Progress towards refinancing borrowings

At a Glance

• 3Q11 DPU maintained at 0.95UScts, though distributable cash flow improves on sequential basis

• Progress made towards refinancing existing borrowings

• Yields look attractive but maintain HOLD pending the outcome of refinancing exercise and efforts to deploy 2 product tankers from spot market to long-term leases

Comment on Results

Spot market product tanker performance disappoints but cash flow shores up by new TORM leases. As a result of full-quarter lease revenue from the two newly acquired vessels leased to TORM, revenue was up 22% to US$28.6m. On a q-o-q basis though, revenue was flat as the product tankers on spot market performed weaker. Cash earnings were boosted 16% y-o-y and 11% q-o-q to US$15.6m due to the accretive TORM deal and lower interest expenses following the expiry of covenant waiver period in 2Q11. After loan repayments of US$7.2m, net income available for distribution was up 38% y-o-y to US$8.4m, but management decided to maintain DPU of 0.95UScts for the quarter.

Recommendation

Loan refinancing is the first priority. With one tranche of close to US$240m maturing in April 2012, and another tranche of US$243m maturing in March 2014, management has decided to refinance the entire outstanding amount with a partially amortising 6-year loan. Firm commitments have been secured from a group of 6 lenders (both existing and new) for 90% of the amount and management is hopeful of securing the rest by the end of FY11. We estimate spreads for the new loans will be significantly higher than existing 125-145bps, pushing up interest costs. And with loan amortisation payments to be made every quarter, DPU growth may be limited. Pending finalization of and details of the refinancing exercise and a long-term lease solution to end the earnings volatility from the 2 product tankers trading on the spot market, we retain our HOLD call on the stock. Our TP is revised down to S$0.34 (14% target yield) as we account for the higher risk environment. Upside may be capped by recent round of equity placement at S$0.35.

Refinancing risks loom

At a Glance

• 2Q11 DPU maintained at 0.95 UScts

• Proceeds of recent placement used to part-finance the DPU-accretive acquisition of two LR2 product tankers

• Distribution growth expected in FY12, but refinancing of ~US$230m debt looms in April 2012; maintain HOLD

Comment on Results

Spot market for product tanker improves to an extent. These tankers generated bareboat charter equivalent revenue of US$3.2m (inclusive of US$1.6m attributable to 1Q11) in 2Q11 vs. a US$1.1m loss in 1Q11, but the combined 1H11 bareboat revenue of US$2.1m fell significantly short of the US$7.6m bareboat charter revenue that these vessels would have earned in a 6-month period prior to redelivery last year. Cash earnings was thus, up 17% q-o-q to US$13.5m, and after loan prepayment of US$8.0m, net cash available for distribution amounted to US$5.5m, just about sufficient to pay out the 0.95 UScts DPU declared for the quarter. FSL Trust also recorded US$2.5m provisions in 2Q11, given that it lost its case against Daxin Petroleum in the PRC court.

Outlook and Recommendation

NAV dilutive, DPU accretive acquisitions. FSL Trust raised about US$15m via an equity placement last month and along with proceeds from previous round of placements, acquired two product tankers for US$46m each. These will be leased back to Denmark based TORM Tankers, and we estimate each vessel could add about US$6m charter revenue per year. As expected from a new equity issue at a discount to current market price, the placement will be dilutive at the NAV level, reducing end-FY11NAV by about 4.5%, in our estimate. However, given that the vessels will be 50% debt funded, we expect DPU accretion of about 2%/ 9% in FY11/12.

Balance sheet still a worry. Post-acquisitions, net gearing could go up to 1.4x from current 1.2x and the Trust also has a pending refinancing target of close to US$230m debt by April 2012. Our TP of S$0.43 and HOLD rating remain unchanged, pending further clarity on asset values and refinancing plans.

FSL Trust’s DPU for Q2 unchanged at 0.95 US cents

FIRST Ship Lease (FSL) Trust reported distribution per unit (DPU) of 0.95 US cents for its second quarter ended June 30, 2011 – unchanged from before.

Quarterly distribution was US$5.73 million, 0.8 per cent higher than US$5.69 million achieved a year ago. Net cash generated from operations was 21.8 per cent lower at US$13.5 million instead of US$17.3 million in Q2 FY10.

Revenue in Q2 was 0.6 per cent higher at US$28.7 million, from US$28.5 million last year. Contributing to better revenue was improved freight income for its two product tankers, FSL Hamburg and FSL Singapore, as well as the maiden contributions of two newly acquired vessels – with a price tag of US$92 million – leased to TORM.

FSL Trust managed to narrow net losses for the quarter by 92 per cent to US$491,000 from US$6.1 million in the year-ago period. If not for a financial provision of US$2.5 million, FSL Trust would have been in the black with US$2 million in profits.

