Rickmers Maritime - 2Q09: Retaining cash to weather challenges ahead

RMT reduces distribution policy from 46% to 13% for financial flexibility and declares DPU of 0.6 US cents. While fair price of S$0.76 is 30% above current price, we maintain HOLD in view of the US$712m unfunded capex.

Rickmers Martime (RMT) posted a net profit of US$5.2m for 2Q09 (-43% yoy; -53% qoq). The fall in earnings was mainly due to the provision of US$7.5m for asset impairment charged for a vessel (Maersk Djibouti) as the charterer, Maersk Line, may exercise an early termination option. The impairment also takes into account the likelihood of a fall in charter rates in 2010. Excluding the provision for impairment, 2Q09 earnings would be US$12.7m (+38% yoy; +15% qoq). According to management, this is the only vessel in RMT’s fleet that has an early termination option.

The trust’s income available for distribution amounts to US$19.6m (+42% yoy). RMT is paying DPU of 0.6 US cents, or 13% of distributable cash flow (1Q09: 46%). A reduction in its payout ratio is mainly to conserve cash for financial flexibility amid uncertainties in the container shipping market.

To date, RMT has a fleet of 16 containerships time chartered out for periods of between seven and 10 years. Three more 4,250-TEU newbuilds, contracted to Hanjin Shipping, are expected to join its fleet. Of these, two are scheduled for delivery in 2H09 and one in 1Q10. RMT is evaluating options for the funding of four 13,100-TEU container vessels worth US$712m to be chartered out to Maersk in 2H10. These vessels have secured 10-year charter contracts at a daily time charter rate of US$56,941. The trust is also seeking to re-finance a US$130m loan facility due in Apr 10.

While our fair price of S$0.76 is 30% above its current share price, we maintain our HOLD recommendation in view of RMT’s unfunded US$712m capex due in 2010. Our fair price is based on 2010 P/B of 0.4x, similar to US peer Danaos’ P/B of 0.4x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.

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Rickmers Maritime: DPU slashed; LTV waiver negotiations continue.

Auditor adds emphasis of matter. Rickmers Maritime (RMT)'s 2Q09 results were in line with expectations, barring a US$7.5m provision (on top of a US$3.5m provision in 4Q08) for impairment on vessel Maersk Djibouti, at risk for redelivery in February 2010. RMT has repaid a total of US$4.2m of loans in 1H09. The auditor issued an emphasis of matter, citing material uncertainty that "may cast doubt on the [trust's] ability to continue as a going concern".

DPU down 72% QoQ. The Board has declared a distribution of 0.6 US cents per unit for the quarter, down 73% YoY and 72% QoQ. This is equivalent to an annualized yield of roughly 6%. The sponsor will defer (but not waive) its right to its share of the distribution of over US$841,374. Including the sponsor's deferral, RMT saves nearly US$7.4m compared to 1Q09 within the trust. This is relatively small, in our opinion, but nonetheless significant: 1) it is highly unproductive to pay out much-needed cash in the face of financial covenant concerns and a large funding gap; 2) more importantly, it serves as an important good-faith gesture to RMT's lenders.

LTV issue unresolved, deposit payment delayed. RMT's attempts to obtain loan-to-value covenant waivers from its lenders, which began in 1Q09, are still ongoing - to our disappointment. The manager could not provide an approximate timeline for the negotiations. LTV covenants affect both existing loans and RMT's ability to drawdown on committed facilities for the three outstanding Hanjin vessels. RMT has started negotiations with banks to refinance a US$130m top-up facility maturing in April 2010. The manager said it is also in negotiations with all stakeholders (including the shipyard; the charterer; and lenders) on the unfunded US$711.6m Maersk vessels due in 2010. Payment of a US$20m deposit on two of the Maersk vessels has been delayed while discussions are ongoing. RMT has also appointed an independent financial advisor and investment bankers.

Price inadequate reflection of risk. No DPU guidance has been given. RMT's lenders may demand loan amortization in exchange for LTV waivers, which would cut into cash available for distribution. An equity issue may also be needed in the next 12 months to part-finance the Maersk vessels. We do not expect a big upward revision in DPU until at least some of these issues are resolved. In our opinion, the current unit price does not adequately reflect the risks associated with investing in RMT. Maintain SELL with S$0.39 fair value.

Rickmers Maritime: Between a rock and a hard place

Between a rock and a hard place. We have a NEUTRAL rating on the shipping trust sector, which faces falling asset values and counterparty concerns driven by a weak shipping market. These broader issues are compounded for Rickmers Maritime (RMT) because of its high leverage (2.2x debt-to-equity as of 31-March) and sizeable contracted acquisitions that were committed to during the better days. To recap, our concerns include: 1) loan-to-value covenants on existing loans; 2) loan-to-value requirements that affect RMT's ability to draw down committed loan facilities for the US$207m Hanjin acquisitions due in 2H09; 3) a need to repay up to US$154m in loans next year (our estimate); 4) no arranged financing for the US$711.6m in contracted acquisitions due next year; and 5) the likely redelivery of a vessel in February 2010 that could impact cash flows.

