Monday, 1 May 2017

Review of First Ship Lease Trust (FSL)

First Ship Lease Trust (FSL) is currently the only listed shipping trust on SGX, in recent times, the market value of FSL has fallen 35% from a market value of s$102 in million to s$65.5million. This was due to the negativity of the shipping industry and market's apprehension on the trust's inability to refinance its debts. 


FSL owns a fleet of mainly tankers and 5 container ships and lease them out to shipping companies for revenue. While we tend to associate shipping to the container or dry bulk segment, FSL is more exposed to the tanker segment; with only 33% revenue derived from the container segment. 

However, its most lucrative contract are its 3 container ships with Yang Ming at a bare boat charter revenue (BBCE) of $20.8mil a year for the 3 contracted 4,250 TEU container ships. This represents 32% of its revenue with only 15% of its fleet with Yang Ming. This is because the Yang Ming contract was signed during the heydays of the container ship cycle, as a result Yang Ming has to continue honoring the contract until 2020-2021. At current rates, one is likely only able to obtain annual BBCE of US$2 mil for such 3 ships., When asked on the possibility of Yang Ming defaulting during the AGM, the board expressed high confidence because Yang Ming had recently dry docked the 3 ships (costed Yang Ming 1 mil per ship for dry docking). Dry docking is similar to car servicing and after "servicing" is completed, the ships will operate for another 5 years. The dry docking process costs money to Yang Ming as well.

As for the tanker market, most of the tankers segment rates are falling due to the continue oversupply, so its a question of how much can FSL continue to milk from the rest of its fleet

Survival and Refinancing

This is a key concern for the Board and it was repeatedly stressed that without refinancing, a fire sale of its fleet may result. As of Q1FY2017, FSL's debt is at $192 million, with the mgmt guiding that it will be reduced to $171 million by end Dec 17. In my opinion, with a potential cash inflow via BBCE of $60 mil this year, the trust will be able to pay down to about $150 million. Hence a refinancing in the region of $150 million is probably the magic number to ensure the Trust continues as a going concern.

Valuation Difference

Currently FSL utilities a "value in use" (VIU) methodology to value its fleet. This methodology is similar to the "discounted cash flow basis" used for property valuation  where the future cash flows of its ships until its useful life and scrap value is "present valued" to today's value. This is how FSL obtained its vessel value of $427 million. On the contrary, it is likely banks are valuing on a low basis which is even lower than the adoption of "market comparison basis". This difference in valuation basis is one of reasons why refinancing is not yet completed.

Weak Sponsor

The sponsor of the Trust is HSH Nordbank who coincidentally is also one of the lender. The bank itself is in a weak financial state and will be wound up next year. This has resulted in the uncertainty and apprehension of other lenders to continue lending to FSL. This is where Navios is coming in by trying to take over HSH Nordbank's role by becoming the sponsor/ trustee manager. FSL mgmt mentioned during the AGM that with Navios help, the chance of obtaining a refinancing is higher.

Dilution upon Navios entry

However the entry of Navios doesn't come cheap. The Navios and FSL deal is described in the SGX announcement link here:

Basically if refinancing is done and Navios comes onboard as the new trustee manager/sponsor, Navios gets at least a 50.1% share. So lets run through a quick maths exercise on the deal:

Current no of shares in FSL = 637,456,577
No of shares held by Nordbank which will be sold to Navios = 154,430,600

Under the agreement, should Navios exercise its US $20mil (s$28mil) convertible loan into shares, Navios has to have at least 50.1% of the enlarged share capital. Assuming the exercise of this convertible loan, Navios will receive "X" amount of shares to obtain its "at least 50.1% desired share"

Hence (154,430,600+X) divided by (637,456,577+X) must equal to 0.501. Using algebra, the number of shares Navios will get through the convertible loan is 330,531,353 shares. Divide this by s$28 mil, Navios is paying 8.47 cents per share (in Singapore Dollar value).

Thoughts on the deal

In my opinion, Navios seems to have quite a good deal because it is purchasing 330,531,353 shares at about 0.17 of FSL's stated book value. However, it seems without Navios assistance, refinancing progress will be harder. So let's re-evaluate the net worth of FSL should Navios dilution come in and assume the trust will continue to operate as a going concern as a result.

Current Vessel Value based on "VIU" methodology =  $427 million
My own discount (30%) on the VIU = $299 million
New book value of FSL = $119.8 million
Estimated value per share before Navios Dilution = 18.8 US cents per share

Add Navios US $20 million loan, revised book value = $139.8 million
Estimated value per share after Navios Dilution = 14.4 US cents per share ( 20 Sing cents per share)

Are there other ways?

A way suggested by unit holders at the AGM was to sell some of its vessels to repay the debts. Of course, the downside would be that if the market knows you are in desperate need of cash, you will not be fetching the true market value of your vessels in a fire sale.

In my opinion, if it is possible, one good arrangement will be for a "3 rights for every 1 share" exercise at say s$0.09. The raised proceeds will be close to US$120 million and this means only US$30 million of refinancing is needed. Of course, this will be difficult for many shareholders to stomach. As for me personally, I have the sufficient capital resources to subscribe for 3 times my current exposure in FSL (or even 4 times to cover for HSH Nordbank's non-involvement in the rights) 

If the above are not viable, it seems getting Navios help is a good way to persuade banks to refinance and ensure the Trust's survival.

<Vested interest in FSL at multiple entry prices>

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