Pacific Shipping Trust (PST)

[Nick]

It is always crucial that the unit-holder track the financial performance of each charterer in order to be prepared for any potential charter default in the future. A strong profit posting would mean a lower counter-party risk. At the moment, PST only has 2 charterers - PIL (sponsor with 59% stake) and CSAV. In 3Q this year, it will welcome Shagang Group as one of its charterers through the 10 year lease of 2 newbuild cape-size vessels.

I chanced upon this article which should give some comfort to PST unit-holders.

Shagang Group posts sales income of RMB 178.6 billion in 2010

Monday, 31 January 2011 13:51:31 (GMT+2) Tags: iron ore , raw mat , China , Far East , steelmaking , fin. Reports , Shagang | similar articles »

Jiangsu Province-based steelmaker Shagang Group, China's largest private sector steel producer, achieved a sales income of RMB 178.6 billion ($27 billion) and a pre-tax profit of RMB 13.6 billion ($2 billion) in 2010, up 22 percent and 75 percent respectively year on year.

In 2010, despite adverse factors including higher raw material costs, Shagang Group's share of the finished steel product market increased, while the company developed 50 new varieties of high value-added steel products. Shagang Group expects that its annual sales turnover will be in the range of RMB 200-250 billion ($30.4-38 billion) in the China's 12th five-year plan period (2011-16).

In addition, Shougang Group's self-sufficiency in terms of iron ore supplies has reached 20-30 percent, while the company aims to be 50 percent self-sufficient in iron ore supplies by the end of the 12th five-year plan period.

URL: http://www.steelorbis.com/steel-news/lat...580504.htm

We are clearly seeing a trend of commodity companies taking on the role of ship operators in other to cut cost and gain self-sufficiency. Such companies are not bothered about spot rates since they are shipping their own products/raw materials.

Please correct me if I am mistaken.

(Not Vested)

[Jeff]

Like very much this high yield trust. would like to load more
Vested.

[Nick]

I guess the short term catalyst are -

1) Secure bank loan financing for the 5 Glovis vessels and details about equity fund raising.

2) Delivery and chartering of the 2 Shagang vessels.

(Not Vested)

[Nick]

PSTM APPOINTS SHALDINE WANG AS CFO

http://info.sgx.com/webcoranncatth.nsf/V...500119674/$file/PR_CFO_Appointment.pdf?openelement

(Not Vested)

[tonylim]

SGX-ST Announcement
UPDATE ON PST’S FINANCING FOR RECENT ACQUISITIONS

PST Management Pte. Ltd. (“PSTM” or “Trustee-Manager”), the trustee-manager of Pacific Shipping Trust (“PST”), is pleased to announce that it has secured bilateral financing commitments for a total of US$132 million from Oversea-Chinese Banking Corporation Limited, Standard Chartered Bank and ING Bank N.V. to fund its purchase,
announced on 26 November 2010, of five new 57,000 DWT Supramax Bulk Carriers.

These new vessels have been time-chartered to Glovis Co., Ltd, Korea for periods of 8 and 10 years respectively.
Together with the bilateral loans of US$150 million granted by DBS Bank Ltd, Malayan Banking Berhad and Bangkok Bank Public Company Limited (also announced on 26 November 2010) to fund the purchases of two Capesize Bulk Carriers (chartered to Jiangsu Shagang Group Co., Ltd) and two Multi-Purpose Vessels (chartered to Xiamen
Ocean Shipping Company), PST has obtained commitments for a total of US$282 million to finance the acquisition of its nine new vessels (the “Acquisitions”).
These financing arrangements are a good reflection of the confidence of the banks in PST’s business model of chartering good quality vessels to financially strong counterparties on long-term charters.

The proceeds of these bank financings, together with the funds made available from PST’s existing cash retention programme and advances from Pacific International Lines (Private) Limited (PST’s majority unitholder), should make it unnecessary for PST to raise new equity for funding the Acquisitions in the immediate future.
Existing unitholders should benefit from these transactions when the contracted charter earnings come on-stream, raising total revenue by US$552 million to almost US$800 million, extending through 2023.

