Scorpio Tankers Inc

NYSE:STNG

Earnings Call Transcript 2018-Q1

[Operator]

Hello, and welcome to the Scorpio Tankers Inc. First Quarter 2018 Conference Call.

I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

[Brian Lee, Chief Financial Officer]

Thank you and thank you all for joining us today. On the call with me are Emanuele Lauro, our Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer, and [Reidar Brekke].

The information discussed on this call is based on the information as of today April 25, 2018 and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release we issued today, as well as Scorpio Tankers’ SEC filings, which are available at scorpiotankers.com and sec.gov.

Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investors Relations page of our website for approximately 14 days. If you have any financial modeling questions later on, you can contact me and discuss offline.

Now, I’d like to turn the call over to Emanuele Lauro.

[Emanuele Lauro, Chief Executive Officer]

Thank you, Brian. Welcome to the call and good morning or afternoon to all. The format of the call is I will have - I will make my initial remarks and then we will open the call for questions.

In the last nine months, we have been presented as if with a test, as far as the company is concerned and as far as the management team is concerned, as the product tanker market wrestled with its loads. That said we are satisfied with how we have adapted to these challenges. Importantly, we have done so whilst maintaining significant operational and financial flexibility.

We appreciate how supportive our equity capital providers have been during this phase. As a management team we remain focused on delivering value from the anticipated market rebound. The medium-term outlook looks increasingly attractive. The IMO measures to move to low sulphur fuels in 2020 should lead to a significant improvement for the product tanker market, and significant competitive advantages for [indiscernible] tonnage.

Furthermore, we anticipate an acceleration in the volume driven by increased maritime demand for refined products from 2020. Much has been written on this, and I will not add to that noise, however, I think it is sufficient to say that the direction of travel ahead of us is clear. In the meantime, we have work to do. Hope is not and has never been our strategy. The senior management team remains focused on positioning our balance sheet for any market and our best in class [spot] market fleet top tier counterparties and the resumption of a secular growth in our product tanker markets.

Whilst we will not be able to expand to a great extent on the important measures we are taking to enhance liquidity and financial flexibility, we are comfortable to say that we continue to enjoy and expand supportive relationships with top tier lenders at competitive pricing.

The company continues to continuously evaluate its potential financing transactions that it believes will enhance shareholder value and that in the best interest of the company, including the repayment or refinancing of its existing indebtedness. More importantly, the company has signed term sheets or agreed main terms for a series of bank loans and sale leasebacks to refinance certain of its outstanding security indebtedness. These transactions if consummated will be expected to raise $334 million of liquidity, after the pre-payment of the existing secured debt related to the specific vessels.

We expect to make detailed announcement for the individual transactions in the coming weeks. As a management team, we are pleased to note that in an era of financial repression in shipping our capital providers recognize, as we do, that Scorpio Tankers is positioned as a winner in this space.

With this operator I would like to turn the call to questions. Operator, are you there?

[Operator]

[Operator Instructions] Our first question is from with Jon Chappell with Evercore. Your line is now open.

[Jon Chappell, Evercore]

Thank you. Good morning and good afternoon. Emanuele, I don't want to equate what Scorpio Tankers has been going through in the last few quarters to exactly where Scorpio Bulkers was back in 2016, although the stock price indicates it was something similar. But, in a lot of those dry bulk recapitalizations including your own there was an equity pledge or a need to raise equity for the banks in order to kind of improve the terms, and kind of provide a better runway. Is there a similar situation for staying right now, and if not why are you able to get this recapitalization plan underway without the pledge for new equity?

[Robert Bugbee, President]

Let me answer that one Jon. It is Robert. First of all, yes, we raised equity with [indiscernible] but at no time did we make - did the bank ask us for a pledge or do we make a pledge. What we did was raise the equity price to that position, and then we got rewarded for that good behavior by the banks. And that is a very - in a way a very similar account to what has just happened with Sting.

We already raised the equity. We did that in December, and so we got ahead of the position. So, the answer is anyway in short-terms there is no pledge. There is no requirement. You know, very little. We have been working really diligently on creating enough liquidity from present resources without the requirement to do a dilutive equity raise.

[Jon Chappell, Evercore]

Okay, and then, I understand you can't really say too much until all the i’s are dotted and the t’s are crossed, but to put $334 million exactly in the press release you have to be pretty close on some things. Is there any way you can expand just a little bit on some of the [indiscernible] that you have been able to use here?

