First Ship Lease Trust

(27-03-2017, 12:31 PM)Boon Wrote: 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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Carrying amount or BV, as at 31 Dec 2016, would have been USD 471 (427 + 44), had there been no impairment loss.
 
An impairment loss is the amount by which the carrying amount of an asset or a cash- generating unit exceeds its recoverable amount.
 
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use.
 
Fair value less costs to sell (fvlcts) is the amount obtainable from the sale of an asset or cash- generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
 
Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.
 
Value in use (viu) is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
 
If either fvlcts or viu is greater than carrying amount of USD 471 m => no impairment
 
Impairment loss of USD 44 m had been made implies:
 
ð “recoverable amount” = USD 427 m
 
“Recoverable amount” is the higher of fvlcts and viu
 
If fvlcts > viu,
 
=> fvlcts = “recoverable amount”
 
ð fv=V (as in VTL ratio) = USD 427 m = BV, ignoring cts
 
If viu > fvlcts,
 
=> viu = “recoverable amount” = USD 427 m
 
meaning V (as in VTL ratio) is less than BV (=USD 427 m)
 
Trouble is we do not know which is HIGHER, fvlcts or viu, do we ?
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The impairment loss was due to:

Quote:This relates to the impairment loss recognised on five containerships, two crude oil tankers and one
product tanker in FY 2016 (FY 2015: two Evergreen vessels) (refer to paragraph 8(b)(ii)).

I suppose it should be fvlcts since 3 of the 5 containers are leased beyond 2020.

The drop in BV of containership was likely related to the widening of the panama canal that allowed larger vessels to pass thru.
http://www.joc.com/maritime-news/ships-s...61017.html

(28-03-2017, 12:52 PM)yeokiwi Wrote: The impairment loss was due to:

Quote:This relates to the impairment loss recognised on five containerships, two crude oil tankers and one
product tanker in FY 2016 (FY 2015: two Evergreen vessels) (refer to paragraph 8(b)(ii)).

I suppose it should be fvlcts since 3 of the 5 containers are leased beyond 2020.

The drop in BV of containership was likely related to the widening of the panama canal that allowed larger vessels to pass thru.
http://www.joc.com/maritime-news/ships-s...61017.html

I thought since the 3 containers are leased with good rate (from good old times), they are definitely higher value than fvlcts? 
Hence the viu is higher? 

At this rate, it is kind of hard to get the precise number on the valuation.
However if the room is big enough for errors, I'd err on the approximate and yield to speculate.

<tiny stake>

(28-03-2017, 07:16 PM)ksir Wrote: I thought since the 3 containers are leased with good rate (from good old times), they are definitely higher value than fvlcts? 
Hence the viu is higher? 

My explanation is sloppy. My thought was, since the rate did not change, it should not affect the VIU and so the impairment loss was not due to VIU.

And all the five container ship of FSL contributed to the impairment loss and the most likely reason was the drop in market value of the container ship due to the widening of the panama canal.

Therefore, 44mil impairment loss was arisen out of the drop in fvlcts.

(28-03-2017, 09:54 PM)yeokiwi Wrote:

(28-03-2017, 07:16 PM)ksir Wrote: I thought since the 3 containers are leased with good rate (from good old times), they are definitely higher value than fvlcts? 
Hence the viu is higher? 

My explanation is sloppy. My thought was, since the rate did not change, it should not affect the VIU and so the impairment loss was not due to VIU.

And all the five container ship of FSL contributed to the impairment loss and the most likely reason was the drop in market value of the container ship due to the widening of the panama canal.

Therefore, 44mil impairment loss was arisen out of the drop in fvlcts.

If i interpret the definition from Boon's post correctly, it is "the higher value".
So it must be both are lower then we have the impairment.

I'd say viu is likely to be higher than fvlcts because of the old good rates.
Hence they are likely based on viu or combination of either.

(27-03-2017, 08:49 PM)Boon Wrote: https://sg.moorestephens.com/MediaLibsAn...f?ext=.pdf

Practical financial reporting for shipping in Singapore
March 2015
Moore Stephens
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There is a section in the above document covering impairment including fvlcts and viu. (page 12 to 15)
 
Here is another interesting article:
http://accounting-financial-tax.com/2011...t-testing/
 
“While FVLCS is market price based, representing the value in exchange, VIU, however, represents the reporting entity’s assessment of its very specific ability to exploit the asset to generate cash flows: It is the entity’s present value over its economic useful life. By introducing those two concepts, considered to be of equal reliability, IAS 36 deviates significantly from the concepts applied in IAS 16 (Property, Plant and Equipment) or IAS 39 (Financial Instruments: Recognition and Measurement), as well as under U.S. generally accepted accounting principles (GAAP). Read on for more details.
The fair value concepts of IAS 36 differ significantly from those of IAS 39, Financial Instruments: Recognition and Measurement, or IAS 16, as it defines an asset’s recoverable amount as the higher of its FVLCS and its VIU………………………..”
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I find the value concepts of fvlcts and viu a bit “strange”…………….
 
In the context of “income producing property”, doesn’t one expect fvlcts (ignoring cts) = viu ?
 
After all, value = ability to generate income or future cash flow
 
BTW, only the accountants/auditors of FSL know which is higher, fvlcts or viu………………..
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One of the biggest pitfalls for retail investors in shipping stocks is the tendency for book values (i.e. accounting values) to be wildly inaccurate. This is because shipping is a violently cyclical industry and ships can lose (or gain) large percentages of value in a matter of months or even weeks. 

