Rickmers Maritime Trust

[john]

Re NAV of RMT - are'nt cos incl shipping are obliged to revise the NAV yearly to incor in the Annual Report to shareholders so that its ships, among other assets, reflects the current market value? Or is it in the case of RMT they also incor the valuable Time Charter rates of their various ships which still have many years to go in the NAV thus enhancing its NAV for yet many years to come till the lucrative TC mature?
Grateful of your knowledgeable advice on this point?

It is trading at steep discount to book value. If it is so good, the sponsors should have taken it private at steep discount.

Book value is meaningless for shipowning companies. In a boom, the ships are worth more than book. The reverse is true in a bust. That is why RM has had to negotiate a VTL waiver - because the market value of the ships is below the value required to stay within the VTL covenant.

RMT's book value is still positive. But replace the book value figure with the actual market value, and RMT's equity would be a lot lower, perhaps even negative. If RMT's true equity is negative, then of course there is no point taking it private - RM would be paying real money to buy something that is worthless. They would be better off buying physical ships on the open market.

[Nick]

Hi Nick,

Thanks a lot for your detail analysis. Always a pleasure to read what's in your mind. Definitely more than toll roads.

Cheers
GG

Capital Group to subscribe to Rickmers Maritime rights issue
• Substantial unitholder Capital Group commits full support for rights issue
• Undertaking from Capital Group brings collective support, together with
undertakings from the Sponsor and Independent Directors, to 39.92%

http://info.sgx.com/webcoranncatth.nsf/V...50032403D/$file/RM_Press_Release_Capital_Group_21_March_2013.pdf?openelement

It is important to note that the guidance of 0.6 US cent DPU is only for FY 2013. At the moment, RMT portfolio consist of 16 container vessels of which 15 are on profitable pre-crisis charters and 1 is on short term charter with significantly lower present rates. If one examines the charter maturity time-line - http://www.rickmers-maritime.com/timeline.html - 2 vessels charter will expire in 2014 and 4 vessels charter will expire in 2015. If charter rates do not recover to pre-crisis levels, there is significant downside to revenue. Essentially, there is little upside to revenue since the vessels are leased at high rates - a strong recovery will only guarantee the current revenue will continue to be maintained till the end of the decade. A weak recovery or even no recovery will hamper their cash-flow significantly and the projected US$20 million annual distribution might have to be curtailed. It wasn't long ago that FSLT did a private placement to purchase Torm vessels for growth - a year later, they have slashed the DPU completely. Just playing the Devil's Advocate here - like all things, there are risk and returns - the 10% yield is tied to the higher risk involved. If strong recovery takes place, a unit-holder gains an interesting asset class with guaranteed 10% returns for the next 5 - 7 years and even possibility of yield compression for capital gains. On another note, will the rights issue cause a 50% reduction in the conversion price for the US$49 million Convertible Loan ?

Some numbers based on 4Q 2012 (15 precrisis contracts & 1 ST)

EBITDA: US$26.8 mil
Interest Expense: US$10.2 mil
Debt Repaid: US$13.7 mil
Distribution: US$2.5 mil

If the rights issue is fully subscribed, it can be used entirely to reduce its debt from US$568 mil to US$490 mil and its US$57 mil cash will be retained in its balance sheet. This will reduce the debt interest expense by 14% to US$8.8 mil. If this level of revenue can be maintained till 2020, the annual CF will look like this -

EBITDA: US$107 mil
Interest Expense: US$35 mil
Distribution: US$20 mil
Debt Repaid: US$52 mil (over time this figure can increase since interest expense reduce with lower principal)

If no recovery occurs, the EBITDA will drop significantly.

(Not Vested)

Thanks for the kind thoughts GG ! The yield of 10.5% coupled with possibility of subscribing for excess rights to further boost yield is an intoxicating thought. I guess time needs to be spent to read up on the container shipping outlook and whether the oversupply will persist post 2013 and whether the demand for the smaller vessels which RMT (4,200 TEUs) owns be greatly improved. Though, I do question whether is it better off to just sit this one out.

[mosi]

Re NAV of RMT - are'nt cos incl shipping are obliged to revise the NAV yearly to incor in the Annual Report to shareholders so that its ships, among other assets, reflects the current market value? Or is it in the case of RMT they also incor the valuable Time Charter rates of their various ships which still have many years to go in the NAV thus enhancing its NAV for yet many years to come till the lucrative TC mature?
Grateful of your knowledgeable advice on this point?

Hi John,

Maybe I can say something about the NAV.

I don't know what is REQUIRED by the accounting standards (maybe d.o.g. can say something), but I found out about what is currently being done by the auditors/AC in the case of Rickmers.

Most of the information is gleaned from the last conference call after the FY/Q4 results. I think you are able to find the podcast online at their website.

Two separate issues:

1. NAV - for RMT, management has not "marked to market" the value of the fleet on their books. However, when a lease expires and it's time to recharter the containership, they may take an impairment and reduce the carrying value if the economic value of the ship has deteriotated. For example, they took a charge on Kaethe C Rickmers. It's an annual exercise, and they do it if they believe the earning power of the ship is reduced. So you would expect another charge at the end of the year for the 2-3 containerships that are coming off their contract if rates do not recover.

