Friday, June 10, 2011

First Ship Lease looks to bootstrap itself by bailing out beleaguered TORM

The recent First Ship Lease (FSL) purchase and lease back deal of two LR2 product carriers with TORM is an alliance of two weak market players trying to shore each other up in difficult market conditions. FSL lost US$ 928,000 in 4th Q 2010 and got whacked with credit rating downgrades, whilst TORM expects a gloomy pre-tax loss of up to US$ 125 mio for the current year. FSL is doubling up on a TORM turnaround to bootstrap itself from its prior losses out of a failed MR deal with Groda Shipping.

Lease finance is one of the first moves for overleveraged shipping companies, facing liquidity problems. They sell vessels to the leasing company for cash and then commit to long term bareboat charter deals to continue to operate the vessels in their fleet. The lease payments generally leave very little margin for any surplus between operating income and expenses. Frequently the leases go underwater and have to be covered elsewhere in the company. The company gets badly needed cash and a book profit on the vessel sale. They bet on a turnaround in the market to cushion them in the lease payments.

Leasing companies are looking for higher returns on investment than commercial banks. They normally aim for a low double digit return on the lease payments and 20-25% return on equity. Well capitalized shipping groups shun this high-priced finance and are not keen to share residual value gains on their vessels. The ideal client for a leasing company is a shipping group with a big balance sheet who is willing to pay a higher price for finance because it is already overleveraged and hopes to grow itself out of its financial problems.  A healthy, lean growth company lacks the balance sheet.

FSL made a bad placement on two MR product carriers, the ice-classed 47,470-dwt Nika I (built 2005) and the 47,496-dwt Verona I (built 2006) that were leased to Groda Shipping. In the falling product tanker market, Groda struggled to make the lease payments and the ships were arrested by their bunker suppliers. FLS was forced to repossess the vessels and pay off the creditors. The ensuing losses on this transaction led to credit downgrading and an S+P creditwatch 'negative' outlook for FSL.

Despite strong growth in demand for refined oil products, the product tanker market is still struggling to absorb the large inflow of tonnage seen in 2008 and 2009. A major Scandinavian ship finance group is forecasting that this may continue well into 2012. FSL seems to be betting that the projected 6% distance-adjusted demand advance for 2011 and expected 5% product tanker fleet growth will support rates and values.

With 16% contract coverage in the tanker division, TORM needs more equity to allow for amended amortization with its senior lenders until the market returns. They are happy to absorb the additional finance costs for fresh cash to assist them with their liquidity problems.

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