terms of the NOC Service Contracts, which expire in July 2022 and September 2022. INSW’s guarantee of the FSO Term Loan has financial covenants that provide (i) INSW’s Liquid Assets shall not be less than the higher of $50,000 and 5% of Total Indebtedness of INSW, (ii) INSW shall have Cash of at least $30,000 and (iii) INSW is in compliance with the Loan to Value Test (as such capitalized terms are defined in the Company guarantee or in the case of the Loan to Value Test, as defined in the credit agreement underlying the Company’s 2017 Debt Facilities (see Note 9, “Debt,” to the accompanying condensed consolidated financial statements). The FSO Joint Venture has entered into floating-to-fixed interest rate swap agreements with the aforementioned Swap Banks, which cover the notional amounts outstanding under the FSO Loan Facility and pay fixed rates of approximately 4.858% and receive a floating rate based on LIBOR. These agreements have an effective date of June 29, 2018, and maturity dates ranging from July to September 2022. As of June 30, 2018, the maximum potential amount of future principal payments (undiscounted) that INSW could be required to make relating to equity method investees secured bank debt was $104,612 and the carrying value of the Company’s guaranty in the accompanying condensed consolidated balance sheet was $951.

 

  49

INTERNATIONAL SEAWAYS, INC.

 

INSW maintains a guarantee in favor of Qatar Liquefied Gas Company Limited (2) (‘‘LNG Charterer’’) relating to certain LNG Tanker Time Charter Party Agreements with the LNG Charterer and each of Overseas LNG H1 Corporation, Overseas LNG H2 Corporation, Overseas LNG S1 Corporation and Overseas LNG S2 Corporation (such agreements, the ‘‘LNG Charter Party Agreements,’’ and such guarantee, the ‘‘LNG Performance Guarantee’’). INSW will pay QGTC an annual fee of $100 until such time that QGTC ceases to provide a guarantee in favor of the LNG charterer relating to performance under the LNG Charter Party Agreements.

 

OSG continues to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantees, the ‘‘OSG LNG Performance Guarantee’’). INSW will indemnify OSG for liabilities arising from the OSG LNG Performance Guarantee pursuant to the terms of the Separation and Distribution Agreement. In connection with the OSG LNG Performance Guarantee, INSW will pay a $135 annual fee to OSG for 2018, which will increase to $145 in 2019 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.

 

In addition, and pursuant to an agreement between INSW and the trustees of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the ‘‘Scheme’’), INSW guarantees the obligations of OSG Ship Management (UK) Ltd., a subsidiary of INSW, to make payments to the Scheme.

 

Aggregate Contractual Obligations

 

A summary of the Company’s long-term contractual obligations, excluding operating lease obligations for office space, as of June 30, 2018 follows:

 

                       Beyond     
   2018   2019   2020   2021   2022   2022   Total 
2017 Term Loan - floating rate(1)  $38,020   $61,880   $59,964   $57,853   $405,975   $-   $623,692 
ABN Term Loan - floating rate(2)   2,533    4,913    4,720    4,520    4,323    13,142    34,151 
Sinosure Credit Facility - floating rate(3)   17,803    35,249    34,312    33,314    32,803    231,614    385,095 
8.5% Senior Notes - fixed rate   1,240    2,125    2,125    2,125    2,125    26,063    35,803 
10.75% Subordinated Notes - fixed rate   1,630    3,225    3,225    3,900    3,900    31,950    47,830 
Operating lease obligations (4)                                   
Bareboat Charter-ins   3,165    6,278    6,295    6,278    6,278    6,828    35,122 
Time Charter-ins   13,219    4,683    -    -    -    -    17,902 
Total  $77,610   $118,353   $110,641   $107,990   $455,404   $309,597   $1,179,595 

 

(1)Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate effective one-month LIBOR rate as of June 30, 2018 of 2.10% and applicable margins for the 2017 Term Loan Facility of 6.0%. Management estimates that no prepayment will be required for the 2017 Term Loan Facility as a result of estimated Excess Cash Flow for the year ended December 31, 2018. Amounts shown for the 2017 Term Loan Facility exclude any estimated repayment as a result of Excess Cash Flow.

 

(2)Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate effective three-month LIBOR rate as of June 30, 2018 of 2.33% and applicable margin for the ABN Term Loan facility of 3.25%.

 

(3)Amounts shown include contractual interest obligations of floating rate debt estimated based on (i) the fixed rate stated in the related floating-to-fixed interest rate swap through the swap maturity date of March 21, 2022, or (ii) the effective three-month LIBOR rate as of June 30, 2018 of 2.33% for periods after the swap maturity date, plus the applicable margin for the Sinosure Credit Facility of 2.00%. The Company is a party to a floating-to-fixed interest rate swap covering a notional amount of $305,073 at June 30, 2018 that effectively converts the Company’s interest rate exposure under the Sinosure Credit Facility from a floating rate based on 3-month LIBOR to a fixed LIBOR rate of 2.047%.

 

 

  50

INTERNATIONAL SEAWAYS, INC.

 

(4)As of June 30, 2018, the Company had charter-in commitments for six vessels on leases that are accounted for as operating leases. Certain of these leases provide the Company with various renewal and purchase options. The future minimum commitments for time charters-in have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock.

 

Risk Management:

 

The Company is exposed to market risk from changes in interest rates, which could impact its results of operations and financial condition. The Company manages this exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. To manage its interest rate risk in a cost-effective manner, the Company, from time-to-time, enters into interest rate swap or cap agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed upon notional amounts or to receive payments if floating interest rates rise above a specified cap rate. The Company uses such derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage exposure to nonperformance on such instruments by the counterparties.

 

During the six months ended June 30, 2018, the Company was party to an Interest Rate Cap agreement with a major financial institution covering a notional amount of $300,000 to limit the floating interest rate exposure associated with the 2017 Term Loan. The Interest Rate Cap agreement contains no leverage features and had a cap rate of 2.5% through the termination date of December 31, 2020. Additionally, in June 2018, the Company acquired an Interest Rate Swap agreement with a major financial institution covering the entire currently outstanding notional amount of the Sinosure Credit Facility. The Interest Rate Swap agreement contains no leverage features and has a fixed rate of 2.047% through the termination date of March 21, 2022.

