First Ship Lease Trust

[CY09]

http://infopub.sgx.com/FileOpen/First%20...eID=446902

FSL has released its annual report with a few highlights:

1) The chairman is concerned on the values of the vessel. As of now FSL has made impairments to " 5 container ship,2 crude oil tanker (FSL Shanghai & Hong Kong) & 1 product tanker" . In my opinion, there may be more impairments from the other product tankers because of declining MR rates. So expect net profit to be zero this FY; no need pay tax to agencies like IRAS again . If i was smart, I would space out my impairments over a few years to match the lease expiry, so that my net profit will always be zero with positive cash flow

2) This leads to the issue of loan valuations. As of 31 March 17, outstanding loan is US$190, one question i will ask is what is the current LTV ratio? This may shed light on the actual value of all its 22 vessels. Also, it seems last year's talk on getting a loan renewal was untrue as FSL mgmt is still trying to get debt refinancing.

<vested>

[Boon]

http://infopub.sgx.com/FileOpen/First%20...eID=446902

FSL has released its annual report with a few highlights:

1) The chairman is concerned on the values of the vessel. As of now FSL has made impairments to " 5 container ship,2 crude oil tanker (FSL Shanghai & Hong Kong) & 1 product tanker" . In my opinion, there may be more impairments from the other product tankers because of declining MR rates. So expect net profit to be zero this FY; no need pay tax to agencies like IRAS again . If i was smart, I would space out my impairments over a few years to match the lease expiry, so that my net profit will always be zero with positive cash flow

2) This leads to the issue of loan valuations. As of 31 March 17, outstanding loan is US$190, one question i will ask is what is the current LTV ratio? This may shed light on the actual value of all its 22 vessels. Also, it seems last year's talk on getting a loan renewal was untrue as FSL mgmt is still trying to get debt refinancing.

<vested>

Hi CY09,
 
Impairment should be made when carrying amount exceed recoverable amount (the higher of fvlcts and viu). I don’t think one could control the timing of making an impairment loss.
 
Besides, it serves no purpose to “tweak” net profit, as FSL's shipping related income is tax exempt anyway. 
 
Accounting profit is not important, but positive cash generation is.
 
Rights issues is being considered by the board.
_______________________________________________________________________
 
page 75 of AR2016:
 
The lease income derived by the Group’s entities from the respective bareboat charter and time charter agreements qualifies for tax exemption under the Maritime Sector Incentive (“MSI”) scheme (previously known as the Maritime Finance Incentive scheme), with effect from 19 March 2007. This tax exemption on the qualifying income will be granted for the remaining useful life of any vessel that is acquired by the Trust during the initial period of 10 years from the effective date subject to further extension. The distributions made out of the tax exempt income less allowable expenses will also be exempt from Singapore income tax in the hands of the unitholders. The freight income and pool income derived by the Group is also exempted from tax under Section 13A of the Singapore Income Tax Act (“SITA”), Chapter 134.
 
The Group is subject to tax on its non-tax exempt income such as interest income at the prevailing corporate tax rate, after adjusting for allowable expenses. 
 
Page 63 of AR2016:
 
3.3  Impairment Assessment of Vessels 
Impairment loss is recognised when events and circumstances indicate that the vessel may be impaired and the carrying amount of the vessel exceeds the recoverable amount. The recoverable amount for each vessel is determined based on the higher of the fair value of the vessel less the estimated costs of disposal and the carrying value of the vessels based on “value-in-use” methodology. 
In determining the fair value less costs of disposal, the Group has obtained valuation reports from third parties sources in December 2016. The valuation of the vessels was prepared assuming a sale between a willing seller and a willing buyer on a charter-free basis. 
For the value-in-use calculations, the Group determined the cash flows based on past performance and their expectation of market development. The Group prepared the value-in-use calculation based on projected cash flows over the remaining useful life of each vessel and its projected residual value. 
The projected cash inflows are based on existing charter contracts rates and/or inflation-adjusted daily rates from observable historical trends of five to 20 years. Management has adjusted the projected cash flows with management’s assessment of the achievable cash flows based on recent performance of the vessels and the age of the vessels. If the Group were to project cash flows based on the current average rates, the carrying values of the vessels will decrease by approximately 8% (2015: 5%). 
The projected cash outflows take into consideration each vessel’s inflation-adjusted actual and budgeted operating expenses. The pre-tax discount rates range from 6.39% to 7.76% (2015: 6.39% to 7.76%) and take into account the time value of money and the risks specific to the vessels’ estimated cash flows. If the pre-tax discount rates increase by 1%, the carrying values of the vessels will decrease by approximately 3% (2015: 1%). 
During the financial year ended 31 December 2016, the Group recognised an impairment loss on vessels amounting to US$44,137,000 (2015: US$971,000). As at 31 December 2016, the carrying amount of the vessels was US$427,508,000 (2015: US$526,516,000). 

