DPU up 5.4% QoQ, CSAV in focus

DPU up 5.4% QoQ. Pacific Shipping Trust (PST) posted a significant 72% YoY increase in 1Q09 revenue to US$15.2m, due to contributions from the four vessels acquired last year. This is the first quarter recording full contributions from all four vessels and 1Q revenue rose 4.9% QoQ. Cash earnings (net profit adjusted for non-cash items such as depreciation) rose 63% YoY and 4.8% QoQ to US$10.8m. The trust will pay out 0.98 US cents per unit, up 5.4% QoQ and 1% YoY. The small YoY increase in per share figures is due to the enlarged unitholder base after last year’s preferential offering. The results were in line with our expectations.

CSAV renegotiation in focus… As announced last week, PST customer CSAV is asking ship owners (including PST) for a temporary reduction in charter hire payments. Two PST vessels are chartered to CSAV on 5-year time charters. We expect PST to agree to this renegotiation request as this is probably the best option PST has in the current environment. Discussions are still in preliminary stages but details are thin on: 1) whether the various ship owners will all agree to the request; 2) the exact quantum of the discount; 3) the size and type of compensation granted to owners.

…making lenders a concern. Despite wide-spread issues in the ship financing arena, PST had so far managed to escape ‘lender overhang’ due to its fairly conservative business model; a fortuitous equity issue last year that strengthened its balance sheet; and importantly – the lack of loan-to-value covenants on its books. But the CSAV issue tilts the balance of power, in our view: a renegotiation likely qualifies as ‘material change’ in the trust’s circumstances. PST’s lenders could conceivably tack on a punitive spread to PST’s cost of debt (increasing interest expense) or demand higher debt repayments. We understand that PST’s lenders are reserving judgment for the moment, with no explicit renegotiation proposal out yet.

Valuation. We think it is too early to turn buyers of shipping trusts – we would prefer to wait until the shipping markets show concrete signs of stabilizing. For PST, significant uncertainty remains on the CSAV front. We also see a possibility that PST’s board takes an even more prudent stance on distributions in the coming quarters in response to recent events. Counterparty risk (both CSAV and PIL), and lender reaction, remains our key concern, which we think is adequately reflected in our US$0.16 fair value estimate. Maintain HOLD.

PST’s Q1 distributable income surges

Revenue in Q1 boosted by four new vessels

AS the global economic slowdown and credit crunch continue to erode demand, freight rates for containerships and tankers are likely to remain depressed this year.

For instance, the Baltic (Dirty Tanker) Index has dropped 46 per cent since the start of this year despite the tanker sector being traditionally more resilient, says Pacific Shipping Trust (PST).

But PST – which leases vessels to charterers on long-term bare-boat or time charters – registered stable growth for Q1 ended March 31, as revenue was boosted by four new vessels.

Total distributable income surged 75 per cent year on year to US$6.5 million, from US$3.7 million. Minus the 10 per cent of income retained as part of PST’s policy of long-term strategic development, US$5.8 million will be distributed, translating to distribution per unit (DPU) of 0.98 US cents, compared with 0.97 US cents previously.

Net profit grew to US$6.6 million in Q1 2009, from US$466,000 in Q1 2008.

Gross revenue rose 72 per cent to US$15.2 million, on the back of full-quarter contributions from four new vessels delivered in 2008 – Kota Naga, Kota Nabil, CSAV Laja and CSAV Lauca.

‘PST’s current portfolio of 12 vessels is fully financed,’ said PST Management chief executive Alvin Cheng. ‘We continue to amortise our loans on a monthly basis to maintain a conservative debt-to-equity ratio. This will provide the headroom for financing should there be opportunities for new acquisitions in the future.’

Last week, PST gave an update on one of its charterers, Latin American line Compania Sud Americana de Vapores (CSAV), which is restructuring to strengthen its operating cash flow and consolidate its South American franchise.

CSAV, which is looking to boost its financial position by about US$750 million, chartered CSAV Laja and CSAV Lauca from PST on five-year time-charters from September and November 2008 respectively.

As part of its restructuring plan, CSAV has asked shipowners to assist by temporarily reducing charter hire payments about 30 per cent, part of which will be capitalised.

However, participation in the scheme is on a voluntary basis.

CSAV accounts for 30 per cent of PST’s top line but contributes less than 20 per cent of its operating cash flow. While loan repayments may not be an issue for PST, distributable income could be affected.

Mr Cheng has said previously that PST’s cash conservation strategy will allow it to meet its current financial obligations should an agreement be reached with CSAV.

‘Based on current information available, it has been determined that there will be no significant impact on the carrying amounts of the said vessels and it was determined that the recoverable amounts are above the carrying amounts of the vessels,’ PST said in a statement.

PST units closed half a cent higher at 16.5 US cents yesterday. Books close April 30 and DPU will be paid on May 29.

And the renegotiations are here

Pacific Shipping Trust announced that it might have to renegotiate charter rates down by about 30% for CSAV, which charters 2 of its fleet of 12 vessels. To note, we had highlighted in our last report that the key risk for PST’s distributions would be in the form of counterparty risk with respect to CSAV. We estimate this will impact DPU by at least 13-15% in FY09 & FY10, and downgrade PST to FULLY VALUED at a reduced target price of US$0.15. Further risks stem from PST’s lenders invoking penalty clauses owing to the resulting material changes in charter contracts.

