First Ship Lease Trust

[Behappyalways]

yang-mings-massive-loss-prompts-recapitalisation-concerns
http://splash247.com/yang-mings-massive-...-concerns/

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%.

[Boon]

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,
 
Good work with great efforts there.
 
Here are my comments:
 
FSL currently has 22 vessels:
12 x Product Tankers ( 2 x LR2 + 3 x MR + 7 x Handy )
5 x Containerships
2 x Crude OIL Tankers ( 2 x Aframax )
3 Chemical Tankers 
 
FSL Charter Profile:
1 product tanker (MR) in pool with Hafnia
2 feeder containership in pool with HANSE
3 chemical tankers in pool with Nordic tankers
2 product tankers expiring in 2021 (on fixed rate bareboat charters to Fisher)
3 containerships with leases expiring in 2020 (on fixed rate bareboat charters to Yang Ming)
2 product tankers (LR2) with leases expiring in 2018 ; TORM
7 product tankers with leases expiring in 2017, of which 5 have option for lease renewal.
2 crude oil tankers (Aframax) with leases expiring in 2017.
 
Leases of 9 vessels would expire in 2017, of which 5 vessels have “options” for extension, and 4 without.
 
5 vessels with option for extension:
a) Speciality – handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
b) Seniority - handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
c)  Superiority - handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
d) FSL Hamburg – MR product tanker – current gross daily charter rate = USD 18,000
e) FSL Singapore - MR product tanker – current gross daily charter rate = USD 18,000
 
4 vessels with no option for extension :
1) Cumbrian Fisher – Handy size product tanker – current bareboat charter rate (net) = USD 3,450 / day
2) Clyde Fisher – handy size product tanker - current bareboat charter rate (net) = USD 3,450 / day
3) FSL Hong Kong – Aframax crude oil tanker – with current gross daily charter rate of USD 23,000
4) FSL Shanghai– Aframax crude oil tanker – with current gross daily rate of USD 24,100
 
Assuming leases of FSL Hamburg and FSL Singapore would be renewed at current market charter rate of USD 13,000 (gross),
 
=> Potential revenue reduction (gross) for the two MR = USD 3.7 m (gross)
 
Assuming leases FSL Hong Kong and FSL Shanghai would be renewed at current market charter rate of around USD 16,000 (gross)
 
ðPotential reduction in revenue for the two Aframax vessels = USD 5.5 m per year (gross)
 
Total potential revenue reduction for 2 x MR + 2 x Aframax = USD 9.2 m (gross), which might be less on “net” basis.
 
The total revenue for the 5 handy size tankers = USD 7 m (net). I think these are “specialist product tankers” and their leases are likely to be renewed with the same rate.
 
Even with a 30% rate reduction => USD 2.1 m (net) reduction per year.
 
The two LR2 vessels with TORM due for lease renewals in 2018 are on variable market rates anyway.
 
Your assumption of rate reduction from USD 18,500 to USD 5,000 (net) in 2020 for the 3 containership is HUGE……..
 
BTW,
 
1) Do note the difference between Revenue (FY2016 = USD 98.144 m) and BBCE revenue (FY2016 = USD 72.849 m)
2) Do note the difference between BBCE revenue (FY2016=USD 72.849) and OCF (FY2016= USD 66.971)
3) Do note the difference between OCF (FY2016 = USD 66.971 m) and FCF (FY2016 = ???)
4) Do note the difference between “gross” rate and “net” rate.
5) Would a reduction in BBCE revenue by an X amount translate into a reduction in OCF by the same X amount ?
6)  If one were doing a more detail analysis, the above matter.
7) Not saying you are wrong as your 40% uniform cut is more than enough to absorb the difference.
 
That said,
 
NAV per share now = USD 39 cents
 
NAV per share 10 year later (2027) = USD 37.5 cents
 
Why take the risks and wait for 10 years ? Liquidate the trust now ………Ha-ha !

However, your projections do show that debt would be fully pared down in 2022. 

If all excess cash could be returned to unit holders from then on, it would make a big difference.

