Category: Rickmers
Shipping Trusts – OCBC
1Q10 results preview
1Q10 earnings should be fairly stable. We expect FSL Trust (FSLT) and Pacific Shipping Trust (PST) to release 1Q10 results next week, with Rickmers Maritime [RMT, NOT RATED] following later in the season. Earnings are likely to be fairly stable for the trusts and we expect FSLT to meet its guidance of 1.5 US cents DPU (flat QoQ), representing some 55% of cash earnings. PST paid out 43% of cash earnings in 4Q09, with cash used to repay debt and also retained for future acquisitions. We expect PST to retain this strategy and estimate a 1Q10 DPU of 0.80 US cents (-4% QoQ). RMT paid out 0.57 US cents in 4Q09 or 13% of cash earnings but said it could not give forward guidance for DPU because of ongoing discussions with lenders.
But what comes next is key. The most-watched event this time is likely to be how RMT addresses the maturity of a US$130m loan facility due later this month. Speculation is rife regarding its discussions on its US$918.6m in committed vessel purchases and on loan-to-value covenants. In response to a TradeWinds interview with Mr Bertram Rickmers, the Chairman of the RMT board (and of sponsor Rickmers Group), RMT announced that negotiations with its sponsor on its order book “have been positive”. What that means exactly and how it impacts unitholders remains to be seen. Positive developments here, especially in relation to the attitudes of RMT’s lenders, could uplift the broader sector.
Acquisitions, ahoy? RMT is not the only trust that has updates to give – FSLT, for one, has been sitting on the US$28.3m net proceeds from its Sep 2009 placement for about seven months now. We will be keen to get an update on how much closer it is to finding viable acquisition options to employ that cash effectively (so far, the larger unit base has not been offset by additional income or lower expenses). We also note that at this week’s EGM, a proposal to buy back units was passed successfully (after failing last year). How seriously the manager views this tool is another question mark, especially if that money could be used more productively – in our opinion – to repay debt or purchase vessels. PST’s manager has also been talking about acquisitions for a while – we are eager to hear if it believes if conditions are ripe to go a step further down this path, especially as distributable income continues to be retained. Maintain NEUTRAL view, with PST our preferred play.
Rickmers – OCBC
Uncertainty driving volatility
Vessel secures new employment. Rickmers Maritime (RMT) announced that its vessel – Kaethe C. Rickmers (formerly Maersk Djibouti) – has secured employment with South American liner CSAV. The agreement is for a one-year charter at US$8,288/day, and also gives CSAV the option to renew the charter for another 12 months at US$23,888/day (averaging to a two-year daily rate of US$16,088). We note that the vessel was earlier earning US$22,708/day with Maersk. The US$8,288 rate is below our estimate of US$10,000/day – but it is a far better alternative to not securing any employment at all (which had seemed a likely possibility a few weeks ago). We note that CSAV is a current charterer of Pacific Shipping Trust; the liner has made great strides in resolving its own financial difficulties.
Implications of the April maturity of the US$130m loan facility. RMT had US$110.7m in cash as of 31 Dec but the question is if the remaining seven lenders will be willing to release that cash to only three lenders, considering the outstanding capital commitment of US$918.6m and the very likely breached loan-to-value covenants on the existing US$773.8m loans. The key determinant of the outcome is how close the banks and the sponsor are to reaching an overall agreement (which is in approximately month 12 of discussions). We re-iterate that it is not in the sponsor's best interest for RMT to default as the sponsor will end up footing the bill for the new ships (which are perhaps worth about half of what they cost). The lenders are probably not keen to see a default situation either (especially if they also lend to the sponsor). The likely outcome is that the burden will eventually be passed to RMT's unitholders through dilution via fresh equity.
Uncertainty driving volatility – witness the 25.6% unit price decline in the last two days on what can hardly be called 'new news' . Some investors may be waiting to see if there is a positive or even neutral resolution of the April loan maturity (and hoping that this would translate to a positive market reaction). But they should be mindful that the underlying problem does not go away – and any solution is likely to come at the expense of unitholders (unless the order book disappears completely, which is highly unlikely). In what is essentially a dragged-out and uncertain situation, we do not find offering a rating on RMT productive – as such we are SUSPENDING COVERAGE of the trust.
Shipping Trusts – OCBC
US peer looks for asset value recovery over 2-3 Years
Highlights from SSW's FY09 conference call. Seaspan Corp [SSW, NOT RATED], a container-focused US-listed comparable of the Singapore-listed shipping trusts reported FY09 earnings earlier this week. Basic 4Q09 EPS of US$0.22 was three cents below consensus. SSW discussed its newbuild order book – 23 vessels will be delivered over the next three years, costing roughly US$1.8b total. SSW has been addressing the financing need on several fronts: 1) reduced dividends; 2) a US$200m preferential share issuance; 3) debt facilities. We note that while SSW is not constrained by loan-to-value covenants on existing loans, access to the roughly US$270m remaining from a US$1.3b credit facility is restricted because of market value covenants. SSW has other committed debt available, however. Management estimates further equity needs of US$180-240m over a period of 18 months.
SSW optimistic on a 2-3 year horizon. SSW's management noted that line majors have done a good job managing effective supply. A primary contributor is slow-steaming – SSW said that, the number of vessels required on the Asia-Europe trade has increased from eight to 10 or nine to 11. SSW very frankly said the recent demand side pick-up was due largely to inventory re-stocking, and that the market would "normalize once the stocking is finished" and as more supply was added. It said that the current "abnormal" market would trend down but 2010 would still be much better than "2009 and even 2H08". Management was more optimistic on a longer time horizon saying rates could "reach the level of average historical amount over the next two to three years [and asset values would follow]".
