Sunday, July 26, 2009

shipping trust

FIRST Ship Lease Trust (FSLT) may have set the wheels of an inevitable slide in the fortunes of the shipping trusts for the rest of the year in motion with its downward revision of distribution per unit (DPU) on Tuesday.

The other two SGX-listed shipping trusts, Pacific Shipping Trust (PST) and Rickmers Maritime, are due to report their second quarter results today and in early August respectively. The outlook for the shipping sector in general and the shipping trusts specifically has been deteriorating over the past quarter.

FSLT cited a change in policy to repay more debt faster as the reason for reducing its DPU from the third quarter onwards. Both FSLT and Rickmers have been hit by loan-to-value covenant breaches in recent months.

FSLT is planning to use around half of its free cash flows to prepay loans, which should ease its woes with the banks. 'We understand this new guidance is driven by discussions with lenders. We expect loan-to-value covenant concerns to become a non-issue once these discussions conclude,' said OCBC Investment Research in a report released yesterday.

Analysts seem to be looking more kindly at FSLT in the wake of its new policy. 'A consolation - in our opinion, this is finally a realistic number,' added OCBC in its report where it rerated FSLT to a buy from a hold with a fair value of 76 cents.

OCBC went on to explain that 'right since we initiated coverage over a year ago, we have been saying the trust's aggressive payout was unsustainable'.

'With this new approach, FSLT now looks more like a viable long-term investment vehicle for serious shipping trust investors,' it concluded.

Rickmers is the next trust likely to face similar issues, and may even be in a slightly worse position because it has new vessel deliveries with unsecured financing coming due. 'Funding risks are high with a US$130 million facility due next year as well as unfinanced capital expenditure of US$712 million,' said DnB NOR.

SIAS Research, however, offered some hope for Rickmers by suggesting that Rickmers' sponsor Rickmers Group will provide support with either financing or helping to negotiate postponement of the deliveries.

OCBC, however, was not as benign. In an earlier report it said: 'We think the Q2 DPU decision may be driven by conflicting forces: it may make sense to cut or freeze distributions entirely to save cash to fund obligations and to appease lenders. But the cash saved is small relative to what is needed.'

Against this backdrop, PST looks the most stable relatively. The trust's sponsor is locally-owned container line Pacific International Lines and it has no loans coming due in the next five years. It has also fully financed all its vessels and has no committed capex in the near future. The trust has a very conservative acquisition policy that should put it in a good position in the troubled times ahead.

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