Frontline 2012 will be established and registered on the NOTC list in Oslo
Cash-strapped Frontline is to form a new company, as part of a restructuring programme.
Frontline 2012 will be established and registered on the NOTC list in Oslo.
The new company will acquire five VLCC newbuilding contracts, six modern VLCCs and four modern Suezmaxes from Frontline at fair market value.
The value of these vessels, including the value of one timecharter agreement, is based on independent appraisals, and was set at $1,121 mill.
In addition, Frontline 2012 will assume a total of $666 mill in bank debt attached to the newbuilding contracts and vessels, plus a further $325.5 mill in remaining newbuilding commitments.
In addition, Frontline will be paid for working capital related to the assets acquired. The transaction will be supported by a fairness opinion.
The company’s restructuring was approved by the board this week and will in the next few days be put forward to creditors and counterparties for approval.
This solution has been made possible through a large commitment from Frontline’s major shareholder – Hemen Holding – which is fronted by John Fredriksen.
Frontline claimed that it had agreed preliminary arrangements with its major counterparts whereby the rates in the existing chartering contracts are reduced during the period 2012 to 2015. This includes a rate reduction in the existing Ship Finance International agreements of $6,500 per day for all vessels.
In turn, Frontline will pay Ship Finance an up front compensation of $106 mill of which $50 mill will be pre-payment of profit split and $56 mill will be a release of restricted cash currently serving as security for charter payments.
Frontline will also compensate the counterparties with 100% of any difference between the renegotiated rates and the actual market rate up to the original contract rates. Some of the counterparties will receive compensation for earnings achieved above original contract rates.
In addition, Frontline 2012 plans to raise new equity to the amount of $250 mill, of which Frontline will subscribe for 10%. A commitment for the underwriting of the remaining equity issuance has been received from Hemen. This move is subject only to final agreement with the banks and major counterparts.
The equity raised will be used to finance the acquisition of the vessels and newbuilding contracts from Frontline, pay for working capital, prepay senior secured debt, general corporate purposes and capitalise Frontline 2012 with cash.
Hemen will give a special guarantee of $250.5 mill to ensure that all necessary debt and equity is in place to take delivery of all the remaining newbuildings.
In addition, Hemen will provide a guarantee of $30 mill to satisfy minimum cash requirements in Frontline 2012. Terms of these guarantee are still to be finalised, however Hemen have agreed that any guarantee fee should be paid in shares.
Hemen is giving total guarantees of $505.5 mill in order to restructure Frontline and establish Frontline 2012. These guarantees are valid until 31st December, 2011 and are given on the basis that a successful restructuring can be agreed prior to that date and Frontline thereby can avoid any breaches of loan covenants as the year end.
Frontline Management’s CEO, Jens Martin Jensen, said: “In this very difficult situation, we are extremely pleased with the understanding and flexibility shown by our leading banks and the major counterparts.
“We feel that significant upside will be kept for Frontline’s existing equity holders through the massive reduction in debt and newbuilding obligations that the proposed solution will bring.
“With the restructured cash break even rates Frontline will be extremely well positioned to meet the challenges the current oversupply of tankers has created and also benefit from a recovery in the tanker market going forward,” he said.
For its part, Ship Finance said that it had agreed, subject to final board and bank financing approvals, to amend the terms of the long-term chartering agreements with Frontline.
Ship Finance Management’s CEO, Ole Hjertaker said: “The uncertainty relating to Frontline has been negative for our company and a potential default on their chartering obligations could be dramatic for us.
“It has been a difficult process for all involved parties, but we feel that the outlined solution will, if accepted, give our company a solid footing under our large tanker exposure in what is a very difficult time for the tanker industry.
“We will receive base charter rates which are clearly in excess of what can be achieved in the market today and we will have a solid counterpart with a good liquidity position and low cash break-even rates. In a positive market scenario, we will have the potential to recover more than the original agreed charter payments through an improved profit share agreement.
“Since the establishment of Ship Finance in 2004, we have received more than $500 mill in profit sharing from Frontline. It has enabled the company to grow and diversify the asset base much faster than originally anticipated with corresponding higher dividend capacity. This clearly illustrates the value of optionality in the tanker market.
“The uncertainty regarding our tanker exposure should then be dramatically reduced, and the foundation for a long term dividend capacity with additional upside potential should be established,” he concluded.
Source: Tanker Operator
