Rickmers Maritime Trust

[money]

If the net income is net of depreciation, doesn't this mean that sufficient budget would have been set aside for ship replacement?

It is true that net income is net of depreciation but it says nothing about whether management is setting aside money for ship replacement.

Currently, it is very clear from the financial statement of RM, FSL that all cash that enters the company is used for dividends, debt repayment, interest repayment. NOTHING is set aside for ship replacement.
The companies have difficulties paying down the large debt, you cant expect them to set aside money for ship replacement.

Their cash will be rising quarter after quarter if they are setting aside money for ship replacement.

Dump ALL your shares in RM, FSL before it is too late. That said, i wont know about the short term share price fluctuation but i am quite certain that in the long run, if these 2 companies dont do a rights issue or a share placement, the share price will definitely drop to a theoretical ZERO

[freedom]

That said, i wont know about the short term share price fluctuation but i am quite certain that in the long run, if these 2 companies dont do a rights issue or a share placement, the share price will definitely drop to a theoretical ZERO

Is this a calculated conclusion or are you just anyhow make conclusion?

Their equity is not ZERO, how could they definitely drop to a theoretical ZERO?

If the assumption is that all equity will be paid out as dividend, then all shares will definitely drop to a theoretical ZERO. It makes no difference with any companies.

[hkl]

That said, i wont know about the short term share price fluctuation but i am quite certain that in the long run, if these 2 companies dont do a rights issue or a share placement, the share price will definitely drop to a theoretical ZERO

Is this a calculated conclusion or are you just anyhow make conclusion?

Their equity is not ZERO, how could they definitely drop to a theoretical ZERO?

If the assumption is that all equity will be paid out as dividend, then all shares will definitely drop to a theoretical ZERO. It makes no difference with any companies.

I guess money is saying that these shipping trusts are stuck in between a rock and a hard place. Without a fleet renewal plan and with all the cash being spent on dividends and repaying interest and debt, the only cash generative assets (i.e. the ships) will eventually be depreciated and scrapped in the long run.

[freedom]

That said, i wont know about the short term share price fluctuation but i am quite certain that in the long run, if these 2 companies dont do a rights issue or a share placement, the share price will definitely drop to a theoretical ZERO

Is this a calculated conclusion or are you just anyhow make conclusion?

Their equity is not ZERO, how could they definitely drop to a theoretical ZERO?

If the assumption is that all equity will be paid out as dividend, then all shares will definitely drop to a theoretical ZERO. It makes no difference with any companies.

I guess money is saying that these shipping trusts are stuck in between a rock and a hard place. Without a fleet renewal plan and with all the cash being spent on dividends and repaying interest and debt, the only cash generative assets (i.e. the ships) will eventually be depreciated and scrapped in the long run.

debt will be paid before the ships go to 0 theoretically, that's why there is still equity left. after that, the cash can be used for anything they want, which replacement will be an option.

the shipping trusts made their mistakes and paid dearly, which does not equals that they would go to theoretical ZERO.

[money]

That said, i wont know about the short term share price fluctuation but i am quite certain that in the long run, if these 2 companies dont do a rights issue or a share placement, the share price will definitely drop to a theoretical ZERO

Is this a calculated conclusion or are you just anyhow make conclusion?

Their equity is not ZERO, how could they definitely drop to a theoretical ZERO?

If the assumption is that all equity will be paid out as dividend, then all shares will definitely drop to a theoretical ZERO. It makes no difference with any companies.

I guess money is saying that these shipping trusts are stuck in between a rock and a hard place. Without a fleet renewal plan and with all the cash being spent on dividends and repaying interest and debt, the only cash generative assets (i.e. the ships) will eventually be depreciated and scrapped in the long run.

Hi hkl, thanks for the reply, you have expressed my thoughts fully.

The business model is flawed in the first place, sometimes i wonder where those idiots who are running the companies got their mba, degree, etc.

Then again, the high (but unsustainable) yield tricks many people. If i didnt remember wrongly, AIA is one of the largest shareholders of FSL.

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[/quote]

debt will be paid before the ships go to 0 theoretically, that's why there is still equity left. after that, the cash can be used for anything they want, which replacement will be an option.

the shipping trusts made their mistakes and paid dearly, which does not equals that they would go to theoretical ZERO.
[/quote]

Totally agree. Looking at the balance sheet of RM & FSL, if they do not do a rights issue or share placement, i think they would take at least 10 years to pay of the debt. After that, the cash saved is probably enough to buy 1,2 or 3 new ships?

