Why liquidity and restructuring dragged Frontline shares down 16%



Cash flow is key

The restructuring gave Frontline time to ride through the industry’s weakness that also negatively affected Teekay Tanker Ltd. (TNK), Navios Maritime Acquisition Corp. (NNA), and the Guggenheim Shipping ETF (SEA). Still, recall that Frontline Ltd. (FRO) wouldn’t be generating positive cash flow unless rates were above cash breakeven—an important factor for whether the company can pay its other debt when they mature.

Frontline Debt and Lease Obligations

Debt and maturities

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Frontline’s share prices were down 15% or more on the day its earnings were released, likely because management said it might need to do another restructuring if the weakness in the crude tanker market persisted. As of March 31, 2014, Frontline had debt and lease obligations of $1,044 million. This comprised $718 million in capital lease obligations to Ship Finance, $76 million in notes payable to Ship Finance, $60 million in capital lease obligations to German KGs, and $190 million in a senior, unsecured convertible bond loan.

A convertible bond is a bond that gives bondholders the option to convert into equity at a predetermined price and time. The interest rate on these bonds are usually lower, because the bondholder has the option to covert them into equity. Though for Frontline, the problem is that $190 million of the convertible bond will mature in 2015.

As management noted in the press release, “In the event that cash flow from operations does not enable Frontline to satisfy short-term or medium- to long-term liquidity requirements, Frontline will have to consider alternatives, such as raising equity or selling assets, establish new loans, or refinance existing arrangements.”

In the event that Frontline can’t repay $190 million in 2015, the company would go into bankruptcy. Because bondholders have a priority claim over Frontline’s assets before equity holders, bondholders will have a chance of collecting something. Equity investors, though, could see all their investments evaporate.


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