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Risk Management
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Risk Management
- What is the biggest risk to the business of FSL Trust?
- What does FSL Trust do to manage its credit risk?
- In the light of current difficult conditions for shipping lines, what is the risk of a lessee defaulting on its lease payments?
- How does the Trust manage foreign exchange and interest rate risks?
- How are the vessels insured?
- What happens if a lessee defaults in its lease payment?
- What is the biggest risk to the business of FSL Trust?
- The biggest risk is lessee credit risk leading to defaults on lease payments.
- What does FSL Trust do to manage its credit risk?
- The Trustee-Manager has developed a set of proprietary internal risk management protocols to manage the risk profile of the overall portfolio, as well as individual transactions. These include the identification, assessment and pricing of risks prior to a potential transaction, monitoring of on-going risks following the execution of a transaction and hedging of risks associated with a transaction.
FSL Trust's portfolio is diversified across customers and sub-sectors of the shipping industry and its internal risk policy is intended to ensure that the risk profile of the portfolio is not overly concentrated on any particular lessee or sub-sector. The long-term objective of FSL Trust is to limit the exposure of any single customer to no more than 25% of its revenues and any single shipping sub-sector to no more than 40% of its revenues, although there may be deviations from these limits in the short-term as FSL Trust grows its vessel portfolio.
The Trustee-Manager has a dedicated risk management team that evaluates the risks associated with a transaction by using a proprietary internal risk management process which assigns an internal credit rating to each customer and transaction. The Trustee-Manager will not enter into transactions which it believes have a substantial risk of default over the life of the lease. Credit reviews will be conducted annually or semi-annually to monitor the lessee's financial performance and compliance with financial covenants (if any). In addition, the payment conduct of a lessee will be monitored on a monthly basis.
The risk management function is independent of the sales function of the Trustee-Manager and is necessary for the approval of any acquisition or transaction. The Trustee-Manager's risk management criteria give priority to long-term cash flow security from the lease over capital gains considerations.
- The Trustee-Manager has developed a set of proprietary internal risk management protocols to manage the risk profile of the overall portfolio, as well as individual transactions. These include the identification, assessment and pricing of risks prior to a potential transaction, monitoring of on-going risks following the execution of a transaction and hedging of risks associated with a transaction.
- In the light of current difficult conditions for shipping lines, what is the risk of a lessee defaulting on its lease payments?
- All of FSL Trust's lessees have been prompt in the payment of their lease rentals, which FSLTM receives monthly in advance. As at the last predictable date, FSLTM has not been approached by any lessees to re-negotiate the lease agreement.
Prior to entering into a lease, FSLTM conducts full due diligence to assess the credit worthiness of potential lessees, stress-testing their cash flows etc. FSLTM would only enter into the lease if it is satisfied with the analysis.
Further, as part of FSLTM's on-going risk management protocol, it maintains regular dialogue with all of FSL Trust's lessees and remains vigilant to the developments in the global shipping market.
- All of FSL Trust's lessees have been prompt in the payment of their lease rentals, which FSLTM receives monthly in advance. As at the last predictable date, FSLTM has not been approached by any lessees to re-negotiate the lease agreement.
- How does the Trust manage foreign exchange and interest rate risks?
- To manage interest rate and foreign currency exchange risks arising from its operations and sources of financing for its transactions, the Trustee-Manager may from time to time enter into derivative transactions, being principally interest rate swaps, foreign currency forward contracts and cross currency swaps.
FSL Trust's management of such financial risks is to hedge out all variability in interest rates and exchange rates within the lease structure thereby protecting the spread between the lease income and the funding costs to enable the Trust to distribute long-term predictable DPUs.
- To manage interest rate and foreign currency exchange risks arising from its operations and sources of financing for its transactions, the Trustee-Manager may from time to time enter into derivative transactions, being principally interest rate swaps, foreign currency forward contracts and cross currency swaps.
- How are the vessels insured?
- FSL Trust's bareboat lease agreements require all lessees to obtain insurance coverage with the relevant Special Purpose Company ("SPC") as a co-insured beneficiary. They are:
- Hull & Machinery and War Risk Insurance – which covers the risk of actual or constructive total loss for all the vessels, up to at least fair market value with certain deductibles per vessel per incident; and
- Protection and Indemnity Insurance – which insures third-party and crew liabilities in connection with the lessee's shipping activities. It is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations (P&I associations).
- In addition, as a contingency, the Trustee-Manager will also obtain for the relevant SPC's sole benefit, a "passive investor's interest" type policy to cover situations where the charterer's primary policy has declined a claim or fails to respond within the designated time allowed. This policy mirrors the vessels' primary insurance (H&M, War Risks and P&I) but is secondary to the primary coverage. Therefore, a claim is valid when the appropriate primary policy has declined a claim or fails to respond within the designated time allowed.
- FSL Trust's bareboat lease agreements require all lessees to obtain insurance coverage with the relevant Special Purpose Company ("SPC") as a co-insured beneficiary. They are:
- What happens if a lessee defaults in its lease payment?
- When there is a lease default, the Trustee-Manager has the right to repossess the vessel/s, and depending on the market conditions, the Trustee-Manager can either (1) sell or re-lease the vessel on a bareboat charter basis, or (2) trade the vessel/s in the spot or short-to-medium term time charter market.
TopImportant Notes:
These FAQs may contain forward-looking statements that involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions, interest rate trends, cost of capital and capital availability, competition from other companies, changes in operating expenses, trust expenses and governmental and public policy changes and the continued availability of financing in the amounts and the terms necessary to support future business. Investors are cautioned not to place undue reliance on these forward-looking statements, which are based on current view of management on future events.