 

In July 2018, the Company amended the Interest Rate Cap agreement described above to increase the notional amount to $350,000 and increase the cap rate to 2.605%, effective July 31, 2018. The maturity date of December 31, 2020 remained unchanged. The amendment did not require a cash expenditure by the Company, as a portion of the “in-the-money” position of the original Interest Rate Cap agreement was utilized to increase the notional amount. The Company also amended the interest rate swap agreement in July 2018 to increase the fixed rate to 2.99%, effective September 21, 2018. The maturity date of March 21, 2022 remained unchanged. In conjunction with such amendment, the Company received a cash settlement of $7,677 from the counterparty to the transaction.

 

Available Information

 

The Company makes available free of charge through its internet website, www.intlseas.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

 

The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington D.C. 20549 (information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330). The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov.

 

The Company also makes available on its website, its corporate governance guidelines, its code of business conduct, insider trading policy, anti-bribery and corruption policy and charters of the Audit Committee, the Human Resources and Compensation Committee and the Corporate Governance and Risk Assessment Committee of the Board of Directors. Neither our website nor the information contained on that site, or connected to that site, is incorporated by reference into this Quarterly Report on Form 10-Q.

 

  51

INTERNATIONAL SEAWAYS, INC.

 

Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s current disclosure controls and procedures were effective as of June 30, 2018 to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting during the three months ending June 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

  52

INTERNATIONAL SEAWAYS, INC.

 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

See Note 16, “Contingencies,” to the accompanying condensed consolidated financial statements for a description of the current legal proceedings, which is incorporated by reference in this Part II, Item 1.

 

Item 1A.Risk Factors

 

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2017 Form 10-K. The risks described in our 2017 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors from those disclosed in our 2017 Form 10-K, except for the following:

 

Risks Related to Our Company

 

INSW has incurred significant indebtedness which could affect its ability to finance its operations, pursue desirable business opportunities and successfully run its business in the future, all of which could affect INSW’s ability to fulfill its obligations under that indebtedness.

 

As of June 30, 2018, INSW had approximately $838 million of outstanding indebtedness, net of discounts and deferred finance costs. In addition, the FSO JV has borrowed $110 million under the FSO Term Loan and $110 million under the FSO Revolver, which is secured by substantially all of the assets of the FSO JV. The FSO Term Loan is guaranteed by the Company and the FSO Revolver is guaranteed by INSW’s JV partner. INSW’s substantial indebtedness and interest expense could have important consequences, including:

 

·limiting INSW’s ability to use a substantial portion of its cash flow from operations in other areas of its business, including for working capital, capital expenditures and other general business activities, because INSW must dedicate a substantial portion of these funds to service its debt;
·to the extent INSW’s future cash flows are insufficient, requiring the Company to seek to incur additional indebtedness in order to make planned capital expenditures and other expenses or investments;
·limiting INSW’s ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, and other expenses or investments planned by the Company;
·limiting the Company’s flexibility and ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, and INSW’s business and industry;
·limiting INSW’s ability to satisfy its obligations under its indebtedness;
·increasing INSW’s vulnerability to a downturn in its business and to adverse economic and industry conditions generally;
·placing INSW at a competitive disadvantage as compared to its less-leveraged competitors;
·potentially limiting the Company’s ability to enter certain commercial pools;
·limiting the Company’s ability, or increasing the costs, to refinance indebtedness; and
·limiting the Company’s ability to enter into hedging transactions by reducing the number of counterparties with whom INSW can enter into such transactions as well as the volume of those transactions.

 

INSW’s ability to continue to fund its obligations and to reduce or refinance debt may be affected by among other things, the age of the Company’s fleet and general economic, financial market, competitive, legislative and regulatory factors. An inability to fund the Company’s debt requirements or reduce or refinance debt could have a material adverse effect on INSW’s business, financial condition, results of operations and cash flows.

 

Additionally, the actual or perceived credit quality of the Company’s or its pools’ charterers (as well as any defaults by them) could materially affect the Company’s ability to obtain the additional capital resources that it will require to purchase additional vessels or significantly increase the costs of obtaining such capital. The Company’s inability to obtain additional financing at an acceptable cost, or at all, could materially affect the Company’s results of operation and its ability to implement its business strategy.

 

  53

INTERNATIONAL SEAWAYS, INC.

 

The Company may not be able to generate sufficient cash to service all of its indebtedness and could in the future breach covenants in its credit facilities, notes and term loans.

 

The Company’s earnings, cash flow and the market value of its vessels vary significantly over time due to the cyclical nature of the tanker industry, as well as general economic and market conditions affecting the industry. As a result, the amount of debt that INSW can manage in some periods may not be appropriate in other periods and its ability to meet the financial covenants to which it is subject or may be subject in the future may vary. Additionally, future cash flow may be insufficient to meet the Company’s debt obligations and commitments. Any insufficiency could negatively impact INSW’s business.

 

The 2017 Debt Facilities contain certain restrictions relating to new borrowings as set forth in the loan agreement. In addition, the 2017 Debt Facilities have a covenant to maintain the aggregate Fair Market Value of the Collateral Vessels (each as defined in that loan agreement) at greater than or equal to $300.0 million at the end of each fiscal quarter and to ensure that at any time, the outstanding principal amounts of the 2017 Debt Facilities and certain other secured indebtedness permitted under credit agreement minus the amount of unrestricted cash and cash equivalents does not exceed 65% of the aggregate Fair Market Value of the Collateral Vessels plus the Fair Market Value of certain joint venture equity interests.

 

Additionally, the Sinosure Credit Facility and ABN Term Loan Facility each require the Company to comply with a number of covenants, including collateral maintenance and financial covenants, restrictions on consolidations, mergers or sales of assets, limitations on liens, limitations on issuance of certain equity interests, limitations on transactions with affiliates, and other customary covenants and related provisions. The ABN Term Loan Facility also requires that it be amended to incorporate financial covenants (other than the vessel value maintenance covenant) included in other loan facilities or agreements evidencing indebtedness (with principal balances in excess of $50 million), to which the Company is party to becomes a party, that are deemed to be materially more advantageous to the lenders under such other agreements than those currently required by the ABN Term Loan Facility. The Company expects to execute such an amendment during the third quarter of 2018.

 

The Senior Notes Indenture and Subordinated Notes Indenture each also contain certain restrictive covenants, including covenants that, subject to certain exceptions and qualifications, restrict our ability to make certain payments if a default under the Indenture has occurred and is continuing or will result therefrom and require us to limit the amount of debt we incur, maintain a certain minimum net worth and provide certain reports. Additionally, the Subordinated Notes Indenture contains a number of additional covenants restricting our ability to sell assets, incur liens, amend the 2017 Debt Facilities, enter into sale and leaseback transactions and enter into certain extraordinary transactions.

