Month: December 2008
FSL – OCBC
Covenant concerns
Trailing yield is misleading. First Ship Lease Trust (FSLT) is currently trading at a trailing yield of about 40%. This is seemingly attractive, but misleading. Even in our best case ‘standstill scenario’ (where nothing happens), this yield is not sustainable. We estimate that FSLT’s DPU will decrease even if the trust’s income and equity base is unchanged. This is because of the trust’s debt repayment schedule. While FSLT had traditionally secured debt financing on bullet repayment terms, lenders require the most recent US$65m loan tranche to be amortized from Sep 2010 until the loan’s maturity in Apr 2012. We assume FSLT will have to use its cash income to pay down the loan from 2010 onwards. As FSLT is currently paying out 100% of its cash income, we estimate that DPU would fall 7.5% to 40% YoY over 2010-12.
Diversified portfolio. FSLT has the most diversified portfolio of the three Singapore-listed shipping trusts. The other two trusts are containershipfocused, while FSLT owns containerships, dry bulk carriers, and tankers. However, we do not believe any sub-segment is completely immune to the reversal in the shipping and leverage cycles. Counterparty risk, which can lead to rate reductions or charter defaults, is a concern. We also note that FSLT has suspended its acquisition program as it awaits better debt and equity market conditions. Unfortunately, its ability to hunker down and ride out the cycle is limited by debt covenants.
Covenant concerns. FSLT disclosed that the latest fair market value of its vessel portfolio as of mid-October is US$896m, or about 11% less than the original acquisition cost. This represents 175% of FSLT’s outstanding loan value of US$513m. Lenders require a minimum coverage of 145%. The fair market value of the current portfolio would have to fall about 20% to breach this covenant. The shipping cycle has peaked and we believe asset values have further to fall. Another 20% decline is certainly not outside the realm of possibility. A breach triggers a technical default – in this event, we understand the cost of debt ratchets up and distributions are halted. FSLT’s lenders may require an immediate equity top-up to correct the breach or FSLT may be able to negotiate gradual repayment terms (where a portion of quarterly cash income goes to lenders). Distributions could be reduced, or even cut to zero in such a scenario. The ultimate outcome depends on the health and risk appetite of FSLT’s lenders. We have adjusted our estimates slightly and our fair value inches up from S$0.43 to S$0.46. Maintain HOLD.
Shipping Trusts – OCBC
Victims of the cycle
More turbulence ahead… The last several years have seen major export growth as well as a commodities boom. This drove a boom in shipping – manifested in both an increase in rates as well as a demand for increased capacity, and led to increased asset prices and the construction of more ships. Asset prices soared at ‘bubble speed’ in the past couple of years, partly because of an aggressive use of leverage. The global economy then turned in early 2008 and the shipping industry was caught with a huge capacity and a large order pipeline. The industry has already seen a sharp reduction in charter rates. Asset values are expected to fall as the cycle corrects. We expect this decline to be steep in line with the deleveraging cycle.
2008 was about growth. Investors and managers of yield instruments in a bull market (rising asset values) and a cheap market (easy credit) were caught in a growth trap. The focus was on who could ramp up leverage and consequently, who could grow the fastest. The three Singapore-listed shipping trusts were all formed at, or very near, the peak of the shipping cycle. Consequently, their ships were priced at high valuations. They then continued to grow aggressively (at those same stratospheric price levels) – the sector has invested some US$1.3b since listing, more than doubling their IPO portfolio, in a space of less than two years. This growth was achieved through an aggressive use of leverage.
2009 is about survival. We believe valuations in 2009 will be driven by the health and strength of the three trusts, with the main focus on survival. Technically, shipping trusts are structured as long term, cash generating entities that have the ability to ride out short-term cycles. Unfortunately, the sector’s hunger for higher leverage has made them victims of those
same cycles. The biggest threat to the sector is the loan-to-market value (LTV) covenant. An LTV breach, not outside the realm of possibility, triggers a technical default. The ultimate outcome, possibly lower (or zero) distributions or distressed asset sales, depends on the health and risk appetite of the trust’s lenders. Pacific Shipping Trust is the only trust without LTV requirements. We expect capital commitments to be another overhang on valuations in 2009 – Rickmers Maritime has US$1.1b in new vessels coming in from now until 2010. This level of growth, previously a positive, has now become a burden. We have a NEUTRAL rating on the sector.
AREIT – BT
Moody’s places A-Reit rating on review
MOODY’S Investors Service placed Ascendas Real Estate Investment Trust’s (A-Reit) A3 corporate family rating on review for possible downgrade. This is due to A-Reit’s continuing reliance on uncommitted revolving banking facilities to fund its asset growth and capital expenditure, Moody’s said.
