Why restructuring concerns weigh down Frontline's stock

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Part 6
Why restructuring concerns weigh down Frontline's stock PART 6 OF 7

Why Frontline doesn’t have the liquidity to pay a $190 million bond


So would Frontline be able to come up with $190 million to pay off its debt that matures in 2015? As of March 31, 2014, Frontline Ltd. (FRO) had ~$111 million in cash and cash equivalents. Even though the company has $75 million in restricted cash, this is the amount Frontline has reserved for ITCL, its subsidiary, to settle certain pre-arranged loan or lease payments, minimum deposits, management fees, and vessel operating costs.

Why Frontline doesn&#8217;t have the liquidity to pay a $190 million bond

Share issuance

Given industry weakness and its fragile balance sheet, Frontline has been tapping the public market for cash. During the first quarter, 8,829,063 new ordinary shares were offered under the company’s at-the-market offering program, totaling ~$40.5 million based on the company’s filing. An additional 3,134,695 shares were offered between the end of March and May 27, 2014, which is equivalent to ~$10 million based on the average price in April and May. The company expects to collect proceeds of up to $100 million.

With an estimated amount of $10.0 million raised throughout April and May and $6.2 million that was raised in 2013, a total of $56.7 million has been raised so far. Since these shares are more or less used to keep Frontline afloat, they will negatively impact the value of each Frontline share.

As share prices have fallen, management might slow down the pace of its at-the-market offering a little bit in the short term, so that it won’t dilute earnings for shareholders as much. It would likely wait until the third quarter, when the crude tanker market is expected to improve, and Frontline may see higher share prices.

Not enough liquidity

But with cash and cash equivalents of just $110 million and a remaining amount of ~$45.0 million from the at-the-market offering that it plans to raise from the equity market, Frontline might have to sell or scrap some of its assets and further raise equity in the market. This activity would further dilute earnings, which would put Frontline Ltd. (FRO) behind its other peers, such as Teekay Tanker Ltd. (TNK), Navios Maritime Acquisition Ltd. (NNA), and Tsakos Energy Navigation Ltd. (TNP). This is based on the assumption that rates won’t be high enough for Frontline to cover its cash breakeven cost.


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