Category: FSL
Shipping Trusts – DBS
Shipping woes spreading to trusts
Shipping industry concerns bearing down on share prices. Concerns on all three shipping trusts – First Ship Lease, Pacific Shipping Trust and Rickmers Maritime – have been on : (a) stability of revenues, cashflows and DPUs; (b) rising counterparty risks; (c) availability of credit lines; and (d) fast declining asset values.
Revenue sustainability. Leases are locked in. FSLT’s has an average lease term of 9 years with the earliest lease coming up for renewal in 2014. For PST, the average lease term is 7 years, with the earliest coming up for renewal in 2013. In the case of RMT, the average lease term is 7 years, with the earliest lease expiring in 2012.
Counterparty risk is low for now. RMT currently operates twelve container vessels leased out to blue-chip charterers – Italia Maritima, CMA CGM, AP Moeller Maersk, Hanjin Shipping, Mitsui OSK. For PST, of the 11 vessels it owns and operates, 10 are leased back to Sponsor PIL while 1 is to CSAV. FSLT has 8 charterers. So far, we gather from management of all three shipping trusts that all payments have been prompt. However, we are aware that there is room for renegotiation (down) of leases for a short period should any of the lessees face headwinds from slowing trade. We also understand any loss in revenue will have to be made good for when the lessee is able to and/or when the cycle turns.
Financing/Credit lines intact for PST and FSLT. For FLST, the earliest debt facility comes up for refinancing in Apr 2012. However, it will need to amortise US$5m per quarter from Sep 2010 to Apr 2012. In PST’s case all loans are on an amortising basis. For RMT, it will need to repay US$130m, a short term debt facility in 1Q10. Of the 3, both PST and FSLT have noncommitted capex. RMT has an aggressive capex program of US$1.3bn to acquire 13 (two have been delivered). Out of this, US$712m of funding requirements for vessel deliveries in FY10 have yet to be finalized.
Best pick in this environment – FSLT. Our preferred pick in this sector is FSLT. No uncommitted capex program with no refinancing of any loan until 2012. Maintain Buy for FSLT with a TP of S$0.97. We downgrade PST (Hold, TP S$0.29) and RMT (Hold, TP S$0.63).
Shipping Trusts – OCBC
Sharp sell-off across sector
Pessimism rules the seas. We attended Marine Money’s Asia conference earlier this week where the mood of both speakers and participants was overwhelmingly pessimistic. Conversation was focused on two key themes:
1) consequences of the current credit crisis on ship and trade finance; and
2) unfavorable industry outlooks, especially for the container and dry bulk sub-sectors.
Sharp sell-off across trusts. First Ship Lease Trust (FSLT); Pacific Shipping Trust (PST); and Rickmers Maritime (RMT) were all in attendance. ince our last sector report dated Sept 10, the shipping trusts have seen a sharp sell-off in share prices (FSLT down 61%, RMT down 58%, and PST down 37%). We attribute the decline to both transient fears: today’s abnormal credit conditions which have paralyzed equity markets; and to more enduring concerns: the trusts’ extensive use of leverage and overall industry concerns.
Beware the fine print. FSLT announced last week that its lenders had invoked the market disruption clause (MDC) as the reference rate on the loans, the US$ LIBOR, did not accurately reflect the lenders’ actual cost of funds. With increased interest costs, FSLT reduced its DPU guidance for 4Q08 by 1%. PST and RMT told us that some version of the MDC also exists in their loan documents but it has not been invoked as of now. The MDC is a standard clause in almost all loan documents. In our view, the next bit of fine print to watch is loan-to-value.
Multiple layers of risks. There is a very real risk of a large depreciation in underlying asset and rental values. Falling asset values can breach a loanto- market value covenant, triggering a technical default (and potentially distressed sales). We note that PST is the only shipping trust without a version of this clause in its loan documents. Meanwhile, counterparty risk is also becoming more of a concern – a charterer default or rate renegotiation could stress cash flows, endangering distributions or debt repayments. Committed capex is another possible stressor.
The recent sell-off is an overcorrection (in our view) but market logic is trumping everything else at present and we believe we could see further value destruction. We maintain our BUY ratings on PST and RMT, and our HOLD rating on FSLT but place all our fair value estimates under review as we work in latest developments. We believe the trusts will continue to be barraged by negative news flow on the shipping industry.
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.
