First Ship Lease Trust

it is very difficult to give a proper valuation to the fleet.

This is because the price varies according to the charter rates. Similarly, FSL's trust fleet cannot be valued on the assumption that it is for scrapping. This is because some of its ships are in lucrative long term charters (containership with Yang Ming).

As for the current VTL ratio, FSL is in a good position. This is how I did my calculation.

Assumed VTL of 150%, based on FY16 222 mil debt. This means fleet value (ex FSL Osaka) is about 333 mil.
Add in osaka and minus 20 mil repayment this quarter, current debt is about 202 mil and fleet value is about 353 mil.

This gives FSL's VTL ratio:

353/202 = 175%

It is quite a strong ratio. Furthermore, FSL has made regular payments. To me, this signals a high possibility of extending the loan.
However, given such a strong balance sheet; as a shareholder, I do not mind if FSL raises rights so that I can buy into the assets at a cheap price which will also help reduce the financing expense which is at 4-5% per annum

Shipping still has a lot of excess capacity. And with increasing interest rates more players might be force to throw in the towel and default and get liquidated. I dun think things have bottomed out yet on capacity side.

China had a run of positive manufacturing PMI numbers last couple quarters which has led to boost shipping rates as more raw materials are imported and goods exported. However there is a glut of some commodities at Chinese ports now, so things might be turning again. I would be monitoring the PMI closely to see what direction things are going.

If PMI goes back negative, pretty sure shipping rates will dip. price will likely dip more, maybe sub 10c again.

Dun board a sinking ship [emoji14]
Caveat emptor..

Sent from my MotoG3 using Tapatalk

Just a caveat on the above valuation:

The banks re-compute the VTL ratio every 6 mths. The fact that FSL had to recently pay down an extra $20m (thereby reducing the L) and put up additional collateral (thereby incr the V) suggests that the VTL ratio has deteriorated. Any valuation that's based on the 4Q16's VTL range (1.4 to 1.8) multiplied by the debt is likely to be outdatedly too high.

Nonetheless, the bank's valuation of the vessels is based on the market value, and doesn't take into account the locked-in charters (Total of $101m). This is why the value in FSL's book is quite a bit higher.

(25-03-2017, 05:20 PM)lanoitar Wrote: Just a caveat on the above valuation:

The banks re-compute the VTL ratio every 6 mths. The fact that FSL had to recently pay down an extra $20m (thereby reducing the L) and put up additional collateral (thereby incr the V) suggests that the VTL ratio has deteriorated. Any valuation that's based on the 4Q16's VTL range (1.4 to 1.8) multiplied by the debt is likely to be outdatedly too high.

Nonetheless, the bank's valuation of the vessels is based on the market value, and doesn't take into account the locked-in charters (Total of $101m). This is why the value in FSL's book is quite a bit higher.

The interest margin of the term loan: 

VTL ratio              Margin over US$ 3-month LIBOR 
>100% to 140%        3.0% 
>140% to 180%        2.8%
>180%                    2.6% 
 
Following compliance with the Value-To-Loan (VTL) covenant in January 2015, by 4Q2015 the Trust had attained a VTL level of above 140% and benefitted from a reduction in margin on its outstanding debt from 3.0% to 2.8%.
 
The VTL ratio will be assessed semi-annually and won’t be assessed again until end of 2Q2017.

Interest margin had been improved from 3% (VTL < 140%) to 2.8% (VTL > 140% to 180%).

One other possible explanation is the Management is working towards 2.6% (VTL > 180%) by increasing V and reducing L. Therefore, it might not necessarily be due to deterioration in VTL ratio, IMO. The figures do not look so...............

BV of 21 vessels / L (FY2016) = 407.5 / 223.2 = 180%

BV of 22 vessels / (L - 20) = 427.5 / 203.2 = 210%
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(25-03-2017, 02:44 PM)kbl Wrote: Good noon Boon san and everyone.

Liquidation of the trust - Banks in the front Q. If the banks FireSale the vessels How?

<Not a call to Buy or Sell>

Hi kbl san,
 
Long time no “hear”
 
No FireSale, of course.
 
The loan is not due until Dec 2017.
 
Orderly liquidation before the secured creditors could "act" on the collateral.
 
All else failed.
 
Raise money (be it loan or equity) from shareholders to pay off the loan first.
 
Liquidate the trust orderly.
 
Pay ALL back to shareholders.

The likely outcome is the loan would be extended or refinanced, IMO.

Huge MOS on collateral, who wouldn't lend?

I am just trying to make a point that, if all things failed, liquidation might not necessarily be a bad outcome to unit-holders.

Rights issue (without liquidation) is another possibility.
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(25-03-2017, 08:28 PM)Boon Wrote:

(25-03-2017, 02:44 PM)kbl Wrote: Good noon Boon san and everyone.

Liquidation of the trust - Banks in the front Q. If the banks FireSale the vessels How?

<Not a call to Buy or Sell>

Hi kbl san,
 
Long time no “hear”
 
No FireSale, of course.
 