 

While the Company was in compliance with these requirements as of June 30, 2018, a decrease in vessel values or a failure to meet such requirements could cause the Company to breach certain covenants in its existing credit facilities, notes and term loans, or in future financing agreements that the Company may enter into from time to time. If the Company breaches such covenants and is unable to remedy the relevant breach or obtain a waiver, the Company’s lenders could accelerate its debt and lenders under the 2017 Debt Facilities, Sinosure Credit Facility and ABN Term Loan Facility could foreclose on the Company’s owned vessels.

 

A range of economic, competitive, financial, business, industry and other factors will affect future financial performance, and, accordingly, the Company’s ability to generate cash flow from operations and to pay debt and to meet the financial covenants under the 2017 Debt Facilities, the Sinosure Credit Facility and the Subordinated Notes Indenture. Many of these factors, such as charter rates, economic and financial conditions in the tanker industry and the global economy or competitive initiatives of competitors, are beyond the Company’s control. If INSW does not generate sufficient cash flow from operations to satisfy its debt obligations, it may have to undertake alternative financing plans, such as:

 

·refinancing or restructuring its debt;
·selling tankers or other assets;
·reducing or delaying investments and capital expenditures; or
·seeking to raise additional capital.

 

  54

INTERNATIONAL SEAWAYS, INC.

 

Undertaking alternative financing plans, if necessary, might not allow INSW to meet its debt obligations. The Company’s ability to restructure or refinance its debt will depend on the condition of the capital markets, its access to such markets and its financial condition at that time. Any refinancing of debt could be at higher interest rates and might require the Company to comply with more onerous covenants, which could further restrict INSW’s business operations. In addition, the terms of existing or future debt instruments may restrict INSW from adopting some alternative measures. These alternative measures may not be successful and may not permit INSW to meet its scheduled debt service obligations. The Company’s inability to generate sufficient cash flow to satisfy its debt obligations, to meet the covenants of its credit agreements and term loans and/or to obtain alternative financing in such circumstances, could materially and adversely affect INSW’s business, financial condition, results of operations and cash flows.

 

Risks Related to Our Industry

 

INSW conducts its operations internationally, which subjects it to changing economic, political and governmental conditions abroad that may adversely affect its business.

 

The Company conducts its operations internationally, and its business, financial condition, results of operations and cash flows may be adversely affected by changing economic, political and government conditions in the countries and regions where its vessels are employed, including:

 

·regional or local economic downturns;
·changes in governmental policy or regulation;
·restrictions on the transfer of funds into or out of countries in which INSW or its customers operate;
·difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;
·trade relations with foreign countries in which INSW’s customers and suppliers have operations, including protectionist measures such as tariffs and import or export licensing requirements;
·general economic and political conditions, which may interfere with, among other things, the Company’s supply chain, its customers and all of INSW’s activities in a particular location;
·difficulty in enforcing contractual obligations in non-U.S. jurisdictions and the collection of accounts receivable from foreign accounts;
·different regulatory regimes in the various countries in which INSW operates;
·inadequate intellectual property protection in foreign countries;
·the difficulties and increased expenses in complying with multiple and potentially conflicting U.S. and foreign laws, regulations, security, product approvals and trade standards, anti-bribery laws, government sanctions and restrictions on doing business with certain nations or specially designated nationals;
·import and export duties and quotas;
·demands for improper payments from port officials or other government officials;
·U.S. and foreign customs, tariffs and taxes;
·currency exchange controls, restrictions and fluctuations, which could result in reduced revenue and increased operating expense;
·international incidents;
·transportation delays or interruptions;
·local conflicts, acts of war, terrorist attacks or military conflicts;
·changes in oil prices or disruptions in oil supplies that could substantially affect global trade, the Company’s customers’ operations and the Company’s business;
·the imposition of taxes by flag states, port states and jurisdictions in which INSW or its subsidiaries are incorporated or where its vessels operate; and
·expropriation of INSW’s vessels.

 

The occurrence of any such event could have a material adverse effect on the Company’s business.

 

  55

INTERNATIONAL SEAWAYS, INC.

 

Additionally, protectionist developments, or the perception they may occur, may have a material adverse effect on global economic conditions, and may significantly reduce global trade. Governments may turn to trade barriers to protect their domestic industries against foreign imports, thereby depressing shipping demand. In particular, leaders in the United States have indicated the United States may seek to implement more protective trade measures. There is currently significant uncertainty about the future relationship between the United States, China and other exporting countries, including with respect to trade policies, treaties, government regulations and tariffs. For example, on January 23, 2017, President Trump signed an executive order withdrawing the United States from the Trans-Pacific Partnership, a global trade agreement intended to include the United States, Canada, Mexico, Peru and a number of Asian countries. Further, President Trump has called for substantial changes to foreign trade policy with China and has recently raised, and has proposed to further raise in the future, tariffs on several Chinese goods in order to reverse what he perceives as unfair trade practices that have negatively impacted U.S. businesses. Increasing trade protectionism may cause an increase in the cost of goods exported from regions globally, particularly the Asia-Pacific region, the length of time required to transport goods and the risks associated with exporting goods. Such increases may significantly affect the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs.

 

INSW must comply with complex non-U.S. and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to government officials; anti-money laundering laws; and competition regulations. Moreover, the shipping industry is generally considered to present elevated risks in these areas. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on the Company’s business operations and on the Company’s ability to transport cargo to one or more countries, and could also materially affect the Company’s brand, ability to attract and retain employees, international operations, business and operating results. Although INSW has policies and procedures designed to achieve compliance with these laws and regulations, INSW cannot be certain that its employees, contractors, joint venture partners or agents will not violate these policies and procedures. INSW’s operations may also subject its employees and agents to extortion attempts.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

On May 2, 2017, the Company’s Board of Directors approved a resolution authorizing the Company to implement a stock repurchase program. The program allows the Company to opportunistically repurchase up to $30,000 worth of shares of the Company’s common stock from time to time over a 24-month period, on the open market or otherwise, in such quantities, at such prices, in such manner and on such terms and conditions as management determines is in the best interests of the Company. Shares owned by employees, directors and other affiliates of the Company will not be eligible for repurchase under this program without further authorization from the Board.

 

No shares were repurchased during the three months ended June 30, 2018. The maximum number of shares that may still be purchased under the program as of June 30, 2018 was 1,350,907 shares, which was determined by dividing the remaining buyback authorization ($26,823) by the average purchase price of common stock repurchased during 2017. Future buybacks under the stock repurchase program will be at the discretion of our Board of Directors and subject to limitations under the Company’s debt agreements.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

Not applicable.

