Tuesday, 29 May 2018

First Ship Lease trust (FSL Trust)

A few major developments has happened on FSL- one of it is the securing of three loans which in my opinion secures the survival of the trust.

Refinancing Concerns- Cleared

Mr. market has been concerned by the syndicated term loan FSL has. Due to the clause in the term loan, all bankers in the loan has to agree to an extension before it can be renewed after Dec 2017. However, FSL hit a road block when not all parties agreed to extending it; as a result the trust is under court protection and this has spooked investors.

As of now, FSL's debt stands at US$110 million. However, recently FSL has secured three loans - totaling US$108 Million. These 3 secured loans are agreed in principle and should FSL and these bankers put pen to the paper, the amount is sufficient to repay the syndicated loan. FSL has current cash reserves of about US $7 million. 

Cash Flow Viability

The next question is how much cash flow will FSL generate as it continues as a going concern. Given the weakening tanker market, FSL has been able to generate US$10 million in cash flow per quarter. Based on an estimated interest rate of 5.5% on its US$108 million loan and 7% interest on its US$7.5 million convertible bonds. It will probably take FSL until 2022 to repay it based on its current cash flow. After which, its cash flow should be available to unit holders as dividends.

Dividends

In my opinion, it will be based on how the 3 loans are structured.

If these 3 loans are amortized with straight line repayment, unit holders will probably have to wait until 2022 to get some sort of dividends. Tankers have about 20 years of operating lifespan. Based on an assumption that FSL is only about to generate US$7 million per quarter of cash flow (older ships will secure lower charter rates) and scrap value of about nett US$40 mil for scraping of its entire fleet, unit holders can reasonably expect about US$180 million ($240 million) in cash flow from 2022 to 2027. Per unit holder, this means about 37.6 Singapore cents of cash flow available. This is of course based on the assumption that the tanker market does not worsen or improve from its current conditions ("ceteris paribus")

If we are to present value this amount to today's value based on a 8% discount rate, this means the trust is worth about 17.4 Singapore cents now.

Similarly, if the three new secured loans are packaged similar to the current syndicated loan structure where small quarterly pay downs are made with a large sum to be repaid at the end of the tenure, unit holders may enjoy dividends from the trust as soon as 2019; however, this might affect the ability of FSL to repay all its debts before 2022.

<Author is vested in FSL Trust>

8 comments:

  1. Hi Investmoolah,
    Do you think the shipping and chartering rates will become better this year? Saw that FSL Trust has been making losses for a few years and its retain earnings are negative.

    Also saw that you have pumped in investment into this Trust. Is the same management still helming the Trust upon the successful restructuring of debts to ensure business continuity?

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    Replies
    1. Hi Blade Knight,

      No i think chartering rates for Tankers will remain as bad as last year. This is why i forecast that FSL will only be generating 10 mil in cashflow per year. FSL has been making losses because of impairments it has to make to its vessels because they were overvalued.

      Yes, it is the same management helming the trust after the successful debt restructuring. The current mgmt belongs to a shipping company (Prime) who bought over from Nordbank.

      Delete
    2. Thanks a lot for sharing Investmoolah…...appreciate! Think at your current entry price and the fair value you have worked out means you have a huge margin of safety and very favourable upsides. Steady!
      With the financing and going concern issue settled, think the market will start to re-price it upwards eventually.

      Delete
  2. Will the developments be good for the investors?

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  3. Hi Investmoolah,

    Do you think that upon successful refinancing, the rates would affect the projected cashflow. Current rates for the 110m debt are floating, and the bankers probably would charge a premium over that.


    ReplyDelete
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