April D-day looming up

At a Glance

• 4Q09 DPU payout of 0.57Uscts, 5% lower than 3Q09

• Loan restructuring process drags on; revenue growth stymied by inability to take on vessels on orderbook

• Significant near term liquidity risk in the form of US$130m bullet repayment less than 2 months away

• Limited DPU visibility, maintain SELL with TP of S$0.30

Comment on Results

In spite of the uncertain outlook, RMT’s quarterly report card continued to impress, underpinned by long-term cash flows. On a sequential basis, operations were stable, with revenues coming in flat at US$38m and cash generation of US$18.6m, down 4%. Net profit surged 65% q-o-q to US$15.2m, however, owing to US$6m accelerated amortisation of deferred income from charter contract – resulting from early redelivery of the Maersk Djibouti. Excluding this non-cash gain, net profit would have been at par with 3Q09.

Outlook & Recommendation

While revenues have been steady for the last 3 quarters, we should see some decline from 1Q10, owing to the redelivery of the aforementioned Maersk vessel on 1 Feb 2010. The vessel will be shortly sent for drydocking but employment thereafter is not guaranteed, and neither are freight rates likely to be attractive.

Except the Hanjin Newport, which the Trust took delivery of last year, the remaining 3 Hanjin 4250 TEU vessels have been delivered to and are currently being warehoused by parent, Rickmers Group. We believe it is unlikely that the Trust will be able to recognize revenue from these charters in the near term as well. While RMT has more than US$150m of undrawn credit facility at this point of time, the facility is likely to be frozen, till ongoing multiparty negotiations involving its 10 lenders and its parent are concluded.

RMT has formed a Finance Committee – comprising 4 Independent Directors – to safeguard the interests of minority shareholders in the loan restructuring process, but we are not hopeful of an early resolution to the crisis. Till then, operating cash flows may have to be fully redirected towards loan repayment, and visibility on future DPU payout is extremely limited. Maintain SELL.

Rickmers lowers Q4 DPU on funding shortfalls

RICKMERS Maritime Trust put in a creditable fourth quarter performance despite the cloud of unsecured funding hanging over it, with charter revenue and income available for distribution rising 29 per cent and 12 per cent to US$38.1 million and US$17.7 million respectively.

Distribution per unit (DPU), however, dipped a little further even from its already cut level in the past two quarters to 0.57 US cent from 0.6 US cent in the past two quarters. Year-on-year, it was a 75 per cent drop from the 2.25 US cents it was giving a year earlier. This was due to Rickmers continuing to conserve cash in the face of funding shortfalls for deliveries due later this year.

For FY09, charter revenue rose 43 per cent to US$146.3 million from US$102.1 million the year before. The strong performance came on the back of revenue contributions from three new vessels delivered during the year.

For the full year, income available for distribution grew 36 per cent to US$76.1 million but DPU plunged by more than half to 3.91 US cents. This represents a payout of 14 per cent and 22 per cent of income available for distribution in Q4 and FY09 respectively.

Cash and cash equivalents have been building steadily over the year as Rickmers retained cash and as at Dec 31, 2009 stood at US$110.7 million.

Rickmers maintained high operational efficiency, with only 0.2 off-hire days in the fleet in Q4 and a total of 7.9 days in FY09, thereby maximising charter revenue for the trust. However, the Kaethe C Rickmers, a 5,060 TEU containership (formely Maersk Djibouti), was re-delivered to the trust from Maersk on Feb 1 and is proceeding with its first scheduled dry-docking in Asia, which should last till mid-March, management said. Rickmers is actively marketing the vessel for future employment.

Said Thomas Preben Hansen, CEO of trustee-manager Rickmers Trust Management: ‘With the cooperation of our ship manager, we have succeeded in providing our charterers with the highest level of operating efficiency at 99.9 per cent utilisation rate.’

CFO Quah Ban Huat noted that while the trust has enjoyed a good year in terms of financial and operational performance, its unresolved financing issues makes it necessary to continue with cash conservation efforts.

As negotiations with Rickmers’ lending banks are still ongoing, the trust is unable to provide any forward guidance on distribution. Since the beginning of the year, the trust has actively engaged its creditors in discussions on the resolution of its financing issues including its value-to-loan covenants, the refinancing of its US$130 million top-up loan facility maturing in April and the financing of its orderbook. None of these proposals have been accepted so far.