Cambridge – BT
New CEO at Reit manager CITM
SINGAPORE’S first independent real estate investment trust (Reit), Cambridge Industrial Trust (CIT), will see Wilson Ang Poh Seong step down as chief executive of the Reit manager Cambridge Industrial Trust Management (CITM). He makes way for Christopher Calvert, formerly the CEO of MacarthurCook Ltd (Asia).
Mr Ang was part of the team that initiated and launched the initial public offering (IPO) of CIT in July 2006.
In February, Oxley Group, led by executive chairman Michael Dwyer (formerly chief executive and managing director of Allco), acquired an effective 20 per cent interest in CITM by procuring 33 per cent of the equity in Cambridge Real Estate Investment Management (CREIM)). Oxley’s stake was acquired from Chan Wang Kin – until then a director of CREIM and CITM – who was also part of the team that initiated the Reit. CREIM held a majority stake of 60 per cent of CITM at the time.
In August, National Australia Bank and Oxley Group formed a joint venture to take an 80 per cent stake in CITM.
Since then, Finian Tan, who was also part of the IPO team of CIT, has resigned from the board of CITM.
When contacted, Mr Ang said that he had not intended to leave CITM when Oxley first took a stake in February. However, he added that the new board will take CIT ‘to the next level’. Mr Ang, who still holds 420,000 units in the Reit, said that he has not decided on his future plans yet.
Separately, CITM said yesterday that it has reached an agreement with three banks for a $390.1 million syndicated term loan to CIT. The funds will be fully utilised to refinance all of CIT’s existing debt facilities. The three banks are HSBC, nabCapital (a division of National Australia Bank) and RBS. The effective interest rate will be about 6.6 per cent per annum including amortisation of upfront costs.
CITM said that CIT’s distribution per unit in 2009 will be reduced by about 0.9 cents per unit per annum.
In terms of forward commitments that may have required debt funding, CITM said that it has reached an agreement with the seller of 29 Tai Seng Avenue to extend the option agreement to June 30, 2009, and the completion is subject to market conditions having supported an equity fund raising by CIT. It has also reached an agreement with the seller of 75 Tuas Avenue to terminate an earlier option agreement.
Cambridge – SGX
PRESS RELEASE
CAMBRIDGE INDUSTRIAL TRUST TO REFINANCE WITH S$390.1 MILLION TERM LOAN
Coordinating Lead Arrangers : The Hongkong and Shanghai Banking Corporation Limited; nabCapital, a division of National Australia Bank; and The Royal Bank of Scotland plc
Tenor : 3 years from drawdown
Loan: S$390.1m syndicated term loan, fully funded by the Coordinating Lead Arrangers. Completion of the Loan is subject to standard documentation. A portion of the Loan is subject to syndication on normal market conditions.
Effective Interest Rate: 6.6% per annum (approximately), including amortisation of upfront costs.
DPU Impact: CITM anticipates that CIT’s distribution in 2009 will be reduced by approximately 0.9 cents per unit per annum(1). (1) Note that amortisation of upfront costs does not affect the level of distributions to unitholders.
Properties mortgaged: CIT’s existing property portfolio excluding 16 Tuas Avenue 18A
Mr Chris Calvert, CEO of CITM said, “We are addressing the short-term refinancing risk that has been affecting CIT.
“Investors in CIT now have a highly stable income stream, driven by CIT’s long average lease term and high level of tenant security deposits, and following successful completion of the new loan facility, will be coupled with three years of debt financing. Given the current economic climate, this will be a welcomed position.”
Commenting upon the refinancing, Dr Chua Yong Hai, the Chairman of CITM said, “In the current economic circumstances it is pleasing to note that CIT has been able to retain the support of its existing lenders, HSBC and RBS. It is also pleasing that the National Australia Bank – through nabCapital, its institutional banking and capital markets business – has become a lender, adding to the role its nabInvest business has taken as a shareholder in the REIT’s manager. This is an excellent demonstration to REIT investors of the importance of strong sponsorship,” says Dr Chua.
Standard and Poor’s Ratings Services affirmed CIT’s ‘BBB-‘ credit rating on 6 October 2008.
CITM has decided to refinance using conventional debt, in lieu of a Shariah compliant facility. The Board recognises the strategic importance and potential benefits to CIT of becoming Shariah compliant and will continue to investigate whether this direction is in the best interest of unitholders in the medium term.
In terms of forward commitments that may have required debt funding, CIT has reached agreement with the seller of 29 Tai Seng Avenue to extend the option agreement to 30 June 2009 (or such other mutually agreeable date) and the completion is subject to market conditions having supported an equity fund raising by CIT. CIT has reached agreement with the seller of 75 Tuas Avenue to terminate the option agreement relating to that property.