Basically, I guess if they were to mark to market, the auditors would probably have to give a qualified opinion to say that the trust has negative equity, since the market value is less than the liabilities blah blah and it would not serve anybody any good.

It sort of makes sense as RMT is indeed receiving good cashflow from the shipping lines by leasing their containerships to them. So the economic rights are still good, until it is time for renewal. As such, RMT has chosen to close an eye and delay any impairment to as late as possible. I guess it can be argued to the auditors that way, and it is the practice so far.


2. VTL - Banks, on the other hand, are unwilling to play ball and are only willing to value the containership as scrap metal. They do a charter-free valuation. In the worst case, if they really have to take possession of the containership, they will break all contracts and sell the ship as they do not have the expertise to manage the fleet. So the fleet is only good to them as scrap metal. So in that sense, RMT has breached the VTL convenants.

So despite the fact that RMT reported a NAV of USD1, it is still in breach of the convenant.



Cheers,
M

[HitandRun]

Two separate issues:

1. NAV - for RMT, management has not "marked to market" the value of the fleet on their books. However, when a lease expires and it's time to recharter the containership, they may take an impairment and reduce the carrying value if the economic value of the ship has deteriotated. For example, they took a charge on Kaethe C Rickmers. It's an annual exercise, and they do it if they believe the earning power of the ship is reduced. So you would expect another charge at the end of the year for the 2-3 containerships that are coming off their contract if rates do not recover.

Hi Mosi

I agree that typically, companies do not mark to market their fixed assets but will have to make a provision for an impairment should such a situation arise.

However, I am surprised by your conclusion that Rickmers will only take a charge only upon their ships going off contract. My simple thinking is that their auditors would have asked them to make an impairment assessment based on the potential cash-flow of every single ship. I would expect such an assessment to be made every year. Hmmmm....... I think one could always post this question to the auditors during the AGM.

[mosi]

Hi Hitandrun,

I got the information from the conference call. In that sense, it's not my conclusion. I'm just relating what the CFO said when he was asked by the S&P analyst.

M

[Boon]

Big shipping lines remain upbeat on hopes of US turnaround
By Thomas Cho | Posted: 22 March 2013 2341 hrs

SINGAPORE: Hopes of a turnaround in the US economy have led big shipping lines to turn optimistic on their market prospects.

They have even started to order huge container vessels on expectations that container shipping volumes will be on the rise.

However, the smaller shippers are not too upbeat on the market and are holding back from making new investments.

Container shipping capacity is expected to increase 11 per cent this year on the back of more new vessel deliveries.

However, experts said demand growth for container shipping is expected to remain at about 3 per cent this year.

This compared to growth of between 6 to 10 per cent previously when the market was buoyant in 2007-2008.

Still, it did not stop the world's largest container shipping line, Maersk, from building a mega vessel that can carry some 18,000 boxes.

But for the smaller and medium-sized ship owners, they are not following the crowd yet.

Managing director of Pacific International Lines S. S. Teo said: "We are a medium-sized company, so we don't have the financial resources to be involved with the big boys' game investing in such big ships. So, I think for the time being, we have to avoid those big number game. As for the rate hike, I think rate has been fluctuating and this round, the big boys are trying to add what we called rate resurrection - RR for April."

Container ship owners said that for their services to remain sustainable, current shipping rates should move higher than current levels.

The current trans pacific container shipping rate, for example between Hong Kong and Los Angeles stands at US$2,400 to US$2,500 per box.

The Shanghai Containerized Freight Index, a measure of box rates out of China, rose 13 per cent last week as container lines had planned US$600 to US$775 per box rate increases on Asia-Europe routes.

But, fear of oversupply of tonnage saw the weekly index fell close to 5 per cent on Friday.

However, it is not all doom and gloom for the shipping sector.

The nuclear disaster in Japan has raised demand for liquefied natural gas (LNG) and in turn LNG tankers.

With the expected opening of Singapore's LNG terminal in the second quarter of this year, experts said this will help boost the shipping sector.

Chairman of Singapore Maritime Foundation Michael Chia said: "LNG vessels get to offload here, it means some opportunities to repair the LNG vessels and I think with the terminal available, it also means we can cool down the vessels after repair."

Another challenge for the industry is getting finance for new ships.

The Eurozone crisis has led some banks to re-assess their shipping portfolios.

This comes amid plummeting charter rates and low vessel prices in the used market.

Head of Asia of DNB Bank Asia Erik Borgen said: "Before, there used to be one-on-one loan. Today, a lot of the loans are being syndicated and that you see the banks taking smaller share in each loan and so actually, you need more banks to make up for one loan."

But, shipowners are enticed with cheap financing from Chinese yards.

These Chinese shipbuilders only require as low as 1 per cent deposit for new building orders with a bulk of the payment to be made upon delivery of the vessels.

http://www.channelnewsasia.com/stories/s...79/1/.html

[d.o.g.]