As I have also said earlier - don't have to wait till debt is fully pared down before resuming dividend payments - if DPU could be restored earlier than 2022, it would be even better.  
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[CY09]

Hi Boon,

As you had previously linked to the "seekingalpha" article, the reported NAV and the current market value can vary to a large extent.
And in my opinion, this is what is happening for FSL's case. The NAV of USD 39 cents per share is optimistic and I think will not be the eventual amount.

We saw this in rickmer's case as well when the reported NAV of Rickmer's fleet was bery high, resulting in a low P/B. However, with each passing year leases were not renewed at its high rate and rickmers had to take impairments whenever these leases were not renewed.

<vested>

[Boon]

Hi Boon,

As you had previously linked to the "seekingalpha" article, the reported NAV and the current market value can vary to a large extent.
And in my opinion, this is what is happening for FSL's case. The NAV of USD 39 cents per share is optimistic and I think will not be the eventual amount.  

We saw this in rickmer's case as well when the reported NAV of Rickmer's fleet was bery high, resulting in a low P/B. However, with each passing year leases were not renewed at its high rate and rickmers had to take impairments whenever these leases were not renewed.

<vested>

Hi CY09,
 
NAV in the financial statements is updated every quarterly. It would be about 2 months out of date by the time shareholders have access to it.
 
True, current market value could deviate widely from the reported NAV, especially in a volatile period. But surely this could not be the common scenario at all times.
 
What is the NAV of FSL now?
 
If could be close to USD 39 cents now or it may not.
 
Assume it is at USD 30 cents now, would you rather take the money now or wait for 10 years later for USD 7.5 cents more?
 
Looks like NAV of FSL is trending down as well…….
 
NAV (USD cent) :
FY2012 =   48
FY2013 =   41
FY2014 =   41
FY2015 =   44
FY2016 =   39   
 
With no dividend being distributed, this would not be in the interests of unit-holders, if this trend persists…

How much more value could be added over the next 10 years by the management for unit-holders ?

Liquidation seems to be the best way to maximise shareholder value assuming NAV is close to market value.
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[gzbkel]

Hi Boon,

Thank you for your detailed comments. I sure missed out some things, and I will check out the things you mentioned.
Always a pleasure to learn from lao jiaos like you.

And thanks to CY09 and lanoitar for sharing your valuable views.

I wanted a quick and dirty calculation of the returns should the status quo continue, so my calculation lacks accuracy.
The assumptions are conservative so that I can get the "floor" value.
I am not sure why the manager is not liquidating the trust now. Could it be that they expect market value of the vessels to improve? Or they want to continue to earn the management fees?

[Boon]

Hi Boon,

Thank you for your detailed comments. I sure missed out some things, and I will check out the things you mentioned.
Always a pleasure to learn from lao jiaos like you.

And thanks to CY09 and lanoitar for sharing your valuable views.

I wanted a quick and dirty calculation of the returns should the status quo continue, so my calculation lacks accuracy.
The assumptions are conservative so that I can get the "floor" value.
I am not sure why the manager is not liquidating the trust now. Could it be that they expect market value of the vessels to improve? Or they want to continue to earn the management fees?

Hi gzbkel,
 
Your analysis is great - it serves your purpose - that's most important.
 
OCF ~ 67% to 74% of revenue
BBCE revenue ~ 74% to 80% of revenue
 
Not that big a difference really
 
Sometimes even if one wants to do a more detail and accurate analysis, there might not be enough detail data available to do so.
 
An analysis is only as good as its underlying assumptions.
 
As long as it serves your purpose, there is nothing wrong, IMO, to even assume BBCE revenue = OCF, if one is prepared to accept a wider margin of error in the outputs…………
 
Who is willing to give up an “ATM”? It is not in the interest of the Trustee Manager to liquidate the Trust…….
 