 
Page 5 of AR2016:
 
“The highest priority for the Board is to secure a refinancing of the outstanding debt, and to this end we are considering a variety of strategies. as a Board, we are committed to improving the structure of the Trust’s balance sheet in a manner that enables unitholders to benefit. This will require the balance sheet to be strengthened and we are considering various options in this regard. as part of these considerations we are requesting unitholders to approve a general mandate to issue pro-rata renounceable rights of up to 100% of the Trust’s capital.“
___________________________________________________________________________________________ 

[CY09]

Thanks boon. Actually i was trying to make the impairment as a joke- by suggesting to stagger impairments to avoid paying taxes.

Building on your 50% BBCE fall in revenue due to the tanker segment downturn, it made me think deeper about FSL's trust cash generation ability. I built on this assumption: i) interest expense 5%, ii) dry docking and other cash outflow of 4mil & iii) its BBCE for container will not be affected until FY2020

For FY 16, FSL total BBCE was 72.8 mil. With 20.8 coming from its 3 Yang Ming containers, we can actually "agar" that if the remaining BBCE takes a 50% cut, new BBCE revenue will be 26 mil. As these effect will occur from 2018. I can roughly plot the cash flow.

2017: Total cash inflow about 40 + 20.8 (from container) - 4 = USD 56.8 mil

2018: 26 + 20.8- 4 = USD 42.8 mil

2019: 26 + 20.8- 4 = USD 42.8 mil

2020: 26 + 10.4 (assumed half BBCE for container) - 4 + (4.5*3) scrapping of the 3 container ship = USD 43.9mil

2021 to 2026 : USD 24 mil each year (assumed the 2 feeder containers are also scrapped)

Total Cash flow generation: USD 316mil by 2026.

From this projection, it seems it will take FSL until 2021 to clear its total debt. And from 2022 until 2026 (about the 20th year of the fleet), will the cash flow be for unit holders. This works out to be about s$158 mil for shareholders and 16 tankers for scrapping (assume s$34 mil). At current market capitalization of s$ 83 mil, the implied return for a 10 year wait is about 8.7% per annum.

Perhaps it may be good for a rights to be done to alleviate some of the the interest expense which will work out to be about USD28.2 mil (s$40 mil)

As one will notice, the value of fsl varies greatly upon the assumptions we make to it's cash flows

[Boon]

Thanks boon. Actually i was trying to make the impairment as a joke- by suggesting to stagger impairments to avoid paying taxes.

Building on your 50% BBCE fall in revenue due to the tanker segment downturn, it made me think deeper about FSL's trust cash generation ability. I built on this assumption: i) interest expense 5%, ii) dry docking and other cash outflow of 4mil & iii) its BBCE for container will not be affected until FY2020

For FY 16, FSL total BBCE was 72.8 mil. With 20.8 coming from its 3 Yang Ming containers, we can actually "agar" that if the remaining BBCE takes a 50% cut, new BBCE revenue will be 26 mil. As these effect will occur from 2018. I can roughly plot the cash flow.

