THE Singapore Exchange Regulation (SGX RegCo) has ordered First Ship Lease Trust (FSL Trust) to seek unitholders' approval for a sale of two product tanker newbuildings.

 

FSL Trust had announced on March 1 that it had completed the sale of the two vessels, realising a total net gain of about US$500,000 and total sale proceeds of US$103.8 million. It did not seek unitholders' approval as it deemed the sale to be in the ordinary course of business.

 

However, SGX RegCo has ordered an undertaking from FSL Trust' s sponsor not to dispose of its units in the trust until an extraordinary general meeting seeking unitholders' approval has been conducted, among other directives.

 

In a letter published in full by FSL Trust on Wednesday, SGX RegCo said it is believes that the sale of the vessels would constitute " short-term trading" , which would go against FSL Trust' s main objective of deriving a stable income stream from its portfolio of lease assets, as stated in the trust' s initial public offering prospectus.

 

The regulator noted that the vessels were sold " immediately" upon the completion of construction, " even before deployment by the trust" .

 

SGX RegCo also pointed out that FSL Trust had completed a three-for-two rights issue to raise net proceeds of US$31 million to finance the acquisition of the vessels, and had apparently stated that the net proceeds of the rights issue would be used, among others, for " fleet renewal by way of the newbuilding acquisition" .

 

" Clearly, the disposal of the two new vessels deviates from the original objectives of the acquisition and rights issue, which was to renew the trust' s ageing fleet," said SGX RegCo.

 

And, even if the Covid-19 pandemic has affected the earnings prospects for the tankers in the short term, it does not change the basis of determining whether transactions are in the ordinary course of business, the regulator noted.

 

In response, FSL Trust Management, the trustee-manager of FSL Trust, said it remains of the view that the disposal, " as well as the other disposals recently announced and future disposals" , was made in the ordinary course of business.

 

Firstly, it noted that the definition of authorised businesses in the deed of trust constituting FSL includes the disposal of vessels.

 

Also, keeping the vessels, which were " reasonably expected" to create losses as a result of the pandemic, would have run counter to FSL Trust' s objective of generating stable income, the trustee-manager said. Disposing them for an " extraordinarily high" price in the current market environment was therefore in the best interest of all unitholders.

 

However, the trustee-manager said that it will comply with SGX RegCo' s directives nevertheless. Among others, it has submitted a written undertaking from FSL Trust to SGX RegCo that it will seek unitholders' ratification of the sale by April 30.

THE trustee-manager of First Ship Lease (FSL) Trust has cited weaker earnings prospects as the rationale for its decision to sell two LR2 product tankers, in response to queries from the Singapore Exchange (SGX).

 

The trustee-manager also revealed that the FSL Trust is selling each vessel at US$52.5 million to nominees of a Libyan state-owned shipping firm. FSL Trust had paid US$97.6 million in total for the construction of the vessels, as disclosed in 2018.

 

In a Friday bourse filing after the market close, FSL Trust' s manager said that SGX had raised questions over the reasons behind the firm' s Feb 17 announcement regarding the sale of the two vessels. Back in December 2018, FSL Trust had said that it was acquiring those vessels to renew its ageing fleet, SGX noted in its query.

 

In response, FSL Trust' s trustee-manager said that the earnings prospects for LR2 product tankers have " fundamentally weakened" in the short term due to the adverse impact of the pandemic on the oil and oil products trade. Its medium- to long-term prospects are also affected by the transition to carbon-neutral, cleaner fuels.

 

" The next generation of vessels will likely use alternative fuels to reduce greenhouse gas emissions and meet environmental targets and the trust intends to prioritise such considerations in the future strategy. The trustee-manager has therefore concluded that it is beneficial to the trust to sell the newbuildings and limit the exposure to the current market and regulatory risks," it said in the filing.

 

The trustee-manager also disclosed that the agreed selling price was US$52.5 million per vessel. Back in 2018, FSL Trust had disclosed that the vessel acquisition amounted to US$97.6 million. The carrying value of both vessels in aggregate as of end-2020 was US$43.6 million.

 

It also unveiled the buyers as being guaranteed nominees of General National Maritime Transport Company, a state-owned Libyan shipping company.

 

FSL Trust' s trustee-manager said that the following factors influenced the selling price: the cost of building the vessels the current and expected charter market environment and earnings prospects for the vessels and the expected economic lives and residual values.

 

Other factors included the supply of and demand for comparable vessels and potential prices otherwise achievable for the vessels in the current market. FSL Trust received advice from a third party ship-broker during the negotiations for the sale.