Frontline Drops After Warning on Bond Repayment Risk

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February 22, 2013

Front Force VLCC. Photo: Frontline Ltd.

By Rob Sheridan

(Bloomberg) — Frontline Ltd., the oil-tanker company led by billionaire John Fredriksen, dropped to the lowest level in 15 months in Oslo trading and its bond yields surged after warning it may miss bond repayments.

Shares in Frontline fell as much as 6.2 percent to 15.10 kroner, the lowest intraday level since Nov. 23, 2011, and traded 4.4 percent lower as of 3:25 p.m. in Oslo. The yield on Frontline’s convertible 4.5 percent 2015 bond climbed by 2.5 percentage points to 38.16 percent today from the latest trade on Feb. 6, according to prices compiled by Bloomberg.

If the tanker market doesn’t recover before 2015 and “no additional equity can be raised or assets sold, there is a risk that Frontline will not have sufficient cash to repay the existing $225 million convertible bond loan” due in April 2015, the Hamilton, Bermuda-based company said today. That might force a restructuring of the company, including modifications of charter lease obligations and debt agreements, it said.

Frontline split in two in December 2011 to avoid running out of cash. Its fleet of VLCCs need $24,200 to break even this year, the company said.

Supertankers shipping 2 million-barrel cargoes of crude are earning $7,518 a day, close to the lowest level on record, according to data stretching back to 1997 from Clarkson Plc, the world’s largest shipbroker. Still, supertanker demand will expand 5.9 percent this year, outpacing fleet capacity growth of 5.3 percent, Clarkson said.

‘Evaporate Fast’

Crude tankers are going through one of the “worst winters ever” with VLCC rates close to zero, a limited number of fixtures and very high availability of vessels, Frontline said.

Should this continue, it is likely to lead to “significant” financial problems for the whole tanker industry, and “the tanker market will not experience sustained recovery until overcapacity is removed,” the company said.

Benchmark freight swaps that traders use to bet on future shipping prices show earnings no higher than about $15,000 a day by 2015, according to data from Marex Spectron Group, a broker.

While Frontline’s fourth-quarter results were better than expected, “the guidance is very weak and Frontline will see its cash position evaporate fast in the current market,” Arctic Securities ASA Erik Nikolai Stavseth said in an e-mailed note. “While the company might be able to sell its $90 million stake in Frontline 2012, it will still likely require an equity injection at some point over the next two years.”

Funding Gap

Frontline posted a fourth-quarter net loss of $16.6 million, narrowing from a loss of $343.7 million a year earlier, it said in a statement today. That compares with an expected loss of $24.8 million, according to the average of seven analyst estimates compiled by Bloomberg.

“We perceive the challenging market outlook to be reflected in the share price, while the shareholding of its spin-off, Frontline 2012, should bridge the funding gap until the market recovers,” RS Platou Markets AS analyst Frode Moerkedal said in an e-mail. The broker upgraded its rating on Frontline to neutral from sell, he wrote.

Shares in Frontline have slumped 49 percent this year, giving the company a market value of 1.25 billion kroner ($221 million).

Copyright 2013 Bloomberg.

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