Defaults and bankruptcies threaten shipping industry

Credit risks are rising fast as maritime services slow to a crawl in 2012, says DBS Vickers.

Tanker-operators are requesting for debt restructuring plans from debtors, observes the brokerage firm.

Several trusts like First Ship Lease Trust are also struggling to keep cash flowing as their counterparties see sinking revenues.

What's the final verdict on First Ship Lease Trust and what does it reveal about the overall shipping industry overall, if any?

Here's more from DBS Vickers:

First Ship Lease Trust: Bracing for more pain.

Survival strategies. While operating cash flows in 4Q11 were largely in line with estimates, the key surprise was a 90% cut in DPU to 0.10UScts. The Board’s move is aimed to strengthen balance sheet and conserve liquidity amid a tough operating environment.

Declining asset values threaten. The Trust was able to successfully refinance its borrowings last year with a US$479.6m 6-year amortising loan, secured against its current portfolio of 25 vessels. Under this new term loan facility, FSL Trust will make quarterly loan repayments of US$11m and interest margin will be increased to 2.6-3.0% above LIBOR, depending on the value-to-loan coverage. The charter-free valuation of its vessels must not go below 125% of outstanding loans, and the ratio stands at about 130% as of last valuation. This does not leave much room for comfort.

Management believes that 2012 will be another bad year for the shipping industry. The Trust’s counterparty risks will be considerably higher amid growing risk of defaults and bankruptcies among shipping companies. Indeed, its newest customer, Danish tanker-operator TORM is already in negotiations with lenders to restructure its debt to avoid default. Other tanker players are unlikely to fare any better. Thus, we prefer to avoid exposure to these risks and downgrade the stock to SELL, with a reduced DDM-based TP of S$0.20. Without any dividend support, the stock is unlikely to perform in a downturn. If and when the shipping markets turnaround, high-beta pure container operators like NOL will fare better.