Frontline represents approximately 35% of SFI?s long-term charters.
SFI caught up in concerns over Frontline?s plans to restructure
RATINGS agency Moody?s Investors Service has downgraded Ship Finance International, which charters vessels to Frontline, from Ba3 to B1 with a review for possible further downgrade, as a direct result of plans by Frontline to restructure following its deteriorating financial performance.
It has also downgraded SFI?s senior unsecured rating from B1 to B3.
Moody?s vice-president and lead analyst Marco Vetulli said that the action ?reflects Moody?s concerns about the negative implications for SFI?s credit profit of the deterioration in the liquidity position of its counterparty Frontline?.
He pointed out that Frontline represents approximately 35% of SFI?s long-term charters.
?The persistent shipping market stress and the decline in Frontline?s liquidity position has negative implications for SFI for two reasons,? Mr Vetulli said. ?Firstly, it could lead to the company having to restructure the charter contracts it currently has with Frontline, which could lead to a weakening of SFI?s short-term performance. And secondly, it will result in a deterioration in the quality of Ship Finance?s backlog of long-term charterers, which could negatively affect the company?s credit profile.?
This negatively affects SFI?s business model, which is based on stable and visible revenues with most of its assets chartered on long-term contracts.
?Therefore, we have downgraded Ship Finance to B1 from Ba3 because we consider that the company?s corporate family rating will not be commensurate with the Ba rating category,? Mr Vetulli said.
Moody?s said the review of SFI will look at the evolution of Frontline?s liquidity and possible alternatives to alleviate the issue, and the impact of any restructuring at Frontline on SFI?s credit profit and liquidity.
However, it added that a more positive outlook could arise in the longer term if SFI showed progress towards sustaining a retained cash flow to net debt ratio approaching a percentage in the low teens, and a debt to ebitda (earnings before interest, taxation, depreciation and amortisation) ratio of under five times.
Analysts have also noted the impact of Frontline?s announcement on SFI. The implication is that Frontline needs to lower the cash breakeven rate for its ships and the only way to lower it to any significant extent is to cut the bareboat charter rate from SFI.
Source: http://www.lloydslist.com/ll/sector/finance/article385364.ece
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