FIRST SHIP LEASE TRUST annual report: Ex-CEO caused slow progress toward refinancing

First Ship Lease Trust released its 2016 annual report yesterday. Its chairman's message explains why the all-important refinancing of a loan facility has made far less progress than expected, putting the blame squarely on the former CEO, Alan Hatton. Excerpts : 

Tim Reid Non-Independent, Non-Executive Chairman.The Trust’s Syndicated Loan Facility is due for repayment in December 2017. Early last year the Board requested that Alan Hatton, the then CEO, take steps to ensure early refinancing of the syndicated loan. In June I became concerned that the refinancing exercise was not progressing as I had expected. This view was shared by some, but not all Board members.

My concerns continued to grow and in August I formed the view that there was an urgent need for a CFO to be appointed for the Trust, in part, as I wanted to ascertain what was really happening with the refinancing. Mike Gray, as Chairman of the Audit and Risk Committee was very supportive of the appointment of a CFO, as he was concerned that certain controls and procedures needed to be improved.

The appointment of Alan Mitchell as CFO was confirmed by a majority decision of the Board. With the benefit of a competent CFO joining the Trust, the Board received clear responses to its concerns, which were not limited to the progress of the refinancing alone. Many concerns focused on the conduct of Alan Hatton. Hatton was issued with two warning letters and two show cause letters, which culminated in him resigning prior to being terminated.

The announcement released to SGX on 6 February 2017 advising of Hatton’s departure records the Board’s view of Hatton’s conduct.

The Board ascertained from its investigations into Hatton’s conduct that numerous non-disclosure agreements had been signed with third parties without the Board’s knowledge or approval. The Board concluded that Hatton’s interests were primarily directed towards his own enrichment rather than achieving a refinancing for the benefit of the Trust’s unitholders.

Despite the Board’s decision to commence the refinancing exercise in the first quarter 2016, well ahead of the scheduled repayment date in December 2017, a refinancing has not 4 annual report 2016 first ship lease trust chairman’s letter to unitholders yet been secured. In the intervening period, vessel values have declined. Notwithstanding that the Trust continues to enjoy full deployment of its vessels and a resulting strong level of net cash generation from operations, refinancing will require meeting the security value expectations of lenders.

At the time I was appointed a director, the Trust was in breach of the syndicated loan covenants and the debt due to the lenders was US$425m. The amount due to the lenders as at 31 March 2017 is US$192m. In 2015 the Trust purchased FSL Osaka at a price of US$20.8m from cash resources in the Trust and this vessel has recently been pledged to our current lenders.

Despite these efforts, the reduction in vessel values will again result in financiers focusing on the Trust’s vessel security value relative to indebtedness.

The highest priority for the Board is to secure a refinancing of the outstanding debt, and to this end we are considering a variety of strategies. As a Board, we are committed to improving the structure of the Trust’s balance sheet in a manner that enables unitholders to benefit. This will require the balance sheet to be strengthened and we are considering various options in this regard. As part of these considerations we are requesting Unitholders to approve a general mandate to issue pro-rata renounceable rights of up to 100% of the Trust’s capital.

The current members of the Board are fully committed to retaining and building value to unitholders, while fully mindful of obligations to lenders.

N Sreenivasan joined the Board on 20 September 2016. His input since joining the Board, together with the continuing contributions of Michael Gray and Michael Oliver, have been invaluable in steering the Trust through challenges that have arisen due to internal and external factors.

We are grateful for the efforts of Roger Woods, Alan Mitchell and the FSL team for their steadfast commitment to ensuring the Trust’s business is managed in a very efficient and effective manner.

Tim Reid
Chairman