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Strategic Management Report - Fsl Trust

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Strategic Management Report | First Ship Lease Trust (“FSL Trust”) - Singapore | Charl Maingard – CT0209461 |

Contents

Company Profile 2 The General Environment of FSL Trust 2 Industry Competitiveness – Where does FSL Trust stand? 4 Summary of Industry Competitiveness for FSL Trust 5 Internal Environment Analysis 5 SWOT Analysis 6 Conclusion 6 Recommendations 7 References 8

Company Profile
First Ship Lease Trust ("FSL Trust") is a Singapore business trust that provides lease financing solutions to the international maritime industry. FSL Trust currently owns a diversified portfolio of 25 vessels with an average age of eight years. FSL Trust derives stable long-term cash flow primarily through leasing its vessels on long-term bareboat charter, spot charter or time charter basis to international shipping companies. The Trust has a diversified portfolio of 25 modern and high quality vessels, comprising seven containerships, 11 product tankers, three chemical tankers, two dry bulk carriers and two crude oil tankers.
Date Established 2007
Listed in SGX 2007
ADR quoted on OTCQX 2008
Corporate HQ Singapore
Vessel Flags * Singapore * Bahamas/UK * Liberia * Marshall Islands /Cyprus * Panama
Shipping sub-sectors * Crude Oil Tankers * Petroleum Tankers * Chemical Tankers * Dry Bulk Carriers * Containerships
The General Environment of FSL Trust

Political Forces:
Since FSL Trust own their fleet of vessels, and are in the business of leasing out the vessels to shipping operators, there are a few political factors which will affect the demand for their services such as: a. Global and regional economic conditions, b. demand for and the consumption of the product which their fleet are able to transport, c. international trade development, d. changes in marine transport methods and the development of alternative solutions, e. the globalization of production and f. environmental and other legislative trends.
Economic Culture:
FSL Trust owns a number of vessels which can serve a wide variety of industries. Since FSL Trust is not a shipping company, the business is of such a nature that it rather offers alternative financing solutions to the shipping industry, thereby reducing the cost of ownership to a lessee, and yet giving the lessee total control over the running of the ship. Since the company’s profitability would rely heavily on both long and short term lease agreements, it is well placed in this area whereby currently 16 of their vessels are under such contracts.
Even though long term lease agreements are based on water-tight contracts and therefore show as future earnings (sometimes up to 10 years plus extensions), the recent defaults on payments by two of their customers has had a massive negative affect on the company.
Socio-culture Conditions:
FSL Trust is currently on very shaky grounds. The entire top management team including the president and CEO resigned on-masse during July of 2013 which left the company without a top-management team for approximately two months. The appointment of Alan Hatton as CEO is a concerted effort to stabilize and turn the company around. The Board of FSL Trust stated that Mr. Hatton brings “significant commercial shipping experience including negotiating and executing time charters, sale & purchase deals and risk management strategies.” In addition, the appointment of Timothy Reid as non-executive director from the insolvency and restructuring firm, Ferrier Hodgson is a significant sign that the company is heading in one of two ways.
The resignation of top-management could have directly been influenced by the ongoing default on lease agreements, as well as the company’s inability to fulfill certain financial covenants.
Technological Challenges:
The ongoing discussions of FSL Trust with lenders to extend the loan covenant relaxation has led the company to halt all share trading on the SGX since November 2013. The current board is investigating the terms of the extension of the covenant and has taken independent legal advice on the matter. Since the company owns a relatively young fleet, and 7 vessels are not on long-term leases, there is probably no reason to purchase any new vessels in the foreseeable future, unless there is a significant uptake in the market. The company will probably focus rather on settling outstanding debt. Owning a relatively young fleet also suggests that the current technologies within the vessels are up to recent standards and would not need any significant upgrades. Advanced technological instrumentation will also not have a major influence on whether a customer will lease one ship over another.
Environment Factors:
There are numerous examples of the damage which tanker oil spills have caused to the environment. Since FSL Trust own several vessels which can contain hazardous or damaging material, they should ensure that the lessee has adequate insurance to cover against such mishaps. In addition, the crew assigned by the lessee should also have the correct credentials to operate the vessels. In the unfortunate case where such incidents could happen, FSL Trust will be indirectly responsible unless all the checks and balances on the lessee and their appointed crew are met by FSL Trust Risk Management Team.

Industry Competitiveness – Where does FSL Trust stand?