[Nick]

Just curious - how can the equity go to zero when the are paying out less dividends than they earn resulting in increase an increase in book value ? What they do with the profits retained is immaterial - keeping it as cash in the B/S (increase in assets) or repaying debt (reducing liabilities) has the same effect. If the equity remains the same (ie dividends = net profit) or equity grows (dividend < net profit), they shouldn't have a problem regenerating their equity. They just need to regenerate 300 - 400 mil to regain their fleet assuming the vessel prices are the same and the depreciation policy is correct. The high interest burden will also disappear as debt is repaid resulting in more profits etc. There are many faults with the shipping trusts but this isn't one of them.

Trust ABC

Assets: $10 (Equity $5, Debt $5) and 10 year life-span
Profits: $1
Cash-flow: $2 (add in $1 depreciation expense)

If Trust ABC pay out $1 dividend and use $1 to repay debt, after 5 years he will be debt-free. He just needs another 5 years to regenerate $5 equity into cash. This can be done by continuing to retain the $1 annually (previously) used to repay debt and maintain the dividend payment. Borrow another $5 to buy the assets and the game restarts. This is what the banks are forcing RMT and FSLT to do albeit more cash being diverted to loan repayment first. PST did this from the start and didn't suffer from any capital structure shocks.

My main concern with shipping trust isn't their capital structure now. Its whether can they keep earning this amount of profits over the next 20 years !

(Not Vested)

[d.o.g.]

Just curious - how can the equity go to zero when the are paying out less dividends than they earn resulting in increase an increase in book value ?

In shipping, the actual (not reported) book value is not driven by earnings. It is driven by the market value of the fleet. That is why FSL is facing problems over its VTL covenants. The reported book value of FSL is irrelevant because that does not reflect the true liquidation value of the fleet. Banks are deeply concerned about liquidation value because that is their last resort - to seize and sell the ships. FSL's reported book value reflects an "in-use" valuation i.e. no default, which is plainly a false assumption in today's conditions.

Why does the fleet market value fluctuate so much? Because freight rates fluctuate.
Why do rates fluctuate? Because supply and demand are often out of sync.

Shortages can develop quickly, but by the time new supply arrives there may be no shortage, and a glut is created instead. It takes time to work off that excess supply, then rates suddenly spike when there are no ships available, and the cycle starts again.

Shipping trusts are not insulated from the underlying freight market, despite what they may have tried to imply during their IPOs. The fact is, if your customer is getting poor rates he can't pay you, and he defaults. This has been most visible in FSL which has suffered multiple defaults.

Shipping trusts deliver the worst of both worlds: in a boom their rates are fixed, in a bust their customers default. No upside, lots of downside. A bit like lending to Greece - if it works you get an extra 1% per year. If it doesn't, you lose 50% of your capital. Oops.

Fundamentally a shipping trust differs from a REIT only in that:

1. The underlying individual assets always eventually go to zero;
2. The underlying customers are usually heavily leveraged; and
3. Exposure is concentrated in a very cyclical industry.

These minor differences are enough to make a world of difference to the outcome for minority investors.

[Nick]

You are right d.o.g. It is a good illustration on the flaws of the shipping trust - i) Lack of long term defensive revenue ii) Vessel valuations are in flux iii) Poor Management in FSLT and RMT resulting in flawed capital structure and highly leveraged assets. This is why I made the caveat - by assuming they generate similar amount of revenue over the next 15 - 20 years, only then can they safely regenerate their equity.

If I make a bold assumption that they can maintain this level of revenue for the next 15 years (a very bold assumption here), then they can easily repay all the debt and regenerate their equity. Within 10 years, they should be debt-free and another 5 years to replenish their tiny equity. Then use the equity gear up and buy new vessels etc. Easier said than done though. The mistakes started in 2008 - i) FSLT for not retaining cash to repay debt / replenish assets and ii) RMT for not carrying out their $650 million equity fund raising to finance the vessels in 2008. It is no surprise that PST - the only one who repaid its debts from Day 1 and raised rights to finance their acquisitions in late 2008 walked away from the crisis scot-free and could even expand its fleet but alas it has been privatized.

If this assumption is true, then I see no reason why the shipping trust is self-liquidating since dividends is significantly smaller than NPAT in the case of RMT. Again, the depreciation policy assumption (vessels last for 30 years) must be examined carefully.

Though I often wondered - had RMT succeeded in raising the proposed US$650 million equity to finance the post-IPO vessels (including the Maersk mega vessels) and repaid their debt annually since listing - how would they look like today ? I guess the error lies in Trust Management trying to act like REIT Managers / financiers instead of veteran shipping operators.

(Not Vested in any business trust)

[yogi]

* Write down of vessel value on balance sheet. The vessel value on balance sheet is meaningless. But its too high and needs to be written down. I don't care about a non-cash write off (since the value was destroyed long ago), but it will certainly be very bad for the share price. It will be a day to buy the shares.