[Brian Lee, Chief Financial Officer]

John, yes, I can expand on that. Just first to follow up on what Robert said. I think we would characterize the discussions with all the financial providers as being relatively routine, and I think we are obviously pleased with the terms and conditions we have received, but we were expecting that and the discussions have been very moderate, and we certainly haven't had any demands placed on us.

And in terms of giving you more color on the transactions, I can probably go a bit further and let me start with the bank facilities. All of the facilities, both the bank and lease facilities are involved in refinancing of existing secured financings that have a lower loan to value than what is replacing them. The discussions with the banks are such that we have - as Emanuele said, we signed term sheets or agreed main terms with our lenders for separate credit facilities, and I can tell you that the advance rates for those have been between 62.5% and 65% of vessels fair market value.

The loan margins for these loan facilities are expected to range between LIBOR plus 2.40 and LIBOR plus 2.60. The credit facilities are being provided by existing lenders to Scorpio and I think we have a strong and close relationship with these lenders and we are very appreciative of their strong support. In terms of announcements, we would expect to announce the commitment of all of these credit facilities within May.

In terms of the leasing facilities, the advance rates for these transactions are expected to range between 75% and 85% of vessels fair market value. They are predominantly floating rate in nature and bear interest of between LIBOR plus 3% and LIBOR plus 3.7%. Where we have negotiated a fixed rate of interest, the equivalent floating rate to today’s LIBOR rates is also within this range.

And these transactions are considered as finance leases for accounting purposes. In addition to that, we are negotiating. In fact we have agreed main terms with the leasing company for a sale of leaseback of certain of our vessels for a higher advance than what I have previously stated. And this transaction would be an operating lease for accounting purposes.

I would characterize the lease facilities as being relatively flexible and non-restrictive and I say that by - with reference to early purchase options, covenants and other features that position them much closer to bank debt than perhaps certain leasebacks that looked like in the past. And we are seeing certain leaseback financing become a lot more flexible generally. We expect to update the market during May and June as to when approvals are achieved and lease transactions are definitively executed.

We can't give any more details at this stage for modeling purposes, and I am afraid you are going to have to be patient with us and await further details in upcoming announcements and filings.

[Jon Chappell, Evercore]

No. That is much more helpful than I would have imagined. Thank you so much. Just one super-quick last follow-up, as far as kind of additional firepower is concerned, do you think that you have done all that you can with the finance leases, with the loan to value kind of updates with the credit facilities or are there even a few more ships that can potentially go down either one of those paths?

[Emanuele Lauro, Chief Executive Officer]

We have the ability to do more if we choose to do it. But I think what we are announcing is what we are doing.

[Jon Chappell, Evercore]

Thank you, Lee. Thanks Robert.

[Operator]

Our next question is from Magnus Fyhr with Seaport Global. Your line is now open.

[Magnus Fyhr, Seaport Global]

Good morning guys. I just had one question on the markets. I mean, it is good to see that rates are picking up here, bookings for the second quarter higher than the first quarter. I guess it is just the LR2s that are slightly below the first-quarter bookings. Can you talk a little bit about the - I mean the longer haul market therefore the LRs, you made an acquisition here, to kind of lever into that market, can you kind of just go through the outlook here over the next couple of quarters ha would be interesting to see your views.

[Unidentified Company Representative]

Hi, Magnus. It is [indiscernible]. I think what we saw with the LR2s was requiring maintenance in the Middle East, January and February, and it is important to keep in mind that the ships go on longer haul voyages. I think overall the LR market is strong, and I think that was reflected in the LR1 rates, but I would expect them to continue now that - to continue to go up now that refinery maintenance has ended. There was also some competition from LPG, but I think triangulation of the LR2 voyages has increased and continues to increase and that should be a positive for higher rates.

[Magnus Fyhr, Seaport Global]

Okay, and I notice that you chartered in additional two vessels at 14,300 and 14,000, can you kind of - I mean you have a lot of operating leverage already in this segment, can you kind of just explain why you are adding two more vessels?

[Emanuele Lauro, Chief Executive Officer]

That is opportunistic Magnus, and we see that at these levels with the optionality, which is provided to us in these contracts there is more value in the company retaining the control of these vessels, rather than finding them competing in weaker hands. And as I said that is one reason and the other reason is specifically the attractiveness of the rate at a time and point where the optionality provided to us will hopefully result in good value and returns.