 

Item 6.Exhibits

 

See Exhibit Index on page 58.

 

  56

INTERNATIONAL SEAWAYS, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  INTERNATIONAL SEAWAYS, INC.
  (Registrant)
   
Date:  August 8, 2018 /s/ Lois K. Zabrocky
  Lois K. Zabrocky
  Chief Executive Officer
   
Date:  August 8, 2018 /s/ Jeffrey D. Pribor
  Jeffrey D. Pribor
  Chief Financial Officer

 

 

 

  57

INTERNATIONAL SEAWAYS, INC.

 

EXHIBIT INDEX

 

2.1 Stock Purchase and Sale Agreement, dated April 18, 2018, by and among Euronav NV, Euronav MI Inc., and Seaways Holding Corporation (pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted but will be furnished supplementally to the Commission upon request) (filed as exhibit 2.2 to the Registrant’s Registration Statement on Form S-3 (File No. 333-224313) filed on May 14, 2018 and incorporated herein by reference).
   
2.2 Guarantee of International Seaways, Inc., dated April 18, 2018, in favor of Euronav MI Inc. (filed as exhibit 2.3 to the Registrant’s Registration Statement on Form S-3 (File No. 333-224313) filed on May 14, 2018 and incorporated herein by reference).
   
4.1 Indenture, dated May 31, 2018, between International Seaways, Inc. and The Bank of New York Mellon, as trustee (filed as exhibit 4.1 to the Registrants’ Current Report on Form 8-K dated May 31, 2018 and incorporated by reference herein).
   
4.2 First Supplemental Indenture, dated May 31, 2018, between International Seaways, Inc. and The Bank of New York Mellon, as trustee (filed as exhibit 4.2 to the Registrants’ Current Report on Form 8-K dated May 31, 2018 and incorporated by reference herein).
   
4.3 Form of Global Note (included as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.2).
   
4.4* Indenture, dated June 13, 2018, between the Company and GLAS Trust Company LLC, as trustee.
   
4.5 Form of Notes (included as Exhibit A to Annex I to the Indenture filed as Exhibit 4.4).
   
10.1 $220 Million Senior Secured Credit Facility of TI Africa Limited and TI Asia Limited, as joint and several Borrowers, and ABN Amro Bank N.V. and ING Belgium SA/NV, as Mandated Lead Arrangers, dated March 29, 2018 (filed as exhibit 10.21 to the Registrant’s Registration Statement on Form S-3 (File No. 333-224313) filed on May 14, 2018 and incorporated herein by reference).
   
10.2 Guarantee, dated March 29, 2018, relating to $220 Million Senior Secured Credit Facility dated March 29, 2018 (filed as exhibit 10.22 to the Registrant’s Registration Statement on Form S-3 (File No. 333-224313) filed on May 14, 2018 and incorporated herein by reference).
   
10.3* Credit agreement dated as of June 7, 2018, by and among Seaways Shipping Corporation, a Marshall Islands corporation and wholly-owned subsidiary of the Registrant, the Registrant (as a guarantor), certain other guarantors which are subsidiaries of the Registrant, lenders named therein and ABN AMRO Capital USA LLC as lead arranger and facility agent.
   
10.4* Amending and Restating Agreement by and among Gener8 Maritime Subsidiary VII, Inc., Seaways Holding Corporation, a wholly owned subsidiary of the Company, the Company, Citibank, N.A. (London Branch), the Export-Import Bank of China and Bank of China (New York Branch) (and its successors and assigns) and certain other parties thereto.
   
10.5* Second Amendment, dated as of June 14, 2018, to the Credit Agreement dated as of June 22, 2017, among the Registrant, OIN Delaware LLC, International Seaways Operating Corporation and certain of its subsidiaries as other guarantors, various lenders, Jefferies Finance LLC and JP Morgan Chase Bank, N.A., as joint lead arrangers, UBS Securities LLC, as joint bookrunner, DNB Markets Inc., Fearnley Securities AS, Pareto Securities Inc. and Skandinaviska Enskilda Banken AB (Publ) as co-managers, Jefferies Finance LLC, as administrative agent, syndication agent, collateral agent and mortgage trustee.
   
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
   
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
   

 

  58

INTERNATIONAL SEAWAYS, INC.

 

32* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
EX-101.INS XBRL Instance Document
   
EX-101.SCH XBRL Taxonomy Extension Schema
   
EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase
   
EX-101.LAB XBRL Taxonomy Extension Label Linkbase
   
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
   

 

*Filed herewith

 

  59
(Back To Top)

Section 2: EX-4.4 (EXHIBIT 4.4)

 

Exhibit 4.4

 

Execution Version

 

INTERNATIONAL SEAWAYS, INC.

 

as Issuer

 

and

 

GLAS Trust Company LLC

 

as Trustee

 

INDENTURE

 

Dated as of June 13, 2018

 

 

 

 

Table of Contents

 

      Page
 
Article One
 
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
       
SECTION 1.01. Rules of Construction   1
SECTION 1.02. Definitions   2
SECTION 1.03. Compliance Certificates and Opinions   29
SECTION 1.04. Form of Documents Delivered to Trustee   29
SECTION 1.05. Acts of Holders   30
SECTION 1.06. Notices, Etc., to Trustee, Issuer, any Guarantor and Agent   30
SECTION 1.07. Notice to Holders; Waiver   31
SECTION 1.08. Effect of Headings and Table of Contents   32
SECTION 1.09. Successors and Assigns   32
SECTION 1.10. Severability Clause   32
SECTION 1.11. Benefits of Indenture   32
SECTION 1.12. Governing Law; Submission to Jurisdiction   32
SECTION 1.13. Legal Holidays   32
SECTION 1.14. No Personal Liability of Directors, Managers, Officers, Employees and Stockholders   32
SECTION 1.15. Counterparts   32
SECTION 1.16. USA PATRIOT Act   33
SECTION 1.17. Waiver of Jury Trial   33
SECTION 1.18. Force Majeure   33
SECTION 1.19. FATCA   33
 
Article Two
 
NOTE FORMS
       
SECTION 2.01. Form and Dating   33
SECTION 2.02. Execution, Authentication, Delivery and Dating   34
 
Article Three
 
THE NOTES
       
SECTION 3.01. Title and Terms   34
SECTION 3.02. Note Registrar, Transfer Agent and Paying Agent   35
SECTION 3.03. Denominations   36
SECTION 3.04. Temporary Notes   36
SECTION 3.05. Registration of Transfer and Exchange   36
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Notes   37
SECTION 3.07. Payment of Interest; Interest Rights Preserved   37
SECTION 3.08. Persons Deemed Owners   38
SECTION 3.09. Cancellation   38
SECTION 3.10. Computation of Interest   39

