Frontline’s bond battle

Warnings of a second restructuring for John Fredriksen’s Frontline have met with a mixed reaction among analysts.
Tor Olav Troim steps up to the plate to reveal Frontline's restructuring headache in Q3 2011. Frontline 2012 was born weeks later.

Tor Olav Troim steps up to the plate to reveal Frontline's restructuring headache in Q3 2011. Frontline 2012 was born weeks later.

Oslo-listed Frontline needs the tanker market to improve if it is to meet a $225m bond payment in 2015 without selling assets or issuing fresh equity, it told investors this morning.

“Such a situation might force a restructuring of the company, including modifications of charter lease obligations and debt agreements,” said the owner a year after spinning off Frontline 2012.

Its cautious note led to a morning dip in its share price but the stock is now trading only a fraction down.

Erik Nikolai Stavseth of Arctic Securities says the guidance is weak, suggesting the owner will need to issue equity by the end of 2014.

“While the company might be able to sell its $90m stake in Frontline 2012, it will still likely require an equity injection at some point over the next two years,” he said noting it has a $200m issue on the shelf in the US.  

“While the Frontline 2012 stake could be sold off easily, it will still leave Frontline short,” Stavseth added.

Analysts at RS Platou Markets were more upbeat, upgrading Frontline to neutral from sell and explaining the stake in Frontline 2012 is sufficient to keep the lights on.

“We perceive the challenging market outlook to be reflected in the share price while the shareholding of its spin-off, Frontline 2012, should bridge the funding gap until the market recovers,” Platou Markets said.

“The spin-off of Frontline 2012 (FRNT) allowed Frontline to avoid bankruptcy, and has since more than doubled the value of the investment in FRNT,” they added.  

“We also believe Frontline will terminate the [two] suezmax newbuilds at Rongsheng which should return $26m of cash to the company.”

Platou Markets says today’s upgrade came as Frontline’s share price had reached its target price of $2.5 per share.

Frontline’s fourth quarter loss of $30.1m was better than the $34.5m red number the market had feared.

It came after revenue of $113m beat the $96m average bet thanks to an above market showing from its VLCCs.

The ships commanded $19,300 daily in the quarter, well ahead of the $12,800 reported by Euronav for the same period.

Frontline’s fourth quarter report said: “The tanker market has shown a strong negative development in the last four years.

“Currently crude tankers are going through one of the worst winters ever with VLCC rates close to zero, limited number of fixtures and very high availability of VLCC tonnage.

“Several tanker companies are already experiencing severe problems and if the weak market continues it is likely to lead to significant financial problems for the whole tanker industry.

“Consensus is that the tanker market will not experience sustained recovery until overcapacity is removed.”

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