Author: tfwee
FSL – BT
High interest costs force First Ship Lease to lower DPU
Lending banks invoke ‘market disruption clause’ in loan terms, allowing them to increase rates
COMPANIES are coming out to reveal the impact of the tight credit conditions on their operations and their bottom line. Provider of bareboat leasing services, First Ship Lease Trust (FSL Trust), yesterday said that higher interest cost levied by FSL Trust’s lending banks in the fourth quarter of 2008, has led the trust to revise the distribution per unit (DPU) guidance for the fourth quarter of this year (from 3.11 US cents) to 3.08 US cents.
Banks that lend to FSL Trust include German banks Bayerische Hypo-und Vereinsbank AG, Singapore and Landesbank Hessen-Thuringen Girozentrale, Singapore’s OCBC Bank, and Japanese lender Sumitomo Mitsui Banking Corporation, Singapore.
In a statement to the Singapore Exchange yesterday, FSL trust said: ‘Due to the turmoil in the global financial markets, the lenders have been unable to obtain interbank fundings at or close to the quoted London Interbank Offer Rate (Libor). As such, the Libor is no longer accurate in reflecting the lenders’ actual funding cost, which has increased significantly.’
Because of this, the lenders have invoked a ‘market disruption clause’ in the loan terms during the recent interest rate resets. This allows the lenders to levy higher interest rates on FSL Trust based on their actual cost of funds rather than on the lower three-month Libor, plus margin, FSL Trust said.
The incremental increase in interest expense for the fourth quarter is about US$680,000, the trust said. ‘The invocation of the market disruption clause by the lenders reflects the state of the current credit market and is not connected to the credit quality of FSL Trust,’ Cheong Chee Tham, senior vice-president and chief financial officer of FSL Trust Management, said in a statement.
‘The credit margins on our facilities at 100 basis points and 120 basis points remain unchanged,’ he added. ‘Unfortunately, the invocation of the market disruption clause has rendered our floating-to-fixed interest rate swaps ineffective as we are receiving three-month Libor under these swaps, whilst paying the higher cost of funds of the lenders during this interest period.’
And the invocation of the market disruption clause is likely to remain for at least three months. According to FSL trust, the clause will remain in effect until the next interest reset dates between mid-December and early January next year.
The manager of the trust is providing DPU guidance of 3.17 US cents for the first quarter of 2009 – provided the market disruption clause is not invoked for the next interest rate resets.
Other local shipping trusts said that their DPU has not been affected yet. Thomas Hansen, chief executive of Rickmers Maritime, told BT: ‘As Rickmers Maritime retains a portion of its distributable cashflow, its DPU would not be immediately impacted should any of its loans be subjected to market disruption clauses.’
He added that, in the past, circumstances that led to market disruption clauses being invoked have been ‘rare’. ‘However, in the current market turmoil, one must be prepared for it,’ he said.
Alvin Cheng, CEO of Pacific Shipping Trust Management said: ‘We would like to assure unitholders that PST has not received any formal notice on the market disruption clause from its lending banks and as such, there will be no impact on our distributions to unitholders for the third quarter 2008.’
He added: ‘We have enjoyed a very strong and supportive relationship with all our banks and the majority of our lenders have indicated that they have no plans to invoke such a clause at this point.’
For FSL Trust, the previously announced DPU guidance of 3.05 US cents for third quarter 2008 remains unchanged, while the first quarter 2009 DPU guidance of 3.17 US cents is 0.09 of a US cent higher than the revised fourth quarter 2008 DPU guidance of 3.08 US cents, it said.
Separately yesterday, FSL Trust also announced that American International Assurance Company has increased its stake in the trust from 8.995 per cent to 9.293 per cent.
The stake is held by the life insurance funds of American International Assurance Company Ltd, Singapore branch (AIA Singapore) and American International Assurance Company Ltd, Brunei branch (AIA Brunei) as well as the two Singapore-domiciled unit trusts and other investment funds managed by AIG Global Investment Corporation (Singapore) Ltd. An FSL spokesman said: ‘It is inappropriate for us to comment on a substantial stakeholder’s interest.’
In a third announcement yesterday, FSL Trust also said that it bought a 4,250 TEU containership, YM Enhancer, from a subsidiary of Taiwan-based and listed Yang Ming Marine Transport Corporation (YML). YM Enhancer has been concurrently leased back to YML for 12 years with a purchase option for YML at the end of the lease term.
The YM Enhancer was part of a three container vessel transaction that FSL Trust had entered into for a total amount of US$210 million.
The trust said that the acquisition of YM Enhancer is fully funded by FSL Trust’s recently announced US$65 million revolving credit facility and the existing US$200 million revolving credit facility. FSL Trust has hedged its interest rate risk through interest rate swaps to fix the interest rate until the maturity of the facilities.
The acquisition of YM Enhancer will be accretive to FSL Trust’s DPU from Q408 onwards, the trust said.