I have the impression that the TM thinks they could further create value for unit-holders going forward…………………
 
 
BBCE revenue (USD million):  (BBCE as % of Revenue)
FY2012 = 84.820      (80%)
FY2013 = 70.088      (78%)
FY2014 = 72.335      (77%)
FY2015 = 80.527      (74%)
FY2016 = 72.849      (74%)
 
OCF (USD million):  (OCF as % of Revenue)
FY2012 = 78.664      (74%)
FY2013 = 60.701      (67%)
FY2014 = 68.275      (73%)
FY2015 = 78.859      (74%)
FY2016 = 66.971      (68%)
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[Retired@52]

For your reading only, good explanation. 

https://www.nextinsight.net/story-archiv...down-today

I'll vote against the Auditors in the coming AGM.

[Boon]

Hi gzbkel,
 
BBCE revenue to FSL = Gross revenue (GR) - vessel operating expenses (VOE), borne by FSL.
 
Let’s take a closer look at FSL Hamburg:
 
From page 15 of 4Q2016 results:
 
“FSL Hamburg generated a net time charter revenue of US$6.5 million in FY 2016 (FY 2015: US$4.6 million). After deducting vessel operating expenses, the vessel generated BBCE revenue of US$3.6 million in FY 2016 (FY 2015: US$1.5 million). 
”
 
Old charter rate = USD 18,000/day,
 
Old GR = USD 6.57 m per annum
 
Old BBCE revenue = USD 3.6 m per year
 
Implied vessel operating expenses (VOE) = 6.5 – 3.6 = USD 2.9 m per year.
 
Assumed VOE remains the same
 
New charter rate = USD 13,000/day,
 
New GR = USD 4.7m per year
 
New BBCE revenue = 4.7 – 2.9 = USD 1.8 m per year
 
Reduction in charter rate = 18,000 – 13,000 = USD 5,000 / day (-28%)
 
Reduction in gross revenue = 6.5 – 4.7 = USD 1.8 m per year ( - 28%)
 
Reduction in BBCE revenue = 3.6 – 1.8 = USD 1.8 m ( - 50%)
 
In another words,
 
Reduction in GR = reduction in BBCE revenue = USD 1.8 m, if VOE remains unchanged.
 
Percentage (%) reduction in daily charter rate = Percentage (%) reduction in yearly GR = - 28%
 
GR is reduced by - 28%, but BBCE revenue is reduced by  - 50% , NOT – 28%
 
Applying the same exercise, one should gets a BBCE revenue reduction of – 50%, - 48%, and -53% for FSL Singapore, FSL Hong Kong and FSL Shanghai respectively.
 
For these 4 vessels, your assumption of 40% reduction in BBCE revenue do NOT look conservative at all.
 
(to be continued)
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[gzbkel]

Hey Boon, thanks a lot for digging out the information about the vessel operating expenses!
Looks like I need to re-estimate with a greater MOS... haha

Hi gzbkel,
 
BBCE revenue to FSL = Gross revenue (GR) - vessel operating expenses (VOE), borne by FSL.
 
Let’s take a closer look at FSL Hamburg:
 
From page 15 of 4Q2016 results:
 
“FSL Hamburg generated a net time charter revenue of US$6.5 million in FY 2016 (FY 2015: US$4.6 million). After deducting vessel operating expenses, the vessel generated BBCE revenue of US$3.6 million in FY 2016 (FY 2015: US$1.5 million). 
”
 
Old charter rate = USD 18,000/day,
 
Old GR = USD 6.57 m per annum
 
Old BBCE revenue = USD 3.6 m per year
 
Implied vessel operating expenses (VOE) = 6.5 – 3.6 = USD 2.9 m per year.
 
Assumed VOE remains the same
 
New charter rate = USD 13,000/day,
 
New GR = USD 4.7m per year
 
New BBCE revenue = 4.7 – 2.9 = USD 1.8 m per year
 
Reduction in charter rate = 18,000 – 13,000 = USD 5,000 / day (-28%)
 
Reduction in gross revenue = 6.5 – 4.7 = USD 1.8 m per year ( - 28%)
 
Reduction in BBCE revenue = 3.6 – 1.8 = USD 1.8 m ( - 50%)
 
In another words,
 
Reduction in GR = reduction in BBCE revenue = USD 1.8 m, if VOE remains unchanged.
 
