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>