FSL – UOBKH
Yields Are Intact But Bullet Payments Not Too Far Away
First Ship lease Trust (FSLT) has raised S$42.0m (US$29.2m) via a private placement of 80m new units (15% of pre-placement share capital) at an issue price of S$0.525/share to fund acquisitions. The shipping trust has also secured a two-year waiver for its loan-to-value (LTV) covenant and reaffirms quarterly
payout of 1.5 US cents from 3Q09 onwards.
Management targets gross asset yield of 15 p.a. Based on the placement price of S$0.525/share, we estimate the cost of equity at 16.5%, which appears high. However, the management targets a gross asset yield of 15% p.a. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are non-accretive.
Waiver of LTV covenant is a positive development for FSLT as it eliminates the risk of breaching its LTV covenant, given the fall in ship values. Over the two-year waiver period, FSLT will make quarterly repayment of US$8.0m.
However, balloon payments are not too far away. While FSLT has begun to repay part of its loans on a quarterly basis, it still has a total outstanding loan balance of about US$400m due for balloon payments in 2012 and 2014. It will either have to refinance the debt or raise equity for the bullet payments. The latter would likely result in a yield dilution. Based on a hypothetical scenario, if FSLT were to raise US$400m at today’s share price of S$0.61, this would imply a mere yield of 5.6% p.a. (before accretive acquisitions).
Maintain HOLD and cut our fair price from S$0.64 to S$0.62 in view of the dilution from an enlarged share capital. Our fair price is based on 0.8x 2010 P/B of the container shipping sector. We suggest entry price at S$0.56.
FSL – BT
First Ship Lease Trust to raise funds from placement
JUST days after winning some reprieve from its bankers, First Ship Lease Trust (FSLT) is now seeking to raise more funds with a 100 million unit placement exercise.
The placement, to be arranged by CLSA Singapore, will not be underwritten. The issue price per new unit and number of new units to be issued will be determined by CLSA in consultation with the trustee-manager, FSL Trust Management (FSLTM), following a book-building process.
FSLTM said that the issue price will be between 52.5 cents and 57.5 cents unless otherwise agreed between CLSA and FSLTM but provided that it will not be at a discount of more than 20 per cent to the traded volume-weighted average price of 59 cents on the day before the agreement was signed.
The trustee-manager said that assuming that all the 100 million new units are issued at an assumed price of 59 cents each, FLST estimates that it will receive net proceeds of about $57.3 million.
The trust plans to use funds raised for the acquisitions of vessels with leases or of companies holding such vessels, although it has not identified any specific assets to be acquired as yet.
The new units are equivalent to about 19.28 per cent of the existing issued units and about 16.16 per cent of the enlarged issued units, assuming that all the 100 million new units are issued.
To ensure fairness to existing unit holders, FSLT will give a stub distribution, estimated at 1.27 cents, for the period July 1 to the day immediately preceding the date on which the new units will be issued instead of to Sept 30 as originally scheduled. The new units are expected to be issued on Sept 17, said FSLTM, adding that the next distribution following the stub distribution is expected to be for the period from the issue of the new units to Sept 30.
CDL H-Trust – DBS
Extending its winning streak
• Recovery in sight
• We believe our 2H09 DPU estimate of 4.05 Scts (17% above consensus) is achievable
• Prospects for a further re-rating driven by earnings
• Maintain BUY, TP S$1.57 based on DDM
Signs of recovery sighted. July’09 tourist arrival statistics were very encouraging. We believe that newsflow for Singapore tourism industry should start turning positive from Aug-Sept’09 on the back of a lower base effect. In addition, sequential improvements in hotels occupancy levels is reassuring as further room rate cuts should be unlikely on the back of better room utilization rates.
Earnings likely to surprise consensus – again. Consensus is too conservative on CDL HT’s FY09 performance, in our opinion. With a 1H09 DPU of 3.86 Scts paid out, market is factoring in a lower 2H09 DPU of 3.44 Scts vs our estimate of 4.05 Scts, which does not jive with an improving outlook for tourist arrivals. We see possibility of another round of upward DPU adjustment come 3Q09. In addition, consensus has not priced in the positive ripple effect from the tourist influx on RevPAR in 2010.
Implied value per room of S$550k – not lofty. CDL HT’s implied valuation is on par with the recent transacted price of Swissotel Merchant Court. We believe CDL HT should trade at a premium given (i) strong support from Hong Leong and (ii) established business relationships, (iii) larger number of room inventory gives the trust economies of scale.
Maintain BUY, TP S$1.57. We see prospects for a further rerating driven by earnings in 2H09. Our TP is raised to $1.57 from higher RevPAR assumptions (+5 pct) and lower equity risk premium assumptions. We urge investors to take a long-term perspective on CDL HT, which will be a beneficiary of Singapore’s push for the success of the integrated resorts come 2010. CDL HT offers a FY09-10F yield of 5.7% – 7.1%.
