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May 30 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Singapore-based First Ship Lease Trust's (FSLT) Long-Term Issuer Default Rating (IDR) to 'B-' from 'B'. The Outlook is Stable.
The downgrade reflects weakness in FSLT's portfolio asset quality following defaults by two lessees, Geden Holdings and OMNI Ships, in 2013, which resulted in a decline in FSLT's revenue and EBITDA. FSLT had been in discussion with its lenders since September 2013 to negotiate a further set of covenant relaxation terms. Immediate liquidity concerns have eased following an extension of relaxed loan covenants until December 2014, and recent vessel sales have further improved the liquidity position. FSLT's current bareboat lessees are of adequate credit quality, and Fitch expects FSLT to generate adequate operating cash flows to meet its debt servicing commitments and other operational expenses. Fitch does not expect FSLT's credit metrics to improve significantly in the medium term.
KEY RATING DRIVERS:
Materially Weaker Credit Metrics: At end-2013, EBITDA debt service coverage ratio was 0.91x, which was weaker than Fitch's expectations and below the bank loan covenant threshold of 1.0x. Two of FSLT's lessees, Geden Holdings and OMNI Ships, which together accounted for 24% of FSLT's 12-month bareboat charter revenues, defaulted in July and September 2013 respectively. This resulted in a 15% drop in 2013 revenue to USD89.99m and a 19% drop in EBITDAR to USD62.56m. In February 2014, FSLT secured an extension of relaxation in its bank loan covenants to 31 December 2014, which alleviated immediate liquidity pressure. Proceeds from vessel sales have been directed to debt reduction, which has enabled FSLT to comply with the relaxed bank loan covenant of an EBITDA debt service coverage ratio of 0.90x for 1Q14.
Vessel Sales Fund Debt Reduction: FSLT sold two loss making vessels, the Stella Fomalhaut and the FSL Durban, in 1Q14 for USD23.55m cash. This transaction resulted in FSLT recognising a loss of USD1.41m. The sale proceeds and its cash balance of USD20.37m as at end-2013 were used to fund a USD22m loan prepayment and an USD8.5m contractual loan repayment. Gross term debt as of 31 March 2014 was USD347.30m (end-2013: USD377.49m). Contractual principal repayment after the prepayment has reduced to USD39m per annum from USD44m in 2013.
FSLT's free cash generation and its unrestricted cash of USD10.64m at end-1Q14 should enable the trust to comfortably cover its contractual principal repayments. In addition, debt repayment is not overly onerous because Fitch expects FSLT to sustain positive free cash flows (FCF).
Adequate Contracted Revenue Visibility: FSLT's remaining bareboat charter lessees - Yang Ming, Evergreen, James Fisher and Schoeller are of acceptable credit quality. Contracted revenue in 2014 and 2015 is USD47m and USD40m respectively. This and the time charter, spot and pool revenues should enable the trust to meet its debt servicing commitments till end-2015.
Unit Distribution to Limit Metric Improvement: While Fitch expects cash flow from operations of USD45m-50m per annum for 2014-2016, FSLT could be required to make unit distributions from 2015 and therefore Fitch expects only modest improvement in FSLT's credit metrics.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- FSLT's cash available for debt service, that is, (Unrestricted cash + FCF + interest expense + unit distributions) / (interest expense + contractual principal repayment of USD39m + unit distributions), falls below 1.2x on a sustained basis due to further lease default (2013: 1.05x).
Positive rating action is not likely in the next 24 months. Fitch may, however, consider positive rating action if FSLT's cash available for debt service improves to above 1.6x on a sustained basis.