Rickmers opts to conserve cash, keeps Q3 DPU at 0.6 US cent

RICKMERS Maritime, the last shipping trust to report its third-quarter results, decided to stay conservative in income distribution despite posting steady results for the three months ended Sept 30.

The group decided to maintain its Q3 distribution per unit (DPU) at Q2’s level of 0.6 US cent. This is 73 per cent lower than the DPU of 2.25 US cents for Q3 2008.

‘While the trust has turned in a strong performance for the third quarter, we do have unresolved financing issues, and until a solution is found, it would be in the interest of the trust and our unitholders to continue our cash conservation efforts,’ said Thomas Preben Hansen, CEO of trustee-manager Rickmers Trust Management.

Rickmers continued to do well operationally in the third quarter, with a 43 per cent year-on-year increase in charter revenue to US$38.1 million from US$26.5 million – resulting in a 46 per cent rise in cash flow from operating activities to US$28.6 million as it maintained a high fleet utilisation rate of 99.9 per cent. Income available for distribution accordingly rose 36 per cent year-on-year to US$19.2 million.

Among the challenges that Rickmers is facing is that Maersk, the charterer of Maersk Djibouti, has given notice of early termination of its charter and will re-deliver the vessel to the trust on Feb 1, 2010. Rickmers is in the process of marketing the vessel for future employment but, given the global economic and trade slowdown and the oversupply of tonnage in the container industry, ‘this will not be an easy task and Maersk Djibouti will definitely be at a charter level lower than she was at’, said Mr Hansen. There is a risk the vessel may not find immediate employment or will secure employment only at a significantly reduced charter rate.

Financing issues are also impacting on the deliveries of Rickmers’ series of 4,250-TEU newbuildings. One of them, Hanjin Milano, has been completed and delivered to Polaris Shipmanagement, a Rickmers Group unit, from which the vessel was purchased. Hanjin Milano has begun its charter with Hanjin Shipping and is currently warehoused by Polaris until discussions with the banks have been finalised.

The future delivery of two 4,250 TEU vessels chartered to Hanjin, which are expected in December and early 2010, may likewise be affected, pending finalisation of discussions with the banks.

Rickmers has previously highlighted its value-to- loan covenants, the refinancing of its US$130 million top-up loan facility maturing in April and the financing of its existing order book as key issues to address. No agreement has been reached yet.

Essentially behaving like a toxic asset

Swift resolutions needed. Rickmers Maritime (RMT)’s increased cash retention following the 72% QoQ cut in 2Q09 DPU is just a drop in the bucket compared to the immediate issues ahead of the trust. In order of urgency (our opinion); RMT needs to 1) resolve LTV clauses that restrict access to loan facilities for the Hanjin vessels due in next five months; 2) secure waivers for LTV covenants on existing loans; 3) arrange payment of US$40m in vessel deposits and of loans that begin amortizing soon; 4) refinance the US$130m top-facility maturing in April 2010; and 5) finance the US$711.6m Maersk vessels due in 2H2010.

What next? RMT is in negotiations with lenders on LTV covenants and also in discussions with all stakeholders on the Maersk orders. RMT does not have the resources to honour its obligations (in our opinion) but it is in the sponsor’s best interest that it does due to 1) reputation risk and 2) the sponsor’s status as an intermediary on committed acquisitions – that is, if RMT defaults, the sponsor is still obligated to purchase the ships from the yards. Possible compromises involve delaying delivery of vessels (for a price) or letting the sponsor warehouse the assets (for a price) or raising a significant amount of equity (ability to do so is questionable).

Disadvantage unitholders. Whatever the final solution, we believe it not likely to favour the unitholders. With the high level of leverage and sizeable acquisitions fixed at peak prices, we believe RMT is essentially behaving like a toxic asset. When a leveraged play unwinds, the equity tranche is the worst place to be. Unitholders are caught in a game of “heads I lose, tails you win” and we think their best option is to exit this investment.

Adjusting valuation for distress. RMT’s unit price has fallen 29% since the 2Q DPU announcement and is now trading close to our original fair value estimate of S$0.39. This estimate values RMT as a going concern, which requires many assumptions including on the trust’s ability to successfully raise US$550m at S$0.53. We expect a high level of price volatility in the next few months and a going concern approach may not reflect the risks inherent in this investment. Our new fair value of S$0.16 is based a probability-weighted valuation approach that reflects the likelihood and consequences of a distressed scenario. Note also we now estimate no distributions are paid in 2H09 and FY10. Maintain SELL.

Rickmers confounds investors on DPU

THE difference between distributable income and distribution per unit (DPU) became sharply obvious to investors when Rickmers Maritime Trust (RMT) became the last of the three SGX-listed shipping trusts to release second-quarter results at the end of last week.

RMT said back in May that it expected to see an increase in distributable income in Q2 due to the delivery of new vessels. It delivered on that, posting a 42 per cent rise in distributable income to US$19.6 million. Charter revenue and cash flow from operating activities both rose 59 per cent and 56 per cent respectively to US$37.6 million and US$28.7 million from the second quarter the year before.

However, the rub lies in the actual returns to unitholders in the form of distribution per unit – DPU plunged 73 per cent to just 0.6 of a US cent. Like the other two trusts reporting before it, RMT cited conserving cash as a reason for the cut. It also chose to use the results briefing to highlight some major challenges facing the trust’s management, while declining to give a DPU forecast for the coming quarters. In the process, RMT has positioned itself as the shipping trust with the most negative outlook.

Investors naturally reacted negatively on Monday, selling down the trust, which lost over 20 per cent to close at 46.5 cents from 58.5 cents on Friday.

To be fair, the issues that management flagged are not new. The refinancing of RMT’s US$130 million top-up loan facility maturing in April 2010 and unsecured funding for its four 13,100 TEU ships, due for delivery in the latter part of 2010 have been hanging over it for most of the year, as has the question of value-to-loan (VTL) covenants and the need to negotiate a waiver on them.

Analysts have also turned bearish on RMT. Maintaining its ‘sell’ call on RMT, Citigroup’s Rigan Wong said DPU was lower than consensus expectations of 1.5 US cents and went on to add that: ‘We believe RMT’s share price may de-rate, given the low Q209 DPU payout and lack of dividend guidance.’

The question that needs to be asked is why did they choose to reiterate them at this particular juncture. One answer might be that the prognosis has gotten worse and management feels investors should be further warned of the risks. ‘PwC highlighted the ‘existence of a material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern’, noting that RMT’s US$130 million loan maturing in April 2010 has yet to be refinanced and that it is also in talks with banks on its VTL covenants,’ said Mr Wong.

The other possibility is that in depressing the unit price, it helps make the yield look a little better. The 5.9 per cent annualised yield at last Friday’s closing is far below the average 15 per cent yields the other two are producing, but with yesterday’s closing price of 45 cents, it goes up to 7.7 per cent. As the unit price drops, the yield picture might start to look better going forward because, barring some pretty drastic restructuring moves, the future looks very grim indeed for RMT. Barring questions of whether one buys business trusts for capital gains or dividend yields, this may well be the only bright spot ahead.