The lowdown on shipping trusts

IT hasn’t been much fun being a shipping trust, lately. If your creditor isn’t leaning on you, your client is reneging on you or asking for a 30 per cent discount on charter rates.

At some point in the past 18 months, at least one or a combination of these three vexing situations has been a reality for all three shipping trusts listed here – Rickmers Maritime Trust, First Ship Lease Trust (FSL) and Pacific Shipping Trust (PST).

Consequently, the past 18 months haven’t been a barrel of laughs for investors either. The share price for PST has lost about 23 per cent of its offer price value since the trust listed in 2006, while FSL and Rickmers have lost 55 per cent and 75 per cent respectively since they went public in 2007.

While the headlines for the trust sector have been glum in general, they have varied for each of the trusts across a spectrum of harrowing news.

Glum news

At one end of the spectrum has been Rickmers, which found itself unable to raise enough equity to buy seven vessels that it had committed itself to for US$918.7 million, even as it scrambled to refinance US$130 million in loan facilities with its banks.

About the same time, charterer Groda Shipping & Transportation told FSL to take back two tankers about four years early in May – but not before running up a US$4.1 million tab for unpaid bunker bills that led to tanker arrests and a 10 per cent dive in FSL’s share price.

Amid renewed fears of counter-party risk, some threw up their hands. OCBC Investment Research’s Meenal Kumar ceased coverage of the entire sector in June, citing ‘subdued trading volumes’. He also noted the difficulty of getting publicly available information on some of the trusts’ clients, such as Groda.

At the opposite end of the spectrum, however, PST’s trials were milder by comparison – and already seem to be receding into the past. Chilean liner CSAV, which charters two vessels from PST, caused a bit of a flap in April last year when it looked likely to negotiate a temporary 30 per cent reduction in charter hire payments.

But now, with CSAV’s turnaround in fortunes – it posted a record Q3 profit earlier this month – the threat of renegotiation has been reduced to a panicky footnote.

It is fitting that for Q3, only PST reported an increase in its distribution per unit (DPU) – albeit a small one of 1.7 per cent year on year.

Of the lot, PST has been favoured by analysts for its conservative financing strategy. It also scored points for its canny move to diversify into bulk carriers and multi-purpose vessels in measured doses that precluded any frantic equity-raising exercises.

FSL, on the other hand, is still being hobbled by the fall in revenue from the two tankers that Groda returned prematurely. Its Q3 distribution per unit of 0.95 US cent was 36.7 per cent lower year on year – and the outlook appears subdued.

DBS Group Research’s Suvro Sarkar cut DPU estimates for FY 2011 by 17 per cent to about one US cent per quarter.

FSL’s payout ratio is at 40 per cent as of Q3 – which is relatively prudent and not abysmal unless you are an investor who remembers getting 100 per cent of distributable cash flow in 2008 before the sector hit an ice patch.

What FSL does have in its favour is its vessel portfolio, which is the most diversified of the three – at a time when diversification has become a hedge against events that the sector cannot control, such as falling vessel values.

Diversification, on the other hand, is not on the immediate horizon for Rickmers’ all-containership fleet. After a period of giddy acquisition that preceded its financing woes – at one point, it had 11 containerships waiting to be delivered within a two-year span – it will be content with its existing 16 while it regroups.

While containership rates have recovered convincingly and are poised to improve next year, the much-dreaded double dip could undo it all.

And all else remaining equal, there is the 0.6 US cent cap on Rickmers’ DPU per quarter. It will be in place for at least as long as the trust is protected by the value-to-loan waiver granted by its creditors for up to three years. Its latest DPU of 0.57 US cents was a payout of just 13 per cent of distributable cash flow.

Stable and boring bet

It could work out for everyone, of course, and the sector could become the more exciting alternative to Reits that it was originally branded – and not in a way that causes indigestion.

But as things stand, PST – which its sponsor’s MD called ‘stable and boring’ in March, according to Lloyd’s List – looks like the sector’s best bet. When ‘boring’ is the best adjective for a sector, investors might just stock up on antacid tablets and move elsewhere.

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.

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.

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.

Share Prices of US Peers Rally 30-60% wow

US peers rallied 30-60% wow; CCFI rebounded 26% from trough. Share prices of Danaos Corporation (DAC US) and Seaspan Corporation (SSW US), US peers of the Singapore shipping trusts, soared 58% wow and 32% wow respectively. The China Containerized Freight Index (CCFI) has rebounded 26% from its recent trough of about 750-945.3. We have not yet seen an upturn in the share prices of Singapore-listed shipping trusts similar to the recent rally of their US peers.

Stock Recommendations

FSLT. FSLT recently raised S$42m via a private placement to fund acquisitions. Accretive acquisitions will boost its distributable cash. However, the trust may need to raise equity for its outstanding loan balance of US$400m due for bullet payment in 2012 and 2014, and this may lead to yield dilution. Thus, we maintain HOLD on FSLT but raise our fair price from S$0.62 to S$0.70 based on a higher container shipping sector
2010F P/B of 0.91x (previously 0.81x).

PST. We forecast PST’s 2009 and 2010 dividend yields at 11.7% and 9.3% respectively after adjusting for the reduction in the distribution payout ratio from 90% to 70%. The cash retained will be applied to finance acquisitions. Accretive acquisitions may drive a re-rating of the stock. Maintain BUY with a target price of US$0.37.

RMT. We reduce our fair price from S$0.76 to S$0.55 based on a lower 2010F P/B of 0.32x (previously 0.40x), a shade below US peer Danaos’ P/B of 0.54x, because RMT would have a similarly very high net gearing of 4.0x, This is assuming the availability of debt financing for the US$712m capex due in 2H10 relating to the purchase of four containerships to be chartered to Maersk. RMT also has a US$130m loan facility due in Apr 10. While our fair price for RMT is 43% above its current share price, we maintain our HOLD call.

RMT is trading at a very low FY09 P/B of 0.31x. Should the trust overcome its financial hurdles by refinancing the US$130m loan, and by securing funding for its newbuilds, we expect a re-rating. At this juncture, the management is still seeking solutions to its financial hurdles.