First Ship Lease Trust

[wonghw12]

I am interested to know how the trust can extract the value of the fleet for unitholders.

Nett of Mgmt fee, FSL is generating 40 mil cashflow per year. Post 2021, this is likely to drop until 22 mil cashflow per year. The fleet has another useful life of about 9 years (Year 2027). On the balance sheet front, the debt stands at 132 mil at 5% interest currently with cash of 13mil.

If FSL decides to just renew the loan without lowering the principal now and survive till 2027, unitholders are likely to get US $110mil + scrap value of the vessels (e.g. 20 mil). This means unitholders can expect about SGD 20 cents in returns in 2027. This gives about 8.5% annual returns

However, if mgmt decides to raise cash of SGD $50mil using a rights, FSL can pay back the loan faster by about 1-1.5 years; unitholders will get back about US 150 mil + scrap value. Unitholders can expect about SGD 28 cents in returns in 2027. However as they have pledged more cash, their annualized returns will fall to about 5.2% but with the trust being less at risk to the interest rate environment and bank's demands.

The best option will be that Prime injects its assets without any encumbrances into FSL and be issued shares at the price of FSL's book value ($0.37 per share). However, even i feel this third option is unlikely; it may be possible that Prime injects it assets at current share prices, but such an arrangement is more beneficial to Prime because it gets a larger pile of the lucrative FSL assets.

Seems that rights to retire debt would be a terrible deal for unitholders - cost of equity should definitely be higher than 5.2%. Though I returns might be somewhat higher if we assume that FSL dividend out the cashflow every year instead of only doing one capital return in 2027.

Suspect that the new management want to run FSL for longer though so scenario 3 (injection of assets) or fleet renewal is quite possible. Recall the earnings
call mentioned that FSL will do a big asset revaluation this month. Expect huge impairments to the asset value - which can allow Prime to inject assets as discussed by CY09.