2017: Total cash inflow about 40 + 20.8 (from container) - 4 = USD 56.8 mil

2018: 26 + 20.8- 4 = USD 42.8 mil

2019: 26 + 20.8- 4 = USD 42.8 mil

2020: 26 + 10.4 (assumed half BBCE for container) - 4 + (4.5*3) scrapping of the 3 container ship = USD 43.9mil

2021 to 2026 : USD 24 mil each year (assumed the 2 feeder containers are also scrapped)

Total Cash flow generation: USD 316mil by 2026.

From this projection, it seems it will take FSL until 2021 to clear its total debt. And from 2022 until 2026 (about the 20th year of the fleet), will the cash flow be for unit holders. This works out to be about s$158 mil for shareholders and 16 tankers for scrapping (assume s$34 mil). At current market capitalization of s$ 83 mil, the implied return for a 10 year wait is about 8.7% per annum.

Perhaps it may be good for a rights to be done to alleviate some of the the interest expense which will work out to be about USD28.2 mil (s$40 mil)

As one will notice, the value of fsl varies greatly upon the assumptions we make to it's cash flows

Hi CY09,
 
My suggestion of “50% cut in BBCE revenue” was in response to gzbkel’s model, and it applies only to the 11 vessels with leases expiring in 2017/2018.
 
However, your model is different. You are applying a 50% cut in BBCE revenue across 19 vessels, including those of Shannon Fisher and Solway Fisher whose leases would not expire until 2021.
 
Shannon Fisher, Solway Fisher together with the 3 containerships charted to Yang Ming contributed USD 22 m in BBCE revenue to FSL in FY2016.   
 
Also, bear in mind that there is difference between OCF and BBCE revenue.
 
Basically,
 
OCF = BBCE revenue + other income – Trust Operating Expenses (TOE)
 
FY2016 BBCE Revenue = USD 72.849 m
FY2016 OCF                = USD 66.971 m
 
The major difference is in the Trust operating expenses (TOE), which amounted to USD 4.7 m (Management fees, trustee fees, other trust expenses) in FY2016.
 
gzbkel allows for USD 2 m capex
 
You have allowed for USD 4 m, which include dry-docking.
 
To allow for dry-docking and TOE, we should be talking roughly about USD 7 m per year, which seem to be under-provided by your analysis, assuming you had used USD 72.8 m as your cash flow base.
 
As always, an analysis is only as good as its underlying assumptions.

What is the roughly "floor value"?
 
Keep exploring……………………………………………..
_________________________________________________________

[Boon]

Hi CY09,

This scenario should be pretty close to yours.....................

Too conservative, perhaps ?

FSL Charter Profile: (total = 22 vessels):
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.
 
In summary :
=> 5 vessels with leases expiring in 2020/2021 (with current BBCE revenue ~ USD 22 m per year)
=> 11 vessels with leases expiring in 2017/2018 (FY2016 BBCE revenue ~ USD 37 m)
=> 6 vessels in “pool” (FY2016 BBCE revenue ~ USD 14 m)
 
BBCE revenue reduction assumptions:
=> No reduction for the 5 vessels until after 2010/2021. From 2020, apply a 50% reduction. => - 11 m reduction per year
=> For the 11 vessels with leases expiring in 2017/2018, apply a 50% reduction from 2017 => - 18.5 m reduction per year
=> For the 6 vessels in “pool’, apply a 50% reduction from 2017, => -7 m reduction per year.
 
Expenses assumptions:
Dry docking = USD 2 m per year
Trust operating expenses (TOE) = USD 5 m per year.
 
