John Fredriksen controlled Hemen Holding Ltd. is giving more than $505 million in guarantees to restructure Frontline Ltd. in a solution that will see the world's largest tanker company carved into two.
The restructuring has been approved by Frontline's Board and will soon be put to creditors and counterparties for approval.
A new company, Frontline 2012, will be established and registered on the NOTC list in Oslo. Frontline 2012 will acquire five VLCC newbuilding contracts, six modern VLCCs and four modern Suezmax tankers from Frontline at fair market value. The value of these vessels, including the value of one time charter agreement, is set at $1,121 million, based on independent assessments. In addition, Frontline 2012 will assume a total of $666 million in bank debt attached to the newbuilding contracts and vessels and a further $325.5 million in remaining newbuilding commitments. Further Frontline will be paid for working capital related to the assets acquired.
Frontline 2012's ambition is to "grow and become the consolidator in the tanker market when timing is right."
Frontline has achieved preliminary agreements with its major counterparts that will see the rates in the existing chartering arrangements reduced in the period 2012 to 2015. This includes a rate reduction in the existing Ship Finance International Limited ("Ship Finance") agreements of $6,500 per day for all vessels. Frontline will pay Ship Finance an up front compensation of $106 million of which $50 million will be prepayment of profit split and $56 million will be a release of restricted cash currently serving as security for charter payments. Frontline will compensate the counterparties with 100 percent of any difference between the renegotiated rates and the actual market rate up to the original contract rates. Some of the counterparties will receive some compensation for earnings achieved above original contract rates.
Frontline 2012 plans to raise new equity in the amount of $250 million, of which Frontline will subscribe for 10 percent. A commitment for the underwriting of the remaining equity issuance has been received from Hemen. This commitment is subject only to final agreement with the banks and major counterparts. The purchase of the assets from Frontline is based on fair market value supported by independent appraisals. However the Board of Frontline 2012 and the guarantor of the Frontline 2012 equity will to the extent permissible by securities law, seek to give preference to Frontline equity holders to subscribe to the new capital in Frontline 2012. In view of the fact that the transaction is based on current market values there will not be given any tradable rights for subscription.
The equity raised through the issue 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 capitalize Frontline 2012 with cash.
Hemen will give a special guarantee of $250.5 million to make sure that all necessary debt and equity is in place to take delivery of the full remaining newbuilding program. In addition, Hemen will provide a guarantee of $30 million to satisfy minimum cash requirements in Frontline 2012. Terms of these guarantee are still to be finalized, however Hemen have agreed that any guarantee fee should be paid in shares.
Hemen is giving total guarantees of $505.5 million in order to restructure Frontline and establish Frontline 2012. These guarantees are valid until December 31, 2011, and are given on the basis that a successful restructuring can be agreed prior to December 31, 2011 and Frontline thereby can avoid any breaches of loan covenants as per year end.
If the proposed solution is approved, says a statement issued today, Frontline should have significant strength to honor its obligations and meet the challenges created by a very weak tanker market. The company's sailing fleet, excluding the non recourse subsidiary ITCL, will be reduced from 50 units to 40 units. The cash in the company will be increased with approximately $125 million. The newbuilding commitments will be reduced from $437.9 million to $112.4 million. The bank debt will be reduced from $679 million to $13 million. The gross charter payment commitment will be reduced by approximately $336 million in the period 2012-2015. When including the earnings from charter out agreements, the estimated daily cash break even rates for VLCCs and Suezmaxes in 2012 will be reduced from $25,600 and $20,800 to $17,600 and $12,800, respectively. All the numbers above exclude the non recourse subsidiary ITCL.
Frontline will, with the restructured cash break even rates and the solid cash position, be amongst the best positioned tanker companies to serve its obligations even if the market remains very weak. Until a clearer sign of recovery can be seen in the tanker market, Frontline will remain cautious and focus its resources on present activities.
"Through the solution of the sale of a limited amount of the company's assets, Frontline will avoid a heavy dilutive new equity offering and will thereby keep significant upside for the existing Frontline equity holders if the market recovers in the years to come," says today's statement.
The Chief Executive of Frontline Management AS, Jens Martin Jensen, says in a comment: "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. We want to thank all the parties who have contributed to this solution, which ultimately, if implemented, will give significant extra value to our creditors, counterparties and equity holders."
December 6, 2011