Jan. 7 (Bloomberg) -- U.S. Shipping Partners LP, a carrier of petroleum products, is in talks with lenders after defaulting on $333 million of debt, becoming at least the fifth shipping line worldwide to succumb to a collapse in cargo rates.

The Edison, New Jersey-based company failed to pay the principal or interest due on a senior credit agreement by a Dec. 31 deadline, it said in a U.S. Securities and Exchange Commission filing yesterday, and is now discussing options with creditors including a possible sale of the firm and its assets.

U.S. Shipping has suffered from waning demand for gasoline and petrochemicals as manufacturing slows and U.S. driving suffers its longest continuous decline on record. Four commodity shippers including Armada (Singapore) Pte and Britannia Bulk Holdings Plc have sought creditor protection since October as the global recession damps trade.

“The demand figures are obviously contracting in the U.S.,” said Louisa Follis, general manager for research at Simpson, Spence & Young shipbrokers in Singapore. Most shipowners are “expecting lower freight rates for 2009 and of course that will impact on the bottom line.”

Moody’s Investors Service cut U.S. Shipping’s debt rating one level to Ca, its second lowest non-investment grade, after the company’s statement. It also raised its probability of a default rating, affecting $450 million of rated debt.

Creditors have agreed to taken no action against U.S. Shipping before Feb. 10 as it holds talks on its future, according to the shipping line.

No Assurance

“There can be no assurance that the partnership’s negotiations with 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,” U.S. Shipping said in its filing.

The company operates 12 vessels, according to its Web site. It is governed by the Jones Act, which means its vessels are built and registered in the U.S., as well as being crewed by U.S. citizens.

U.S. gasoline demand fell last year after retail fuel prices reached $4.37 a gallon during the week of July 16. Motor fuel consumption fell 3.2 percent in the week ended Dec. 26 from the same time in 2007, the Energy Department said in a Dec. 31 report.

The nation’s drivers traveled 100 billion fewer miles in the 12 months ended October than a year earlier, according to the Federal Highway Administration.

Armada Singapore yesterday said it filed for creditor protection in Singapore and the U.S. after a collapse in rates for carrying commodities such as iron ore and coal. It followed Atlas Shipping Group, Industrial Carriers Inc. and Britannia Bulk, which have taken similar steps because of tumbling rates.

The Baltic Dry Index, a measure of commodity-shipping costs, plunged 92 percent last year.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net;

Last Updated: January 6, 2009 23:12 EST