There was no question that the company had to do something, but Frontline (NYSE:FRO) has taken a pretty interesting path in its restructuring. Although the chances of Frontline going out of business due to liquidity pressures are now much lower, it is an open question as to how upside remains left with the publicly-traded remainder and who really benefits the most from this somewhat convoluted transaction. (For related reading, check out Understanding Financial Liquidity.)
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From One to Two
Frontline was founded in the mid-1980s by John Fredriksen in response to a terrible market for oil tankers. Yet another terrible tanker market, a market wherein rates have frequently been at or below cash operating costs, will now fundamentally change this company going forward.

In response to severe liquidity pressure (and a negative net asset value), Fredriksen's holding company Hemen Holding is stepping in to restructure Frontline by basically breaking it up into two companies. A new company, Frontline 2012, will emerge in a shape that should allow it to take advantage of an eventual rebound in the tanker market, while the old Frontline will float on but with likely substantially less potential.

Frontline 2012 will come into being largely through a $250 million stock issuance - 10% of which will be bought by Frontline and Hemen buying the remainder. With this money, as well as additional debt capital, Frontline 2012 will acquire five Very Large Crude Carrier (VLCCs) newbuild contracts, as well as six existing VLCCs and four Suezmax ships from Frontline's fleet, valued at a fair market value of $1.12 billion today.

Frontline 2012 will also assume $666 million in debt and $326 million in future payment obligations tied to those newbuilds. All told, that reduces Frontline's debt and capital expenditure demands by about $1 billion and boosts the cash balance by about $125 million.

But Wait, There's More
As part of the restructuring, Frontline will also blend and extend certain charter contracts with Ship Finance (NYSE:SFL). In exchange for upfront payments of $106 million and potential future make-good payments, Frontline will get substantially lower charter rates on the underlying vessels - a deal that ultimately derisks the business relationship for both Ship Finance and Frontline (as it is not as though Ship Finance has others clamoring to charter those ships at high rates).

Frontline Survives, but at a High Cost
With this deal, Frontline's liquidity issues should be largely in its past. The cost of this, though, is that the company has substantially gutted its asset base. After this deal, it maintains a stake in ITCL and two old Suezmax ships, and all the rest of its operating fleet is chartered-in from Ship Finance. There's nothing necessarily wrong with being a ship operator (as opposed to an owner-operator), but it does mean a different cost structure, a different capital structure and a different expected return curve for investors. And to be both fair and clear, even before this transaction, a large percentage of Frontline's ships were chartered-in from Ship Finance.

Still, it seems pretty clear that Fredriksen is likely to benefit the most of all from this restructuring; he arguably had the resources to recapitalize Frontline, but instead decided to go this route with creating Frontline 2012 instead (a company he will largely own and which will not be public).

What Now?
Investors thinking about a shipping recovery should probably not get their hopes up for much positive news before 2013 or 2014. Right now, there are just too many ships chasing too little business for sustainably strong dayrates.

Within tankers, Scorpio Tankers (NYSE:STNG) and Nordic American Tankers (NYSE:NAT) are both still worth a look, and Tsakos Energy Navigation (NYSE:TNP) may likewise be undervalued relative to the value of its assets. Keep in mind, though, that Scorpio and Nordic American have relatively cleaner balance sheets at present, and that's a premium in a terrible market. Along similar lines, LNG carrier Golar LNG Partners (Nasdaq:GMLP) is at least worth a look.

Drybulk is still looking like a tough market, though. Diana Shipping (NYSE:DSX) and Knightsbridge Tankers (Nasdaq:VLCCF) have relatively better capital structures, with Diana looking like the cheaper play. In containerships, Costamare (NYSE:CMRE), Box Ships (NYSE:TEU) and Seaspan (NYSE:SSW) have decent balance sheets, and container cargo looks like it may be the first major shipping category to turn around (perhaps a 2012 event). (For additional reading, check out Evaluating A Company's Capital Structure.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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