First Ship Lease Trust

[CY09]

Both rickmers and FSL are using a projected cash flow+ residual valuation of their vessels. This makes it dicey because it assumes the survival of the fleet until it's end of useful life year.

Comparable valuation of the recent transactions of ships is one good method, but again it is not of value due to the difference on contracts for each ship

[Gaudente]

crap...I was hoping this to be the year restarting distribution , and they are going to issue rights instead 

[Boon]

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 ?
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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.

Hi HitandRun san,
 
Unitholders could vote against rights issue, related-party transactions that require unitholders approval, and acquisitions in excess of certain aggregate value, if I am not mistaken.
 
Anyway, there is a huge difference between the need for funding to replace existing debt due in Dec 2017 and the need for funding to further expand and grow the fleet size.
 
If “rights issue” is solely for the purpose of replacing EXISTING debt, it makes no sense, as cost of equity is almost always higher than cost of debt.
 
If “rights issue” were needed to restore compliance with EXISTING loan covenants due to deteriorating LTV ratio as a result of rapid decline in vessel values. It makes sense. But for that to happen, vessel values would need to have dropped more than 50% with respect to FY2016 values.
 
4Q/FY 2016:
BV of 22 vessels = USD 427 m
Debt = USD 223 m
 
1Q2017:
Debt = USD 203 m after voluntarily repaid USD 20 m in 1Q2017
BV of 22 vessels = USD 427 x 50 % = USD 214 m
BV/Debt = 214/203 = 1.05
 
Question:
Has value of vessels dropped 50% or more in a space of 3.5 months?
 
If “rights issue” were to serve as a back-up plan in case all refinancing plans of EXISTING debt fail. It makes sense.
 
FSL is a Singapore incorporated Business Trust (BT) managed by FSL Trust Management Pte. Ltd.
(FSLTM) – the Trustee Manager ™.
 
TM is 100% owned by the Sponsor, who controls 24.82% of the Trust.
 
Does the TM need a CFO?
Who is responsible for the refinancing of existing debt? CEO, CFO or the Chairman?
Power Struggle?
Blame games?
 
Could any of the “internal fighting” within the TM be attributed to unitholders ?
 
NO.
 
Could unitholders suffer from any adverse outcomes of the “internal fighting”?
 
YES.
 
As far as unitholders are concerned, TM is the single party responsible for getting the job done.
 
It really reflects poorly on the part of the TM !
 
I could be wrong on this, but this is the way I look at the following:
 
It is always in the interests of TM to grow the fleet size hence AUM - (Who doesn’t? more fees).
 
To meet its expansionary ambition, I think they have been exploring at funding which would allow them to kill two birds with one stone – a debt-refinancing package with extra capacity for fleet expansion as well.
 
As debt is being paid off, L in the LTV ratio is decreasing. This plan should work best if vessel value, V, is increasing as well.
 
Unfortunately, this is not the scenario, as vessel value, V, has actually decreased, instead of increased or remained unchanged.
 
As a result, the 2-in-1 plan has to be abandoned and they have to look into alternatives now including the possibilities of equity funding.
 
But to raise new equity for fleet expansion is a totally different ball game all together……………….
 
Investors and the market would have lots of question to ask………………….
 
What’s the real motive ?
To grow fees for TM ?
To benefit unitholders ? How?
What is the expected return for the rights?
What are the risks?
................................
...............................
etc
 
In short, there is a real need for funding to replace existing debt.
 
But is there a real need for funding to expand the fleet size ?
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[Boon]

“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 ?
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"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.

Hi level13,

1)
If LTV ratio has been breached due to declining V, and if the problem could be solved by selling a few vessels, why not?
 
2)
Current loan would get recalled early if FSL fails to make interest payment/principal repayment or in breach of LTV ratio. Again, problems probably could be resolved by selling a few vessels.
 
To get more loans, the real constraint lies in inability to come up with more “collaterals’ as security.
 
3)
Agreed
 
4)
Agreed. Too costly to issue unsecured debt. Makes no economic sense.
 
5)
See post# 223 on what makes sense to me.
 
On the contrary, this could turn out to be the option with the MOST resistance.
 
For those disagree with the proposed rights issue. There is a chance to Vote “NO” in the first place. After all, the Sponsor/TM only controls 24.82% of the votes.

From the share price movement, looks like Mr. market doesn't quite like it............
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[HitandRun]

See post# 223 on what makes sense to me.
 
On the contrary, this could turn out to be the option with the MOST resistance.
 
For those disagree with the proposed rights issue. There is a chance to Vote “NO” in the first place. After all, the Sponsor/TM only controls 24.82% of the votes.

From the share price movement, looks like Mr. market doesn't quite like it............

I think the problem is that a rights issue is such a blunt instrument. 

TM only hinted indirectly at the necessity to strengthen the balance sheet but is asking for carte blanche to do what he pleases. That's a no no in my dictionary. 

Incidentally, I've already instructed my nominee to vote against the resolution.

[Boon]

Page 4 of AR2016:
 
“Despite the Board’s decision to commence the refinancing exercise in the first quarter 2016, well ahead of the scheduled repayment date in December 2017, a refinancing has not yet been secured. In the intervening period, vessel values have declined. Notwithstanding that the Trust continues to enjoy full deployment of its vessels and a resulting strong level of net cash generation from operations, refinancing will require meeting the security value expectations of lenders. “
 
Cash generation from operation in FY2017 would still be reasonably strong I reckon.
 