1. Intensity of rivalry among competitors:
This is medium to low. There are currently only 3 shipping trusts registered in Singapore, Rickmers Maritime, Pacific Shipping Trust (PST) and First Ship Lease (FSL) Trust, and all three companies are going through very tough times. Pacific Shipping Trust (PST) is in the process of delisting and the sponsor has made a buy-out offer. The onus would therefore rather be on each company to stabilize their own business than going into a price war with their competitors. The three shipping trusts in Singapore are also small in comparison to their bigger and better established counterparts in the USA and Canada. 2. The threat of new entrants:
Based on recent market reports, this is low. The Financial market has obviously realized that shipping trusts are very volatile, and investors are not climbing over themselves to buy shares in shipping trusts. This, together with a downswing in the economy makes this type of business not as attractive as initially thought. 3. The threat of substitutes:
There are currently only 3 shipping trust companies in Singapore, one of which has seized operations. Based on the remaining two companies’ current financial situations, it is highly unlikely that any substitute companies will emerge in the market. From a product perspective, there are a myriad of shipping companies, but since FSL has a unique business model, substitution of product is not an issue. Low. 4. The bargaining power of suppliers:
FSL Trust does not specifically need to rely on suppliers since they are the supplier of the vessels. This threat is therefore low. 5. The bargaining power of customers:
FSL Trust is in the business of buying and then leasing ships back to their previous owners. This reduces the ownership cost and gives the previous owner a cash injection for the sale of the vessel. Since they already make use of the vessel, they will negotiate a standard leasing contract for the vessel with standard freight rates (FSL Trust do not dictate rates), but will not be in a position to switch to a competitor. This threat is therefore low.

Summary of Industry Competitiveness for FSL Trust

Internal Environment Analysis

Resources:
Tangibles (normal) ~ The Market capitalization is only about $55 million making the company relatively small in comparison to its US and Canadian counterparts. The company owns a fleet of 25 vessels of which 16 are on long-term bareboat charter agreements. The vessels are all relatively young giving them “lease-time” of around 10 years plus.
Intangibles (medium to weak) ~ * The original board has resigned and a new CEO and additional independent directors have been appointed. The new members have several years’ experience in the shipping industry and therefore this intangible is rated as medium. * The company is busy re-negotiating terms on relaxation of loan covenants, and has suspended share trading. This leaves them without an alternative leg of funding. * The defaulting on payments from long-term bareboat contracts meant that the company had to take delivery of the vessels, leaving the Trust to inadvertently become ship operators. This is not part of their business model and adds to their daily overheads. * The company is well placed in Singapore, where the government has various incentives for the shipping industry under the Maritime Sector Incentive (MSI) scheme.

SWOT Analysis

| Positive | Negative | Internal | Strengths: * New members of board have in-depth experience of shipping industry * The trust has long-term bareboat charter contracts valid until 2021 * Relatively young fleet * Well positioned in Singapore, with government backed incentive schemes | Weaknesses: * Share trade suspension due to loan covenant relaxation talks with lenders * Inability to foresee defaults on payments from seemingly stable lessees * The company has inadvertently become a shipping operator, which brings about additional costs and reduced long term revenue | External | Opportunities: * Slowdown of Chinese shipbuilding industry and increased shipbuilding costs, may lead to increase in demand for current ship-owners * Private equity funding could bring about much needed funding * Opportunities exist with local competitors to merge or to manage their portfolio of vessels which will bring about additional revenue. | Threats: * Slowdown in demand for products transported by fleet * Economic downturn * Shipping disasters will have an indirect negative affect on FSL trust, since the materials transported by the fleet can be hazardous to both the environment and humans |
Conclusion

The company is currently in turmoil. The old board, including CEO and founder, resigned in July of 2013 leaving the company leaderless for approximately 2 months. Due to perceived irregularities with the relaxing of bank covenants, all trading of the company’s stock has been halted and is yet to resume. In addition, two lessees defaulted on payments, which reduced the company’s long term revenue forecast. This also means that the trust now has additional costs associated with the running of the vessels, increasing overheads and which can be ill-afforded in the current climate. It is imperative that these vessels are either contracted out again, or placed on the spot market as soon as possible.
The appointment of Alan Hatton as CEO, and additional independent directors who are also aligned with strategic companies, could well mean that a turnaround of fortunes are on the books. Singapore remains an attractive location for shipping and logistics and the fact that the Singapore government offers 100% tax holidays for shipping companies and offer incentive schemes for ship investment vehicles, means that the company is well setup to grow and expand in the region. Nevertheless, the trust has a remaining aggregate revenue forecast for the next 5-8 years of about US$190 million. This is based on bareboat charter revenue of only 14 vessels and excludes other leasing, extension and buy-out options. The company remains in a position where they are able to service their loan repayments and interest.
Renewed energy from management, strategic partnerships and solid financial investments could help FSL Trust and this specific business model, to once again become a darling of the stock market.
Recommendations