2016:
BBCE Revenue = 73 m
Cash = 43 m
Debt = 223 m
 
2017:
BBCE Revenue = 73 – 18.5 – 7 = 47.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 223 m = - 10 m
Debt repayment = - 44 m
Cash = 43 + 47.5 – 2 – 5 – 10 - 44 = 29.5 m
Debt = 223 – 44 = 179 m
 
2018:
BBCE Revenue = 47.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 179 m = - 8 m
Debt repayment = - 44 m
Cash = 29.5 + 47.5 – 2 – 5 – 8 - 44 = 18 m
Debt = 179 – 44 = 135 m
 
2019:
BBCE Revenue = 47.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 135 m = - 6 m
Debt repayment = - 44 m
Cash = 18 + 47.5 – 2 – 5 – 6 - 44 = 8.5 m
Debt = 135 – 44 = 91 m
 
2020:
BBCE Revenue = 47.5 m – 11 m  = 36.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 91 m = - 4 m
Debt repayment = - 34 m
Cash = 8.5 + 36.5 – 2 – 5 – 4 - 34 = 0
Debt = 91 – 34 = 57 m
 
2021:
BBCE Revenue = 36.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 57 m = - 2.5 m
Debt repayment = - 27 m
Cash =0 + 36.5 – 2 – 5 – 2.5 - 27 = - 0
Debt = 57 - 27 = 30 m
 
2022:
BBCE Revenue = 36.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 30 m = -1.5 m
Debt repayment = - 28 m
Cash = 0 + 36.5 – 2 – 5 – 1.5 – 28 = 0
Debt = 30 -28 = 2 m
 
2023:
BBCE Revenue = 36.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 4.5% x 2 m = 0 m
Debt repayment = - 2 m
Cash = 0 + 36.5 – 2 – 5 – 0 - 2 = 27.5 m
Debt = 0
 
2024:
BBCE Revenue = 36.5 m
Dry docking = - 2 m
TOE = - 5 m
Interest exp = 0
Debt repayment = 0 m
Cash = 27.5 + 36.5 – 2 – 5 – 0 – 0 = 57 m
Debt = 0
 
2026:
Debt = 0
Cash = 57 + (36.5 – 2 – 5) x 2 = 116 m = USD 18 cents per share

Note:

gzbkel, CY09 and I have been trying to find a conservative “floor” value in viu and I must admit it is not an easy endeavor. Each analysis is only as good as its underlying assumptions. What seems to be a conservative assumption today may not look so in the future if charter rates were to decline further going forward………………………   
_____________________________________________________

[yawnyawn]

Thanks boon. Actually i was trying to make the impairment as a joke- by suggesting to stagger impairments to avoid paying taxes.

Building on your 50% BBCE fall in revenue due to the tanker segment downturn, it made me think deeper about FSL's trust cash generation ability. I built on this assumption: i) interest expense 5%, ii) dry docking and other cash outflow of 4mil & iii) its BBCE for container will not be affected until FY2020

For FY 16, FSL total BBCE was 72.8 mil. With 20.8 coming from its 3 Yang Ming containers, we can actually "agar" that if the remaining BBCE takes a 50% cut, new BBCE revenue will be 26 mil. As these effect will occur from 2018. I can roughly plot the cash flow.

2017: Total cash inflow about 40 + 20.8 (from container) - 4 = USD 56.8 mil

2018: 26 + 20.8- 4 = USD 42.8 mil

2019: 26 + 20.8- 4 = USD 42.8 mil

2020: 26 + 10.4 (assumed half BBCE for container) - 4 + (4.5*3) scrapping of the 3 container ship = USD 43.9mil

2021 to 2026 : USD 24 mil each year (assumed the 2 feeder containers are also scrapped)

Total Cash flow generation: USD 316mil by 2026.

From this projection, it seems it will take FSL until 2021 to clear its total debt. And from 2022 until 2026 (about the 20th year of the fleet), will the cash flow be for unit holders. This works out to be about s$158 mil for shareholders and 16 tankers for scrapping (assume s$34 mil). At current market capitalization of s$ 83 mil, the implied return for a 10 year wait is about 8.7% per annum.

Perhaps it may be good for a rights to be done to alleviate some of the the interest expense which will work out to be about USD28.2 mil (s$40 mil)

As one will notice, the value of fsl varies greatly upon the assumptions we make to it's cash flows

Looks like your prediction on the rights issue may come true.

I notice the below paragraph was mentioned in the Chairman's Letter to Unitholders in the latest AR2016 on page 5.