By Order of the Board
PST Management Pte. Ltd.
(Company Registration No. 200602579M)
(as Trustee-Manager of Pacific Shipping Trust)
Lim Sim Keat
Chief Executive Officer
17 March

[Nick]

Certainly very good pieces of news for existing unit-holders. I find it almost impossible to believe that the Trust managed to secure loans at 88% gearing from local banks to fund its latest acquisition ! PST has mentioned that it will not be raising new equity in the near term so DPU should steadily spike up when the first vessel is delivered in Sept this year.

Lets examine how much equity PST needs to inject into the acquisition of 9 vessels made in 2010 in light of the recent financing efforts -

Acquisitions:

2 X 180,000 DWT Capesize vessels leased to Shagang for US$123.2 million
2 X MPP vessels leased to Cosco for US$60.0 million
5 X 57,000 DWT Supramax vessels leased to Glovis for US$150 million.

1) Shagang & Cosco vessels

Acquisition: US$183.2 million
Financing: US$150 million
Equity Required: US$38.2 million

2) Glovis Vessels

Acquisition: US$150 million
Financing: US$132 million
Equity Required: US$18 million

Equity Calculations:

Total Equity Required: US$56.2 million (PIL has loaned PST US$54 million to settle pre-delivery financing)
Deposit Paid in 3Q 2010: US$14 million
Potential Cash Retained for FY 2011/12: US$15 million (PST retains US$1.8 million quarterly)
Net Equity Required: US$56.2 mil - US$14 mil - US$15 mil = US$27.2 million

I would hence expect PST to raise new equity of at least 20-30% of its current market capitalization to finance the equity portion in late 2012. Judging by the relatively high revenue to asset yield, the acquisitions should be yield accretive after equity financing is completed. However, its gearing will take some time to drop since it amortizes its loans steadily.

PST closed at US$0.345 today. Its market capitalization stands at US$203.4 million.

Please correct me if any of my figures/assumptions/date is incorrect.

(Not Vested)

[tonylim]

Nick,
You are spot on.
Since the gearing has increased, would PST face the same problem as FSLT and Rickmars, if there is a financial crisis (like in 2007/2008) ?

[Nick]

Hi Tony,

I do expect gearing to shoot up near term but it should decline significantly when PST does their equity fund raising exercise. I don't think they will leave the portfolio of 9 vessels with over 80% gearing. It is just too risky. I think they will raise funds to reduce the gearing closer towards 60%. They might even consider raising more cash to create a warchest for potential acquisitions. Let's see what the Management will do when the vessels start to arrive from the shipyards.

FSLT and RMT financial problems are unique -

FSLT: It took up on loans attached with VTL (valuation to loan) covenants of 145%. This means that the charter-free valuation of the fleet at any point of time must be 145% of the loan amount. If it fails, FSLT will be in default. In 2009, the VTL ratios dipped below 145% and so the lending banks waived the VTL ratios in return for higher interest expense and loan amortization of US$8 million per quarter. Lets not forget that half of its loans are due in 2012.

RMT: It faced similar problems as FSLT with regards to the VTL. But, it faced an even greater problem then by failing to finance its US$0.9 billion worth of acquisitions. The lending banks were not willing to finance the deal when the same vessels were trading at much lower prices. Similarly, the low share price prevented it from turning to equity. So it faced a major problem till 2010.

PST is different for the following reasons:

i) Its loans do not have any VTL ratios so volatile vessel valuation doesn't impact its credit rating.

ii) It takes on long term loans with monthly principal payments. The earliest loan matures in 2016.

iii) It has managed to secure financing for all of its order-book.

iv) It retains on average US$1.8 million quarterly for working capital purposes.

I am not saying PST has a risk-free capital structure. If the counter-party defaults, it might not even have sufficient cash-flow to repay the minimum amount of loan principal for that period which would mean a default. In short, I expect PST to raise new equity in late 2012 to lower its overall gearing. I think local shipping trust mentioned that the ideal capital structure is $1 debt backed by $1 equity.

[tonylim]

Nick,

Well said.
Many thanks for your valuable sharing. Happy investing.

[Nick]

What are your views on the depreciating USD/SGD rate ? This was my main reason to divest PST a short while ago. The dividend income and capital value of the shareholding is declining if the unit price doesn't appreciate in tandem.