CSAV feels the heat. After a couple of downgrades by rating agencies earlier in April, Chilean container ship operator CSAV has decided to strengthen its balance sheet by US$750m – through a US$220m rights issue, as well as capitalising commitments with ship-owners and banks to the tune of US$400m. The re-negotiation with PST is thus, part of a broader co-operation and assistance framework to bail CSAV out of a difficult situation arising from huge operating losses.

And PST will be forced to cut DPU. Currently, CSAV’s two charters account for about 30% of PST’s revenue stream. Hence, we estimate revenue will be affected by about 10% in FY09-10, and lower our DPU estimates for FY09-10 by 14-16%. This translates to a DPU of about 3.2 UScts in FY09 and 3.4 UScts in FY10, down from 4.1 UScts in FY08.

Clouding sentiment for the shipping trust sector. While part of the reduction in charter hire may be capitalized in the form of shares to motivate ship owners, we feel the risks to DPU is heightened by reduced cash flows backing up the US$80m outstanding loan for the 2 CSAV ships. Diversion of cash flows to meet lender’s penal requirements cannot be ruled out. In line with lower DPUs, our DDM-based TP is also reduced to US$0.15. Downgrade to FULLY VALUED.

Charterer CSAV seeking rate reduction

Charterer CSAV seeking rate reduction. Pacific Shipping Trust’s (PST) customer CSAV is asking ship owners (such as PST) for a temporary reduction in charter hire payments. Two PST vessels (out of a 12 vessels fleet) are chartered to CSAV on 5-year time charters. These charters contribute 30% of PST’s annual revenue.

Expect PST will agree. We expect PST to agree to the renegotiation request. The reality is that accepting this reduction is probably the best option PST has in today’s environment. PST’s manager acknowledged that vessels of comparable size to the two PST vessels are currently unemployed and while the current market rate would cover operating costs, it would likely not be enough to cover both interest expenses and debt repayments. Lower cash flows from CSAV are better than no cash flows at all, in our view.

Still a lot of unknowns. Discussions are still in very preliminary stages. This is a complicated process as CSAV will have to negotiate reductions with all the numerous ship owners. Based on CSAV’s targeted savings, PST estimates that it may be asked for a 30% reduction in charter rates. This figure only holds if every owner agrees to similar terms (a big if). Typically, ship owners would demand some sort of compensation in return – revenue clawback or partial payment in CSAV equity – that has yet to be determined. Also unclear is how PST’s lenders will react to what likely qualifies as ‘material change’ in the trust’s circumstances. PST’s lenders could conceivably tack on a punitive spread to PST’s cost of debt (increasing interest expense) or demand higher debt repayments.

Will PIL follow suit? PST derives the remaining 70% of its annual revenue (on original rates) from bareboat charters to its sponsor and 59.2% stakeholder, Pacific International Lines (PIL). PST said it has not received any indications from PIL regarding rate reductions. Despite their strong ties, a request for renegotiation is not unlikely, especially if the container industry’s performance continues to deteriorate.

Maintain HOLD. We have reduced our revenue forecasts for FY09-10F by 7% and 9%, and slashed DPU estimates by 17% and 22%. We may need to make further revisions as more details emerge. Counterparty risk (and lender reaction) remains the key risk, and we think this is reflected in our US$0.16 fair value estimate. PST will release 1Q09 results next week. PST already has a fairly conservative distribution payout policy but the Board may have to be even more prudent in light of recent events.

Pacific Shipping charterer planning capital boost

PACIFIC Shipping Trust (PST) yesterday took the initiative to give an update on developments at one of its charterers, major Latin American line Compania Sud Americana de Vapores (CSAV), which earlier this week said it was in discussions to strengthen its financial position by about US$750 million.

CSAV, which charters two of PST’s 12 vessels, on Monday said that as part of a financial strengthening plan, it recently appointed HSH Corporate Finance to oversee a restructuring plan to strengthen its operating cash flow and consolidate its South American franchise.

Among CSAV’s plans to boost capital is the decision to significantly increase its equity base. Thus, next to the capital increase of US$130 million currently being implemented, the company will ask its shareholders for an additional equity increase of US$220 million. Ship owners have also been asked to contribute US$400 million to the equity base of the company.

The plan seems to have found positive reception among investors with CSAV’s shares rising earlier this week.

Details of the proposal are being worked out. The company is asking charterers for a temporary reduction of charter hire payments of about 30 per cent, part of which will be capitalised.

PST chief executive Alvin Cheng, however, clarified that participation in the scheme is on a voluntary basis and the trust has not received further details about what is expected of it. ‘We feel very positive that CSAV has undertaken this exercise to improve its cash position,’ he said.

While Mr Cheng conceded that there may be revenue reduction with some effects on distribution per unit, he maintained that PST would not be too adversely affected. He added that it is difficult to give guidance on what the impact will be until further discussions with CSAV.

‘Despite the potential revenue reduction, PST’s business model and fundamentals remain sound and stable. Our cash conservation strategy thus far will provide us with sufficient headroom to meet our current financial obligations. We will provide our unitholders with updates on CSAV’s restructuring plan as and when the details are confirmed,’ said Mr Cheng.

PST shares closed unchanged at 17 US cents yesterday.