Container shipping capacity is expected to increase 11 per cent this year on the back of more new vessel deliveries.

However, experts said demand growth for container shipping is expected to remain at about 3 per cent this year.
...
But, shipowners are enticed with cheap financing from Chinese yards.

These Chinese shipbuilders only require as low as 1 per cent deposit for new building orders with a bulk of the payment to be made upon delivery of the vessels.

Supply growth +11%. Demand growth +3%. Doesn't sound like a recipe for freight rate increases to me. But then I'm no shipping expert.

1% downpayment for newbuilds? Wow, a better deal than property. If the market doesn't recover before the rest of the payment is due, just walk away. What a cheap call option. And what a horrible deal for shipyards. Heads you have to finish a ship on crappy terms, tails you're stuck with a half-built ship. The yard owners are clearly not acting entirely on economic considerations.

[john]

Thanks for the explanation, Mosi

Yes, reckon RMT don't hv to update its NAV promptly esp they hv the VTL waiver which ends on 15 May 2013, by then may be they will hv to be more open. Or perhaps, somebody will query them on this matter during the coming AGM

BRgds
John

Hi John,

Maybe I can say something about the NAV.

I don't know what is REQUIRED by the accounting standards (maybe d.o.g. can say something), but I found out about what is currently being done by the auditors/AC in the case of Rickmers.

Most of the information is gleaned from the last conference call after the FY/Q4 results. I think you are able to find the podcast online at their website.

Two separate issues:

1. NAV - for RMT, management has not "marked to market" the value of the fleet on their books. However, when a lease expires and it's time to recharter the containership, they may take an impairment and reduce the carrying value if the economic value of the ship has deteriotated. For example, they took a charge on Kaethe C Rickmers. It's an annual exercise, and they do it if they believe the earning power of the ship is reduced. So you would expect another charge at the end of the year for the 2-3 containerships that are coming off their contract if rates do not recover.

Basically, I guess if they were to mark to market, the auditors would probably have to give a qualified opinion to say that the trust has negative equity, since the market value is less than the liabilities blah blah and it would not serve anybody any good.

It sort of makes sense as RMT is indeed receiving good cashflow from the shipping lines by leasing their containerships to them. So the economic rights are still good, until it is time for renewal. As such, RMT has chosen to close an eye and delay any impairment to as late as possible. I guess it can be argued to the auditors that way, and it is the practice so far.


2. VTL - Banks, on the other hand, are unwilling to play ball and are only willing to value the containership as scrap metal. They do a charter-free valuation. In the worst case, if they really have to take possession of the containership, they will break all contracts and sell the ship as they do not have the expertise to manage the fleet. So the fleet is only good to them as scrap metal. So in that sense, RMT has breached the VTL convenants.

So despite the fact that RMT reported a NAV of USD1, it is still in breach of the convenant.



Cheers,
M

[tanjm]

Let's see if I can make any fresh contribution here in terms of observations.

First, the bad news. One year ago, I noticed that their interest expense was not in line with the stated interest rates on their debt. Turns out that their swap hedges locked them into a hedged rate of circa 5%+ on their libor (which was the fair value pre-crisis - i checked). This means that their interest expense of 40 million is not contingent on their debt capital reduction but rather on when the hedge runs out. Unfortunately, they were not forthcoming on when their swaps mature.

Second, it is well known that shipping has cycles. The longer ones last 9 years or thereabouts. We are 5 years into this particular shipping trough. These ships have a remaining life of about 20 years or so. The shipping cycle makes any attempt at valuation particularly difficult.

Third. Bertram Rickmers and associated companies have 80% of the shares in the trust ! I believe they have all committed to subscribing for their rights in addition to the hundreds of millions of dollars they must have already put in at IPO. Bertram Rickmers and co are likely to be long term committed to this and have some reasonable expectation on the long term prospects. Before they embarked on this rights exercise, I would not have been surprised if they tried to privatize the trust.

Forth. With 400+ million in committed chartered revenue against fairly reputable shipping companies, and a debt in the 500+ million range. I think the chance of default is not high. Banks are enforcing the dividend restriction precisely to make sure of that.

Fifth. As of end of 2012, their free cash flow per share (before debt principal repayment) was about 15 US cents per share. They can easily sustain the 2.4 cents per annum dividend even with twice the number of shares - at least for the next few years.

sixth. Predicated on a longish shipping cycle with full recovery in 2018, no charterer default, no dimunition in interest expense and another mini down cycle further along in the twenties, I arrive at a (very rough!!) valuation of 50 cents (as of end 2012 before this rights issue). I'm not breaking down my calculation because I suspect this is a very easy to attack number :-). I consider this an "average" scenario. Obviously, if you are very pessimistic about the industry, you'll arrive at a much lower number. On the other hand, if you think there will be a recovery and new highs arrived at, you will get a higher valuation.

[freedom]

supposedly, they should have around notional value of US$300+ million(out of original US$640 million) interest rate swap matured at the end of 2012. pay attention to the line item(derivative financial instruments) in their upcoming annual report.