Is First Ship Lease Trust Finally Able To Turn Its Business Around Now?

Last week, my colleague David Kuo and I met with Alan Hatton, the Chief Executive Officer of FSL Trust Management Pte. Ltd., the trustee-manager of First Ship Lease Trust (SGX: D8DU). We were invited for a meeting to be updated on the latest on-goings at the business trust.

I first noticed First Ship Lease Trust back in 2012 when it was undergoing a restructuring. At that time, what I saw was not pretty and many of the problems plaguing the trust had persisted through to 2013. You can read more about the history of First Ship Lease Trust in here and here.

But history is what it is – the past. According to Mr. Hatton, there had been a near-complete change of staff after FSL Trust Management underwent a restructuring. To that point, only two members of the current team of 12 were from the pre-2012 group. Mr. Hatton himself was only appointed as CEO of the trustee-manager on 27 August 2013.

I went into the meeting hoping to find some reasons that would show that the new First Ship Lease Trust is no longer the entity that I once knew. And during our 2-hour meeting, there were indeed a few bright spots.

Mr. Hatton seemed confident that the business trust is now past its lowest point. For most of First Ship Lease Trust’s vessels that were affected by customers who had defaulted, the trust has managed to redeploy those assets into new time charters, the spot market, or earnings pools.

Moreover, the trust has already impaired the asset value of many of the vessels that were impacted by customer defaults. The trust has returned to profitability for the whole of 2014 (a profit of US$4.05 million versus a loss of US$65 million in 2013).

In addition, the trust announced back in January this year that is now “compliant with the terms of its original loan agreement dated 1 December 2011.” The trust had broken the covenants of the loan agreement back in 2012 (key covenants would be a value to loan ratio of 125% and a debt service coverage ratio of at least 1.10) and was given a relaxation period.

Now, the relaxation period is over and the trust can go back to strengthening its balance sheet and building its business.

In other developments, the trustee-manager had recognized the flaws in the business model of the old First Ship Lease Trust in being a financing company.

To that point, the trustee-manager has been transforming First Ship Lease Trust’s business model toward one of being a true vessel owner. This means that the trust will be more actively involved in the deployment of its vessels to end users instead of just engaging in bareboat charter agreements as it has done in the past.

First Ship Lease Trust is also seeking to stabilise its cash flow so that it can consider restarting distributions to unitholders.

Foolish Takeaway

All these do seem great. If the trust is able to transform its business into a ship-owner model, the trust’s business risks might be reduced significantly.

That said, there are still some major risks confronting First Ship Lease Trust and its current management which might hinder the trust’s turnaround. These risks are explored further in here.

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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 writer Stanley Lim does not own any companies mentioned above.