FSL Trust "weak" against business risk: S&P

Prevailing shipping industry woes of oversupply and lackluster demand may result in more charter terminations.

Singapore-based FSL Trust has already had lessees terminate their charter contracts, and additional ones could be looming as 2012 proves to be another trying year for the shipping sector.

"We lowered the rating on FSL because of the increase in the company's exposure to volatile freight rates in the spot market," said Standard & Poor's credit analyst Abhishek Dangra. "This is due to termination of fixed-rate long-term charter contracts by two lessees. A prolonged downturn in the shipping industry has put the weak credit profile of FSL's lessees under pressure."

"In 2012, PT Berlian Laju Tanker Tbk. (BLT; D/--/--) terminated the charter contract with FSL, which repossessed the three chemical tankers leased to BLT and will deploy them in the "Nordic Siva" pool. FSL also announced that it is renegotiating charter terms with TORM S.A. (unrated) for two product tankers. The charter arrangement is likely to be adjusted to variable rates that TORM achieves in the freight market. TORM is also negotiating restructuring of debt with its lenders. Another lessee, Groda Shipping & Transportation Ltd. (unrated), returned two vessels in June 2010. FSL will deploy one of these two vessels on time-charter with Petroleo Brasileiro S.A. - Petrobras (BBB/Stable/--) from the second half of 2012," said S&P in a release.

"FSL's business risk profile is 'weak', in our view. The company is exposed to risks in the shipping industry, which will face difficult times in 2012 due to oversupply of ships, tepid demand, and high bunker fuel prices. We assess the credit profiles of FSL's lessees to be in the 'B' category. A prolonged downturn in the shipping industry increases the risk that some more lessees may terminate charter arrangements," it said.

"In our view, FSL has limited access to capital markets, and its mortgage of all existing vessels under a banking arrangement limits its financial flexibility. However, we note that FSL can reduce dividends to maintain its liquidity," S&P said.

"The negative outlook reflects our view of high credit risk of FSL's lessees and its increasing exposure to the volatile spot market amid the prolonged downturn in the shipping industry. We may lower the rating if: (1) the credit profiles of FSL's lessees deteriorate further and payments from lessees are delayed; or (2) FSL faces liquidity and covenant pressure such that its debt servicing coverage ratio falls below 1.2x," it said.

"In our view, an upgrade is unlikely over the next 12 months. We may revise the outlook to stable if we see clear signs of improvement in the credit quality of FSL's lessees, along with a sustained improvement in the company's credit protection measures and adequate liquidity," it added.