FSL – Westcomb
Proposes distribution reinvestment scheme
• First Ship Lease Trust (“FSL Trust”) proposed the adoption of the First Ship Lease Trust Distribution Reinvestment Scheme (the “Scheme”).
• The proposed Scheme, if adopted, will enable Unitholders to elect to receive their distributions in the form of new units (“New Units”) in lieu of cash. Unitholders will have the flexibility to elect for part of their distribution to be received in the form of New Units with the remaining distribution to be paid in cash. Unitholders who do not choose to participate in the Scheme will continue to receive their distribution in cash.
• The Scheme enables Unitholders to acquire additional units in FSL Trust and thus increase their unitholding incrementally without incurring brokerage or other transaction costs. With the issue of New Units in lieu of cash, the capital base of FSL Trust will be enlarged incrementally and this is expected to enhance the trading liquidity of the units in the long run.
• The cash retained, which would otherwise have been paid as distribution, could be deployed to fund the continuing growth and expansion of FSL Trust.
AIG – BT
AIG has direct stake in three listings here
Its largest stake is in Macquarie Prime Reit, followed by First Lease & Jiutian
Ailing insurer American International Group (AIG) has direct and significant stakes in Singapore listings Macquarie Prime real estate investment trust (Reit), First Ship Lease Trust and Jiutian Chemical Group, Bloomberg data showed.
About 10 other firms listed here are exposed to investment funds owned by the world’s largest insurer, which was thrown a life-line on Wednesday in the form of a US$85 billion government loan.
AIG directly owns 10.9 per cent of Macquarie Prime Reit, which works out to $75.3 million based on yesterday’s closing price of 72 cents. It also holds 0.9 per cent stake of the Reit through two AIG-managed international funds, known as the Singapore bond and Acorns of Asia balanced funds.
First Ship Lease Trust has about 8 per cent, or 40.4 million shares, held directly by AIG. This is worth $34.4 million based on the last closing price of 85 cents. AIG also holds an additional 1.6 per cent of First Ship through the same two international funds.
China-based Jiutian Chemical Group has nearly 4 per cent in the direct hands of AIG. The 64.6 million shares is equivalent to $4.84 million, according to yesterday’s closing price of 7.5 cents. Two AIG-managed funds – AIG South-east Asia small companies fund and Southeast Asia small and mid-cap fund – owns another 0.3 per cent.
AIG has not declared changes in shareholding to the Singapore Exchange.
First Ship Lease Trust called AIG late afternoon on Wednesday regarding the company’s shareholding and was told that AIG would be holding on to its stake for now, chief financial office Cheong Chee Tham told BT.
‘We have received no indication from AIG on selling,’ he said.
Macquarie Pacific Star spokesperson said: ‘Macquarie Pacific Star, the manager of MP Reit, maintains regular communications with the Reit’s substantial unitholders,’ adding that AIG has held its stake in the Reit since its listing in September 2005.
‘However, we are not in a position to speak on behalf of them. AIG, as a substantial unitholder, is required to inform the market of any change in their interest in MP Reit.’
AIG-managed funds are also invested in other stocks including S-chips Ferrochina, Fibrechem Technologies and Synear Food Holdings, property firms Ho Bee Investment and Hotel Properties, marine players STX Pan Ocean and Swiber Holdings, as well as Raffles Education Corporation and Raffles Medical Group. All stakes are below 0.5 per cent.
Fibrechem and Raffles Medical have not contacted AIG on their shareholdings, spokesmen said. Ferrochina and Raffles Education declined comment.
As the US Treasury rushes to save AIG, Wall Street has turned its attention to Morgan Stanley, after the Financial Times reported that the US investment bank was in preliminary merger talks with parties including Wachovia, the fourth largest US bank based on assets, and China Investment Corporation. This follows the declared bankruptcy of Lehman Brothers in the same week.
Morgan Stanley directly owns 12 per cent of United Industrial Corporation (UIC), a property unit of Singapore’s second largest bank United Overseas Bank, Bloomberg data showed. It also holds another 1.36 per cent in UIC through its asset management and investment divisions.
Some 10 per cent of logistics firm CWT is also held by Morgan Stanley. It holds 9.79 per cent directly and 0.25 per cent through its asset management arm. ‘Everything remains well and unchanged now,’ CWT chief financial officer Lynda Goh told BT.
Lehman has no significant direct investment in stocks here, according to Bloomberg.