 

-i-

 

  

SECTION 3.11. Transfer and Exchange   39
SECTION 3.12. CUSIP, ISIN and Common Code Numbers   39
 
Article Four
 
SATISFACTION AND DISCHARGE
       
SECTION 4.01. Satisfaction and Discharge of Indenture   39
SECTION 4.02. Application of Trust Money   41
 
Article Five
 
REMEDIES
       
SECTION 5.01. Events of Default   41
SECTION 5.02. Acceleration of Maturity:  Rescission and Annulment   42
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee   44
SECTION 5.04. Trustee May File Proofs of Claim   45
SECTION 5.05. Trustee May Enforce Claims Without Possession of Notes   46
SECTION 5.06. Application of Money Collected   46
SECTION 5.07. Limitation on Suits   46
SECTION 5.08. Right of Holders to Bring Suit for Payment   47
SECTION 5.09. Restoration of Rights and Remedies   47
SECTION 5.10. Rights and Remedies Cumulative   47
SECTION 5.11. Delay or Omission Not Waiver   47
SECTION 5.12. Control by Holders   47
SECTION 5.13. Waiver of Past Defaults   47
SECTION 5.14. Waiver of Stay or Extension Laws   48
SECTION 5.15. Undertaking for Costs   48
 
Article Six
 
THE TRUSTEE
       
SECTION 6.01. Duties of the Trustee   48
SECTION 6.02. Notice of Defaults   49
SECTION 6.03. Certain Rights of Trustee   49
SECTION 6.04. Trustee Not Responsible for Recitals or Issuance of Notes   51
SECTION 6.05. May Hold Notes   52
SECTION 6.06. Money Held in Trust   52
SECTION 6.07. Compensation and Reimbursement   52
SECTION 6.08. Corporate Trustee Required; Eligibility   53
SECTION 6.09. Resignation and Removal; Appointment of Successor   53
SECTION 6.10. Acceptance of Appointment by Successor   54
SECTION 6.11. Merger, Conversion, Consolidation or Succession to Business   54
SECTION 6.12. Appointment of Authenticating Agent   54

 

-ii-

 

  

Article Seven
 
HOLDERS LISTS AND REPORTS BY TRUSTEE AND ISSUER
       
SECTION 7.01. Issuer to Furnish Trustee Names and Addresses   56
SECTION 7.02. Reports by Trustee   56
 
Article Eight
 
MERGER, CONSOLIDATION, AMALGAMATION OR SALE
OF ALL OR SUBSTANTIALLY ALL ASSETS
       
SECTION 8.01. Issuer and Restricted Parties May Consolidate, Etc., Only on Certain Terms   56
 
Article Nine
 
SUPPLEMENTAL INDENTURES
       
SECTION 9.01. Amendments or Supplements Without Consent of Holders   57
SECTION 9.02. Amendments, Supplements or Waivers with Consent of Holders   58
SECTION 9.03. Execution of Amendments, Supplements or Waivers   59
SECTION 9.04. Effect of Amendments, Supplements or Waivers   59
SECTION 9.05. Reference in Notes to Supplemental Indentures   59
SECTION 9.06. Notice of Supplemental Indentures   59
 
Article Ten
 
COVENANTS
       
SECTION 10.01. Payment of Principal, Premium, if any, and Interest   59
SECTION 10.02. Maintenance of Office or Agency   59
SECTION 10.03. Money for Notes Payments to Be Held in Trust   60
SECTION 10.04. Organizational Existence   61
SECTION 10.05. Payment of Taxes and Other Claims   61
SECTION 10.06. Net Worth Maintenance   61
SECTION 10.07. No Adverse Amendment   61
SECTION 10.08. Statement by Officer as to Default   61
SECTION 10.09. Reports and Other Information   62
SECTION 10.10. Limitation on Restricted Payments   62
SECTION 10.11. Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock   63
SECTION 10.12. Liens   65
SECTION 10.13. Limitations on Transactions with Affiliates   66
SECTION 10.14. Limitations on Dividend and Other Payment Restrictions Affecting Restricted Parties   66
SECTION 10.15. Sale and Leaseback Transactions   67
SECTION 10.16. Business   67
SECTION 10.17. Asset Sales   68
SECTION 10.18. Additional Amounts   70
SECTION 10.19. Distribution or Dividend from Operating Company.   71

 

-iii-

 

  

Article Eleven
 
REDEMPTION OF NOTES
       
SECTION 11.01. Right of Redemption   72
SECTION 11.02. Optional Redemption for Changes in Withholding Taxes   72
SECTION 11.03. Special Mandatory Redemption   73
SECTION 11.04. Applicability of Article   73
SECTION 11.05. Election to Redeem; Notice to Trustee   73
SECTION 11.06. Selection by Trustee of Notes to Be Redeemed   73
SECTION 11.07. Notice of Redemption   74
SECTION 11.08. Deposit of Redemption Price   75
SECTION 11.09. Notes Payable on Redemption Date   76
SECTION 11.10. Notes Redeemed in Part   76
SECTION 11.11. Sinking Fund; Open Market Purchases   76
 
Article Twelve
 
SUBORDINATION OF NOTES
       
SECTION 12.01. Agreement to Subordinate   76
SECTION 12.02. Liquidation, Dissolution, Bankruptcy   76
SECTION 12.03. Acceleration of Payment of Notes   77
SECTION 12.04. Subrogation   77
SECTION 12.05. Relative Rights   77
SECTION 12.06. Subordination May Not Be Impaired by Issuer   77
SECTION 12.07. Rights of Trustee and Paying Agent   77
SECTION 12.08. Distribution or Notice to Representative   78
SECTION 12.09. Article Twelve Not to Prevent Events of Default or Limit Right to Accelerate   78
SECTION 12.10. Trust Moneys Not Subordinated   78
SECTION 12.11. Trustee Entitled to Rely   78
SECTION 12.12. Trustee to Effectuate Subordination   78
SECTION 12.13. Trustee Not Fiduciary for Holders of Senior Indebtedness of the Issuer   79
SECTION 12.14. Reliance by Holders of Senior Indebtedness of the Issuer on Subordination Provisions   79
 
Article Thirteen
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
       
SECTION 13.01. Issuer’s Option to Effect Legal Defeasance or Covenant Defeasance   79
SECTION 13.02. Legal Defeasance and Discharge   80
SECTION 13.03. Covenant Defeasance   80
SECTION 13.04. Conditions to Legal Defeasance or Covenant Defeasance   80
SECTION 13.05. Deposited Money and U.S. Government Obligations To Be Held in Trust Other Miscellaneous Provisions   82
SECTION 13.06. Reinstatement   82

