Rickmers – OCBC

Essentially behaving like a toxic asset

Swift resolutions needed. Rickmers Maritime (RMT)’s increased cash retention following the 72% QoQ cut in 2Q09 DPU is just a drop in the bucket compared to the immediate issues ahead of the trust. In order of urgency (our opinion); RMT needs to 1) resolve LTV clauses that restrict access to loan facilities for the Hanjin vessels due in next five months; 2) secure waivers for LTV covenants on existing loans; 3) arrange payment of US$40m in vessel deposits and of loans that begin amortizing soon; 4) refinance the US$130m top-facility maturing in April 2010; and 5) finance the US$711.6m Maersk vessels due in 2H2010.

What next? RMT is in negotiations with lenders on LTV covenants and also in discussions with all stakeholders on the Maersk orders. RMT does not have the resources to honour its obligations (in our opinion) but it is in the sponsor’s best interest that it does due to 1) reputation risk and 2) the sponsor’s status as an intermediary on committed acquisitions – that is, if RMT defaults, the sponsor is still obligated to purchase the ships from the yards. Possible compromises involve delaying delivery of vessels (for a price) or letting the sponsor warehouse the assets (for a price) or raising a significant amount of equity (ability to do so is questionable).

Disadvantage unitholders. Whatever the final solution, we believe it not likely to favour the unitholders. With the high level of leverage and sizeable acquisitions fixed at peak prices, we believe RMT is essentially behaving like a toxic asset. When a leveraged play unwinds, the equity tranche is the worst place to be. Unitholders are caught in a game of “heads I lose, tails you win” and we think their best option is to exit this investment.

Adjusting valuation for distress. RMT’s unit price has fallen 29% since the 2Q DPU announcement and is now trading close to our original fair value estimate of S$0.39. This estimate values RMT as a going concern, which requires many assumptions including on the trust’s ability to successfully raise US$550m at S$0.53. We expect a high level of price volatility in the next few months and a going concern approach may not reflect the risks inherent in this investment. Our new fair value of S$0.16 is based a probability-weighted valuation approach that reflects the likelihood and consequences of a distressed scenario. Note also we now estimate no distributions are paid in 2H09 and FY10. Maintain SELL.