Percentage (%) reduction in daily charter rate = Percentage (%) reduction in yearly GR = - 28%
 
GR is reduced by - 28%, but BBCE revenue is reduced by  - 50% , NOT – 28%
 
Applying the same exercise, one should gets a BBCE revenue reduction of – 50%, - 48%, and -53% for FSL Singapore, FSL Hong Kong and FSL Shanghai respectively.
 
For these 4 vessels, your assumption of 40% reduction in BBCE revenue do NOT look conservative at all.
 
(to be continued)
 _________________________________________________________________________________________

[Boon]

Hey Boon, thanks a lot for digging out the information about the vessel operating expenses!
Looks like I need to re-estimate with a greater MOS... haha

Hi gzbkel,
 
BBCE revenue to FSL = Gross revenue (GR) - vessel operating expenses (VOE), borne by FSL.
 
Let’s take a closer look at FSL Hamburg:
 
From page 15 of 4Q2016 results:
 
“FSL Hamburg generated a net time charter revenue of US$6.5 million in FY 2016 (FY 2015: US$4.6 million). After deducting vessel operating expenses, the vessel generated BBCE revenue of US$3.6 million in FY 2016 (FY 2015: US$1.5 million). 
”
 
Old charter rate = USD 18,000/day,
 
Old GR = USD 6.57 m per annum
 
Old BBCE revenue = USD 3.6 m per year
 
Implied vessel operating expenses (VOE) = 6.5 – 3.6 = USD 2.9 m per year.
 
Assumed VOE remains the same
 
New charter rate = USD 13,000/day,
 
New GR = USD 4.7m per year
 
New BBCE revenue = 4.7 – 2.9 = USD 1.8 m per year
 
Reduction in charter rate = 18,000 – 13,000 = USD 5,000 / day (-28%)
 
Reduction in gross revenue = 6.5 – 4.7 = USD 1.8 m per year ( - 28%)
 
Reduction in BBCE revenue = 3.6 – 1.8 = USD 1.8 m ( - 50%)
 
In another words,
 
Reduction in GR = reduction in BBCE revenue = USD 1.8 m, if VOE remains unchanged.
 
Percentage (%) reduction in daily charter rate = Percentage (%) reduction in yearly GR = - 28%
 
GR is reduced by - 28%, but BBCE revenue is reduced by  - 50% , NOT – 28%
 
Applying the same exercise, one should gets a BBCE revenue reduction of – 50%, - 48%, and -53% for FSL Singapore, FSL Hong Kong and FSL Shanghai respectively.
 
For these 4 vessels, your assumption of 40% reduction in BBCE revenue do NOT look conservative at all.
 
(to be continued)
 _________________________________________________________________________________________

Hi gzbkel,

There are 11 vessels we are talking about with leases expiring and/or due for renewal in 2017/2018.
 
The affected BBCE revenue for 11 vessels = USD 36 m
The affected BBCE revenue for the 4 vessels ~ USD 18 m
The affected BBCE revenue for the other 7 vessels ~ USD 18 m
 
A uniform 50% cut to 4 vessels + a uniform 30% cut to 7 vessels is still equivalent to a uniform 40% cut across the 11 vessels.
 
If the uniform 30% cut to the 7 vessels could be proven to be a valid conservative assumption, then overall, the uniform 40% cut across 11 vessels is still on the conservative side.
 
Otherwise, to err consistently on the conservative side, one would have to apply a uniform 50% (or even 60%) cut to the 11 vessels 
 
40% cut => USD 14.5 m reduction in BBCE revenue
 
A further 10% uniform cut implies a further reduction in BBCE revenue of 0.1 * 36 = USD 3.6 m per year. ( = USD 36 m over 10 years ; USD 5.6 cents per share).

We are not aiming to be precisely right but trying to be roughly right in our estimation.

Without further detail analysis, a 40% ~50% uniform cut looks roughly to be the best estimate, IMO. 

A 60% uniform cut looks to be an overkill............. 

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