FSLT cuts distributions to reduce debt

FIRST Ship Lease Trust (FSLT) has cut its guidance for future payouts to unitholders to retain cash for repaying its debts, the latest sign of the pressure faced by shipping trusts here.

It will pay US$12.7 million, or 2.45 US cents per unit, for the second quarter, down from 2.8 US cents a year earlier and unchanged from the first quarter of this year.

That represents 74 per cent, or nearly three-quarters of the trust's US$17.1 million net cash from operations for the three months to end-June. The remaining cash was used mainly to reduce its debts.

From the third quarter, however, it expects to pay out just 1.5 US cents per unit, or about half its free cash flow - the cash generated from operations, less any capital spending. The retained cash will be used to pay down its debt voluntarily to achieve 'a more balanced capital structure', it said.

FSLT's share price fell yesterday after the announcement, ending 4.3 per cent lower at 66 cents.

Philip Clausius, chief executive of FSLT's trustee-manager, said that 'all our lease contracts continue to perform as expected' despite the difficulties faced by the shipping industry worldwide.

'Notwithstanding the very challenging market conditions, our broadly diversified lease portfolio remains robust and we expect it to continue generating stable cash flows.'

Its lease revenue rose 20.2 per cent to US$24.8 million in the three months to end-June, compared to a year earlier. FSLT said that none of its lessees has tried to renegotiate lease terms and that all lease rentals have been received promptly, including the rentals for this month.

The distribution reinvestment scheme, which gives unitholders the choice of receiving their distributions in the form of new units instead of cash, will not apply to the second-quarter payout, FSLT said. In the first quarter, the scheme saved the trust US$3.8 million in cash, which FSLT said would be used mainly to reduce its debt.

When FSLT listed here in March 2007, it had no debt. After listing, however, it funded a rapid expansion of its fleet by taking on more than US$500 million in bank debt to add 10 vessels to its initial fleet of 13. When the financial crisis struck last year, FSLT and Rickmers Maritime, another Singapore-listed shipping trust with substantial debt funding, were hit by higher interest costs as lenders invoked market disruption clauses and a plunge in demand for ship charters.

In October, FSLT cut its guidance for fourth-quarter distributions to 3.08 US cents per unit from 3.11 US cents due to the higher interest expense. In January, it said it would stop its policy of paying out all its distributable cash each quarter and instead use some of the cash to pay off its debt.

Since the start of this year, FSLT has been reducing its debt voluntarily, though it still has a large amount left. At the end of June, FSLT had US$501 million in secured bank loans outstanding, compared with US$513 million at the end of last year.

But FSLT stressed that all its vessels are fully financed and that it has no need to refinance any loans until 2012.

Mr Clausius said FSLT would continue to reduce its total debt and talk to lenders regularly to avoid any potential breaches of loan-to-value covenants that could be triggered by a fall in the value of vessels.