[Magnus Fyhr, Seaport Global]

All right. Thank you, Emanuele.

[Emanuele Lauro, Chief Executive Officer]

Sure.

[Brian Lee, Chief Financial Officer]

Magnus. I would also expand a little bit that on the [indiscernible] we are not going to go through in detail, but key customers especially in the Middle East and in modern LR2 trade, we have expanded recently forward positions related to contracts and freight that are market related and things like that. And I think that is a pretty good sign that the customer side of that market is stepping up and trying to secure access to modern tonnage.

[Operator]

Our next question is from Amit Mehrotra with Deutsche Bank. Your line is now open.

[Amit Mehrotra, Deutsche Bank]

Thanks operator. Good morning everybody. So, just a few quick questions hopefully. First one is on the liquidity - the increased liquidity, just on the bank debt side, if this a refinancing I guess with entirely new lenders, is it existing lenders on the facilities that are being refinanced, and is the lender consortium more concentrated? Any color you could give there would be appreciated, thanks.

[Emanuele Lauro, Chief Executive Officer]

I can't give much more color Amit, but they are all existing lenders. They are in most cases new facilities, and there is quite a few of them. So, it is generally existing lenders refinancing existing deals, but certainly not refinancing their own deals.

[Amit Mehrotra, Deutsche Bank]

Okay, fine. So there is no like risk that this goes to - there is this huge concentrated one bank that when they go to committee something could change and it is pretty - it is like a peanut butter, it is spread across a bunch of different banks. Is that correct?

[Emanuele Lauro, Chief Executive Officer]

That is correct.

[Amit Mehrotra, Deutsche Bank]

Okay, good. And then if you could just help us think about the use of proceeds, obviously the proceeds will be used to some degree to address the converts, but it probably doesn't make sense. I mean, correct me, if I am wrong, but it probably doesn't make sense to repurchase in its entirety of the convertible notes. So I'm just trying to understand what the pro forma liquidity could be once you maybe address this “overhang”, any thoughts on how you are thinking about that would be appreciated?

[Brian Lee, Chief Financial Officer]

We have lots of thoughts, but I don't think it would be appropriate to say them. I think that one of the great values obviously when you are dealing with a bank setup is, you have liquidity of the timing of where it is so, we are focusing as Emanuele stated with working and executing and creating as much flexibility without resorting to equity issues as possible.

And I think, it doesn’t - we appreciate the irony that in a short time we have gone from - and we appreciate you particularly being early in identifying this that we have gone from a market where people were terrified that we could pay-off the converts at all in July ’19 to now probably wondering if we are going to start paying off converts right now. So, we are not willing to go any further into those discussions for obvious reasons at the moment.

[Amit Mehrotra, Deutsche Bank]

It is just my job to ask, but I certainly…

[Brian Lee, Chief Financial Officer]

Yes, sure.

[Amit Mehrotra, Deutsche Bank]

Absolutely. Just a couple of quick ones…

[Brian Lee, Chief Financial Officer]

Obviously there is nothing. It is a trade. There is nothing - you don't have to do anything. I mean, it is - in one sense it is really cheap money to do something for another year and a quarter.

[Amit Mehrotra, Deutsche Bank]

Yes, absolutely. One last one from me, maybe two quick ones if I could, if I look at the capital structure, what you guys are doing basically is I would term it capital structure gymnastics, right. I mean the financial position of the company doesn't change. You are just going up higher up the capital structure in terms of where the debt lies, pro forma. So, with that respect any thoughts Robert, I mean, I guess through this experience or the experience of the Bulker company over the years, like where is STNG's capital structure going to actually like, jiggle out over time if you start to get a little bit better, rates and what's the rate altitude for this company after the experience you had?

[Emanuele Lauro, Chief Executive Officer]

Again when -- again, we're focusing on dealing with it, this present position. We're very cognoscente to the perception out there as we wanted to just get rid of that. We haven’t had that time is going through looking at where we're going to be forward.

But I would say though that's very interesting is that the flexibility created for a company like STNG with a modern fleet. It's great that these leases that we're doing at the moment as you pointed out bear a much greater resemblance to traditional bank there in many ways and many features and a much more flexible than they've ever been historically.

And I think that new methods is certain lenders, not necessarily in our facilities, but there's certain lenders in shipping come under issues and normal commercial lending comes up under issue and obviously you got a tremendous arbitrage. You can see clear arbitrage between the present capital market.

