On the verge of bankruptcy
John Fredriksen is a shipping magnet. Frontline is one of the companies in his portfolio. In its latest second quarter earnings, the company indicated to investors that it might not be able to pull out of its tailspin.
Should investors avoid Frontline?
Industry analysts suggest that investors should avoid Frontline because of the bankruptcy risk. Currently, the company is facing bankruptcy. This is led by the $190 million bond that’s due in April 2015. In order to become stable, the company would need to average $40,000 for VLCC and $34,000 for Suezmax in the next three quarters. It would have to average this amount each quarter before the note is due. However, the industry is heading into a cyclical high season. It isn’t certain that the rates will reach the requirement.
Also, market conditions and depressed rates pulled down revenue. At the same time, Frontline went on a spending spree. It ordered multiple ships. As a result, the notes are almost due and the company doesn’t have the cash to pay them.
In its latest earning release FRO commented, “A full restructuring of the company, including lease obligations and debt agreements might be the only alternative.” However, management is very guarded regarding its options going forward.
As of June 30, 2014, the company is in a challenging situation. It has $1,031 million in debt and lease obligations. This is despite the improved tanker market in the third quarter. Based on the current outlook for the tanker market, it’s doubtful that Frontline can generate enough cash from operations to repay its convertible bond loan. The loan matures in April 2015.
FRO is considering various financing alternatives like raising equity or selling assets. It’s also considering establishing new loans or refinancing existing arrangements to raise enough cash to repay the $190 million convertible bond loan.
The restructuring and a negative market expectation could impact other industry peers like Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), Teekay Tanker Ltd. (TNK), and the Guggenheim Shipping ETF (SEA).
Visit the Market Realist Marine Shipping page to learn more about the industry.