First Ship Lease Trust

UOBKayhian on 14 June 2012

Investment Highlights
· Vessels redeployed. First Ship Lease Trust (FSL) has secured three-year time charters with Petrobras for the FSL Hamburg and Singapore, while the FSL New York, London and Tokyo will be redeployed in the Nordic Siva pool by 1H12. These vessels were redeployed after the previous lessees Groda Shipping & Transportation and PT Berlian Laju Tanker defaulted on charter payments.
· Renegotiated contract. FSL also renegotiated the charter rates for two product tankers leased to a wholly-owned subsidiary of TORM A/S (TORM). The adjusted charter rates will be based on variable rates that TORM achieves in the market, which are significantly lower than the original bareboat charter rates. FSL will also be allocated equity in TORM in exchange for the rate concessions.
· No near-term plans to expand or dispose fleet. In light of the tough financing environment and depressed vessel prices, FSL does not have any plans to expand or dispose off its vessel fleet in the near term.

Our View
· Risk of further defaults. Although FSL has entered into fixed, long-term bare-boat charters with its customers, the group faces the risks of further defaults or contract renegotiations in a prolonged shipping downturn as most of the previously contracted charter rates are significantly above market rates.
· Risk of declining asset prices. FSL’s debt covenants require the group to maintain a security-to-loan ratio of more than 125%. Currently, the security-to-loan ratio stands at 130%. As the value of the loan security is based on vessel prices, FSL may breach its loan covenants if vessel prices fall further.
· Cut distributions. Given the challenging operating environment, FSL aims to shore up its balance sheet and preserve capital. As a result, the group has cut 1QFY12 distribution by about 90% yoy to 0.1 US cents. In our view, distributions are likely to remain at this level until the balance sheet improves.

Valuation
· Trading at significantly lower yield. FSL is trading at a gross yield of 2.9%, significantly lower than Rickmers Maritime’s 9.6%. Based on P/B metric, FSL’s P/B of 0.3x is comparable to Rickmers Maritime’s.