FSL Trust: 2012 Was a 'Dismal' Year for Shipping
In a letter to unit holders First Lease Ship Trust (FSL Trust) chairman Wong Meng Heng comments on the Trust's 2012 financial report: excerpts as follows:
"The industry witnessed another dismal year as weakness in freight rates and asset values persisted in 2012. This resulted in a spate of defaults, restructurings and bankruptcies as shipping companies struggled with the poor market conditions. Unfortunately, FSL Trust was not spared from the unprecedented downturn.
FSL Trust reported full year 2012 revenue of US$106.1 million, which was 4.2 per cent lower compared to the previous year. Net cash generated from operations declined by 25.4 per cent to US$47.6 million.
During the year, we conserved capital and strengthened our balance sheet, increasing our cash reserves by US$5.2 million to US$37.5 million. The majority of our vessels are leased on long-term fixed-rate bareboat charters and these continue to provide the Trust with a steady stream of cash inflow, enabling us to service our loan repayments.
Staying Nimble in Response to Challenges
When we suffered defaults by subsidiaries of Berlian Laju Tanker Tbk in February 2012, we were able to leverage on our wide network, obtain the necessary support from our partners and react swiftly to the situation. We arranged new employment for the three affected chemical tankers in the ‘Nordic Tankers 19,000 Stainless Steel Pool’ which ensured that our vessels would continue to generate revenue for the Trust, albeit at lower rates.
We believe that the chemical tanker sector is poised for a recovery as it has promising supply-and-demand fundamentals, and deploying our vessels in this pool will allow us to benefit from potential increases in freight rates.
Another lessee, TORM A/S (DSKBF) (“TORM”), succumbed to the prolonged weakness in the shipping market and ran into financial difficulties. To help facilitate TORM’s restructuring, we agreed to reduce our bareboat charter rates to variable rates that TORM achieves in the market. In return, all early buyout, purchase and lease extension options in TORM’s favour were cancelled and FSL Trust received a 2.5 per cent equity stake in the restructured TORM.
Trying to achieve revenue stability amid this volatile freight rate environment was challenging. We managed to secure two three-year time charters with Petròleo Brasileiro S.A., one of the world’s largest energy companies, for our two product tankers, FSL Hamburg and FSL Singapore. This move gives us better cash flow visibility for the two vessels, which had previously traded in the spot market since 2010.
Apart from maintaining our base portfolio of long-term bareboat charters and fixed-rate time charters for stability, we decided to keep a small portfolio of vessels, specifically the three chemical tankers, employed at market rates with the flexibility to fix more lucrative charters when market conditions improve. The variable nature of the renegotiated rates of the two product tankers leased to TORM also allows FSL Trust to benefit from a market recovery.
The Trust continues to face risks of defaults and we remain cautious about the outlook for the Trust. We have completed our restructuring with OMNI Ships Pte. Ltd., the lessee of our two dry bulk carriers and are still engaged in another restructuring discussion with one other lessee. On a combined basis, we expect both of these restructurings to have a material impact on revenues for the current financial year."