First Ship Lease: Demonstrating Strength through Diversification

With a fleet of 9 product tankers, 3 chemical tankers, 2 dry bulk carriers, 2 crude oil tankers and 7 containerships, FSL Trust has the most diversified asset portfolio among the three shipping trusts. The key risk in shipping trusts is the credit risk associated with counterparty default, and FSL Trust seeks to mitigate this through the diversification of lessee base and subsector exposure, and strong risk management. It is also the only trust with a risk management department that mirrors a bank credit department.

Apart from asset diversification, FSL Trust has also been actively seeking alternative funding sources. In October 2008, it became the first Singapore entity to have its American Depositary Receipts (“ADRs”) trading on the PrimeQX tier of International OTCQX in an attempt to reach out to more high quality investors in the United States. And, in 2009, a plan to issue up to USD 200 million senior notes was also put into place, but unfortunately was aborted due to the Dubai World credit crisis.
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Groda Reneges on FSL

The true risk in shipping trusts is the creditworthiness or counterparty risk. On Tuesday, First Ship Lease (“FSL”) announced that Groda Shipping has requested to re-deliver two product tankers, each currently under a seven year base term bareboat charter contract with FSL until November 2014. Employed under long term COAs with Russian energy firm Rosneft Oil Company, the two vessels contribute 15% out of FSL’s annualised revenue of USD 101 million and the pre-mature termination of the contracts will impact cash flow and distributions negatively.

FSL disclosed that Groda Shipping is required to pay lease rental on a monthly basis in advance and has made payment for only one vessel in May. Groda Shipping will no longer make full payments for either vessel from June 2010 onwards. On the brighter side, FSL pointed out that it has the assignment of the long term COAs between Groda Shipping and Rosneft and a cash security deposit of USD 3 million per vessel, which works out to be close to 5 months of charter hire. All eyes are now on the approach the trustee manager will be adopting towards the lessee who had made a clear intention to renege on the contracts. FSL says it is currently in discussions with Groda Shipping and exploring available legal and commercial options.

Finance for Asian Shipping

The availability of ship financing and alternative sources of capital was the central theme revolving Sea-Asia’s conference yesterday. Referring to a slide that illustrates the impact of banks writedowns on their market capitalisations (see below), Dagfinn Lunde, Member of the Board of Managing Directors of DVB Bank SE, pointed out that even though the traditional ship financing landscape has changed dramatically, there is still money available from banks. He told the crowd that DVB, DnB NOR, Nordea, Nord LB, Fortis and some Greek banks are open to different extents and it is possible to put together club deals between USD 100 million to 120 million today. “If you have the words ‘energy’ or ‘offshore’ in your project, even some US banks are still willing to lend,” he added. Continue Reading