The highest priority for the Board is to secure a refinancing of the outstanding debt, and to this end we are considering a variety of strategies.
As a Board, we are committed to improving the structure of the Trust’s balance sheet in a manner that enables unitholders to benefit. This will require the balance sheet to be strengthened and we are considering various options in this regard. As part of these considerations we are requesting Unitholders to approve a general mandate to issue pro-rata renounceable rights of up to 100% of the Trust’s capital.

(not vested)

[CY09]

Hi boon,

that's the problem. We really cant predict the future trend for charter rates. I tried it with Penguin and failed miserably.

Just curious are you an investor of FSL. It is highly likely I will attend its AGM on 28 April 17 at Suntec, maybe can see you there

[Boon]

Hi boon,

that's the problem. We really cant predict the future trend for charter rates. I tried it with Penguin and failed miserably.

Just curious are you an investor of FSL. It is highly likely I will attend its AGM on 28 April 17 at Suntec, maybe can see you there

Hi CY09,
 
No, I am not attending the FSL AGM.
 
I believe if we could improve our understanding on the demand-supply dynamics of the industry, we could certainly improve our skills in the projection of future charter rates. Just have to keep trying and sharpening our skills…………………..ha-ha !
 
It is interesting to note that you are actually in favor of a rights issue by FSL, why?
 
If it is solely for the purpose of replacing its debt, it makes no sense, as cost of equity is almost always higher than cost of debt - there must be a better reason for it.
 
“To strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit.”
 
What exactly does it mean?
 
Is rights issue the only option available to strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit ?
_______________________________________________________________________________________

[HitandRun]

If it is solely for the purpose of replacing its debt, it makes no sense, as cost of equity is almost always higher than cost of debt - there must be a better reason for it.
 
“To strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit.”
 
What exactly does it mean?
 
Is rights issue the only option available to strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit ?
_______________________________________________________________________________________

Boon san

I wonder about that too.

In fact, I find the Chairman's statement very puzzling:

1. In the results announcement in Feb 2017, the management was asked about the refinancing. They appeared to be pretty confident and said that it would be completed by 2Q/3Q17. AFAIK, the market for boat charter would have been firmer or at least no worse from Feb 2017.

2. In the power struggle between Hatton and Reid, Reid quoted Hatton => "That the Board’s priority was to give it more control over executive functions, rather than focus on refinancing plans, and was rejecting viable refinancing plans." Reid DID NOT REFUTE the point by Hatton that there were indeed viable refinancing plans. But now, Reid appears to be putting all the blame on Hatton on the refinancing delay.

One other possibility for fund raising is that FSL wanted to buy more ships. If FSL were to buy them from related parties, that would amount to asking unitholders for an indirect bailout. 

Unitholders cannot vote against ship acquisitions but surely, they can vote against the rights issue.

[level13]

“To strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit.”
 
What exactly does it mean?
 
Is rights issue the only option available to strengthen the Trust’s balance sheet in a manner that enables unitholders to benefit ?
_______________________________________________________________________________________

"Enable unitholders to benefit" --> so that this group of people can continue to HOPE for dividend payout down the road.

Lets see what are other options to raise capital:

1) Sell assets
It will be seen as a fire sale and don't expect good prices. If thats the route they want to take then might as well liquidate the whole thing and distribute whatever is remaining to unitholders.

2) Financial institution loan
Under the current sentiment in the shipping industry, getting more loans will be difficult. FSL will be happy if their current loans dont get recalled back early.

3) Private placement
FSL can find 3rd party investors. But i am sure they will ask for a big discount so ultimately will dilute the holding of current unitholders. Not seen as unitholder friendly.

4) Issue bonds
The problem is not issuing bonds. But only a very high coupon rate will attract investors. And bondholders will rank ahead of unitholders for any amount of money FSL can distribute.

5) Issue rights
Option that makes sense and with the least resistance. Current unitholders are already in all this mess. So easier to milk them for more.
Those who disagree can sell their shares. The remaining ones need to fork out more $$ to maintain their holding proportion. And most importantly, everyone can continue to HOPE.