Credit analyst warns GATX assets offer little recovery value for bondholders

Ronda Fears

Nashville, Feb. 27 -CreditSights analyst Roger King warns bondholders of Oglebay Norton and GATX Corp. - and U.S. Steel to some degree - to impute little asset value to their respective shipping fleets.

Oversupply, illiquidity and anti-trust considerations are the main culprits behind the distressed asset values, he said in a report Thursday.

GATX has roughly $200 million of 7.5% convertible notes due 2007 (Baa3/BBB) outstanding.

The matter of distressed collateral in the Great Lakes shipping area is "of extreme interest to bondholders of financially troubled GATX and Oglebay Norton, and tangentially of U.S. Steel, which refinanced its fleet with a sale/leaseback through Blackstone," King said in the report.

"Secured collateral is designed to provide adequate credit protection when a single issuer tanks. When a whole industry fails, forget about it. When you need it the most, it is frequently not there."

GATX and Oglebay Norton, with a combined 40% market share, are experiencing financial difficulties, he said, but their hard assets offer little comfort.

Declining iron ore shipments to integrated steel mills have created oversupply of Great Lakes shipping, the analyst said.

The specialized nature of the vessels, their indefinite economic lives and the oligopolistic nature of fleet ownership limit asset values, he added.

"Great Lakes vessels are a very unique and illiquid asset. They carry iron ore, coal, minerals and grain throughout the Great Lakes system," King said.

"The investors' dilemma is declining demand versus constant supply."

Coal and minerals trade at fairly constant levels but iron ore shipments are plunging, he said, noting total domestic trade is off 17% from the 1998 peak.

Against the constant supply and oligopolistic nature of fleet ownership, he added, bids for vessels have been and remain non-existent.

"Since the total fleet needs rationalization to match declining cargo volumes, a prospective buyer would have to factor in lower demand and the need to take out capacity - in other words, a very distressed bid," King said.

The swing factor in demand is iron ore, he said.

"As long as the integrated steel mills lining the Great Lakes remain in operation, their ore and limestone needs will be carried by the Great Lakes fleet," King said.

"The only question is how much."

Moreover, he said that stable volumes in non iron ore cargo are insufficient to backstop the current Great Lakes fleet. Also, he noted that coal shipments have been relatively stable but declines in eastern coal moving west have been offset with western, low sulfur coal moving east.

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