Rickmers – OCBC

Steady 3Q

Steady 3Q. Rickmers Maritime (RMT) posted US$26.5m in 3Q revenue, up 97% YoY and 12% QoQ thanks to a steady stream of vessel acquisitions since its May 2007 IPO. The trust will distribute 2.25 US cents for the quarter. We note that the expected delivery dates for three more MOL vessels on order have been pushed back slightly and we have adjusted our earnings estimates accordingly. As of end 3Q, RMT is geared at about 1.1x debt-to-equity.

Containership industry faltering. The looming prospect of a global recession and an immense industry order book are pointing to tougher days ahead for the containership industry. News has been dominated by falling freight rates and reports of vessel redeployments and lay ups. RMT charters out its vessels on long-term, fixed rate charters and is less vulnerable to short-term volatility. The charter expiries are staggered, with only one potential lease expiry in the near-term (end 2009). The key risk is counterparty risk, and a consequent charter default or rate renegotiation. RMT’s customers are amongst the top 10 liner companies in the world.

The LTV risk. The demand-supply imbalance is also creating a downward stress on asset values, posing a more immediate threat to RMT because of the loan-to-market value (LTV) covenant in its loan agreements. The breach of the required LTV ratio amounts to a technical default. The cost of debt ratchets up and lenders have a right to demand a “top-up” in terms of cash or additional assets as collateral. With a breach, RMT would have to renegotiate its position with its lenders and possible outcomes could include a vessel sale or a diversion of cash flows to repay debt – impacting unitholder distributions.

Orderbook becomes a burden. RMT expects to take delivery of 11 new vessels costing US$1.2b over 4Q08 to 2010 (with the charters and charter rates already locked in). RMT has credit facilities in place for the first seven ships worth US$492m. An equity injection was planned to partially fund the acquisitions (and accommodate debt repayment terms). Worst case alternatives include an outright vessel sale, a sale-and-leaseback or a sponsor “bail-out” (equity or asset warehouse). RMT can defer the equity issue but it cannot avoid it forever – even with all else equal, at current price levels, the threat of dilution trumps the lure of value. We like RMT for its blue chip charterers and its partial cash retention policy but find the above issues difficult to downplay. Downgrade to HOLD with S$0.40 fair value.