2Q DPU and its implications. At 2Q results, our focus will be on a possible update on ongoing negotiations for waivers on loan-to-value covenants; aswell as the distribution amount declared for the quarter. RMT, which does not provide distribution guidance, paid out 2.14 US cents per unit in 1Q09. Coincidentally, this was the floor amount mandated under a subordination structure that expired 01 Apr. We think the 2Q 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. Cutting distributions could also hurt any potential equity-raising efforts, rather than help.

Don't expect quick resolutions. Aside from the two aforementioned data points, we would be genuinely (positively) surprised if RMT is able to provide clarity on the larger issues. Our concern is that RMT is already unsustainably geared as it is; and the committed acquisitions leverage up the risk. Additionally, there is no clear roadmap of what the best solution is in this case: ideally the 2010 Maersk vessels worth US$711.6m would just "disappear" - but that may not be possible. And if an equity issue is required, unitholders will have to ask themselves if they want to fund purchases fixed at boom-time prices. With the high level of risk and no clear path out of the woods, we think it is prudent to maintain our SELL call. The recent price increase impacts the equity issue assumptions underlying our valuation. Our fair value estimate consequently increases to S$0.39 from S$0.29 previously.

Rickmers Maritime - Share price may see a re-rating should capex funding be resolved

RMT’s management is still evaluating options for the funding of four containerships of US$712m to be chartered out to Maersk in 2H10. Should this funding issue be resolved, its share price may see a re-rating.

We met up with the management of Rickmers Maritime (RMT) yesterday and discussed the funding of US$712m capex due in 2010 relating to the purchase of four 13,100 TEU containerships to be chartered out to Maersk for 10 years at a daily time charter rate of US$56,491 in 2H10.

Four possible options on the unfunded capex. They are: a) equity/debt funding, possibly on 30:70 basis, b) selling the vessels, c) sale and leaseback and d) settlement with Rickmers Group, the original owner of the four vessels. A total deposit of US$40m (5.6% of vessel cost) for the vessels is payable to RMT’s parent company Rickmers Group one year before the expected delivery date ie. Jul-Sep 09. The balance amount of US$672m (94.4%) will be paid upon delivery of the vessels in 2H10.

Penalty charges include the deposit and interest payment of 2% above US$ LIBOR. According to RMT’s circular released in Apr 08, the company will be liable for a penalty charge of 2% above US$ LIBOR p.a. on the unpaid amount of the vessel cost if it is late in payment upon delivery of the vessels. Should RMT default on the vessel payment for more than five business days after the due payment date, the deposit of US$10m each for the four Maersk vessels and interest charge of 2% over 3-month US$ LIBOR p.a. on the unpaid amount shall be forfeited to Rickmers Group.

Asset deflation might have breached LTV covenants. RMT’s management has guided containership prices without charter contracts have fallen about 30-50% from the peak in 2008 and only expects the shipping market to pick up in two years’ time. We do not rule out a breach in RMT’s loan-to-value (LTV) covenants of 90% in view of the recent collapse in ship values. That said, the trust is in discussion with its bankers on the possible waiver of the LTV covenants. Should asset prices continue to fall and RMT is unable to obtain a waiver of its LTV covenants, bankers may require the trust to reduce its dividend payout in order to partially pay down its loans or levy a higher cost of borrowing on the company.

Renegotiation of charter rates by the charterers. While RMT’s charterers are top liner companies such as A.P. Moller–Maersk, CMA CMG, Mitsui O.S.K. Lines, Hanjin Shipping and Italia Marittima, there is always the possibility that some charterers may renegotiate charter rates in view of the lack of sharp fall in cargo shipment demand and an oversupply of containerships in the shipping market.

RMT’s share price has risen 53% ytd and we forecast DPU yield of 19.6% and 17.6% for 2009 and 2010 respectively. While our fair price of S$0.76 is 28% above its current share price, we maintain our HOLD call in view of its unfunded US$712m capex due in 2010. However, we see a re-rating in RMT should the trust manage to resolve its financing hurdle. Our fair price of S$0.76 is based on 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.

Rickmers Maritime - Sell: Not Mission Impossible, But Too Much Uncertainty

Challenging, but not Mission Impossible – Following the easing of credit crunchand a strong 86% rally of Rickmers’ (RM) share price from its low in Apr-09,we conduct a hypothetical scenario analysis to assess the possibility of a capital raising exercise to meet RM’s funding gaps on a sustainable basis.
Theoretical solution 1 – Based on our analysis, a sustainable solution could be to raise US$300m in 2Q10 at S$0.60/share and implementing a US¢1/qtr dividend policy. This would provide an attractive dividend yield of 9-10% for unit holders, meet RM’s financing needs, and still set aside sufficient reserves to repay debt. Clear communication of RM’s dividend policy may be necessary to restore investor confidence before the capital raising exercise in 2Q10.

