Monday, November 28, 2011

Is Frontline headed for Chapter 11, following Genmar?

Frontline bills itself as the ‘world’s largest tanker company.” This is definitely not the place to be these days with tanker earnings barely covering operating expenses. After the General Maritime Chapter 11 filing, attention has turned to Frontline and its dismal Q3 results: a loss of $ 166.47 million. Frontline, however, is quite a different story that Genmar. The John Fredriksen shipping empire has far more resources than Peter Georgiopoulos.

Unlike General Maritime, Frontline has not yet run out of cash, but the odds of cash crunch in 2012 are substantial. Most market experts don’t expect a significant recovery until 2013. Platou Capital Markets projects accumulated capex totals of $451 million by the end of 2013 with only $147 million bank debt committed. The group is highly leveraged with term debt of $ 1.163 billion and capital lease obligations of $ 1.173 billion but total equity of only $ 557 million. Frontline’s fleet market value is just at par with the term debt and the trend is downwards on vessel values. Frontline’s operating losses in Q3 (net of substantial vessel impairment charges) were $14.4 million with an interest expense of US$ 32.5 million uncovered.

Ironically, the Frontline Suezmax vessels that created its asset impairment charges were ex-Top Ships vessels that Fredriksen had purchased just before the 2008 meltdown in mistaken hopes of an expanding market for this category of tanker. This transaction saved Top Ships from bankruptcy at the time. They were first generation double hull tankers without transversal bulkheads that raised controversial stability problems. Bulkheads are critical for tanker stability.

The Frontline fleet has a large number of older 1990’s-built tankers that are currently at scrap-level prices. Major oil companies have tightened their age criteria to ten years, creating pressure on these older units. This was reported to be one of the factors that led to the departure of Frontline from the TeeKay managed Gemini Suezmax tanker pool. Frontline and Nordic America had older units and they have now gone off to create a pool of their own.

Frontline Chairman John Fredriksen, nevertheless, has resources that he can bring in to restructure Frontline if he wishes. He remains the wealthiest man in Norway (although he has now taken Cypriot nationality for tax relief). Indeed his investment interest had been waning in the Frontline for a few years as he focuses on more profitable ventures like Golar LNG. The related downstream company Ship Finance International, which leases tonnage to Frontline, is invested in a variety of shipping sectors as well as off-shore drilling rigs.

Already Frontline is selling older vessels to raise cash. Like Eitzen, which was initially in trouble in 2009, Frontline is currently airing a number of alternative restructuring ideas. It is considering splitting the company by separating the trading fleet from the new building orderbook. There is also talk about renegotiating the lease payments to Ship Finance with lower payments now and larger payments in the future.

Generally, “Big John” seems relaxed about the situation. The market is counting on Fredriksen to come up with a creative solution to restructure the company.

1 comment:

  1. 1. I was trying to understand why FRO & NAT left the Gemini tanker pool. Your point makes sense.
    2. FRO seem to have decided to cut their losses on the Top Ships vessels. During these troubling times for the tanker sector, it seems like a sensible move.
    3. I agree with you regarding Fredriksen resources for FRO > available GMR resources.

    Thanks for the insights.