(Updates closing share price in first, fifth paragraphs.)
Dec. 6 (Bloomberg) -- Frontline Ltd., the world’s biggest operator of the largest oil tankers, plans to split the company to withstand the worst rates since 1999. The shares jumped as much as 39 percent in Oslo trading.
Frontline 2012 will take control of the newest vessels as well as outstanding orders at ship yards, Hamilton, Bermuda- based Frontline said today. The new company plans to sell $250 million of shares, of which Frontline will take 10 percent. Hemen Holding Ltd., a company indirectly controlled by Chairman John Fredriksen, will underwrite the remainder. Hemen is giving guarantees of $505.5 million, valid until Dec. 31.
“The risk of the company defaulting is gone,” Bjorn Roed, an Oslo-based analyst at Terra Markets, said by phone today. “It makes them very competitive in this low tanker market that is expected in the coming years.”
Earnings from the largest vessels averaged $21,559 so far this year, the lowest since 1999, as fleet expansion outpaced growth in cargo, according to data from Clarkson Research Services Ltd., a unit of the world’s largest shipbroker. Frontline said last month it was seeking talks with lenders as it risked running out of cash next year.
Frontline gained 26 percent to 25.5 kroner in Oslo, reducing this year’s drop to 83 percent and giving the company a market value of 1.99 billion kroner ($344.2 million). The stock plunged 44 percent on Nov. 22 as Frontline said it might breach loan conditions and was seeking talks with creditors.
Frontline said its long-term charters from Ship Finance International Ltd. will be cut by $6,500 per vessel and that it will pay the company $106 million in compensation. The 2012 company’s shares will trade over-the-counter in Norway, it said.
Ship Finance said in a separate statement that it approved the deal subject to the agreement of its board and banks. The deal is favorable to Frontline and “negative” for Ship Finance, Erik Nikolai Stavseth, an analyst at Arctic Securities ASA, said in an e-mailed report.
The plan will cut Frontline’s supertanker break-even level to $17,600 a day in 2012. It needs $30,200 for the remainder of this year, it said Nov. 22.
The carrying capacity of the global fleet of supertankers, known in the industry as very large crude carriers, or VLCCs, expanded 8 percent to 172.9 million deadweight tons this year, according to Clarkson. Demand will swell by 5.3 percent.
Four owners of VLCCs, including Mitsui O.S.K. Ltd. and the tanker division of A.P. Moeller-Maersk A/S, said today they will form a pool of the vessels by February, combining fleets and jointly marketing services to improve fleet use and earnings. The pool will number 50 by the end of 2012, surpassing the world’s biggest, operated by Tankers International.
In 2009, Hemen Holding bought shares that were issued by Golden Ocean Group Ltd., Fredriksen’s dry-bulk shipping company. Fredriksen also sold his convertible bond holdings back to the company at 35 cents on the dollar.
Frontline, which has $1 billion of bonds and public loans maturing in the next decade, said Nov. 22 it may need more funding in 2012 and there were “significant uncertainties” about meeting some loan terms at the end of this quarter.
The company’s $225 million of 4.5 percent convertible bonds due 2015 traded at 52 cents on the dollar, according to Trace, the bond-price reporting system of the U.S.’s Financial Industry Regulatory Authority.
General Maritime Corp., the second-largest U.S.-based owner of crude carriers, filed for bankruptcy protection last month. Forward freight agreements, traded by brokers and used to bet on future transport costs, are anticipating unprofitable charter rates for at least two more years.
The plan would cut the amount Frontline needs to spend on vessel construction to $112.4 million from $437.9 million, the company said. The plan doesn’t need the approval of shareholders, Jens Martin Jensen, Singapore-based chief executive officer of Frontline’s management unit, said by phone today.
Existing Frontline equity investors will likely favor the plan, Ole Stenhagen, an Oslo-based analyst at SEB Enskilda, said by phone.
“It seems like a fair deal and I would guess there will be little resistance,” Stenhagen said. “I’m not sure there will be many other buyers at similar levels.”
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