Corporate Level Strategies: * FSL Trust will need to sort out their covenant default issues first, and would have to look at alternative funding. It seems that there is an influx in funds from private equity companies into the shipping industry and FSL can do no harm in approaching these companies. With their existing long term charter contracts in place, relatively young fleet and new management team, they should look attractive as an investment and turnaround opportunity. * Since Pacific Shipping Trust has decided to exit the shipping trust business, FSL could potentially go into a joint venture with their sponsor, Pacific International Lines to take over the running of that sector of their business. This will associate FSL with the 19th largest line in the world including the opportunity to increase their fleet and thereby making the company more attractive for investment. * FSL could possibly also try to focus on the ASEAN region, since their vessels are not that big. An increase in the cost of building new ships could mean that existing ship-owners will be in higher demand. * FSL could also look at starting to manage and operate its own fleet and thereby to build up its own pool of talent. Since Singapore is a shipping hub, it will not be too difficult to attract the correct personnel; however this type of business model might be a conflict of interest with existing customers and could be a last resort, including the potential selling off of their vessels.
Business Level Strategies: * The newly appointed management team needs to stabilize the company and ensure investors of a renewed effort to commence trading on the SGX. This should be done with a strong turnaround message by the new CEO, outlining the strategy of the trust going forward. * A recent investment by Eclectic Investment Company should be seen as a positive and the board of FSL should ride on the back of this announcement to attract more investment. This can only be done with a sound management team and a solid strategy to turn the company around. * The Risk Management team should evaluate and analyze potential lessees under deeper scrutiny. The recent defaulting of two seemingly strong lessees’ on payments should be a wake-up call to the company that ongoing monitoring of their risk exposure is high priority item and vital to the survival of the company and investor confidence. * In an effort to generate much needed cash, the trust should evaluate long term charter vs spot market charter rates. If it is found that spot market rates will generate cash quicker, then the remaining vessels without long term contracts should be made available to this sector.

References

Financial Times. (2014). Wave of private equity money flows into shipping - ft.com. [online] Retrieved from: http://www.ft.com/intl/cms/s/0/dadcb240-3d97-11e3-b754-00144feab7de.html [Accessed: 26 Feb 2014].
Firstshipleasetrust.com. (2014). Home - first ship lease trust. [online] Retrieved from: http://www.firstshipleasetrust.com/index.html [Accessed: 25 Feb 2014].
Guidemesingapore.com. (2014). Industry specific tax incentives in singapore | taxation in singapore. [online] Retrieved from: http://www.guidemesingapore.com/taxation/corporate-tax/industry-specific-tax-incentives [Accessed: 26 Feb 2014].
Hand, M. (2013). Fsl trust top management exodus continues. [online] Retrieved from: http://www.seatrade-global.com/news/asia/fls-trust-top-management-exodus-continues.html [Accessed: 25 Feb 2014].
Harvard Business Review. (2014). The five competitive forces that shape strategy. [online] Retrieved from: http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1 [Accessed: 26 Feb 2014].
Investopedia. (2009). American depositary receipt (adr) definition | investopedia. [online] Retrieved from: http://www.investopedia.com/terms/a/adr.asp [Accessed: 25 Feb 2014].
Mpa.gov.sg. (2014). Mpa - bareboat charter-out. [online] Retrieved from: http://www.mpa.gov.sg/sites/port_and_shipping/shipping/registering_a_ship_in_singapore/bareboat_charter-out.page [Accessed: 25 Feb 2014].
Nyk.com. (2014). Operating risks | nyk line. [online] Retrieved from: https://www.nyk.com/english/ir/manage/risk/ [Accessed: 25 Feb 2014].
Parker, A. (2014). Howstuffworks "the business of oil tankers". [online] Retrieved from: http://science.howstuffworks.com/transport/engines-equipment/oil-tanker4.htm [Accessed: 25 Feb 2014].
Thisisasiamaritime.com. (2014). Asiamaritime. [online] Retrieved from: http://www.thisisasiamaritime.com/news_list.php?eid=6 [Accessed: 26 Feb 2014].
Valuebuddies.com. (2014). First ship lease trust. [online] Retrieved from: http://www.valuebuddies.com/thread-1135-page-12.html [Accessed: 26 Feb 2014].

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[ 1 ]. As at 30 September 2013, based on a dollar-weighted average basis by net book value. Excludes extension and early-buyout options.
[ 2 ]. Bareboat charter is the hiring of the vessel for a stipulated period during which charterer has possession and control of the vessel, including the right to appoint the master and crew.
[ 3 ]. American Depository Receipts - A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.

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