FSL – OCBC
LTV covenant clouds dissipate
Secures covenant waiver. FSL Trust has secured a two-year waiver for the loan-to-market value covenant in its credit facility. The waiver, subject to documentation, will extend until the end of 2Q11. During this period, the minimum coverage ratio of the charter-free fair market value of the trust’s portfolio over its outstanding indebtedness will be reduced from 145% to 100%. In return, FSLT must repay US$8m per quarter during the two-year period (or US$64m in total). The trust has already prepaid US$12m voluntarily. Margins over US$ LIBOR also increase by between 50 and 70 basis points (bps) during the period. The margin increase is reduced to a 25-bp hike after the waiver period.
Re-affirms DPU guidance. The manager estimates that the additional interest expense during the waiver period averages US$0.7m per quarter. The manager re-affirmed its DPU guidance of 1.5 US cents per quarter. We estimate this works out to a payout of less than 50% of cash earnings. We note there might be some one-off expenses (both cash and non-cash in nature) in 3Q09 as FSLT is likely to re-align its interest hedges to reflect the new amortization schedule.
T&Cs as expected with some positives. The conditions and pricing were in line with our expectations. We were expecting US$35m annual payment (versus US$32m actual). We were off by about 5 bps in our cost of debt
assumptions. The positive surprise was the lower margin increase postwaiver period (we were not so optimistic). The new minimum coverage ratio is fair in our view, especially with outstanding indebtedness falling as quarterly loan repayments are made. The ‘official’ current fair market value of the portfolio was not disclosed.
Remains our top sector pick. A major overhang has eased, taking pressure off the manager and the stock. Industry concerns remain but we like the new, more sustainable payout model and FSLT’s diversified vessel mix. We reiterate that unitholders should constrain their expectations regarding DPU growth; with the new payout model, a significant DPU increase would require acquisitions (and fresh equity) in our view. Note this is a revolving credit facility, so FSLT has the option to tap into the undrawn amount as it grows with each periodic repayment. Our discounted FCFE value is up from S$0.84 to S$0.86, incorporating actual waiver terms. Our fair value estimate edges up a cent to S$0.77, reflecting an “industry uncertainty” discount of 10%. Maintain BUY.
REITs – BT
Reits bank on placement, rights issues for now
BANKS may have loosened their purse strings but many real estate investment trusts (Reits) here are sticking to rights issues or private placements for funds – despite their dilutive effects.
Since June, another five Reits have conducted such exercises to raise more than $1.23 billion. Investors were not too pleased in some cases and sold out, driving unit prices down. Why would some Reits rather incur the wrath of unitholders than turn to banks?
For Reits looking to trim gearing, there are few other fund raising options. While credit conditions have certainly improved, ‘leverage’ remains a dirty word and many would prefer to repay debt than to refinance or borrow more. Frasers Commercial Trust was one which made a cash call in June for this.
‘Peer pressure’ keeps Reits particularly disciplined. With many paring down debt in the last few months, those with relatively higher leverage ratios would start drawing the wrong kind of attention from watchful analysts and investors. Just two out of 13 Reits have gearing levels exceeding 40 per cent, a CIMB report this week shows.
While refinancing may have become easier, there is no saying if credit might tighten again. Banks are still exposed to the recession – the default rate on commercial mortgages held by US banks, for instance, more than doubled in the second quarter from a year ago.
Rolling over debt in unstable times means that refinancing fears can haunt again and again. A DBS Vickers report last week found that Reits have just $1.89 billion of debt maturing next year. But this will surge to $3.28 billion and $4.28 billion in 2011 and 2012 respectively. So cutting debt still seems the prudent thing for many Reits to do.
Even Reits willing to borrow more from banks may not have much room to do so. Some analysts are expecting further asset value writedowns – particularly for commercial property. If this happens, gearing for affected Reits (determined by comparing debt with assets) will rise with or without an increase in borrowings.
In fact, CIMB believes that asset devaluation could trigger more equity raising by Reits. The cash would reduce debt, counter the effect of lower asset values and keep gearing stable.
Reits looking to buy assets but are not keen to raise debt will also value funds from rights issues and private placements. Starhill Reit raised $337.3 million recently not just to reduce debt, but also to capitalise on acquisition and asset enhancement opportunities.
CIMB further suggests in its report that Frasers Centrepoint Trust, CapitaMall Trust and Suntec Reit could also expand their portfolios and issue cash calls.
It helps that the stock market has surged, allowing Reits to issue new units at better prices. Fortune Reit, for example, announced a HK$1.9 billion (S$353.2 million) rights issue last week with new units going at HK$2.29 apiece – a large discount from the last traded price of HK$4.10 then. The rights issue price would have been much lower if the exercise had happened at the end of last year, when units traded at just HK$1.99.
Banks may be more willing to lend, but many Reits will want to keep their hands in unitholders’ pockets until economic skies are clear again.