FSL Trust files writ against Daxin Petroleum

FIRST Ship Lease (FSL) Trust has filed a writ of summons against Daxin Petroleum and its affiliated companies Mesino Shipping and Rovina Shipping.

Three Daxin representatives – Gary Geller, Ngiam Tee Chiang and Per Sanfrid Landin – were also named in the writ filed on Tuesday this week. Daxin was sued after it arrested two FSL Trust ships – Nika I and Verona I – in ports in Japan and China. Daxin detained them early last month, saying its charterers Mesino and Rovina had not been paid for bunkers supplied to the vessels.

FSL Trust has since recovered both vessels after posting bail of US$1.6 million for Verona I in Japan and US$2.8 million for Nika I in China.

Singapore-listed FSL Trust is claiming damages for all losses incurred and for arrest-related damages. It is also seeking declatory relief and ‘for an account to be taken of monies withdrawn from the bareboat charterers’ accounts’.

FSL Trust also wants legal action against the two vessels in Japan and China dropped. Its two wholly owned subsidiaries, FSL-18 and FSL-19 are currently defending claims made against the vessels in Japan and China.

FSL Trust is represented by Allen and Gledhill in the proceedings.

When contacted yesterday, Daxin declined to comment.

FSL Trust secures $6m for vessel re-delivery

FIRST Ship Lease Trust (FSL Trust) has received US$6 million, an amount serving as security deposit and which it was entitled to following the non-fulfilment of contracts by the charterer of two vessels, one of which remains detained by a creditor.

The receipt of the sum follows the re-delivery by the customer of the two vessels. A re-delivery occurs when a lessee asks to return a vessel earlier than stated in a charter agreement.

In May, FSL Trust’s client Groda Shipping & Transportation re-delivered Verona I and Nika I to the trust, citing cashflow problems. Because the contracts were not fulfilled by Groda, Groda was required to pay the US$6 million.

‘The amount has now been released to FSL Trust upon the expiry of the stipulated default notice period,’ said FSL Trust’s trustee-manager. The US$6 million will be recognised as non-recurring revenue for the quarter ended June 30, 2010.

An S&P analyst had warned that the security sum could be in jeopardy because both vessels were seized in June.

Singapore-based Daxin Petroleum detained Verona I and Nika I in Shimotsu, Japan, and Qingdao, China, respectively, over claims that it had not been paid for bunkers it supplied to the vessels.

Verona I has since been released, after FSL Trust posted bail of about US$1.6 million with a Japanese court. Nika I remains in detention, with bail set at US$2.8 million.

Dragged back into uncertainty

Vessel re-delivery. FSL Trust’s (FSLT) charterer Groda Shipping recently requested FSLT to take re-delivery of two of its product tankers Verona I and Nika I as Groda does not intend to continue to make full charter payments. To recap, both vessels are under a seven-year bareboat charter agreement fixed at US$20,700/day each until Nov 2014. For the month of May 2010, Groda has made full payment for only one of the two vessels. It has also told FSLT that from June 2010 onwards, full payments should not be expected for either vessel. The charter agreement was structured with a cash security deposit of US$3m/vessel (covering about five months of charter revenue) and an assignment of the long-term Contract of Affreightment (CoA) between Groda and OJSC Rosneft Oil Company, a Russian state-controlled energy company.

What happens to DPU? FSLT said it was exploring legal and commercial options, and that “best efforts will be made to ensure the uninterrupted operation of the vessels”. FSLT has the option to either continue the CoA with Rosneft (terms not disclosed) or re-deploy the two vessels elsewhere. The end result could potentially be at a lower rate than before. The two vessels contribute roughly 15% of total revenue. In our view, FSLT may be able to meet its DPU guidance for 2Q10 with cash reserves and the vessel deposits. However, DPU guidance for further quarters will depend on where the two vessels are employed and at what terms. Note that FSLT has to pay out US$32m (roughly 50% of cash earnings) in loan repayments every year during the covenant waiver period. The balance is utilized towards distributions.

Contagion key concern. Our key concern is what the redelivery means for the rest of FSLT’s product tanker portfolio (26% of total revenue including Groda). While Groda’s thought process is unknown, it seems to have found it more profitable to walk away from the deal (and the US$6m deposits) than to continue with the charter agreements. FSLT has always touted its focus on risk management and current events may be a good test of that focus. On a positive note, we understand from the manager that this development does not impact FSLT’s loans. Still, any reduction in revenue could affect FSLT’s plans to raise unsecured debt. We reduce our fair value estimate from S$0.59 to S$0.48 (which assumes a slight negative drag on cash earnings from the two vessels and increases our discount to FCFE value from 20% to 25%). Maintain HOLD.

Unexpected counterparty issues

• Key customer Groda Shipping reneges on contract, returns product tankers prematurely to cut losses

• Worst case, DPU down 15-18% in FY10-11

• Risk of knock-on effect on other customers, despite the presence of corporate guarantees as recourse

• Downgrade to HOLD, TP reduced to S$0.55

Charterer wants to return 2 vessels prematurely. FSLT has been requested to take immediate re-delivery of two of their vessels by charterer Groda Shipping, much before the scheduled charter expiry of November 2014. The two vessels are product tankers of about 47,000 dwt each and are currently on a back-to-back sub-charter to Russian statecontrolled energy company OJSC Rosneft, under a long-term Contract of Affreightment (“COA”). Utilisation by Rosneft was probably low and high bunker prices rendered the arrangement unsustainable for Groda. FSLT is likely to settle amicably and will receive US$3m security deposit on each vessel, which translates to about 5 months charter-hire.

Impact cash flow significantly. The two charters are currently fixed at US$20,700 per day each and contribute about 15% to FSLT’s topline. The ships are still employed by Rosneft and FSLT could go into a direct contract with them. However, the COA revenue should be significantly lower than the current bareboat charter rate, and FSLT would have to assume operating risks as well. The other option for FSLT is to scout for 3rd party employment, but current charter rates could be around 40% lower than the existing bareboat rate.

Quarterly DPU could fall to 1.1UScts from 1.5UScts in the near term. Assuming a conservative 50% cut in income from the Groda vessels, our DPU estimate for FY10-11 is reduced by 15-18% to 4.8-5.3UScts from 5.6-6.5UScts earlier. Pending further clarity on negotiations with Groda and how the trustee manager employs the ships in future, we downgrade the stock to HOLD at a TP of S$0.55 (higher peg of 12% target yield to reflect increased risk of charter renegotiations by customers). Impact on DPU could be lower if part of the U$6m security is channeled into distributions.