Rickmers Maritime Trust

[MattAtelier]

All -

Thank you for your thoughtful replies. This is really a high quality forum.

I reviewed the shipping trust thread and considered your comments, esp. with regards to depreciation. I agree with these views on a conceptual basis, but I would offer two points to think about

1. On NAV. I do not think RMT's book value is of much value to us as investors. The reported vessel value is a largely theoretical exercise (i.e. a 25 year DCF -- who knows if that's right?) performed by the auditor; the asset values also reflect the fact that RMT somewhat overpaid for many of its ships; the IRS swaps create a lot of non cash income/expenses, which translate into a reduction book value. In short, a lot of factors here.

I think a much more relevant number is a market-based NAV, where you calculate the asset value based on second hand values (which I did with a ship broker) and the value of the existing leases. This generates a equity value that is 40% beneath today's equity value. Of course, vessel prices go up and down; but as one metric (of many) of value that I use, I get comfort from the fact that 1) I like the container shipping asset outlook (i.e. shipowner) (my view); 2) the asset values I am using are below long run average values; 3) the replacement cost at today's prices are higher than what I am paying for RMT.

But I think you guys know all that and did the same work.

2. More importantly, RMT's position today as a restructured Trust means that the sponsor Rickmers Group faces a big issue: how can they restore confidence amongst equity holders in the Trust in order to use the Trust as a mechanism to dispose of vessels? What's the goal of RG? This is a big issue. If RMT were able to purchase a ship today (i.e., it safely left the covenant wiaver period and bought a new ~4,000 TEU vessel for US$55mn), ship brokers tell me it could get 70% of the vessel financed. Assuming they must issue equity to fund the remaining 30% or US$16.5mn, they would need to issue 52mn shares at S$0.40 (probably more if there is a issue discount). By my math at today's charter rates, the additional ship would not generate enough FCF to be accretive on a FCF / Unit basis -- i.e. the deal would be dilutive to the tune of 7-9%. Probably dilute DPS/unit as well. This is a significant problem. Every sale of equity to buy a vessel at today's prices hurts the Trust -- and should send unitholders fleeing, not the least Capital Research.

So, once RMT feels confident that it can safely exit the waiver period, RG is likely to consider ways at its disposal to generate a substantially better share price before it buys new vessels. One way it can afford to do so is to increase the dividend well in advance of a vessel purchase. At S$0.80/share, I believe a new vessel purchase at today's prices is NAV neutral. If the share price rises to S$0.80/unit and remained at a 7.5% dividend yield, the implied dividend is US$0.048/unit per year or US$20mn/year in dividends versus the ~US$8mn it currently pays. Could RMT afford to pay US$20mn a year in dividends? My view is by 1Q12, it can if it wants to.

Once RMT starts to buy new vessels and trades closer to its market-NAV and a 7-8% dividend yield, I am not sure I want to stick around the name. At that point, it's not a value counter. It's another Singapore listed business trust trading close to its market NAV, but propped by a handsome dividend yield.

But if I buy the name today, my downside is protected by a good dividend yield; I am exposed to assets which benefit from inflation; I like Sing dollar; the name is not easy to short. And per above there is an argument that RG has an interest to work in the interest of unitholders.

The thrust of my argument is that RG wants to restore the trust as something it can use to sell chartered vessels at good prices. It can't do that if every new vessel dilutes the FCF/unit and DPS/unit.

I welcome challenges to my rationale

Matt

PS. I would add that I agree with prior arguments by Blackjack et al that the shipping trust does not create much (if any value) from a corpo finance perspective. For me the key issue is that the Trust has been hammered and is trading well below what its dividend yield and market NAV can support once it exits its cov waiver period. In normal conditions, a shipping trust largely benefits RG, who uses it as a vehicle to sell vessels based on yield to equity.

(Invested in the name)

[mrEngineer]

1. On NAV. I do not think RMT's book value is of much value to us as investors. The reported vessel value is a largely theoretical exercise (i.e. a 25 year DCF -- who knows if that's right?) performed by the auditor; the asset values also reflect the fact that RMT somewhat overpaid for many of its ships; the IRS swaps create a lot of non cash income/expenses, which translate into a reduction book value. In short, a lot of factors here.

