Author: tfwee
Ricmkers – OCBC
US$1.1b order book is a burden
US$1.1b order book. In November, Rickmers Maritime (RMT) took delivery of its 13th vessel, MOL Delight for US$72m. We estimate its gearing will increase to 1.4x by the end of the year from 1.1x debt-to-equity as at 30th September. RMT expects to take delivery of 10 more vessels costing over US$1.1b from now to 2010 (with the charters and charter rates already locked in). RMT has credit facilities in place for the next six ships worth US$420m.
High leverage has a high price. Despite an aggressive acquisition program, RMT has been able to defer raising more equity by ramping up gearing in the near term. This increased leverage comes at a price. Consequently, the trust’s debt repayment requirements have accelerated and certain loan tranches have only 1-2 years maturities. We estimate that if RMT continues on its current ‘debt-first’ trajectory, it would have to repay around US$17.9m of debt in FY09 and another US$157m in FY10. Our estimates suggest that even if RMT diverted 100% of its cash income to pay off debt, it would not be enough to service the FY10 dues. An equity issue will be necessary.
At what price, equity? We also note that credit facilities for the US$711.6m vessels due in FY10 have not been arranged yet. We believe the market value of those vessels would have taken a hit versus the asset cost pre-fixed by RMT. So even if lenders provide 100% loan-to-market value, it would not cover the cost of the vessel. We expect the terms on those facilities to be even more stringent, and expect fresh equity will again be needed to fund the FY10 vessels. In total, we estimate that RMT needs around US$600m in fresh equity, at least, over the next two or three years. At current price levels, any issue would be highly dilutive to existing unitholders.
Unappetizing risk-reward ratio. We believe order book concerns will define 2009 for RMT. Worst case solutions to ‘disappear’ the order book include an outright vessel sale, a sale-and-leaseback or a sponsor “bailout” (equity or asset warehouse). We expect any such resolution to be a positive catalyst for RMT’s share price, and the best case scenario for unitholders. Another major concern is the potential breach of the loan-tomarket value covenant on existing loans. The outcome of any breach will depend on the continuing strength of RMT’s blue chip charterers and the health and risk appetite of its lenders. Maintain HOLD with S$0.40 fair value.
PST – OCBC
Rights issue over and done with
Preferential offering completed in 3Q. Pacific Shipping Trust (PST) raised about US$92.3m in gross proceeds from its preferential offering (PO) in 3Q08. The offering was on the basis of three new units for every four existing units. The issue price of 36.5 US cents per new unit was at an 18.9% discount to PST’s IPO price of 45 US cents. Sponsor Pacific International Lines (PIL) had agreed to subscribe for both its pro-rated shares as well as any unsubscribed units. Approximately 57.2% of the new units were unsubscribed, and PIL has subsequently seen its stake in PST increase from 34.64% to 59.2% after the partial equity “bail-out”.
Stronger balance sheet post PO. The PO proceeds are being used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (May); CSAV Laja (mid-September); and CSAV Lauca (mid-November). Fully debtfunded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to more than 2x by year end. As of 30 September, PST is geared at 0.8x debt-to-equity. Its portfolio now consists of ten vessels, with a total asset investment of about US$493m. PST has no near-term debt expiry and a conservative loan repayment structure.
No LTV covenant. PST is the only Singapore-listed shipping trust without a loan-to-market value covenant on its loan documents. This means that there is no risk of a technical default because of falling asset values. This puts PST in a better position to ride out the shipping cycle than the other two trusts. While PST has no further capital commitments (unlike Rickmers Maritime), it has not suspended its yearly acquisition target either. The trustee-manager indicated in the 3Q release that they would continue to be on the look-out for “yield-accretive growth opportunities”. In addition, PST has received unitholder approval to expand its investment mandate beyond containerships.
Proxy for PIL. PST is the only shipping trust to have completed an equity issue since listing. This issue has come at the price of a smaller free float but demonstrates the willingness of PST’s sponsor to support its trust. Charters to PIL, a top 20 liner company , account for about 70% of PST’s annual revenue. In essence, the risk quantum for PST has become a proxy for the risk of the parent company. PST’s share price has fallen 68% over 2008. It is currently trading at a 32% trailing yield.
