Shipping Trusts – OCBC

Not out of the woods yet

1Q10 review: united in YoY DPU declines. 1Q10 results for the Singapore-listed shipping trusts under our coverage were largely in line with our expectations. Pacific Shipping Trust (PST), FSL Trust (FSLT) and Rickmers Maritime [RMT, NOT RATED] all reported YoY declines in DPU ranging from 19.1%-73.4% primarily due to lower distribution payout levels. FSLT, PST, and RMT are currently paying out 55%, 43%, and 13% of cash earnings respectively to unitholders.

RMT concludes negotiations with sponsor and lenders. In Apr, RMT’s sponsor agreed to discharge RMT’s obligation to purchase seven newbuild vessels for US$918.7m in exchange for a US$64m penalty. Additionally, RMT’s lenders also agreed to a loan maturity extension and to waive valueto-loan (VTL) coverage requirements. The agreement with the lenders is fairly restrictive: 1) the US$130m loan is now amortizing; 2) RMT has to pay a higher cost of debt in exchange for the VTL waivers; and 3) RMT cannot pay out more than 0.6 US cents/quarter while its VTL coverage is breached in any of its loan tranches. These agreements do take RMT away from the brink of bankruptcy but also create, in our opinion, a stasis situation where RMT cannot exert much control over its cash flows. The end point is also unclear (as we do not know what the VTL gap is). RMT could just bide its time under these agreements or possibly raise fresh equity (with a much recovered unit price) and get out of these restrictive agreements.

Counterparty issues remain. In sharp counterpoint to the RMT developments, FSLT announced earlier this month that its charterer Groda Shipping has requested the trust to take re-delivery of two of its product tankers that were under a sevenyear bareboat charter agreement. The charterer indicated that “it has become increasingly difficult for them to improve their cash flow” due to 1) escalating bunker prices; 2) underutilization of the vessels under the Contract of Affreightment (CoA); and 3) “limited options to generate incremental revenue given the trading area of the vessels”.

Growths plans offset by continuing risks. The sector, in our view, remains highly vulnerable due to counterparty risks – and this incident highlights that the broader shipping industry is not out of the woods yet. We expect both PST and FSLT to acquire new vessels this year but the key challenge will be to secure high quality counterparties and still make an accretive deal. Maintain NEUTRAL view. PST is our preferred pick because of its balance sheet strength.