 

-iv-

 

 

APPENDIX, EXHIBITS AND SCHEDULES

 

ANNEX I ― Rule 144A / Regulation S / IAI

 

EXHIBIT 1 to Rule 144A / Regulation S / IAI — Form of Initial Note

 

EXHIBIT 2 to Rule 144A / Regulation S / IAI — Form of Transferee Letter of Representation

 

EXHIBIT A — Form of Incumbency Certificate

 

SCHEDULE 1 — Issue Date Restricted Parties

  

-v-

 

 

INDENTURE, dated as of June 13, 2018 (this “Indenture”), between INTERNATIONAL SEAWAYS, INC., a Marshall Islands corporation (“Issuer”) and GLAS Trust Company LLC, a limited liability company organized and existing under the laws of the state of New Hampshire, as Trustee.

 

RECITALS OF THE ISSUER

 

The Issuer has duly authorized the creation of an issue of 10.75% Step-Up Notes due 2023 issued on the date hereof (the “Notes”) and to provide therefor the Issuer has duly authorized the execution and delivery of this Indenture.

 

All things necessary have been done to make the Notes, when executed by the Issuer and authenticated and delivered hereunder and duly issued by the Issuer, the valid and legally binding obligations of the Issuer and to make this Indenture a valid and legally binding agreement of the Issuer, in accordance with their and its terms.

 

Each of the parties hereto is entering into this Indenture for the benefit of the other party and for the equal and ratable benefit of the Holders (as defined below) of the Notes.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and ratable benefit of all Holders, as follows:

 

Article One

DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION

 

SECTION 1.01.         Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

 

(1)         the terms defined in this Article have the meanings assigned to them in this Article, and words in the singular include the plural and words in the plural include the singular;

 

(2)         all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP (as herein defined);

 

(3)         the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

 

(4)         all references to Articles, Sections, Exhibits and Appendices shall be construed to refer to Articles and Sections of, and Exhibits and Appendices to, this Indenture;

 

(5)         “or” is not exclusive;

 

(6)         “including” means including without limitation; and

 

(7)         all references to the date the Notes were originally issued shall refer to the Issue Date.

 

-1-

 

 

SECTION 1.02.         Definitions.

 

“ABN Facility” means the senior secured term loan facility pursuant to that certain credit agreement, dated as of June 7, 2018, by and among Seaways Shipping Corporation, certain guarantors and lenders to be named therein and ABN AMRO Capital USA LLC as lead arranger and facility agent, as may be amended, restated, supplemented or otherwise modified from time to time.

 

“Acquisition” means the acquisition of six Very Large Crude Carrier (VLCC) vessels from Euronav MI Inc. pursuant to the Acquisition Agreement.

 

“Acquisition Agreement” means that certain Stock Purchase and Sale Agreement, dated as of April 18, 2018, by and among Euronav NV, Euronav MI Inc. and Seaways Holding Corporation.

 

“Act,” when used with respect to any Holder, has the meaning specified in Section 1.05 of this Indenture.

 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.

 

“Affiliate Transaction” has the meaning specified in Section 10.13 of this Indenture.

 

“Agent” means any Note Registrar, Transfer Agent, co-registrar, Paying Agent or other agent appointed in accordance with this Indenture to perform any function that this Indenture authorized such agent to perform.

 

“Appendix” has the meaning specified in Section 2.01 of this Indenture.

 

“Applicable Premium” means, with respect to any Note on any Redemption Date, the excess, if any, of (a) the present value at such Redemption Date of (i) the redemption price of such Note at June 15, 2020 (such redemption price being 100% of the principal amount of the Note to be redeemed), plus (ii) all required interest payments due on such Note through June 15, 2020 (excluding accrued but unpaid interest to the Redemption Date), computed by the Issuer on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) using a discount rate equal to the Treasury Rate as of such Redemption Date plus 50 basis points; over (b) the principal amount of such Note.

 

Calculation of the Applicable Premium will be made by the Issuer; provided that such calculation or the correctness thereof shall not be a duty or obligation of the Trustee.

 

“Applicable Premium Deficit” has the meaning specified in Section 4.01 of this Indenture.

 

“Approved Broker” means any of Compass Maritime Services, H. Clarkson & Co., Ltd., Charles R. Weber Company, Inc., Fearnleys, Braemar, Howe Robinson and Simpson Spence Young or any other independent shipbroker to be mutually agreed upon between the Administrative Agent under the Senior Credit Agreement and the Issuer.

 

“Asset Sale” has the meaning specified in Section 10.17 of this Indenture.

 

-2-

 

  

“Attributable Indebtedness” means, when used with respect to any Sale and Leaseback Transaction, as at the time of determination, the present value (discounted at a rate equivalent to the Issuer’s then-current weighted average cost of funds for borrowed money as at the time of determination, compounded on a semi-annual basis) of the total obligations of the lessee for rental payments (and substantially similar payments) during the remaining term of the lease included in any such Sale and Leaseback Transaction.

 

“Bank Product” means transactions under Hedging Agreements extended to the Issuer or any Restricted Party by a Bank Product Provider.

 

“Bank Product Agreements” shall mean those agreements entered into from time to time by the Issuer or any Restricted Party with a Bank Product Provider in connection with the obtaining of any of the Bank Products.

 

“Bank Product Obligations” shall mean (a) all Hedging Obligations pursuant to Hedging Agreements entered into with one or more of the Bank Product Providers, and (b) all amounts that the Administrative Agent or any Lender under the Senior Credit Facilities (as defined therein) is obligated to pay to a Bank Product Provider as a result of such Administrative Agent or such Lender purchasing participations from, or executing guarantees or indemnities or reimbursement obligations to, a Bank Product Provider with respect to the Bank Products provided by such Bank Product Provider to the Issuer or any Restricted Party; provided that, in order for any item described in clause (a) or (b) above, as applicable, to constitute “Bank Product Obligations,” the applicable Bank Product must have been provided on or after the Issue Date and the Administrative Agent under the Senior Credit Facilities shall have received a Bank Product Provider Letter Agreement from the applicable Bank Product Provider (and acknowledged by the Issuer or such Restricted Party) within 30 days after the date of the provision of the applicable Bank Product to the Issuer or any Restricted Party.

