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FSL Trust moving towards loan covenant compliance, distribution payments

FSL Trust moving towards loan covenant compliance, distribution payments
Having reported its first quarterly profit in three years in the second quarter, First Ship Lease Trust (FSL Trust) is now moving towards a position where it can again pay distributions to unitholders, and then start growing its business again.

When FSL Trust Management ceo Alan Hatton came into the role a year ago the Trust had suffered multiple long-term bareboat charter defaults with a significant portion of its fleet by then trading on the spot or time charter markets, and much of its original senior management had resigned. “There was quite a big vacuum to walk into and quite a lot that needed to be done quite quickly,” he told Seatrade Global in an interview.

One of his key tasks over the last year has been to work towards a position where the Trust is back in compliance with loan-to-value covenants, as under the deal struck with its banks it cannot pay distributions to unitholders without meeting this.

“We decided to focus on where we can take out cost in the process and a lot of that was different layers of commissions to managers, and really improve the net earnings of those ships that had come back into the Trust and improve performance that way,” Hatton explained.

“That’s one of the key drivers of our improved performance in Q2. In Q2 we demonstrated when we have the vessels fully optimised the trust can make money.

“Once we become compliant once again with our original loan terms we will be in a position to drive a distribution, and I think it’s important that we could demonstrate that.”

The current deal between FSL Trust and its banks on the relaxation of its loan covenants expires at the end of 2014. As to whether it will be back in compliance by that date Hatton said it “was quite close” and there might need to be a further renegotiation, however, he is clear compliance “will happen sooner rather than later”.

“We are equity accretive as we are paying down loans much quicker than we are losing value in the ships so that is creating some equity as we move along,” he added.

FSL Trust currently has a fleet of 23 vessels of which 12 are on long term bareboat charters and nine are trading on spot or time charter markets, and two are on market rate bareboat charters.

In the first quarter of this year the Trust sold two bulkers that had been defaulted on by Omni Ships, however, it does not plan to sell any more vessels.

“The reason we sold the two dry bulk vessels, was we got them back in a condition that wasn’t ideal, and that is unfortunately the problem on a defaulting counterparty on a bareboat lease,” Hatton explained.

With the vessels facing significant drydocking expenses and not breaking even it made more sense to sell them.

As a result he said: “By the end of Q1 we saved ourselves $3m in capex and then also what we managed to do was to negotiate with the banks by using that money to pay down our position they gave us some relief on Q1 and Q2 debt repayments to the tune of $5.3m.”

Looking ahead once the Trust is in a position to pay distributions again on a stable basis, the aim will be to renew and grow the fleet.

“The way realistically the deal will be done is by raising new equity and then finding debt to match,” he said. Raising new equity could be done either by going to the existing shareholders, although this would require the stock to sufficiently re-rated by the market or through third party funds.

Hatton added that there were people interested in getting involved and supporting the Trust and that it was in discussions.