The provision was due to an expected ‘call on banker’s guarantee’ which it posted in favour of Daxin Petroleum, when its bunker claims against Rovina Shipping Company were heard in the Chinese courts. The court’s judgment was for the sum of US$2.386 million, plus interest – less than Daxin’s full claim amount of US$2.8 million.

President and CEO of trustee-manager FSL Trust Management, Philip Clausius, said: ‘Steady earnings from our long-term bareboat charters, including the newly minted sale and leaseback deals with TORM, is testimony that the Trust is now back on course for growth.’ FSL Trust’s independent auditor KPMG issued a statement after reviewing the trust’s condensed consolidated interim financial statements. It drew attention to US$229.9 million worth of financing arrangements, maturing on April 2, 2012, that were classified under ‘current liabilities’.

FSL Trust Management said it was in ‘advanced discussions with the lending banks to refinance loans’ under its credit facility and details about the refinancing package should be finalised in the near term. KPMG said should the trust be unable to complete the refinancing plan for the US$229.9 million in arrangements, ‘these conditions indicate the existence of a material uncertainty that may affect the group’s ability to continue as a going concern’.

FSL Trust closed unchanged at 34.5 cents yesterday.

FSLT buys product tanker in sale-and-leaseback deal

This will raise the trust’s portfolio size to 24 vessels

FIRST Ship Lease Trust (FSLT) is buying a product tanker for US$46 million and leasing it out on a seven-year bareboat charter.

The Long Range II (LR2) product tanker – FSLT’s first – will be bought from Torm Singapore Pte Ltd, a wholly owned subsidiary of Torm A/S, and leased back to Torm Singapore. The vessel is expected to be delivered within this month.

‘The bareboat charter agreement is structured with recourse to Torm and contains a purchase option at the expiry of the base lease term, an early buy-out option on or after the fifth anniversary of the lease term, as well as three extension options of one year each,’ FSLT’s trustee manager said in a statement on Wednesday night.

The purchase of the vessel will be fully financed by the drawdown of US$23 million from the trust’s existing revolving credit facility and the utilisation of US$23 million from the previous equity issue in September 2009, which raised net proceeds of US$28.3 million.

After funding this transaction, the trust’s total projected outstanding secured debt as at July 1, 2011, will be about US$460 million.

This deal will be immediately cash flow accretive to the trust and will increase its total remaining contracted revenue to US$602 million, excluding extension options.

‘We believe that the growing demand for alternative shipping finance such as ship leasing will present a healthy pipeline of transaction opportunities that we are well-positioned to take advantage of,’ said Vijay Kamath, senior vice-president and head of sales of First Ship Lease Trust Management.

‘While we now have the flexibility to take on both time and bareboat charters with terms shorter than seven years, our ship leasing business will remain ‘long-biased’.’

The average remaining lease term of the trust’s portfolio remains at the current 6.8 years.

The acquisition of the 109,672 deadweight ton product tanker – called the MT Torm Margrethe – will bring the trust’s portfolio size to 24 vessels. Including Torm, the trust will have eight lessees.

Cash generation continues to disappoint

At a Glance

• 4Q10 DPU maintained at 0.95Uscts as expected, despite further decline in net cash generated from operations.

• Contribution from spot charter of product tankers remains tepid; organic DPU growth unlikely in FY11.

• Placement proceeds of ~US$28m raised in FY09 not utilized yet, visibility on acquisitions remains low.

• Maintain HOLD with TP of S$0.45

Comment on Results

4Q10 revenue of US$24.1m was up 3% q-o-q but operating profit was down 19% q-o-q, owing to lower bareboat equivalent rentals received from the product tankers as well as drydocking costs for one of them. As a result, net operating cash was down 8% q-o-q and 20% y-o-y to US$13.0m. While payout was maintained at 0.95 UScts for the quarter, the Trust had to draw down US$0.7m working capital to distribute the US$5.7m to unitholders, after the usual quarterly loan repayment of US$8m.

Outlook and Recommendation

The product tankers continue to be deployed in the spot voyage markets, but utilization rates and net bareboat equivalent income remain below expectations. While freight income was higher q-o-q in 4Q10, expenses were higher as well and the 2 tankers generated bareboat charter equivalent revenue of only US$0.2m in 4Q10, compared to the US$3.8m revenue per quarter applicable during the original charter. With tanker rates unlikely to perform in the near term, we choose to remain conservative on our earnings assumptions from these vessels in FY11.

While the Trust did not provide an update on fleet valuation of US$700m as at end-3Q10, a big change is unlikely. This puts the current value-to-loan ratio at 154%, and implies about 160% coverage at the end of waiver period in June 2011, above the requirement of 145%. We expect DPU payouts to remain at current level in the near term and given that we have not yet seen any acquisition funded by the US$28m placement proceeds raised in FY09, we maintain our HOLD call at an unchanged TP of S$0.45.