(The) Boring Investor

A reader lately alerted me to the undervaluation of the First Ship Lease Trust (FSL). 0.225 in Jan 2012. Together, with Rickmers Maritime, the shipping trusts were the most severe investments in the 19 years that I had committed to the currency markets. However, regardless of the heavy losses, I am ready to look at it 5 years after it was sold by me.

FSL is available of financing/ leasing boats. The shipping industry has been around the doldrums for quite some time, which has resulted in poor financial performance for shipping companies and trusts. FSL is facing similar business conditions. For me, there are 2 key challenges facing FSL. The foremost is immediate. There is a term loan presently valued at USD192.5M which is because of be repaid in Dec 2017. If refinancing is not successful, FSL shall face liquidation and potential fireplace sale like Rickmers. However, if refinancing is successful, the next challenge is sustainability of its cashflows.

A lot of its existing ship charters will expire in 2017 and another few years. These charters were joined into a long time ago when charter rates were still high but have dropped before few years significantly. When the charters expire, the ships shall earn lower rates, posing questions over whether it could generate sufficient cash flow to meet its annual debt repayment obligations. What is my estimated current valuation of FSL? A lot would depend on the value of the ships. If, like Rickmers, its ships could only fetch 23% of their book value, there would be nothing left for shareholders.

The interest margin that FSL has to pay on its loan is dependent on the Value-to-Loan (VTL) ratio, as shown below. Thus, my estimated current valuation of FSL ranges from SGD0.19 to SGD0.32. As shown above, the valuation varies with the market value of the ships significantly. Based on the above calculation, the loan is fully included in the marketplace value of the ships.

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In addition, in its 1Q2017 results demonstration, FSL reported that the rest of the charters will create USD90M in revenue. Thus, I think that the likelihood of successful refinancing is high. 0.11 after a 5-12 months hiatus. This is solely a bet on successful refinancing. If and after refinancing is successful, I will likely reduce the position taking into consideration the uncertainty in the sustainability of future cashflows.

Although refinancing is likely in my opinion, a privilege’s concern to improve some cash to lower the personal debt can’t be reduced partially. 0.097, a privilege’s issue is going to be very dilute. Hence, when I purchased into FSL, I had been also ready to subscribe fully to the rights issue in order never to dilute my shareholdings.