Positioning for growth

• Placement to raise proceeds of about US$29m, comes on the heels of successful negotiation of two year covenant waiver on existing borrowings
• 3Q09 DPU guidance of 1.50UScts maintained, dilution thereafter, if any, limited to 7% at worst
• DPU accretive acquisitions could be on the radar, maintain BUY with target price S$0.70

Placement fortifies balance sheet… FSL Trust has successfully placed out 80m new units at an issue price of S$0.525 per unit, raising S$41m (US$29m) in net proceeds. This latest development follows an earlier DPU cut and a recent two-year waiver on its loan-to-value covenants; and puts the Trust firmly on the road towards a less aggressive and more sustainable business model.

…and adds acquisition angle. Apart from reducing gearing and satisfying the more stringent covenant requirements on the Trust’s minimum equity level following the recent waiver negotiations, the placement provides a growth option to demonstrate the continued viability of the business model. The proceeds should enable the Trust to enter up to 2 small sized sale and leaseback deals and amidst the current shipping downturn, the Trust is looking at opportunistic deals promising more than 15% asset yield.

Manager keeps guidance intact. While 3Q09 DPU guidance has been reconfirmed at 1.50UScts, we believe that the Trust should be able to distribute a minimum of 1.40UScts on the expanded share base, going forward, without accounting for acquisitions. This implies a mere 7% dilution and brings FY10 yield down to 13.1% from 14.0% pre-placement, which is still attractive given the embedded growth option. Acquisitions, even at a conservative 12% asset yield, could potentially boost DPU by another 9% in FY10. Thus, we maintain BUY, TP slightly reduced to S$0.70 owing to near term dilution effects.

Yields Are Intact But Bullet Payments Not Too Far Away

First Ship lease Trust (FSLT) has raised S$42.0m (US$29.2m) via a private placement of 80m new units (15% of pre-placement share capital) at an issue price of S$0.525/share to fund acquisitions. The shipping trust has also secured a two-year waiver for its loan-to-value (LTV) covenant and reaffirms quarterly
payout of 1.5 US cents from 3Q09 onwards.

Management targets gross asset yield of 15 p.a. Based on the placement price of S$0.525/share, we estimate the cost of equity at 16.5%, which appears high. However, the management targets a gross asset yield of 15% p.a. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are non-accretive.

Waiver of LTV covenant is a positive development for FSLT as it eliminates the risk of breaching its LTV covenant, given the fall in ship values. Over the two-year waiver period, FSLT will make quarterly repayment of US$8.0m.

However, balloon payments are not too far away. While FSLT has begun to repay part of its loans on a quarterly basis, it still has a total outstanding loan balance of about US$400m due for balloon payments in 2012 and 2014. It will either have to refinance the debt or raise equity for the bullet payments. The latter would likely result in a yield dilution. Based on a hypothetical scenario, if FSLT were to raise US$400m at today’s share price of S$0.61, this would imply a mere yield of 5.6% p.a. (before accretive acquisitions).

Maintain HOLD and cut our fair price from S$0.64 to S$0.62 in view of the dilution from an enlarged share capital. Our fair price is based on 0.8x 2010 P/B of the container shipping sector. We suggest entry price at S$0.56.

First Ship Lease Trust to raise funds from placement

JUST days after winning some reprieve from its bankers, First Ship Lease Trust (FSLT) is now seeking to raise more funds with a 100 million unit placement exercise.

The placement, to be arranged by CLSA Singapore, will not be underwritten. The issue price per new unit and number of new units to be issued will be determined by CLSA in consultation with the trustee-manager, FSL Trust Management (FSLTM), following a book-building process.

FSLTM said that the issue price will be between 52.5 cents and 57.5 cents unless otherwise agreed between CLSA and FSLTM but provided that it will not be at a discount of more than 20 per cent to the traded volume-weighted average price of 59 cents on the day before the agreement was signed.

The trustee-manager said that assuming that all the 100 million new units are issued at an assumed price of 59 cents each, FLST estimates that it will receive net proceeds of about $57.3 million.

The trust plans to use funds raised for the acquisitions of vessels with leases or of companies holding such vessels, although it has not identified any specific assets to be acquired as yet.

The new units are equivalent to about 19.28 per cent of the existing issued units and about 16.16 per cent of the enlarged issued units, assuming that all the 100 million new units are issued.

To ensure fairness to existing unit holders, FSLT will give a stub distribution, estimated at 1.27 cents, for the period July 1 to the day immediately preceding the date on which the new units will be issued instead of to Sept 30 as originally scheduled. The new units are expected to be issued on Sept 17, said FSLTM, adding that the next distribution following the stub distribution is expected to be for the period from the issue of the new units to Sept 30.