Sector view intact, prefer PST. Pacific Shipping Trust, a pure container play, is not struggling with capex commitments or debt issues with no loan-to-market value covenants on its loan documents. On the flipside, it has a fairly concentrated charterer base of two, its sponsor Pacific International Lines and South American liner CSAV, which had last year requested for rate renegotiations (ongoing issue). As a result, we continue to rate PST as a HOLD. A key risk for FSL Trust, in our opinion, is that LTV covenant concerns may drive the manager to raise expensive unsecured debt. Rickmers Maritime, the other pure container play, is facing high capex commitments and LTV covenant issues as well. A positive resolution of its US$130m April loan maturity could be a turning point for the sector. The outlook for the broader ship finance industry remains uncertain, and we stay NEUTRAL on the sector.
Shipping Trusts – OCBC
4Q09 results review
Results in line; payouts lower. Full year results for the three Singapore-listed shipping trusts were in line with our expectations, with FY09 distributable income within 4% of our estimate for each trust. The trusts all declared significantly lower payouts for 4Q09 vis-à-vis 4Q08. FSL Trust’s (FSLT) payout represented 56% of cash earnings compared to 100% in the corresponding quarter. Pacific Shipping Trust’s (PST) 4Q09 payout was equivalent to 43% of cash earnings versus 53% in 4Q08. Meanwhile Rickmers Maritime’s (RMT) quarterly distributions amounted to 13% of cash earnings versus 59% a year ago. The trusts used the retained cash to repay loans and/or bolster cash reserves.
No movement on key issues. The results were fairly uneventful with limited or little progress on the outstanding fronts. PST has not re-opened talks with charterer CSAV on the liner’s request for rate renegotiations. On a positive note, CSAV’s debt re-structuring and equity fund-raising plans are coming along on target, which PST’s manager was “encouraged” by. FSLT, meanwhile, continues to scout acquisition opportunities that will utilize the funds raised through the recent placement. The manager also kept its options open for another attempt to diversify its funding sources through a senior unsecured notes offering. RMT is still in talks with its bankers and sponsor on loan-to-value covenants, a US$130m loan facility maturing in April, and large capex commitments. While talks continue, completed newbuilds are being warehoused by sponsor Rickmers Group.
Too soon to call for a recovery. There are arguments for both sides. The bull case for containers: 1) inventory restocking; 2) some economic growth; 3) slow steaming; 4) scrapping and order book management. The bear case: 1) uneven economic data pointing to the likelihood of a slow, ‘benign’ recovery; 2) a still substantial order book; 3) financing difficulties; and 4) precarious industry discipline – laid up vessels are already being re-introduced into service, and it’s unclear who controls the tap. The broader industry’s stance on the ‘knife-edge’ of recovery moves us to upgrade our sector view from UNDERWEIGHT to NEUTRAL. Nevertheless, we leave our ratings on the individual trusts unchanged for now, as we wait to see more sustained evidence of a recovery. A cautious approach in the coming weeks may be prudent considering that RMT’s US$130m loan facility is maturing just next month. How that maturity is handled may drive sector valuations and sentiment in the near-term.
Rickmers – OCBC
April loan maturity is the next test
DPU down 5% QoQ. Rickmers Maritime posted US$38.1m in 4Q revenue, up 29% YoY driven by vessel acquisitions and flat QoQ. RMT will distribute 0.57 US cents per unit, down 75% YoY and down 5% QoQ. Note the sponsor Rickmers Group will not defer its right to its share of the distribution as it had in 2Q09 and 3Q09. Full-year distributable income was within 4% of our estimate. RMT said it could not give forward guidance for DPU because of ongoing discussions with lenders, dragging on since 1Q09. RMT is geared at 1.96x debt-to-equity as of 31 Dec.
April loan maturity is the next test. RMT has so far been able to stave off the most immediate crisis points: the last three newbuild deliveries have been warehoused by its sponsor and a loan-to-value covenant review is on hold while discussions with stakeholders including its sponsor and ten lending banks continue. The next test, in our view, is the US$130m top up facility maturing this April, part of a total US$139.8m in loans up for repayment this year. It remains to be seen if lenders HSH Nordbank, DBS Bank and Citibank are willing to refinance the loan – tricky due to the steep fall in vessel values. We note that RMT has US$110.7m in cash as of 31 Dec, but it is unclear if the other seven banks will be willing to let these funds be utilized to pay off the maturity due to competing interests. How RMT handles this loan maturity could be a good signal of the extent of both lender and sponsor support.
We have further refined our valuation methodology. In an effort to parse market expectations, we introduce a best case valuation of RMT under a scenario where the order book ‘disappears’ at no cost to the trust or unitholders and where RMT is easily able to re-finance the top-up facility maturing in two months. We believe existing investors who are playing the waiting game are in a sense betting on this scenario but the chances of it materializing, in our opinion, are slim. While it is quite possible that RMT manages to resolve its debt and order book concerns – we continue to believe such a resolution may come at the expense of unitholders’ interests, for instance if RMT raises funds through a dilutive private placement. Maintain SELL with fair value revised up to S$0.18 from S$0.15 previously due to the methodology adjustments.