Of course there are others. Those are the ones on my mind

Matt

Matt,

you are right that current valuation reported in balance sheet doesn't reflect the actual market value of ships in current environment.

What do you think about the current market value of ~4500 TEU 5 years old ships (RMT's average age is ~5 years)?

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I just took another quick look at RMT. Here's another way to look at it....

The trust has US$725 million of committed revenue in the next 5 years (on average) of which I have assumed that 562 million will become free cashflow (using the last financial report expenses as a guide). I have assumed no defaults - a not unreasonable assumption given the "stress test" on the charterers in the last financial crisis.

The trust has 609 million of debt, taking out the 49 million convertible loan, which I assume is converted fully.

Then I assume that in 5 years time (on average), the fleet is worth only 60% of its depreciated NAV (depreciated in a straight line with zero value in 25 years), then I get a 528 million valuation on the fleet. I justify the 60% from RMT's IPO prospectus which has shipping rates fluctuating by as much as 30+% in a shipping cycle.

In total I end up with a net amount of 480 million into 558 million shares (including the converted shares) and a value per share of 86 US cents per share or about a dollar SGD. (no discounting was applied).

In other words, if I assume that all committed revenue is received, the convertible loan is fully committed, and we are in a fairly major shipping recession in 5 years time, I still end up with about a dollar per share in value.

I wish to point out that the total bank debt stands at US$656 million (and not US$608 mil) as of 1Q 2011. Conversion of the US$49 million convertible bond will lead to an estimated 30% increase in the outstanding unit float. It is true that book value will continue to grow significantly since much of the profits are being retained. Charterers - CSAV, MOL, CMA CGM etc - are top container liners which is a good thing for the Trust. But personally, I feel in the case of a business trust, the unit price is a function of the yield rather than its NAV. RMT trades at 7% yield and I don't expect major improvement in the next few years unless they refinance the loans or raise new equity. Its peers are trading at a higher yield (FSL 12% and PST 9.4%) but I guess the market is also looking at their payout ratio as well. What do you think ?

Nick,

Did you have chance to analyze the cashflow and BS of CSAV, MOL, CMA CGM to better understand the counter party risks? I am curious how are these shipping liners performing in current environment?

[MattAtelier]

Hi all,

Thank you Yogi -- you were the first person to ever quote me on this board!

So here are my updated two cents:

As per prior postings, I liked (and was once invested in) RMT a lot. I have since divested. Based on the market value + charter value, I still think that the share price trades below the Trust's market value. Which means, if you could dissolve the Trust and sell the vessels at current depressed market prices (which I purchase from a shipping service, like Clarkson's), I think you would nearly double your money (after paying back the debt). This analysis is theoretical since it's a low probability event.

I do think that RMT's market equity value is largely determined by the debtholders. They have got the Trust on a tough repayment plan which leaves very little value for us. When the Company comes to refinance in June 2013, I am worried about a continued tough repayment schedule -- indeed it may take a few years to repay. As Nick pointed out, in ~2014 onwards, the Company needs to renew charters at potentially lower rates.

But my two biggest concerns are 1) the parent company RG has pledged their shares to their key bank; this puts the ownership of the Company at risk -- how much, its hard to say since RG is private; 2) the ~4,000 TEU vessel size is suffering from cascading as larger ships flee competition in the ultra-sized (13,000+ segment) and compete.

The game changer for me is:
1) A big writedown in book values would probably kill the shareprice; I would be a buyer
2) A debt restructuring that permits longer repayment
3) an equity issuance greater than US$20mn -- I would be a buyer on this news

Matt

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Matt,

you are right that current valuation reported in balance sheet doesn't reflect the actual market value of ships in current environment.

What do you think about the current market value of ~4500 TEU 5 years old ships (RMT's average age is ~5 years)?

---

Yogi -

I paid for a valuation of RMT in February 2012. Because you were teh first to ever quote me -- hey man, I will share!

My results were as follows, and reflect only the vessel value. You would then need to add the value of the remaining charters:

Djibouti: US$37.9mn
ITAL vessels: US$29mn
ANL + CMA vessels: US$35.7mn
MOL vessels: US$37.1

Total market value of vessels: US$564mn
My estimate of charter value: US$225mn (DCF of cashflows at 15% disc. rate; bulk of value comes from MOL vessels
Less net deb: US$592m as of June 12 (include RG debt as unconverted)
Market value of equity: US$197mn
Current market cap of US$109mn

This is definitely not a reccomendation but just my analysis. I have since sold the shares!