PST – OCBC

Charterer CSAV seeking rate reduction

Charterer CSAV seeking rate reduction. Pacific Shipping Trust’s (PST) customer CSAV is asking ship owners (such as PST) for a temporary reduction in charter hire payments. Two PST vessels (out of a 12 vessels fleet) are chartered to CSAV on 5-year time charters. These charters contribute 30% of PST’s annual revenue.

Expect PST will agree. We expect PST to agree to the renegotiation request. The reality is that accepting this reduction is probably the best option PST has in today’s environment. PST’s manager acknowledged that vessels of comparable size to the two PST vessels are currently unemployed and while the current market rate would cover operating costs, it would likely not be enough to cover both interest expenses and debt repayments. Lower cash flows from CSAV are better than no cash flows at all, in our view.

Still a lot of unknowns. Discussions are still in very preliminary stages. This is a complicated process as CSAV will have to negotiate reductions with all the numerous ship owners. Based on CSAV’s targeted savings, PST estimates that it may be asked for a 30% reduction in charter rates. This figure only holds if every owner agrees to similar terms (a big if). Typically, ship owners would demand some sort of compensation in return – revenue clawback or partial payment in CSAV equity – that has yet to be determined. Also unclear is how PST’s lenders will react to what likely qualifies as ‘material change’ in the trust’s circumstances. PST’s lenders could conceivably tack on a punitive spread to PST’s cost of debt (increasing interest expense) or demand higher debt repayments.

Will PIL follow suit? PST derives the remaining 70% of its annual revenue (on original rates) from bareboat charters to its sponsor and 59.2% stakeholder, Pacific International Lines (PIL). PST said it has not received any indications from PIL regarding rate reductions. Despite their strong ties, a request for renegotiation is not unlikely, especially if the container industry’s performance continues to deteriorate.

Maintain HOLD. We have reduced our revenue forecasts for FY09-10F by 7% and 9%, and slashed DPU estimates by 17% and 22%. We may need to make further revisions as more details emerge. Counterparty risk (and lender reaction) remains the key risk, and we think this is reflected in our US$0.16 fair value estimate. PST will release 1Q09 results next week. PST already has a fairly conservative distribution payout policy but the Board may have to be even more prudent in light of recent events.