Rickmers incurs additional US$26,000 interest cost

This is due to a lending bank raising interest rate on a US$46.31m loan

RICKMERS Maritime said a lending bank has invoked the market disruption clause once again on a US$46.31 million loan, resulting in higher interest cost.

The bank’s move meant that an alternative interest rate higher than US$ Libor (London Inter-Bank Offered Rate) will be levied on the loan, causing an increase of about US$26,000 in interest cost for the current fixing period ending Feb 26, 2010, said the trust.

The invocation arose as US$ Libor does not accurately reflect the lender’s cost of funds, the trust’s manager explained, adding that it is ‘not a reflection of the trust’s credit worthiness’.

The last time that the clause was invoked by the same lending bank was in August.

The trustee-manager said yesterday that Rickmers has also taken a marked-to-market loss of US$3.24 million as at Sept 30 due to the ineffectiveness of cashflow hedge under International Accounting Standard 39 (IAS 39) for this loan.

Based on the current Libor rate, there will be minimal impact to the trust’s net profits for the fourth quarter of FY09 and no cash impact on the trust’s financial performance.

The trust-manager also reiterated that the lender’s move will not have an impact on the trust’s position in its ongoing discussions with banks on the waiver of value-to-loan covenants, the refinancing of a US$130 million loan facility and the funding of its existing orderbook.

As the discussions with the banks are ongoing, Rickmers did not take delivery of the vessel Hanjin Milano in September as previously intended and this has resulted in a swap arrangement – which was entered into for the pre-arranged loan – being rendered ineffective under IAS39 as the loan was not drawn down.

The floating-to-fixed interest rate swap which extends from Nov 30, 2009, to Nov 30, 2012, was earlier entered into to fix the interest cost of the loan that was to have been drawn down for the acquisition of Hanjin Milano.

As the swap arrangement now exists without a related loan, it has been rendered ineffective as a cashflow hedge and marked-to-market losses on this swap arrangement, currently estimated at US$2.63 million, will have to be taken into the trust’s profit and loss in Q409.

The final impact on Q409’s net profits will depend on the movement of US$ Libor.

No progress yet in talks with lenders

At a Glance

• 3Q09 DPU payout of 0.60UScts at par with 2Q09
• Revenue pressures mount as Hanjin vessels scheduled for delivery are delayed owing to lack of funding
• Valuations look expensive, in our opinion, compared to more stable peers (currently trading at ~9% FY10F yield)
• Maintain SELL and cut our TP to S$0.30

Comment on Results
There were no surprises, from an operational point of view, in 3Q09 results. Distributable income and revenues were quite stable on a q-o-q basis, at US$19.7m and US$38.1m, respectively. Net profit of US$9.2m included US$3.3m of MTM losses on interest rate hedges, as the market disruption clause imposed by one of its lenders during the quarter rendered the hedge ineffective.

Outlook & Recommendation
Revenue pressures are expected to mount from FY10 as charterer Maersk has tendered that it will exercise the early termination option on Maersk Djibouti and redeliver the vessel to RMT on 1st February 2010. The vessel is unlikely to find re-employment immediately, given the global glut in container fleet supply.

Additionally, the Group has been unable to take delivery of the 2nd Hanjin vessel, Hanjin Milano, which commenced its charter with Hanjin from Oct 1st and is currently being warehoused by Polaris Shipmanagement, a Rickmers Group company. Two other Hanjin vessels are also up for delivery over the next 3 months and we believe it is unlikely that the Group will be able to recognise revenue from these charters in the near term. While Rickmers has roughly US$200m of undrawn credit facility at this point, the facility will be frozen till negotiations with lenders are concluded.

We estimate RMT will continue to pay out 0.60UScts DPU in the near term, and may suspend distributions in the worst case, if unable to negotiate a solution to its balance sheet woes – namely LTV covenants, bullet loan repayment of US$130m in April 2010 and financing for the 4 x 13,000 TEU Maersk vessels due in 2010. Hence, we maintain our SELL call and cut TP to S$0.30, on the back of lower future DPU assumptions (in line with lower revenue).