SREIT – OCBC
Credit market freeze raises refinancing concerns
Focusing on refinancing risk for now. Putting aside the defensiveness of S-REITs, we believe the focus is now on their credit health and refinancing risk. Spikes in USD 3M SIBOR rates since mid September signalled continuing stress in the credit market and with the tightness in the credit market not expected to abate any time soon, greater scrutiny has been placed on S-REITs’ gearing and debt refinancing over the next year. Some of the worst-performing REITs over the past month share some similar characteristics- like high proportion of current debt to total debt and relatively higher gearings than their peers.
Greater refinancing risk exposure for retail and industrial REITs. Based on data available, we estimate that S-REITs currently have a combined borrowing S$3.5b due for refinancing within a year. Retail and industrial REITs are the most exposed to refinancing risk. Retail REITs have S$1b of borrowings due for financing within a year, which is about 24.3% of their total borrowings. Industrial REITs have S$1.1b of borrowings due for refinancing within a year, which is about 32.7% of their total borrowings. Among the sectors, retail REITs also have the highest gearing of 39.2%.
Sponsors play a key role in tough times. With the freeze in credit market, REIT sponsors will have increasingly important roles to play as the pillar of funding support for their sponsored REITs. So far, we had seen Mapletree Investments, sponsor of MLT, taking up the excess units during its recent rights issue exercise; and Keppel Corp, a key shareholder of K-REIT, providing a new loan of S$391m to refinance the remaining bridging loan. In a scenario whereby banks freeze refinancing for REITs, we think strong sponsors could act as ‘lender of last resort’ for REITs and preventing any fire-sale of assets.
Refinancing is the key to re-rating. Under current market conditions, we think REITs with little or no near-term refinancing needs and backing from strong sponsors could outperform their peers. Risk-return matrix is turning attractive for the sector and we believe that re-rating should occur either when short-term refinancing needs have been addressed or when the credit market functions normally again. Our top picks for the S-REITs sector are Suntec REIT (Fair value S$1.53, FY08 yield 9.9%) and CapitaMall Trust (Fair value S$3.05, FY08 yield 7.9%).
Link – Table
CRCT – JPMorgan
9 for ’09: China retail property looks like the place to be
• Refocus on property fundamentals: CRCT has de-rated more than 40% over the last 3 months, reflecting the stock’s relatively small market cap and illiquidity, and pricing in what we believe are extreme pessimistic assumptions. We think the era of virtual cycle fueled by cheap funding has ended, and we expect the market will start to re-focus on property fundamentals. In our view, CRCT will stand out given high quality management, resilient cash flow and strong organic growth. We believe the trust offers one of the best and purest proxies for the exposure to China retail and retail property sectors, and we add CRCT to our Asia Analyst’s Focus List.
• REIT model is not broken despite higher cost of capital: Part of CRCT’s share price underperformance could be attributed to concern about the REIT business model in a high-cost-of-capital environment. We believe, however, that CRCT will be able to withstand the current situation given a much higher asset yield and rental growth in China. We expect, on a normalized basis, the trust to acquire assets at 6-8% net yield, funded with capital cost about 4-6%, and to generate 3-4% longterm growth. In our view, it is also in CapitaLand’s interest to ensure CRCT maintains a competitive cost of capital.
• Private-equity-like return: Our Dec-09 price target is S$1.55/share, based on DDM. We estimate that even on an ungeared basis, CRCT’s portfolio offers a private-equity-liked five-year IRR of 20% (assuming exit cap rate of 7%). Furthermore, the long-term dual listing or listing restructuring potential should help to ensure the long-term valuation of the underlying properties.
• We reiterate our OW rating on CRCT. Key risks to our call include: 1) a significant decrease in retail rents or withdrawal of tenants due to a severe economic downturn in China; 2) a higher-than-expected cost of borrowings upon refinancing.
HWT – DBS
Growth story under the scanner
Story: Growth seems to be at a premium now, with access to funds drying up. As credit markets tighten up worldwide, Hyflux Water Trust (“HWT”) may find the going getting tougher to finance its potential acquisitions.
Point: HWT has been negotiating the debt funding required to finance the acquisition of the first tranche of nine assets from sponsor Hyflux but credit conditions have deteriorated since the initial announcement and spreads have widened to a level, which may render the acquisition
of certain assets unviable. As a result, HWT may choose to acquire only a part of the portfolio on offer, if the terms of financing are more favourable in that case. Thus, there is considerable uncertainty in the timing and quantum of the acquisition-driven growth story for HWT.
Relevance: As such, we see possible further downside to the share price, as current spread of HWT’s dividend yield over 3m USD LIBOR at 4.9% is lower than YTD peak of 6.2%. Moreover, compared to other SGX-listed business trusts, including closest peer CitySpring, HWT is trading at a much lower yield. Thus, we reduce our target price for HWT to S$0.53, based on blended valuation methodology – DDM and dividend yield valuation – to better reflect the importance of target yield for investors in this asset class, especially in the absence of a credible growth story amidst current credit market uncertainties. In addition, we cut our FY08 and FY09 DPU estimates by 3% and 13%, respectively, to factor in possible lower utilisation in existing assets and downgrade our recommendation on the counter to HOLD.