First Ship Lease Trust

The Trust continues to face risks of defaults and we remain cautious about the outlook for the Trust. We have completed our restructuring with OMNI Ships Pte. Ltd., the lessee of our two dry bulk carriers and are still engaged in another restructuring discussion with one other lessee. On a combined basis, we expect both of these restructurings to have a material impact on revenues for the current financial year. [Annual Report 2012 pg 7]

Source: http://info.sgx.com/listprosp.nsf/6c6be9...900385a9a/$FILE/FSLT_2012AR_FULL_LR.pdf

Despite securing a refinancing of their term loans, it seems the operational side of the business remains fairly volatile.

(Not Vested)

FSL strength is not in operating the vessels.

However with the current oversupply of vessels, FSL may be forced to operate its vessels. Since Singapore is a maritime hub, finding expertise to scale up and operate the vessels should not be difficult. Gaining the efficiency and the economies of scale of its established competitors will be a challenge.

FSL will also have to focus on strengthening its relationship with its lessees and bankers. In addition, a tight lid on cost is crucial. The key to turning FSL around will require management to fine tune and relook at its strategy.

How can FSL run these vessels better than its competitors if its lessees back out of their obligations?
Of course, FSL management will opt for the easier way which is to find another lessee albeit at a lower charter rate.

(Vested)

(26-03-2013, 07:50 PM)a74henry Wrote: FSL strength is not in operating the vessels.

However with the current oversupply of vessels, FSL may be forced to operate its vessels. Since Singapore is a maritime hub, finding expertise to scale up and operate the vessels should not be difficult. Gaining the efficiency and the economies of scale of its established competitors will be a challenge.

FSL will also have to focus on strengthening its relationship with its lessees and bankers. In addition, a tight lid on cost is crucial. The key to turning FSL around will require management to fine tune and relook at its strategy.

How can FSL run these vessels better than its competitors if its lessees back out of their obligations?
Of course, FSL management will opt for the easier way which is to find another lessee albeit at a lower charter rate.

(Vested)

I don't think the Management can do anything at this point. They could hire the most brilliant Manager now but he too will not be able to achieve anything if freight rates remains low. The Management cannot control freight rate - it is a commodity. The mistakes were done in 2007 - 2008 when they foolishly adopted 100% cash earning payout, bought vessels at peak prices via sale and lease back scheme and further in 2011 / 12 by purchasing Torm vessels with money raised from placement despite Torm being financially weak. There is virtually no chance of any recovery unless the shipping market turns. I doubt they can re-instate dividend with more charter defaults. I may be wrong - been a long time since I looked at them.

(Not Vested)

I have done an analysis on its FY2012 annual report and here is my humble opinion.

FSL has a declining revenue of US$111m (FY2011) to US$106m (FY2012).
Based on 4Q2012, its revenue is likely to decline further to US$96m in FY2013. This is a potential US$10m decline in revenue.

The finance expense is likely to reduce by US$1m in FY2013 vs FY2012. If this expense can be reduced, it will be one of the key to turning FSL to profitability. The management will have to look at alternatives to reduce this as it is currently the 2nd biggest expense after depreciation.

Other trust expenses is higher in FY2012 by US$2m when compared to FY2011. In FY2013, I expect this expense to be reduce by US$1m.

The vessel operating expenses could be US$3m higher in FY2013 vs FY2012. This implies that if FSL could scale up and implement productivity and efficiencies by learning from its competitors. This cost could be reduced and could be the deciding factor in turning the company into profitability assuming the other expenses remain consistent as compared to FY2012.

The plus points are
1. Below its NAV (potential acquisition target)
2. Positive operating cashflow (which may not be enough to service its debts if revenue continues to fall)
3. Potential revaluation of its vessels (if the shipping industry faces a sudden shortage of vessels which is unlikely in the near term)
4. Potential positive revision of freight rates (US economy improves could boost this)

Risks are interest rate risk, forex risk, liquidity risk, vessels impairment risk, credit risk and market risk.

As the gearing is high, FSL is not profitable and the freight rates has yet to normalise, I will not recommend buying FSL unless the management can show a strategy that gives FSL has a long term competitive advantage with a comfortable gearing and turns FSL profitable.

(Vested)

When I first met FSL during IPO my takeaway was that these guys are financiers not operators. Has it changed?

Rickmers OTOH is an operator that has a reputation to protect.

(28-03-2013, 12:36 AM)a74henry Wrote: The plus points are
1. Below its NAV (potential acquisition target)
2. Positive operating cashflow (which may not be enough to service its debts if revenue continues to fall)
3. Potential revaluation of its vessels (if the shipping industry faces a sudden shortage of vessels which is unlikely in the near term)
4. Potential positive revision of freight rates (US economy improves could boost this)

The balance sheet comprises 2 big items - vessels on the asset side and borrowings on the liability side. Therefore NAV is basically the value of the vessels (and cash) minus the borrowings.

The value of the ships is reported using acquisition cost less depreciation. These ships were mostly acquired at peak prices and their market values are substantially lower. How much lower?