Theoretical solution 2 – An alternative solution could be the issuance of a debt-equity hybrid instrument such as non-participating preference shares in 2H09, with conversion into ordinary shares when the assets are delivered in July 2010. This solution would have the added immediate advantage of removing the overhang surrounding the unfunded capex commitments.

Caveat emptor applies – We caution that the above are hypothetically possible scenarios to meet RM’s funding needs on a sustainable basis. The challenges facing RM are not impossible to surmount; however, there exists tremendous uncertainty on the exact terms of any capital raising exercise, as well as on RM’s operating environment. As a result, we maintain our Sell/Speculative Risk rating; the “safety floor” share price is equal to our target price of S$0.23, based on NTA/share with 25% discount to vessel book values.

Rickmers Maritime - Share Price May See Re-Rating Should Capex Funding Be Resolved

We met up with the management of Rickmers Maritime (RMT) yesterday. The trust is still evaluating options to resolve the funding of four containerships of US$712m to be chartered out to Maersk in 2H10. Should this funding issue be resolved, its share price may see a re-rating.

Four possible options on the unfunded capex. They are: a) equity/debt funding, possibly on 30:70 basis (in our opinion), b) selling the vessels, c) sale and leaseback and d) settlement with Rickmers Group, the original owner of the four vessels. A total deposit of US$40m (5.6% of vessel cost) for the vessels is payable to RMT’s parent company Rickmers Group one year before the expected delivery date ie. Jul-Sep 09. The balance amount of US$672m (94.4%) will be paid upon delivery of the vessels in 2H10.

Correction in ship prices might have breached LTV covenants. RMT’s management has guided containership prices without charter contracts have fallen about 30-50% from the peak in 2008 and only expects the shipping market to pick up in two years’ time. We do not rule out a breach in RMT’s loan-tovalue (LTV) covenants of 90% in view of the recent collapse in ship values. That said, a lot of shipping companies have breached their loan covenants and bankers look for win-win situations, as it is not a solution to take possession of ships. RMT is in discussions with its bankers on the possible waiver of the LTV covenants.

Maintain HOLD, fair price S$0.76. We forecast DPU yields of 19.6% and 17.6% for 2009 and 2010 respectively. While our fair price of S$0.76 is 28% above its current share price, we maintain our HOLD call in view of its unfunded US$712m capex due in 2010. However, we see a re-rating in RMT should the trust manage to resolve its financing hurdle.

Shipping Trusts: Concerns easing selectively

First Ship Lease Trust : Provides leasing services on a long term bareboat charter basis to the international shipping industry. Currently owns a fleet of 23 vesse

Pacific Shipping Trust : Shipping Trust with a portfolio of 10 container vessels on charter to sponsor PIL and CSAV

Rickmers Maritime : Business trust fund to own and operate containerships under long term, fixed rate charters to container liner shipping companies

Liner companies looking to push rate hikes. Most of the leading container carriers, including Maersk and NOL are now looking to arrest the free fall in container freight rates through coordinated rate increases. While the problem of lower trade volumes, idle capacity and a huge orderbook will still need some solving, we may be seeing some stability in rates for the rest of 2009. This, combined with the improving sentiment about a global economic recovery in 2H09, should spur renewed confidence in container shipping stocks, and consequently, shipping trusts.

Visibility improving bit by bit. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk may be reduced. Moreover, FSLT has no big refinancing risks before 2012. Elsewhere, with the US$360m lifeline thrown to CSAV by German owners last week, PST’s fortunes may be looking up as well. However, RMT has to contend with unfunded capital commitments and an upcoming bullet loan repayment in FY10 and the picture still looks hazy.

FSLT is our top pick, upgrade to BUY. Given the healthy response to the 1Q09 dividend re-investment scheme, investors seem to be giving the thumbs up to FSLT’s attempt to align the interests of both short-term and long-term investors. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, despite trading at much higher yields of about 25%. Hence, we upgrade the stock to BUY, and our DDM-based TP is revised up to S$0.71.

Upgrade PST to HOLD. We are also upgrading our call on PST to HOLD with a revised TP of US$0.20, given that the worst that can happen now on its CSAV charters is a 35% rate cut. Elsewhere, we maintain our HOLD rating on RMT with a revised DDM-based TP of S$0.50.

Increase in borrowing costs on Rickmers Maritime's Loan

Rickmers Maritime (RMT) announced one of its nine banks has invoke the market disruption clause in one of its loans. As such, an additional interest amount of US$37,500 will be levied.

The additional interest payment has no significant impact to our earnings forecas

We forecast 20.9% and 20.4% DPU yield for 2009 and 2010 respectively.

Maintain HOLD in view of the unfunded US$700m capex due in 2010 and risk of falling asset prices that may breach LTV covenant.