(The following statement was released by the rating agency)
Nov 28 -
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Summary analysis -- First Ship Lease Trust ------------------------ 28-Nov-2012
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CREDIT RATING: B+/Negative/-- Country: Singapore
Primary SIC: Trusts, nec
Mult. CUSIP6: 336411
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Credit Rating History:
Local currency Foreign currency
19-Apr-2012 B+/-- B+/--
23-Nov-2009 BB-/-- BB-/--
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Rationale
The rating on Singapore-based First Ship Lease Trust (FSL) reflects the
company's exposure to the weak credit profiles of its lessees and likely weak
freight rates over the next one to two years due to a downturn in the global
shipping industry. FSL's predictable cash flows from long-term lease contracts
protect the company from the volatility--to the extent its customers meet
their rent obligations. An improvement in FSL's short-term liquidity also
supports the rating.
We assess FSL's business risk profile as "weak." We expect conditions in the
shipping industry to remain difficult in 2013 due to an oversupply of ships,
tepid demand, and high bunker fuel prices. Over the past one to two years,
several FSL vessel charter contracts were terminated because the
counterparties faced financial difficulties. This increased FSL's exposure to
the spot market and decreased its EBITDA margin. In our view, a prolonged
downturn in the shipping industry could further increase the risk that some
more lessees may fail to pay rentals on time and renegotiate or terminate
charter arrangements. In our base case, we expect FSL's EBITDA margin to fall
below 70% in 2012 from 77% in 2011, and stay at those levels for one to two
years.
We assess FSL's financial risk profile as "aggressive." In our base-case
scenario, the company's key financial ratios are likely to remain weak. We
expect FSL's ratios of funds from operations (FFO) to debt and of debt to
EBITDA to be 11%-15% and 5x-6.5x, respectively, in the next one to two years.
The EBITDA interest coverage is likely to be 3x-4x in the same period. Most of
FSL's long-term contracts generate predictable cash flow. The company's
improved short-term liquidity following revisions in two loan covenants and
suspension of cash dividends until June 2013 support its financial risk
profile. However, we believe the downside risk to FSL's financial performance
is still significant given that counterparty risks are likely to remain high
in the next one to two years. Our base case does not incorporate potential
losses from further customer defaults or restructuring.
Liquidity
We assess FSL's liquidity to be "adequate," as defined in our criteria. The
company has no short-term debt maturities. FSL's liquidity profile has
improved following the relaxation in two covenants and the suspension of
dividend distribution until June 2013. We expect the ratio of liquidity
sources to uses to be 1.3x-1.4x in the next 12-18 months. Our liquidity
assessment is based on the following assumptions:
-- FSL's sources of funds include cash and cash equivalents of US$18.2
million as of Sept. 30, 2012, (after excluding US$15 million minimum cash
balance that the company is required to maintain as per its loan covenants)
and estimated FFO of about $50 million.
-- FSL has US$44 million of scheduled debt amortization per year and
scheduled interest payments of about US$24 million.
We assume that FSL will not acquire any new vessels in 2012 and 2013.
Outlook
The negative outlook reflects our view of the high credit risk of FSL's
lessees and the company's exposure to the volatile spot freight market amid a
prolonged downturn in the shipping industry.
We could lower the rating if FSL incurs large losses from defaults by
customers, or we see high likelihood of a covenant breach. In addition, lower
spot market freight rates than we expect could weaken the company's credit
protection measures and exert downward pressure on the rating. EBITDA coverage
of gross interest expenses of less than 2.5x or a ratio of FFO to gross debt
below 10% would indicate such weakening.
We could revise the outlook to stable if we see clear signs of an improvement
in the credit quality of FSL's lessees, along with a sustained improvement in
the company's credit protection measures and liquidity. Given that
counterparty risks are likely to remain significant over the next 12 months,
we believe the possibility of a positive rating action is low.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Source: http://news.yahoo.com/text-p-summary-first-ship-lease-trust-111315143--sector.html
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