First Ship Lease Trust

[Boon]

I did a mental exercise in projecting the cashflow assuming that the charter rates stay constant at the current (rather depressed) levels.

- Between 2017-2018, charter will end for number of oil tankers. I estimate affected BBCE revenue is 36 million.
For Aframax, the old charter rate is 23-24k, while market rate is 16k, a drop of about 30%.
For MR, old charter rate is 18k, and market rate is about 13k, which is roughly a similar drop. For convenience, I apply a uniform 40% cut in revenue for all the tankers up for renewal. Resulting decline in revenue will be about 0.4 * 36 = 14.5 million/year.

- In 2020, the charter for the 3 panamax container ship will expire. Affected BBCE is about 20m. The last charter rate is 18.5k. If we assume that panamax charter rate goes to 5k, the estimated decline in BBCE will be about 14.5 million/year.

- Other assumptions:
- no dividend is paid
- Capex of 2 million per year
- No further disposals or purchases.
- Decline in BBCE flows straight to FCF


FY2016:
FCF : 65 m
Interest exp: -9.5m
Debt repayment: -44m
Cash: 43 m
Debt: 222 m

FY2017: (Projected)
FCF: 50.5m (-14.5m after tanker renewal)
Interest exp: -7.7m
Debt repayment: -44m
Cash: 44.2 m
Debt: 178 m

FY2018: (Projected)
FCF: 50.5m
Interest exp: -5.8m
Debt repayment: -44m
Cash: 44.9 m
Debt: 134 m

FY2019: (Projected)
FCF: 50.5m
Interest exp: -3.9m
Debt repayment: -44m
Cash: 47.5 m
Debt: 94 m

FY2020: (Projected)
FCF: 36m  (-14.5m after 3x containership renewal)
Interest exp: -2m
Debt repayment: -44m
Cash: 37.5 m
Debt: 50 m

FY2021: (Projected)
FCF: 36m  
Interest exp: nearly 0
Debt repayment: -44m
Cash: 29.5 m
Debt: 6 m

FY2022: (Projected)
FCF: 36m  
Interest exp: nearly 0
Debt repayment: -6m
Cash: 59.5 m
Debt: 0

FY2027: (Projected)
FCF: 36m  
Cash: 59.5 + 36m x 5 = 239.5m

By 2027, vessels are fully deprecated, and let’s assume that they are worth nothing.
That gives us 37.5 US cents per share.

Potential upside if:
- Oil tanker or containership charter rates goes up

Potential downside if:
- Oil tanker or containership charter rates go down (less likely, since current rates are considered low?)
- One or more charterers default. Both Yang Ming and TORM are not doing well.
- Owner of manager is HSH Nordbank, which is not doing well. It faces liquidation if Schleswig-Holstein and Hamburg fails to sell it. In the event of liquidation, will there be greater motivation to liquidate the fleet, possibly at low prices?
- As a VB is fond of saying, the last few financial crises happened in 1987, 1997, 2007. If one hits us this year, FSLT may face refinancing issues, among other problems.

Hi gzbkel,
 
Good work with great efforts there.
 
Here are my comments:
 
FSL currently has 22 vessels:
12 x Product Tankers ( 2 x LR2 + 3 x MR + 7 x Handy )
5 x Containerships
2 x Crude OIL Tankers ( 2 x Aframax )
3 Chemical Tankers 
 
FSL Charter Profile:
1 product tanker (MR) in pool with Hafnia
2 feeder containership in pool with HANSE
3 chemical tankers in pool with Nordic tankers
2 product tankers expiring in 2021 (on fixed rate bareboat charters to Fisher)
3 containerships with leases expiring in 2020 (on fixed rate bareboat charters to Yang Ming)
2 product tankers (LR2) with leases expiring in 2018 ; TORM
7 product tankers with leases expiring in 2017, of which 5 have option for lease renewal.
2 crude oil tankers (Aframax) with leases expiring in 2017.
 
Leases of 9 vessels would expire in 2017, of which 5 vessels have “options” for extension, and 4 without.
 
5 vessels with option for extension:
a) Speciality – handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
b) Seniority - handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
c)  Superiority - handy size product tanker - current bareboat charter rate (net) = USD 4,100 / day
d) FSL Hamburg – MR product tanker – current gross daily charter rate = USD 18,000
e) FSL Singapore - MR product tanker – current gross daily charter rate = USD 18,000
 
4 vessels with no option for extension :
1) Cumbrian Fisher – Handy size product tanker – current bareboat charter rate (net) = USD 3,450 / day
2) Clyde Fisher – handy size product tanker - current bareboat charter rate (net) = USD 3,450 / day
3) FSL Hong Kong – Aframax crude oil tanker – with current gross daily charter rate of USD 23,000
4) FSL Shanghai– Aframax crude oil tanker – with current gross daily rate of USD 24,100
 
Assuming leases of FSL Hamburg and FSL Singapore would be renewed at current market charter rate of USD 13,000 (gross),
 
=> Potential revenue reduction (gross) for the two MR = USD 3.7 m (gross)
 
Assuming leases FSL Hong Kong and FSL Shanghai would be renewed at current market charter rate of around USD 16,000 (gross)
 
ðPotential reduction in revenue for the two Aframax vessels = USD 5.5 m per year (gross)
 
Total potential revenue reduction for 2 x MR + 2 x Aframax = USD 9.2 m (gross), which might be less on “net” basis.
 
The total revenue for the 5 handy size tankers = USD 7 m (net). I think these are “specialist product tankers” and their leases are likely to be renewed with the same rate.
 
Even with a 30% rate reduction => USD 2.1 m (net) reduction per year.
 
The two LR2 vessels with TORM due for lease renewals in 2018 are on variable market rates anyway.
 
Your assumption of rate reduction from USD 18,500 to USD 5,000 (net) in 2020 for the 3 containership is HUGE……..
 
BTW,
 
1) Do note the difference between Revenue (FY2016 = USD 98.144 m) and BBCE revenue (FY2016 = USD 72.849 m)
2) Do note the difference between BBCE revenue (FY2016=USD 72.849) and OCF (FY2016= USD 66.971)
3) Do note the difference between OCF (FY2016 = USD 66.971 m) and FCF (FY2016 = ???)
4) Do note the difference between “gross” rate and “net” rate.
5) Would a reduction in BBCE revenue by an X amount translate into a reduction in OCF by the same X amount ?
6)  If one were doing a more detail analysis, the above matter.
7) Not saying you are wrong as your 40% uniform cut is more than enough to absorb the difference.
 
That said,
 
NAV per share now = USD 39 cents
 
NAV per share 10 year later (2027) = USD 37.5 cents
 
Why take the risks and wait for 10 years ? Liquidate the trust now ………Ha-ha !

However, your projections do show that debt would be fully pared down in 2022. 

If all excess cash could be returned to unit holders from then on, it would make a big difference.

As I have also said earlier - don't have to wait till debt is fully pared down before resuming dividend payments - if DPU could be restored earlier than 2022, it would be even better.  
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