FSL does not revalue the ships for reporting to the unit holders but it does that for the banks. The loan covenants are now 100% VTL and DSC 1:1 after temporary relaxation. In other words, for every dollar of borrowings, FSL has to match it with a dollar of asset. The latest report shows that FSL has a total borrowing of about $440m. Meaning, the vessel are worth between $440m (worst case scenario being 100% VTL) and $598m (best case scenario being 125% VTL). I think the asset value is worse than the worst case. Certainly no where near the book value of $728m. A discount to book value turns into nothing if the trust gets into negative equity.

A 33% drop in value requires a 50% gain to get back on par. So unless revaluation exceeds 50%, there will not be any positive impact to the vessel valuation.

It seems even more implausible for any positive rate revision. Those that are near the end of their lease were entered when rates were high (well, if we exclude the Petrobras tankers). Unless the rate is higher than the previous high, the odds are for a downward revision. The only hopeful are the spot-rate vessels - the 2 TORMs and 3 Pools, which were the result of restructuring and payment default. Hopefully, the lousy rates don't get lousier.

(28-03-2013, 02:26 PM)cif5000 Wrote:

(28-03-2013, 12:36 AM)a74henry Wrote: The plus points are
1. Below its NAV (potential acquisition target)
2. Positive operating cashflow (which may not be enough to service its debts if revenue continues to fall)
3. Potential revaluation of its vessels (if the shipping industry faces a sudden shortage of vessels which is unlikely in the near term)
4. Potential positive revision of freight rates (US economy improves could boost this)

The balance sheet comprises 2 big items - vessels on the asset side and borrowings on the liability side. Therefore NAV is basically the value of the vessels (and cash) minus the borrowings.

The value of the ships is reported using acquisition cost less depreciation. These ships were mostly acquired at peak prices and their market values are substantially lower. How much lower?

FSL does not revalue the ships for reporting to the unit holders but it does that for the banks. The loan covenants are now 100% VTL and DSC 1:1 after temporary relaxation. In other words, for every dollar of borrowings, FSL has to match it with a dollar of asset. The latest report shows that FSL has a total borrowing of about $440m. Meaning, the vessel are worth between $440m (worst case scenario being 100% VTL) and $598m (best case scenario being 125% VTL). I think the asset value is worse than the worst case. Certainly no where near the book value of $728m. A discount to book value turns into nothing if the trust gets into negative equity.

A 33% drop in value requires a 50% gain to get back on par. So unless revaluation exceeds 50%, there will not be any positive impact to the vessel valuation.

It seems even more implausible for any positive rate revision. Those that are near the end of their lease were entered when rates were high (well, if we exclude the Petrobras tankers). Unless the rate is higher than the previous high, the odds are for a downward revision. The only hopeful are the spot-rate vessels - the 2 TORMs and 3 Pools, which were the result of restructuring and payment default. Hopefully, the lousy rates don't get lousier.

wonderful reply

another thing i dislike about this shpping trust is that it has to pay interest rate of at least 5% for its loan and that seems superhigh

Quote:another thing i dislike about this shpping trust is that it has to pay interest rate of at least 5% for its loan and that seems superhigh

FSL management will have to negotiate with the bank for a better rate. In this low interest rate environment, 5% secured loan interest rate on its collaterals is not cheap.

(28-03-2013, 06:56 PM)a74henry Wrote:

Quote:another thing i dislike about this shpping trust is that it has to pay interest rate of at least 5% for its loan and that seems superhigh

FSL management will have to negotiate with the bank for a better rate. In this low interest rate environment, 5% secured loan interest rate on its collaterals is not cheap.

Bopian. In this "margin call", FSL can't top up the collateral. What can they do? Pay more interest. Furthermore, the assets are depreciating, unlike Singapore properties.

To negotiate with the banks FSL needs a bargaining chip. Right now, all they have is the ability to wind up (but it can be quite powerful).

The correct thing to do is to raise equity or quasi-equity. However, the sense of ownership is not as strong as in Rickmers.

(28-03-2013, 11:47 PM)cif5000 Wrote:

(28-03-2013, 06:56 PM)a74henry Wrote:

Quote:another thing i dislike about this shpping trust is that it has to pay interest rate of at least 5% for its loan and that seems superhigh

FSL management will have to negotiate with the bank for a better rate. In this low interest rate environment, 5% secured loan interest rate on its collaterals is not cheap.

Bopian. In this "margin call", FSL can't top up the collateral. What can they do? Pay more interest. Furthermore, the assets are depreciating, unlike Singapore properties.

To negotiate with the banks FSL needs a bargaining chip. Right now, all they have is the ability to wind up (but it can be quite powerful).

The correct thing to do is to raise equity or quasi-equity. However, the sense of ownership is not as strong as in Rickmers.

FSL lacks a rich tycoon that will back it up financially. FSL will have to reduce its loans and interest expense should decrease (assuming interest rates stay low). Unlike Pacific Trust where its holding company decided to buy back all its units since it was trading below its book value.

Alternatively, some shipping companies may band together to gain a controlling stake in FSL trust by injecting their assets into the trust gaining from the currently traded below book value units.

This will immediately provide FSL Trust with the synergy of being a ship financier and operator in the market with the economies of scale to run the fleet more efficiently.