I think a much more relevant number is a market-based NAV, where you calculate the asset value based on second hand values (which I did with a ship broker) and the value of the existing leases. This generates a equity value that is 40% beneath today's equity value. Of course, vessel prices go up and down; but as one metric (of many) of value that I use, I get comfort from the fact that 1) I like the container shipping asset outlook (i.e. shipowner) (my view); 2) the asset values I am using are below long run average values; 3) the replacement cost at today's prices are higher than what I am paying for RMT.

If a ship broker is expected to discount to 40% of the value, the accounting standards be it IFRS or US GAAP would require the company to impair the assets. The impairment rule is lower of historical cost or net realizable/fair value (where fair value is calculated by the DCF of current shipping rates which may differ from different shipping routes). Why has it not done so?

[Nick]

1. On NAV. I do not think RMT's book value is of much value to us as investors. The reported vessel value is a largely theoretical exercise (i.e. a 25 year DCF -- who knows if that's right?) performed by the auditor; the asset values also reflect the fact that RMT somewhat overpaid for many of its ships; the IRS swaps create a lot of non cash income/expenses, which translate into a reduction book value. In short, a lot of factors here.

I think a much more relevant number is a market-based NAV, where you calculate the asset value based on second hand values (which I did with a ship broker) and the value of the existing leases. This generates a equity value that is 40% beneath today's equity value. Of course, vessel prices go up and down; but as one metric (of many) of value that I use, I get comfort from the fact that 1) I like the container shipping asset outlook (i.e. shipowner) (my view); 2) the asset values I am using are below long run average values; 3) the replacement cost at today's prices are higher than what I am paying for RMT.

If a ship broker is expected to discount to 40% of the value, the accounting standards be it IFRS or US GAAP would require the company to impair the assets. The impairment rule is lower of historical cost or net fair value where fair value is calculated by the DCF of current shipping rates which may differ from different shipping routes. Why has it not done so?

I once asked why it doesn't reveal charter-free valuation or state the market value of the vessels so unit-holders got get a more accurate picture. The reply was as long as the vessels are on LT charters, there is no reason to impair the vessel valuation or provide a charter-free valuation. If the vessels were trading on spot market or fail to get a job, then they will impair. I noticed that PST did no impairment, FSLT only impaired the 2 vessels which Groda defaulted and RMT impaired the vessel trading on 1 year T/C. Personally, as long as loans have VTL covenants, charter free valuation should be revealed semi-annually.

(Not Vested in any shipping trust or operators)

[Musicwhiz]

Hi Matt,

Thanks for your comments, and yes as Moderator of VB I would like to think we are one of the higher-quality forums around which discuss on Singapore shares (and some HK and USA ones too). This is because quite a few of the forumers here are very experienced and they adopt a value-based approach; hence you can see deep analysis here on fundamentals. It is a very good thing for all of us that they are so willing to share their knowledge!

I really enjoyed reading your in-depth analysis of Rickmers Maritime. I understand you are a shareholder and have read quite deeply into the Trust's business. I used to be a shareholder of FSL Trust but had divested it some months ago. The reasons can be found on my blog and I have detailed more than 10 of them.

With regards to increase DPU in order to make share price more attractive, and thereby increasing chances of a secondary placement which would lead to lower dilution, my view is that this may not be possible if unit-holders view the increase in DPU as a prelude to equity-raising. This sort of mentality will effectively kill off any interest in the stock and the share price may even take a tumble instead of rising. Assuming Rickmers can make an accretive acquisition, it must justify it with the relevant numbers and supporting facts in order to receive unit-holders' endorsement for fund raising and taking on more debt.

But as you say, vessel prices are depressed now and the shipping industry is still in the doldrums due to over-supply (exception is OSV segment which still sees relatively healthy demand - read Ezra, Falcon and Swiber). It is sort of a vicious cycle - vessel values stay depressed, share price stays low, fund raising through equity becomes more expensive and therefore dilution is greater. Therefore, Trust cannot raise money to acquire FCF-accretive vessels and the Trust simply languishes.

