Would First Ship Lease Trust Be Buried In A Watery Grave?

First Ship Lease Trust (SGX: D8DU) is a business trust that focuses on leasing its vessels on bareboat charters. A bareboat charter is one where the owner of the vessel is not responsible for providing any crew or provisions when the vessel’s leased.

The trust has been facing some tough challenges in the past few years (it has been making losses for at least its past two completed financial years) due to the slowdown in the shipping industry and is currently still working its way out of the mess. At last count, the trust has a portfolio of 23 vessels that consist of 7 containerships and 16 tankers.

First Ship Lease Trust had announced its first quarter results yesterday. Concurrently, the trust’s auditor also released some important comments regarding the trust’s ability to survive. But first, let’s go through the quarterly figures.

First quarter results

For the quarter, the trust achieved revenue of US$22.4 million, which was a decline of some 2.7% year-on-year. The trust had faced a huge increase in its vessel operating costs and that caused its operating income to fall by 59% to just S$1.9 million.

With financing costs (i.e. interest expenses) and a loss that arose after the sale of some of its vessesl, the trust ended the quarter with a loss of US$4.95 million. While red ink isn’t always welcome on the income statement, First Ship Lease Trust’s showing was at least a nice improvement from the previous year when it made losses of US$7.1 million.

First Ship Lease Trust currently has a cash balance of US$20.6 million; US$10 million of which is restricted cash that’s earmarked for its loan facilities. It has a total debt load of US$347 million, giving it a net debt to equity ratio of 1.24.

Troubles at First Ship Lease Trust

When a business has customers that are in poor financial condition, it can hardly bode well. Unfortunately, some of First Ship Lease Trust’s clients have very weak balance sheets themselves; companies such as TORM and James Fisher have been suffering losses for a few years now and are struggling with debts of their own.

There’s more to be concerned about at First Ship Lease Trust. As part of a deal that had the trust’s creditors relax their loan covenants (covenants are certain conditions which a borrower must fulfil, failing which, the loan may be declared as being defaulted upon), the trust can’t pay any distributions to unitholders until the end of this year. However, a glance at its cash flow statement would reveal that most of its operating cash flow would have to be channeled toward the repayment of loans as well as interest. Even without the restrictions, it might take some time before the trust can have the necessary cash flow to be able to dole out distributions to unitholders.

The last thing that’s troubling First Ship Lease Trust has to do with some aforementioned comments from its auditor. The relaxation of the loan covenants had actually expired on 31 Dec 2013. But, there have been agreements between the trust’s creditors and itself that the relaxation would continue till the end of this year. However, the extension of the deadline has yet to be formally put in place. This resulted in the trust’s long-term loans of US$343 million being viewed as short-term borrowings as the trust’s creditors could demand repayment in the event of a breach in covenants.

As it stands, First Ship Lease Trust’s management is confident that the extension would be enacted smoothly. But, the trust’s auditor is worried about its ability to survive as the trust has a woeful lack of sufficient liquid financial resources to meet its debt-obligations in the event of a covenant-breach.

Investors in the trust might want to keep a close watch on how this all plays out.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.