 

“Bank Product Provider” shall mean any Agent or any Lender under the Senior Credit Facilities (as defined therein) or any of their respective Affiliates (or any person who at the time the respective Bank Product Agreement was entered into by such person was such Agent, Lender or Affiliate under the Senior Credit Facilities); provided, however, that no such person shall constitute a Bank Product Provider with respect to a Bank Product unless and until the Administrative Agent under the Senior Credit Facilities shall have received a Bank Product Provider Letter Agreement from such person with respect to the applicable Bank Product (and acknowledged by the Issuer or such Restricted Party) within 30 days after the provision of such Bank Product to any Borrower or Subsidiary Guarantor under the Senior Credit Facilities (as defined therein).

 

“Bank Product Provider Letter Agreement” shall mean a letter agreement in form reasonably satisfactory to the Administrative Agent under the Senior Credit Facilities, duly executed by the applicable Bank Product Provider, the Issuer or the applicable Restricted Party, such Administrative Agent and, in any event, acknowledged by the Issuer or such Restricted Party.

 

“Bankruptcy Law” means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law and the law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law.

 

“Board” with respect to a Person means the board of directors (or similar body) of such Person or any committee thereof duly authorized to act on behalf of such board of directors (or similar body).

 

-3-

 

  

“Board Resolution” means a duly adopted resolution of the Board or any committee of such Board.

 

“Business Day” means each day which is not a Legal Holiday.

 

“Capital Lease” means, with respect to any Person, any lease of, or other arrangement conveying the right to use, any property by such person as lessee that has been or should be accounted for as a capital lease on a balance sheet of such person prepared in accordance with GAAP.

 

“Capital Lease Obligations” of any Person means the obligations of such person to pay rent or other amounts under any Capital Lease, any lease entered into as part of any Sale and Leaseback Transaction or any Synthetic Lease, or a combination thereof, which obligations are (or would be, if such Synthetic Lease or other lease were accounted for as a Capital Lease) required to be classified and accounted for as Capital Leases on a balance sheet of such person in accordance with GAAP as in effect on the Issue Date, and the amount of such obligations shall be the capitalized amount thereof (or the amount that would be capitalized if such Synthetic Lease or other lease were accounted for as a Capital Lease) determined in accordance with GAAP as in effect on the Issue Date.

 

“Capital Stock” means:

 

(1)         in the case of a corporation, corporate stock;

 

(2)         in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;

 

(3)         in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and

 

(4)         any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

 

“Cash Equivalents” means, as of any date of determination and as to any Person, any of the following: (a) marketable securities issued, or directly, unconditionally and fully guaranteed or insured, by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition by such person, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than one year from the date of acquisition by such person and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody’s, (c) time deposits and certificates of deposit of any commercial bank having, or which is the principal banking subsidiary of a bank holding company organized under the laws of the United States, any state thereof or the District of Columbia having, capital and surplus aggregating in excess of $500,000,000 and a rating of “A” (or such other similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) with maturities of not more than one year from the date of acquisition by such person, (d) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) above entered into with any person meeting the qualifications specified in clause (c) above, which repurchase obligations are secured by a valid perfected security interest in the underlying securities, (e) commercial paper issued by any person incorporated in the United States rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody’s, and in each case maturing not more than one year after the date of acquisition by such person, (f) investments in money market funds at least 90% of whose assets are comprised of securities of the types described in clauses (a) through (e) above, and (g) in the case of any Foreign Subsidiary only, instruments equivalent to those referred to in clauses (a) through (f) above denominated in a foreign currency, which are substantially equivalent in credit quality and tenor to those referred to above and customarily used by businesses for short term cash management purposes in any jurisdiction outside of the United States to the extent reasonably required in connection with any business conducted by any Foreign Subsidiary organized in such jurisdiction.

 

-4-

 

  

For the avoidance of doubt, any items identified as Cash Equivalents under this definition will be deemed to be Cash Equivalents under this Indenture regardless of the treatment of such items under GAAP.

 

“Cash Management Obligations” means (1) obligations of the Issuer or any Restricted Party in respect of any overdraft and related liabilities arising from treasury, depository, cash pooling arrangements and cash management or treasury services or any automated clearing house transfers of funds, (2) other obligations in respect of netting services, employee credit or purchase card programs and similar arrangements and (3) obligations in respect of any other services related, ancillary or complementary to the foregoing (including any overdraft and related liabilities arising from treasury, depository, cash pooling arrangements and cash management services, corporate credit and purchasing cards and related programs or any automated clearing house transfers of funds).

 

“Casualty Event” means any loss of title (other than through a consensual disposition of such property in accordance with this Agreement) or any loss of or damage to or any destruction of, or any condemnation or other taking (including by any Governmental Authority) of, any property of the Issuer or any Restricted Party. “Casualty Event” shall include any taking of all or any part of any Real Property, Vessel or Chartered Vessel of the Issuer or any Restricted Party or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any Legal Requirement, or by reason of the temporary requisition of the use or occupancy of all or any part of any Real Property, Vessel or Chartered Vessel of the Issuer or any Restricted Party or any part thereof by any Governmental Authority, or any settlement in lieu thereof.

 

“Change of Control” means the occurrence of one or more of the following events after the Issue Date:

 

(1) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), is or becomes the “Beneficial Owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (1) such Person shall be deemed to have “Beneficial Ownership” of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Issuer;

 

(2) the merger or consolidation of the Issuer with or into another Person or the merger of another Person with or into the Issuer, or the sale of all or substantially all the assets of the Issuer (determined on a consolidated basis) to another Person other than a transaction following which, in the case of a merger or consolidation transaction, holders of securities that represented 100% of the Voting Stock of the Issuer immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation transaction immediately after such transaction and in substantially the same proportion as before the transaction; or

 

(3) Continuing Directors cease to constitute at least a majority of the Board.

 

-5-

 

  

“Chartered Vessels” means the vessels demise chartered by the Issuer or any Restricted Party from a third party.

 

“Code” means the Internal Revenue Code of 1986, as amended, or any successor thereto.

 

“consolidated” or “Consolidated” means, with respect to any Person, such Person on a consolidated basis in accordance with GAAP, but excluding from such consolidation any Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate of such Person.