Contracted Bareboat Charter = USD 26 m (net)
 
Contracted time charter revenue = USD 18 m (gross) => assumed net = USD 9 m
 
TORM (market rate BBC) = Assumed 4 x 4Q2016 BBCE revenue = 4 x 2.67 = USD 10 m
 
POOL = Assumed 4 x 4Q2016 BBCE revenue = 4 x 2.17 = USD 8 m
 
Total FY2017 BBCE revenue = 26 + 9 + 10 + 8 = USD 53 m
 
Cash = 43 (FY2016) – 20 (voluntary loan repayment) + 53 (FY2017 BBCE revenue) – 2 (dry docking) – 5 (TOE) – 10 (interest payment) – 44 (loan repayment) = USD 15 m
 
Debt = 223 – 20 – 44 = USD 159 m
 
V (21 vessels, FY2016) = 1.4 L = 1.4 x 223 = USD 312 m
 
V (21 vessels, FY2017) = 312 x 50% = USD 156 m (assumed 50% drop in V)
 
V (FSL Osaka, FY2017) = USD 15 m (assumed)
 
V (22 vessels, FY2017) = 156 + 15 = USD 171 m = 1.10% x L
 
How much have vessel values declined since 31 Dec 2016?
 
Unless vessel values dropped MORE than 50% by year-end, meeting the security value expectation of the CURRENT lenders should not be a problem I reckon.

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% 
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[CY09]

The 3 YM ships, solway Fisher and shannon fisher have contracted BBCE revenue of about 57 mil from 2018 to 2021, their combined scrap value is about USD 20 mil.

On the other hand, the remaining 17 vessel's value is contingent on the industry dynamics for MR/Aframx/Handy/LR2/Chemical tankers; The industry may deteriorate so bad over the next 8 months such that they are only worth their scrap value ( approx. USD 70 mil). Unless banks are valuing the fleet at such a scenario, there is no way FSL fleet can be depressingly valued USD 171 mil at the end of 2017.

With the voyage expense of MR and LR2 hovering at US 6,500-7,000/day (reference: Scorpio Tanker FY results) in 2016, the rates of the tankers have to fall to USD $7,000 to justify such depressed valuation. Currently, MR rates are at 13,500/day while LR2 is at 16,000/day

IMO, it will be good to ask FSL mgmt at this AGM what is the current LTV ratio at end March and if possible to give the exact figure +- 5%.

*FSL Osaka is similar to FSL Hamburg and FSL Singapore (MR class), therefore their valuations should be about 2 mil less than Osaka due to it being older than 1 year.
2 x LR2- the 2 TORM boats. The 5 vessels (3 MR and 2 LR2) should be able to deliver 2 mil in BBCE each annually.

[Boon]

The 3 YM ships, solway Fisher and shannon fisher have contracted BBCE revenue of about 57 mil from 2018 to 2021, their combined scrap value is about USD 20 mil.

On the other hand, the remaining 17 vessel's value is contingent on the industry dynamics for MR/Aframx/Handy/LR2/Chemical tankers; The industry may deteriorate so bad over the next 8 months such that they are only worth their scrap value ( approx. USD 70 mil). Unless banks are valuing the fleet at such a scenario, there is no way FSL fleet can be depressingly  valued USD 171 mil at the end of 2017.

With the voyage expense of MR and LR2 hovering at US 6,500-7,000/day (reference: Scorpio Tanker FY results) in 2016, the rates of the tankers have to fall to USD $7,000 to justify such depressed valuation. Currently, MR rates are at 13,500/day while LR2 is at 16,000/day

IMO, it will be good to ask FSL mgmt at this AGM what is the current LTV ratio at end March and if possible to give the exact figure +- 5%.

*FSL Osaka is similar to FSL Hamburg and FSL Singapore (MR class), therefore their valuations should be about 2 mil less than Osaka due to it being older than 1 year.
2 x LR2- the 2 TORM boats. The 5 vessels (3 MR and 2 LR2) should be able to deliver 2 mil in BBCE each annually.

Under current market conditions, I believe the market value ( or FVLCTS) of the 22 vessels is higher than USD 171 m, and VIU (value in use) is higher than FVLCTS.

But, lenders don’t look at V in VIU - they are only interested in FVLCTS when assessing compliance with the LTV ratio - unless the loan is structured such that V should be the HIGHER of the two).
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[Boon]

http://infopub.sgx.com/FileOpen/20170313...eID=443027

News Release
13 March 2017
SGX raises pro-rata renounceable rights issue cap to 100% of share capital

Singapore Exchange (SGX) is enabling companies to seek a general mandate for an issue of pro-rata renounceable rights shares of up to 100% of the share capital from 50% previously. The enhanced rights issue limit is aimed at helping companies raise funds expediently for expansion activities or working capital.

“Recognising that listed companies have to be responsive to current global developments including the emergence of disruptive forces and economic restructuring, we are enhancing this fund-raising avenue. We will closely monitor disclosures of companies tapping the market via enhanced rights issues. Investors should actively participate in the whole process including taking part in the shareholder vote,” said Tan Boon Gin, Chief Regulatory Officer of SGX.

The boards of companies proposing such a rights issue must have formed the view that the enhanced share issue mandate is in the interests of the issuer and its shareholders. Companies must also make periodic announcements on the use of the proceeds as and when the funds are materially disbursed and provide a status report on the use of proceeds in the annual report.

Companies intending to raise funds using the enhanced rights issue limit must seek shareholder approval either via a specific vote or through an enhanced share issue mandate at its annual general meeting. The rights shares arising from the enhanced rights issue limit must be listed and issued by 31 December 2018.

When a company uses the enhanced share issue mandate for its rights issue, the board must also disclose why the rights issue is in the interest of the company including the rationale for the discount at which the rights issue is priced. In addition, if the rights issue takes place within one year from the company’s previous equity fund-raising, the issuer must detail the equity funds raised within the past 12 months, the use of those proceeds and the intended use of any unutilised amount.
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[ZZF]

If they can't get refinancing by end year and shareholders vote no for rights , high chance end up like rickmers ?