Capital market as implied in where our converts are training or baby bonds are trading and where either lease or commercial lenders are going to lend that. And we just haven’t had that. We can see that now when we're using that arbitrage right at this moment and using that change in modern leases but we just haven’t had time to go through and properly see long term where we want to end up.

Obviously, we want to have where you started with is you want to have a diversity. You never wanted to be dependent upon one lease provider or one lender.

[Amit Mehrotra, Deutsche Bank]

And then one quick one, Brian or you. Is $13,000 a day the right number, excluding that repayments, I guess, but including the charter hire dividend, that service. Kind of that the right number to the bogie if you will on in terms of the non-debt repayment cash break even number. Is that kind of a good rule of thumb right now based on where you're today?

[Emanuele Lauro, Chief Executive Officer]

That's okay. I would be -- I would think the deal a little bit lower than that but we will log it.

[Amit Mehrotra, Deutsche Bank]

And especially the charter hire comes down next year, I would imagine, to so about take out maybe a $1000 a day out of that this whole rate.

[Emanuele Lauro, Chief Executive Officer]

Very good point, yes.

[Amit Mehrotra, Deutsche Bank]

Okay. Alright guys, great job. I'm really happy for you. Congrats on on getting this done. Have a good one, bye.

[Emanuele Lauro, Chief Executive Officer]

Thank you.

[Brian Lee, Chief Financial Officer]

Thank you.

[Operator]

Our next question is from Randy Giveans with Jefferies. Your line is now open.

[Randy Giveans, Jefferies]

Thanks, operator. Congrats, guys. A few quick questions, just to be clear for the $334 million in aggregate new liquidity not including any vessel sales, correct? - through operating fleets going to be the same as it is currently?

[Emanuele Lauro, Chief Executive Officer]

Yes, correct. I'm not including the 150 or whatever it was, that what have you given cash today, Brian?

[Brian Lee, Chief Financial Officer]

151.

[Emanuele Lauro, Chief Executive Officer]

Yes. I'm not including the 151 cash either. So, not including any sales, so that no diminution in operating leverage and in terms of ships and it is on top of what we declared as cash today.

[Randy Giveans, Jefferies]

Excellent. And then I heard James on the call. So, I'll throw a question at him as well. It seems like there I a previous disconnect between the color Symphony and how [indiscernible] Polish rates. And what STNG's actually earning.

So, is thus our performance mainly ECO ships, a variety of routes, triangulation trades, if you can touch on that a little bit. James, I like to hear from you again.

[Unidentified Company Representative]

Hi, Randy. I think it's a combination of all definitely won some credit to the commercial department of Scorpio. And also, the ECO ships do provide a benefit. I think the scale and size of fleet definitely serve our customers very well in offering all asset classes a lot to expand our customization had chartering departments in multiple places throughout the world from Singapore went into New York.

So, let's say it's a combination of all those things. And what we’re seeing is kind of the market actually between 18,000 one week and 12,000 the other week. But what I would say when you think about that is when it does tighten up, we are reminded that the underlying demand is struck.

[Randy Giveans, Jefferies]

Alright, well said. Thanks so much and congrats again, guys.

[Operator]

Our next question is from [indiscernible] with Morgan Stanley. Your line is now open.

[Unidentified Analyst]

Hi, guys. Thank you for taking the call. It's so very pleasing, that's what -- start to creep up even though. Resell activity looks lenient. Wondering kind of what's

fuel consumption is going to be so much high that when we go to low Sulfur. And I don’t think that many people are going to take up this scrubber as of the end of the day.

I think it's going to -- that's going to come its way and go. The cash flow at any point in the market is worse. So, it's logical therefore that the lender or the debt side is going to be willing at any point to lend a less of a percentage at the same rate.

There's obviously a price, right? If it's a price that you could, I'm sure borrow 65% debt for an old asset. But are starting to appear, get the two Tier market is starting to appear and is coming through the capital structures first. I mean, the debt side first.

[Unidentified Analyst]

Alright, thank you guys.

[Operator]

And I'm showing no further questions. I would now like to turn the call back to Brian Lee for any further remarks.

[Brian Lee, Chief Financial Officer]

Thank you, operator. And thank you, thanks everyone for joining us today. We look forward speaking to everyone soon. Have a good day.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day!