 

“Consolidated Net Income” means, for any period, the consolidated net income (or loss) of the Issuer and the Restricted Parties for such period, determined on a consolidated basis in accordance with GAAP (after deduction for minority interests); provided, that there shall be excluded from such net income (to the extent otherwise included therein), without duplication:

 

(a)          the net income (or loss) for such period of any person (other than the Issuer) that is not a Restricted Party (including any Unrestricted Subsidiary) or that is accounted for by the equity method of accounting, except to the extent that cash in an amount equal to any such income has actually been received by the Issuer or (subject to clause (b) below) any Restricted Party from such person during such period (provided, however, the amount of the Second Amendment FSO JV Debt Dividend and the amount of the SPV VLCC Pre-Designation Sale Proceeds Dividend shall not be included in Consolidated Net Income to the extent that same otherwise would have been included therein pursuant to this clause (a));

 

(b)          the net income of any Restricted Party during such period to the extent that the declaration and/or payment of dividends or similar distributions by such Restricted Party of that income is not permitted by operation of the terms of its organizational documents or any agreement (other than this Indenture), instrument, Order or other Legal Requirement applicable to that Restricted Party or its equityholders during such period, except that the Issuer’s equity in the net loss of any such Restricted Party for such period shall be included in determining Consolidated Net Income; and

 

(c)          except for determinations expressly required to be made on a pro forma basis, the net income (or loss) of any person accrued prior to the date it becomes a Restricted Party of the Issuer or all or substantially all of the property of such person is acquired by the Issuer or any Restricted Party.

 

“Consolidated Total Assets” means, at any date of determination, the net book value of all assets of the Issuer and its Subsidiaries determined on a consolidated basis in accordance with GAAP on such date.

 

“Contingent Obligation” means, as to any person, any obligation, agreement, understanding or arrangement of such person guaranteeing any Indebtedness, leases or other obligations (“primary obligations”) of any other person (the “primary obligor”) in any manner, whether directly or indirectly, including any obligation agreement, understanding or arrangement of such person, whether or not contingent: (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor; (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth, net equity, liquidity, level of income, cash flow or solvency of the primary obligor; (c) to purchase or lease property, securities or services primarily for the purpose of assuring the primary obligor of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation; (d) with respect to bankers’ acceptances, letters of credit and similar credit arrangements, until a reimbursement or equivalent obligation arises (which reimbursement obligation shall constitute a primary obligation); or (e) otherwise to assure or hold harmless the primary obligor of any such primary obligation against the payment of such primary obligation; provided, however, that the term “Contingent Obligation” shall not include endorsements of instruments for deposit or collection in the ordinary course of business or any product warranties given in the ordinary course of business or any obligation, agreement, understanding or arrangement of such person guaranteeing any obligation to make payments on Equity Interest or Disqualified Stock. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation, or portion thereof, in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such person may be liable, whether singly or jointly, pursuant to the terms of the instrument, agreements or other documents or, if applicable, unwritten enforceable agreement, evidencing such Contingent Obligation) or, if not stated or determinable, the amount that can reasonably be expected to become an actual or matured liability in respect thereof (assuming such person is required to perform thereunder) as determined by such person in good faith.

 

-6-

 

  

“Continuing Director” means a director who either was a member of the Board on the Issue Date or who becomes a member of the Board subsequent to that date and whose election, appointment or nomination for election by the Issuer’s stockholders is duly approved by a majority of the continuing directors on the Board at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Issuer on behalf of the entire Board in which such individual is named as nominee for director.

 

“Contribution Notice” means a contribution notice issued by the Pensions Regulator under section 38 or section 47 of the Pensions Act 2004.

 

“Copyrights” means, collectively, with respect to a Person, all works of authorship (whether protected by statutory or common law copyright, whether established or registered in the United States or any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished) and all copyright registrations and applications made by such Person, in each case, whether now owned or hereafter created or acquired by or assigned to such Person.

 

“Corporate Trust Office” means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business in relation to this Indenture shall be administered, which office at the date of execution of this Indenture is located at 230 Park Avenue, 10th Floor, New York, New York 10169, except that with respect to presentation of the Notes for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business in relation to this Indenture shall be conducted.

 

“Covenant Defeasance” has the meaning specified in Section 13.03 of this Indenture.

 

“Default” means any event that is, or after notice or lapse of time or both would become, an Event of Default.

 

“Defaulted Interest” has the meaning specified in Section 3.07(b) of this Indenture.

 

“Depository” means The Depository Trust Company, its nominees and their respective successors.

 

“Designated Senior Indebtedness” means any Indebtedness outstanding under the indenture governing the Existing Notes and, if such Indebtedness is no longer outstanding, any other Senior Indebtedness permitted under this Indenture, the principal amount of which is $100.0 million or more and that has been designated by the Issuer as “Designated Senior Indebtedness.”

 

-7-

 

  

“Disqualified Stock” means, with respect to any Person, any Capital Stock of such Person which, by its terms, or by the terms of any security into which it is convertible or for which it is putable or exchangeable, or upon the happening of any event, matures or is mandatorily redeemable (other than solely for Capital Stock of such Person that would not otherwise constitute Disqualified Stock, and other than solely as a result of a change of control, asset sale, casualty, condemnation or eminent domain) pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof (other than solely as a result of a change of control, asset sale, casualty, condemnation or eminent domain), in whole or in part, in each case prior to the date 91 days after the earlier of the maturity date of the Notes or the date the Notes are no longer outstanding; provided, however, that if such Capital Stock is issued to any plan for the benefit of employees of the Issuer or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Issuer or its Subsidiaries in order to satisfy applicable statutory or regulatory obligations or as a result of such employee’s termination, death or disability; provided, further, that any Capital Stock held by any future, current or former employee, director, officer, manager or consultant of the Issuer, any of its Subsidiaries or any other entity in which the Issuer or a Restricted Party has an Investment and is designated in good faith as an “affiliate” by the Board of the Issuer (or the compensation committee thereof) shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Issuer or its Subsidiaries pursuant to any stockholders’ agreement, management equity plan, stock option plan or any other management or employee benefit plan or agreement or in order to satisfy applicable statutory or regulatory obligations.

 

“Domain Names” means all Internet domain names and associated uniform resource locator addresses.

 

“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock, but excluding any debt security that is convertible into, or exchangeable for, Capital Stock.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“ERISA Affiliate” means, with respect to any Person, any trade or business (whether or not incorporated) that, together with such person, is treated as a single employer under Section 414(b) or (c) of the Code (and, for purposes of Section 302 of ERISA and each “applicable section” under Section 414(t)(2) of the Code, under Section 414(b), (c), (m) or (o) of the Code), or under Section 4001 of ERISA.

 

“ERISA Event” means: (a) the occurrence of a “reportable event” within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan for which the requirement to provide notice to the PBGC has not been waived; (b) the failure to meet the minimum funding standard of Section 412 or 430 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(c) of the Code) or the failure to make by its due date a required installment under Section 430 of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (c) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress t