FSL – OCBC

LTV covenant clouds dissipate

Secures covenant waiver. FSL Trust has secured a two-year waiver for the loan-to-market value covenant in its credit facility. The waiver, subject to documentation, will extend until the end of 2Q11. During this period, the minimum coverage ratio of the charter-free fair market value of the trust’s portfolio over its outstanding indebtedness will be reduced from 145% to 100%. In return, FSLT must repay US$8m per quarter during the two-year period (or US$64m in total). The trust has already prepaid US$12m voluntarily. Margins over US$ LIBOR also increase by between 50 and 70 basis points (bps) during the period. The margin increase is reduced to a 25-bp hike after the waiver period.

Re-affirms DPU guidance. The manager estimates that the additional interest expense during the waiver period averages US$0.7m per quarter. The manager re-affirmed its DPU guidance of 1.5 US cents per quarter. We estimate this works out to a payout of less than 50% of cash earnings. We note there might be some one-off expenses (both cash and non-cash in nature) in 3Q09 as FSLT is likely to re-align its interest hedges to reflect the new amortization schedule.

T&Cs as expected with some positives. The conditions and pricing were in line with our expectations. We were expecting US$35m annual payment (versus US$32m actual). We were off by about 5 bps in our cost of debt
assumptions. The positive surprise was the lower margin increase postwaiver period (we were not so optimistic). The new minimum coverage ratio is fair in our view, especially with outstanding indebtedness falling as quarterly loan repayments are made. The ‘official’ current fair market value of the portfolio was not disclosed.

Remains our top sector pick. A major overhang has eased, taking pressure off the manager and the stock. Industry concerns remain but we like the new, more sustainable payout model and FSLT’s diversified vessel mix. We reiterate that unitholders should constrain their expectations regarding DPU growth; with the new payout model, a significant DPU increase would require acquisitions (and fresh equity) in our view. Note this is a revolving credit facility, so FSLT has the option to tap into the undrawn amount as it grows with each periodic repayment. Our discounted FCFE value is up from S$0.84 to S$0.86, incorporating actual waiver terms. Our fair value estimate edges up a cent to S$0.77, reflecting an “industry uncertainty” discount of 10%. Maintain BUY.