The loan is not due until Dec 2017.
 
Orderly liquidation before the secured creditors could "act" on the collateral.
 
All else failed.
 
Raise money (be it loan or equity) from shareholders to pay off the loan first.
 
Liquidate the trust orderly.
 
Pay ALL back to shareholders.

The likely outcome is the loan would be extended or refinanced, IMO.

Huge MOS on collateral, who wouldn't lend?

I am just trying to make a point that, if all things failed, liquidation might not necessarily be a bad outcome to unit-holders.

Rights issue (without liquidation) is another possibility.
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Good evening Boon san and all
Thank you for valueable input. Cheers

(25-03-2017, 06:44 PM)Boon Wrote:

(25-03-2017, 05:20 PM)lanoitar Wrote: Just a caveat on the above valuation:

The banks re-compute the VTL ratio every 6 mths. The fact that FSL had to recently pay down an extra $20m (thereby reducing the L) and put up additional collateral (thereby incr the V) suggests that the VTL ratio has deteriorated. Any valuation that's based on the 4Q16's VTL range (1.4 to 1.8) multiplied by the debt is likely to be outdatedly too high.

Nonetheless, the bank's valuation of the vessels is based on the market value, and doesn't take into account the locked-in charters (Total of $101m). This is why the value in FSL's book is quite a bit higher.

The interest margin of the term loan: 

VTL ratio              Margin over US$ 3-month LIBOR 
>100% to 140%        3.0% 
>140% to 180%        2.8%
>180%                    2.6% 
 
Following compliance with the Value-To-Loan (VTL) covenant in January 2015, by 4Q2015 the Trust had attained a VTL level of above 140% and benefitted from a reduction in margin on its outstanding debt from 3.0% to 2.8%.
 
The VTL ratio will be assessed semi-annually and won’t be assessed again until end of 2Q2017.

Interest margin had been improved from 3% (VTL < 140%) to 2.8% (VTL > 140% to 180%).

One other possible explanation is the Management is working towards 2.6% (VTL > 180%) by increasing V and reducing L. Therefore, it might not necessarily be due to deterioration in VTL ratio, IMO. The figures do not look so...............

BV of 21 vessels / L (FY2016) = 407.5 / 223.2 = 180%

BV of 22 vessels / (L - 20) = 427.5 / 203.2 = 210%
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V in the VTL ratio, is computed every 6 months. The next re-assessment wouldn’t be due until end of 2Q2017.
 
Loan repayment (principal) of USD 11 m needs to be made quarterly by FSL. 
 
By end of 1Q2017, for the purpose of computing VTL ratio, V would remain unchanged as an input.
 
V (1Q2017) = V (4Q2016)
 
L (4Q2016) = USD 223.2 m
 
L (1Q2017) = 223.2 – 11 = USD 212.2 m
 
By end of 1Q2017, VTL ratio should be further improved as compared to 4Q2016, as V would remain unchanged and L would have been reduced - as long as FSL could meet the quarterly loan repayment of USD 11m + interest payment, they would be in compliance with the loan covenants.
 
FSL is not in breach with any of the loan covenants and until that happens, they should not be compelled by the lenders to put up additional collateral (FSL Osaka) and make further loan repayment of USD 20 m.

The fact that they have done so "voluntarily" is an interesting one - perhaps to put them in a better bargaining position in the negotiation of loan extension/refinancing.
 
This is notwithstanding of the fact that market condition could have deteriorated since 4Q2016 and V could fluctuate on a monthly, weekly or even daily basis. 
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The V in VTL ratio is based on Professional Valuation - reassessed on semi-annually basis.
 
BV of vessels is stated at cost less accumulated depreciation and accumulated impairment losses.
 
“Cost” is an historical number.
 
“Depreciation” is the systematic allocation of the depreciable amount of an asset over its useful life. (FSL adopts straight-line basis)
 
An “impairment loss” is the amount by which the carrying amount of an asset or a cash- generating unit exceeds its recoverable amount.

http://www.assb.gov.sg/docs/attachments/SB_FRS_36_2009.pdf

As at 31 Dec 2016:
 
BV of 22 vessels = carrying amount = USD 427 m, after allowing for “impairment loss” of USD 44 m
 
Question:
 
Was BV = V = USD 427 m, as at 31 Dec 2016 ?
 
If yes, why?
IF no, why?
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The deprecation charge seems to be on the conservative side.

For the last few years, the deprecation expense for vessels ranges from 42 to 52 million USD.
At the end of FY2016, the value of the vessels is 427 million on the BS.
At this rate, the vessels will be totally deprecated after about 10 more years with straight line deprecation.

Current age of the vessels range from 9-14 years, so after 10 years, the age will be 19-24 years (average of 21 years)

AR2015 states that useful life of a vessel is assumed to be 25 years, so it seems that they will get an average of 4 more years of "free" use without deprecation charge?

https://sg.moorestephens.com/MediaLibsAn...f?ext=.pdf

Practical financial reporting for shipping in Singapore
March 2015
Moore Stephens
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