Why restructuring concerns weigh down Frontline's stock

Part 7
Why restructuring concerns weigh down Frontline's stock (Part 7 of 7)

Frontline has options, but they’ll likely put the company behind

Selling newbuilds

To raise cash, Frontline could sell its two Suezmax newbuilds under construction. Several analysts were expecting that the shipyard couldn’t deliver those newbuilds, as it’s been behind schedule. Yet instead of canceling the contract, Frontline agreed to swap the two Suezmax newbuilding contracts with two similar tankers at a lower contract price.

Frontline Key AssetsEnlarge Graph

The first vessel was already delivered on May 19, 2014, after the company made a final installment of $41.5 million, which has been drawn. The second vessel is expected to be delivered in September 2014, when another $41.5 million is expected to be paid. The second $41.5 million will in part be funded by debt that the company expects to arrange.

Selling assets

While the purchase decision will constrain short-term liquidity, note that Frontline would be paying around $113 million for the two vessels after adding $30.3 million of newbuild value sitting on the company’s first quarter 2014 balance sheet. These are lower than May resale prices of $65 million for a typical Suezmax vessel, based on data compiled by R.S. Platou. Management did respond to analysts, saying they could end up selling those vessels to shore up liquidity, which could bring total liquidity up to ~$200 million, if the remaining at-the-market offering worth ~$45 million is completed.

Frontline 2012 stake

Frontline could also sell some of its stake in Frontline 2012, which an analyst estimated would be worth $100 million. And perhaps—just perhaps—management might be able to use its investment in Frontline 2012 as collateral to obtain loans to help pay the $190 million convertible bond.

In summary, there are several things Frontline can do to pay its maturing $190 million bonds. But activities such as selling assets or raising additional capital would likely put Frontline behind its peers and ETFs such as Nordic American Tanker Ltd. (NAT), Navios Maritime Acquisition Corp. (NNA), Teekay Tanker Ltd. (TNK), and the Guggenheim Shipping ETF (SEA).

To learn more about investing in Frontline and other shipping companies, check out Market Realist’s Marine Shipping page.

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