US Shipping Partners LP (fka USSPQ)

[ScovilleUnits]

8-K (didn't pay principal/interest due 12-31-08)

ITEM 2.04. Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement.

The Partnership did not pay the principal or interest payment due on December 31, 2008 under its senior credit agreement. As a result of the Partnership’s failure to pay such amounts, an event of default has occurred under the senior credit agreement and, subject to the Forbearance Agreement referred to below, lenders holding a majority-in-interest of the outstanding loans may at any time direct the administrative agent to declare all outstanding obligations under the senior credit agreement to be immediately due and payable and to pursue their rights and remedies under the senior credit agreement. At December 31, 2008, an aggregate of $332.6 million was outstanding under the senior credit agreement. However, holders of a majority-in-interest of the outstanding loans under the senior credit agreement have entered into a forbearance agreement (the “Forbearance Agreement”) with the Partnership pursuant to which they agreed to forbear from taking any action or exercising any right or remedy permitted to be taken or exercised under the senior credit agreement and related loan documents as a result of the Partnership’s failure to make the December 31, 2008 principal and interest payments under the senior credit agreement. The Forbearance Agreement will terminate on the earliest to occur of (i) 5:00 p.m. (Eastern time) on February 10, 2009; (ii) the occurrence and continuance of any event of default other than the Partnership’s failure to make the December 31, 2008 principal and interest payments under the senior credit facility and (iii) the failure by the Partnership to comply with any of the provisions of the Forbearance Agreement. During the term of the Forbearance Agreement, the Partnership has agreed to engage in good faith negotiations with the administrative agent and the lenders regarding restructuring and strategic alternatives which shall include a possible sale of the Partnership. Failure of the Partnership to conduct such good faith negotiations shall constitute an event of default and result in a termination of the Forbearance Agreement. This summary of the Forbearance Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the Forbearance Agreement filed herewith and incorporated by reference herein. The full text of the Forbearance Agreement is set forth in Exhibit 10.1 to this Form 8-K and you are urged to read the waiver and amendment in its entirety.

There can be no assurance that the Partnership’s negotiations with the lenders will be successful, or that the lenders will not declare all outstanding obligations under the senior credit agreement to be immediately due and payable and pursue their rights and remedies under the senior credit agreement upon termination of the Forbearance Agreement. The lenders’ prior waiver of any potential defaults under the financial covenants set forth in the senior credit agreement for the quarters ended September 30, 2008 and December 31, 2008 will expire January 31, 2009, which will result in the occurrence of an event of default under the senior credit agreement, and a termination of the Forbearance Agreement, absent an additional waiver or agreement to forbear by the lenders. There can be no assurance that the lenders will not accelerate the outstanding obligations and pursue their remedies under the senior credit agreement after January 31, 2009.

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The Partnership’s failure to make the December 31, 2008 principal and interest payments under the senior credit facility constitutes an event of default under the Partnership’s interest rate swap agreements. As a result, the counterparty to each interest rate swap agreement may, upon prior notice, elect to terminate such agreement early. If the Partnership’s interest rate swap agreement with the administrative agent is early terminated, the Partnership estimates it would owe approximately $14.9 million under such agreement. If the Partnership’s interest rate swap agreement with Lehman Brothers Special Financing Inc. is early terminated, the Partnership estimates it would owe approximately $9.9 million under such agreement. There can be no assurance that the counterparties to these interest rate swap agreements will not early terminate the agreements and seek payment of these obligations, which are secured by all the assets of the Partnership; however, due to the Forbearance Agreement, the counterparties would be unable to require the administrative agent to foreclose on the Partnership’s assets during the term of the Forbearance Agreement.

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