With respect to displaying charter-free valuations or impairment of vessels, I agree that if the vessel is on long-term charter then there should be no impairment charge recognized. There are certain covenants relating to this and they are rather complex, but in most cases the Trust can simply choose to voluntarily disclose this information to make them seem more transparent. FSL Trust discloses the LTV ratio every quarter (since the crisis began, no doubt) to assure unit-holders that it is in no danger of default which may lead to a loan recall (thus crashing the Trust).

I hope I make sense! Haha....just my views.

[mrEngineer]

It make sense for long term charter not to impair anyway. As long the DCF of long term charter is still sufficient to cover operating cost (like increasing fuel cost) and is higher than historical cost or net realizable value, then it should not impair. However for ships that are not on long term charter and subjected to daily rates, why are they not impaired? If there were to be impaired, we should have seen many charterers belly up. So is it a valid point for valuation anyway?

[freedom]

the cash flow generated from fleet might not be enough for the trust to repay its debt after 2013 after dividend(check the trust's debt repayment schedule, 60+ million per year), especially, when the CGM CMA 3450 TEU container ship charter expires and they are commanding much higher charter rate than current market rate.

[MattAtelier]

All -

As some of you have seen, FSL has issued equity to purchase a vessel today, arguing that its FCF accretive to investors. The US$15mn equity issuance will happen at a discount to the share price before the announcement, and will be picked up by a single investor. Notably, the purchase is only 50% financed by debt.

I think this event confirms some of my thinking, but also deeply challenges my thesis on RMT. Specifically,

It confirms:
1. Clearly, the debt market remains very tight. They only used 50% debt to finance the purchase. Got that right! (That was pretty easy). But if I apply that to RMT, they will need US$28mn in equity to finance a purchase of a 4,000 TEU

2. FSL took pains to make sure the deal was accretive -- it is, barely. At least this shipping trust has stayed focused on keeping its deals accretive

But it challenges the RMT thesis because:
3. There are entities like the buyer of the US$15mn equity issuance who will pick up the entire equity issuance for a new ship. In order words, if RMT can find such a buyer, they may be able to issue equity at a level that is dilutive to existing holders but attractive to a new player -- which would be disappointing.

Matt

(Not vested in FSL; vested in RMT)

[freedom]

deal can always be distribution accretive given that debt cost is lower than project yield. if not accretive, just get more debt and less equity. distribution accretive is not that difficult to get. the question will be what will the balance sheet be like? will it improve the balance sheet?

[Nick]

PST recently acquired 9 vessels with 20% equity and 80% debt. It depends on the structure of the loan and the confidence the banking community have in you. Even then, I expect it will turn to equity fund raising eventually since interest expense will be a killer.

It is not difficult to boost DPU - just adjust the equity to debt ratio. RMT got a lot of loans to repay post 2013. I don't think there is much room for DPU growth unless they turn to placements which will destroy IPO unit-holders value even more !

[MattAtelier]

All -

Thanks for the thoughts! I don't agree, though, with some of the assertions:

1) "It's easy to make a deal DPU accretive" It's really not if a) the debt markets are contrained; b) your share price is very low; c) asset prices and charter rates have made a full recovery. This is the state of play today. By my math, a US$55mn acquisition struggles to be DPU or recurring FCFE/unit accretive under today's assumptions if you assume RG would not want to be substantially diluted.

2) "FY13 US$68.2mn princip repayment may be a risk." On my numbers, the company will generate enough to cover (though this would hurt DPU, I agree); if it couldn't cover it, it could a) sell just one vessel to cover some of it; b) (partially) re-finance as the debt (ex CB), will be only 5x OCF, with some ships unencumbered.

Also, RMT is develeraging now ahead of schedule, a/c to a post restructuring excess repayment waterfall. Thus, by the time we reach FY13, some of that principal may already have been repaid.

In any case, great replies. I appreciate you guys questionning my logic. I am sticking with my guns on this one for now, but I do agree that the big risk here in my view is that RG cooperates with a private buyer to do a deal against our best interests (i.e. value dilutive). There are other risks.

Matt