FSL – OCBC
Covenant concerns
Trailing yield is misleading. First Ship Lease Trust (FSLT) is currently trading at a trailing yield of about 40%. This is seemingly attractive, but misleading. Even in our best case ‘standstill scenario’ (where nothing happens), this yield is not sustainable. We estimate that FSLT’s DPU will decrease even if the trust’s income and equity base is unchanged. This is because of the trust’s debt repayment schedule. While FSLT had traditionally secured debt financing on bullet repayment terms, lenders require the most recent US$65m loan tranche to be amortized from Sep 2010 until the loan’s maturity in Apr 2012. We assume FSLT will have to use its cash income to pay down the loan from 2010 onwards. As FSLT is currently paying out 100% of its cash income, we estimate that DPU would fall 7.5% to 40% YoY over 2010-12.
Diversified portfolio. FSLT has the most diversified portfolio of the three Singapore-listed shipping trusts. The other two trusts are containershipfocused, while FSLT owns containerships, dry bulk carriers, and tankers. However, we do not believe any sub-segment is completely immune to the reversal in the shipping and leverage cycles. Counterparty risk, which can lead to rate reductions or charter defaults, is a concern. We also note that FSLT has suspended its acquisition program as it awaits better debt and equity market conditions. Unfortunately, its ability to hunker down and ride out the cycle is limited by debt covenants.
Covenant concerns. FSLT disclosed that the latest fair market value of its vessel portfolio as of mid-October is US$896m, or about 11% less than the original acquisition cost. This represents 175% of FSLT’s outstanding loan value of US$513m. Lenders require a minimum coverage of 145%. The fair market value of the current portfolio would have to fall about 20% to breach this covenant. The shipping cycle has peaked and we believe asset values have further to fall. Another 20% decline is certainly not outside the realm of possibility. A breach triggers a technical default – in this event, we understand the cost of debt ratchets up and distributions are halted. FSLT’s lenders may require an immediate equity top-up to correct the breach or FSLT may be able to negotiate gradual repayment terms (where a portion of quarterly cash income goes to lenders). Distributions could be reduced, or even cut to zero in such a scenario. The ultimate outcome depends on the health and risk appetite of FSLT’s lenders. We have adjusted our estimates slightly and our fair value inches up from S$0.43 to S$0.46. Maintain HOLD.
Shipping Trusts – OCBC
Victims of the cycle
More turbulence ahead… The last several years have seen major export growth as well as a commodities boom. This drove a boom in shipping – manifested in both an increase in rates as well as a demand for increased capacity, and led to increased asset prices and the construction of more ships. Asset prices soared at ‘bubble speed’ in the past couple of years, partly because of an aggressive use of leverage. The global economy then turned in early 2008 and the shipping industry was caught with a huge capacity and a large order pipeline. The industry has already seen a sharp reduction in charter rates. Asset values are expected to fall as the cycle corrects. We expect this decline to be steep in line with the deleveraging cycle.
2008 was about growth. Investors and managers of yield instruments in a bull market (rising asset values) and a cheap market (easy credit) were caught in a growth trap. The focus was on who could ramp up leverage and consequently, who could grow the fastest. The three Singapore-listed shipping trusts were all formed at, or very near, the peak of the shipping cycle. Consequently, their ships were priced at high valuations. They then continued to grow aggressively (at those same stratospheric price levels) – the sector has invested some US$1.3b since listing, more than doubling their IPO portfolio, in a space of less than two years. This growth was achieved through an aggressive use of leverage.
2009 is about survival. We believe valuations in 2009 will be driven by the health and strength of the three trusts, with the main focus on survival. Technically, shipping trusts are structured as long term, cash generating entities that have the ability to ride out short-term cycles. Unfortunately, the sector’s hunger for higher leverage has made them victims of those
same cycles. The biggest threat to the sector is the loan-to-market value (LTV) covenant. An LTV breach, not outside the realm of possibility, triggers a technical default. The ultimate outcome, possibly lower (or zero) distributions or distressed asset sales, depends on the health and risk appetite of the trust’s lenders. Pacific Shipping Trust is the only trust without LTV requirements. We expect capital commitments to be another overhang on valuations in 2009 – Rickmers Maritime has US$1.1b in new vessels coming in from now until 2010. This level of growth, previously a positive, has now become a burden. We have a NEUTRAL rating on the sector.
AREIT – BT
Moody’s places A-Reit rating on review
MOODY’S Investors Service placed Ascendas Real Estate Investment Trust’s (A-Reit) A3 corporate family rating on review for possible downgrade. This is due to A-Reit’s continuing reliance on uncommitted revolving banking facilities to fund its asset growth and capital expenditure, Moody’s said.