Category: FSL
FSL – BT
First Ship Lease revises distribution policy
Lower 75-78% Q1 payout seen; 4Q08 DPU up 27.3%
THE cloudy outlook for the shipping industry and the capital market have led First Ship Lease (FSL) Trust to revise its distribution policy.
Target distribution per unit (DPU) for the first quarter of this year is 2.45 US cents, representing 75-80 per cent of expected distributable cash flow, compared with 100 per cent usually. The retained cash will be used to reduce the trust’s gearing and to seize growth opportunities.
FSL Trust Management (FSLTM) chief executive Philip Clausius said the move is a proactive one amid the global uncertainty. ‘This is not something we have done because we think there is going to be a default or because our lending banks asked us to,’ he said.
Rather, the retained funds will come in handy should the unexpected happen. DPU guidance will be provided on a quarterly basis until longer-term visibility returns.
Chief financial officer Cheong Chee Tham said: ‘Given FSL Trust’s secure long-term cash flow and lack of near-term refinancing needs, it is well-placed to take advantage of attractive opportunities that will present themselves in the next 24 months.’
For Q4 2008 ended Dec 31, FSL Trust will distribute US$15.4 million, excluding an incentive fee of US$590,000 payable to FSLTM. This works out to DPU of 3.08 US cents, up 27.3 per cent from Q4 2007.
FSLTM is confident that FSL Trust will not see any charter rate renegotiations or payment defaults by clients, despite volatility in the industry.
FSL Trust’s portfolio comprises 23 vessels which are leased out on long-term basis. The earliest lease expiry is in 2014. As at Dec 31, 2008, the lease portfolio had a net book value of US$900 million and remaining contracted revenue of US$858 million.
While FSL Trust’s leading bankers did not invoke a market disruption clause during the latest round of interest rate re-sets, Mr Clausius does not rule out the possibility of this happening.
‘The interbank market is so volatile. The banks are still funding themselves at costs way above the quoted Libor,’ he said.
FSL Trust’s net profit fell 75.8 per cent to US$456,000 in Q4 2008 as vessels acquired post-IPO were wholly financed by debt, and interest and depreciation charges for these vessels were higher than the lease rates.
However, revenue jumped 70.2 per cent to US$25.7 million due to the acquisition of two crude oil tankers and three container ships.
For FY 2008, net profit was 23.5 per cent lower at US$4.8 million, while revenue came in 113.4 per cent higher at US$86.62 million. DPU for the year was 11.52 US cents.
Q4 2008 DPU will be paid on Feb 27. FSL Trust’s units closed unchanged at 46.5 cents yesterday.
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.
FSL – OCBC
Multiple layers of risk; maintain HOLD
3Q results as expected. First Ship Lease Trust (FSLT) announced that it generated US$23.7m of revenue in 3Q08, up 84.8% YoY, thanks to the acquisition of six vessels in the past year. The trust will distribute US$15.3m, or 3.05 US cents per share for 3Q08, up 9% QoQ and 36.8% YoY. This translates into an annualized distribution yield of 38%. The results were generally in line with our expectations.
Latest loan terms will impact DPU. While FSLT had so far secured debt financing on bullet repayment terms, lenders require the newest 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 on the existing equity base and portfolio.
Loan-to-value at 175%. 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. One of the loan covenants mandates a minimum coverage of 145%. The fair market value of the current portfolio would have to fall about 20% to breach this covenant, triggering a technical default.
Multiple layers of risk. While a credit market breakdown has been averted, credit markets are still illiquid due to risk aversion arising from mass deleveraging and an imminent global recession. FSLT has a diversified portfolio with long lease terms, but it is not immune to its environment. Counterparty defaults may lead to a rate reduction or at worse, an idle ship. Asset values in turn are likely to depreciate as the industry turns. These risks are magnified by the use of leverage. If the loan-to-market value covenant is breached, lenders may demand that FSLT start using its cash income to pay down debt. Distributions could be reduced, or even cut to zero in such a scenario. We believe that recent price levels fully reflect the current risks and maintain our HOLD rating. Our fair value estimate of 43 S cents prices in a bear case scenario with a 25% fall in charter income, a 50% fall in terminal asset value and zero distributions from 2009 onwards (income is diverted to pay down debt).
FSL – BT
FSL Trust sees steady revenue with long leases
CHARTER lease provider First Ship Lease (FSL) Trust said yesterday that investors have little cause for worry as its charter leases are long-term, which should result in steady revenue. But it plans to scale back acquisitions as the shipping industry navigates choppy waters.
‘While shipping cycles do affect our lessors, our strength is that our charters are long-term and fixed,’ said CFO Cheong Chee Tham. ‘We give investors exposure to the maritime industry with reduced risk.’ Lessors with strong credit ratings will be able to ride through the current storm, he said.
FSL Trust has a portfolio of 23 vessels that are leased out on for terms of at least seven years. The earliest expiry for one of its contracts is 2014. FSL also highlighted that as at Sept 30, it had no loan maturity for three years.
The trust is also unlikely to make any acquisitions between now and mid-2009, and plans to focus on sustaining its distribution per unit (DPU). DPU for the third quarter ended Sept 30 was 3.05 US cents. DPU guidance for Q4 is 3.08 US cents, revised down from 3.11 US cents earlier this month. This is because FSL Trust’s lending banks invoked a ‘market disruption clause’ in loan terms, which has led to higher interest charges.
FSL Trust is ‘optimistic’ its banks will not invoke this clause again when interest rates are reset around end-December and early January, since the gap between interbank funding and the London Interbank Offer Rate (Libor) has narrowed. DPU guidance for Q1 2009 is now 3.17 US cents. Unitholders will be paid the Q3 2008 DPU on Nov 28. Q3 revenue grew 84.8 per cent to US$23.69 million, while net distributable income was 42.2 per cent higher at US$15.8 million, of which US$551,000 was payable as an incentive fee to the trustee-manager.
FSL Trust’s unit price closed five cents higher at 48 Singapore cents yesterday.