"real-time" valuation seems to be the answer.

Questions remain:

What is the fair market value of FSL's entire fleet ?

What is the MOS ?
____________________________________________
A Better Approach To Ship Valuations
Jan. 25, 2017
J Mintzmyer

The shipping markets are notoriously difficult for investors due to the violently cyclical nature of the business coupled with lots of obscure terms and practices. One of the biggest challenges for investors is to determine a 'fair value' for these various enterprises in a sector where "book value" is often meaningless. A much more accurate approach is net-asset-value ("NAV"), but this requires real-time ship valuations from an industry that is very private...............

Book Value vs. Net Asset Value: Key Example & Short Idea

One of the biggest pitfalls for retail investors in shipping stocks is the tendency for book values (i.e. accounting values) to be wildly inaccurate. This is because shipping is a violently cyclical industry and ships can lose (or gain) large percentages of value in a matter of months or even weeks. 

Meanwhile book values are based on the original purchase price, depreciated down on a flat-line basis to a calculated residual (scrap) valuation.
To give just one example......................

https://seekingalpha.com/article/4039482...valuations
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I did a mental exercise in projecting the cashflow assuming that the charter rates stay constant at the current (rather depressed) levels.

- Between 2017-2018, charter will end for number of oil tankers. I estimate affected BBCE revenue is 36 million.
For Aframax, the old charter rate is 23-24k, while market rate is 16k, a drop of about 30%.
For MR, old charter rate is 18k, and market rate is about 13k, which is roughly a similar drop. For convenience, I apply a uniform 40% cut in revenue for all the tankers up for renewal. Resulting decline in revenue will be about 0.4 * 36 = 14.5 million/year.

- In 2020, the charter for the 3 panamax container ship will expire. Affected BBCE is about 20m. The last charter rate is 18.5k. If we assume that panamax charter rate goes to 5k, the estimated decline in BBCE will be about 14.5 million/year.

- Other assumptions:
- no dividend is paid
- Capex of 2 million per year
- No further disposals or purchases.
- Decline in BBCE flows straight to FCF


FY2016:
FCF : 65 m
Interest exp: -9.5m
Debt repayment: -44m
Cash: 43 m
Debt: 222 m

FY2017: (Projected)
FCF: 50.5m (-14.5m after tanker renewal)
Interest exp: -7.7m
Debt repayment: -44m
Cash: 44.2 m
Debt: 178 m

FY2018: (Projected)
FCF: 50.5m
Interest exp: -5.8m
Debt repayment: -44m
Cash: 44.9 m
Debt: 134 m

FY2019: (Projected)
FCF: 50.5m
Interest exp: -3.9m
Debt repayment: -44m
Cash: 47.5 m
Debt: 94 m

FY2020: (Projected)
FCF: 36m  (-14.5m after 3x containership renewal)
Interest exp: -2m
Debt repayment: -44m
Cash: 37.5 m
Debt: 50 m

FY2021: (Projected)
FCF: 36m  
Interest exp: nearly 0
Debt repayment: -44m
Cash: 29.5 m
Debt: 6 m

FY2022: (Projected)
FCF: 36m  
Interest exp: nearly 0
Debt repayment: -6m
Cash: 59.5 m
Debt: 0

FY2027: (Projected)
FCF: 36m  
Cash: 59.5 + 36m x 5 = 239.5m

By 2027, vessels are fully deprecated, and let’s assume that they are worth nothing.
That gives us 37.5 US cents per share.

Potential upside if:
- Oil tanker or containership charter rates goes up

Potential downside if:
- Oil tanker or containership charter rates go down (less likely, since current rates are considered low?)
- One or more charterers default. Both Yang Ming and TORM are not doing well.
- Owner of manager is HSH Nordbank, which is not doing well. It faces liquidation if Schleswig-Holstein and Hamburg fails to sell it. In the event of liquidation, will there be greater motivation to liquidate the fleet, possibly at low prices?
- As a VB is fond of saying, the last few financial crises happened in 1987, 1997, 2007. If one hits us this year, FSLT may face refinancing issues, among other problems.

Hi Gzbkel,

Thanks for the thorough analysis. Mine is about the same as yours; just that, FSL will dispose the 3 panamax containers for scrap (4.5 mil each) in 2020 and use the proceeds with spare cash to pay down total debts.

From 2021 onward, it will have FCF of USD 30 mil until 2026. Following which, it scraps off its tanker fleet at USD 55 mil.

So in total we will get USD215 mil at the end of a 10 years wait. Then I ask at FSL's current market capitalization, what is the annualized return I will be getting under this situation. The answer was a 13.8% annualised return, which to me, sounds quite good.

For the next 1-2 years, FSL's contract with Yang Ming is relatively secure due to their plans to recapitalize the company. So its down to the last 12-15 months of the $18,315 contract; imo will not be cancelled as the Taiwanese will not want to prematurely terminate such contracts as it will be a sign of distress

(31-03-2017, 08:54 AM)gzbkel Wrote: Potential downside if:
- One or more charterers default. Both Yang Ming and TORM are not doing well.

This was a big risk for FSL last year. YM accounts for > 40% of FSL revenue, and has the most leveraged B/S among all carriers. The Taiwanese gov (which has 1/3 stake in YM) has stepped in recently to bail it out, so the default risk has subsided.

TORM doesn't look distressed, and its losses in FY16 were mainly due to non-cash vessel impairment. LTV is at a healthy 58%.