Pre-paying loans may not be enough. Of course, this depends on the trust's lenders reaction to FSLT's attempts to voluntary prepay loans. Last quarter, a total of US$7.8m (roughly 46% of 1Q cash earnings) was earmarked to voluntarily prepay debt. US$3.8m stemmed from DRS proceeds, while US$4m was from retained cash earnings. We note that this amount is still small compared both to total loans and to our expectations of the quantum of the decline in vessel values.
Possibly seeking covenant waivers. We estimate that FSLT's next vessel valuation will be in the Oct/Nov period (but lenders can call for a revaluation at any time). We believe the question here is not really if the loan-to-value (LTV) covenant has been breached but the tolerance level of lenders to such a breach. Peer Rickmers Maritime [SELL, fair value: S$0.39] had previously announced it is negotiating for LTV covenant waivers with its lenders, while US peers such as Danaos [NOT RATED] and Global Ship Lease [NR] have recently announced successful grants/extensions of such waivers. We expect FSLT to also negotiate for the same - in our opinion, it should be able to secure such waivers but our concern is with pricing. A possible cost structure could be a combination of one-time fees along with higher interest margins over the waiver period.
Covenants and counterparties. We have a NEUTRAL view on the shipping trust sector. We like FSLT's diversification but the shipping industry is undeniably facing tough times. As such, our concerns on covenants and counterparty health remain unchanged. Securing an LTV covenant waiver could be an important next step for FSLT. Maintain HOLD with S$0.58 fair value estimate. This values FSLT at a 30% discount to our 'normal' case discounted FCFE value of S$0.83 (10% discount rate).
First Ship Lease Trust (FSLT) is distributing 2.45 US cents per unit for 2Q09, which represents 74% of net cash generated from operations. Retained cash and proceeds of US$3.8m raised from the distribution reinvestment scheme (DRS) in May 09 will be applied towards a voluntary loan repayment of US$8m.
All of FSLT's lessees have been making payments of lease rentals monthly in advance including those in Jul 09. Remains in compliance with loan covenants. 3Q09 DPU guidance of 1.50 US cents. DRS will not be applied for 2Q09.
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