Singapore Shipping Corp

[Boon]

Gearing would not be as bad (or as high) as many have thought as the delivery of the new vessel would not happen until about 2 to 4 years from now.

By then:
1) More cash (equity) would have been generated to fund the purchase of new vessel – hence less debt needed.
2) Debt A (to fund the purchase of MV Boheme + Sirius) would have been paid down to about 9 m (in 2 years) and fully paid off (in 4 years)
3) Debt B ( to fund the purchase of 2 x PCTC vessels) would have been paid down to 75% ( in 2 years) and 50% (in 4 years) – assuming equal monthly/yearly principal repayments over 8 years – similar to that of Boheme + Sirius.
4) Overall, gearing = total debt / total asset value , would still be less than 70%, I reckon.

(vested)

Not necessarily true. If we are acquiring existing shipbuilding contracts, delivery of the vessel could take place in the coming months. Without information from the Management, it's hard to be certain when the delivery is.

In any case, the debt is secured by a bond-like income stream. I don't imagine why it will be difficult financing this deal when Shipping MLPs in the US are trading at higher gearing.

Hi Nick,

Good speculation on your part - not that we encourage speculation but looking at things differently, what u mention is a good possibility as well.

Anyway, Ow is not a SorChai... for him to gear SP Ship to position for a new lease of life is eye opening. It has been 6-7 long years since Ow liquidated the boom & bust bulk shipping sector and for him to continue SP Ship's track record in a new but related form - there must be good reasons.

POISED FOR GROWTH is the theme for the latest annual report.

In Ows We Trust
Vested
Minor Core
GG

Ha-ha !

I guess my “speculation” on “delivery time” of the new vessel is “too pessimistic or conservative”.

“New build” covers “recently built/already built”; “being built” & “to be built” – until more disclosures are made – “speculation” continues…………….”

But how earlier could it be ?

http://infopub.sgx.com/FileOpen/SGXAnnou...eID=314096

It has been disclosed that :

A) “The abovementioned acquisition is not expected to have a material impact on the Group’s net tangible assets and earnings per share for the current financial year ending 31 March 2015.”

B) “As the purchase is in the ordinary course of the Company’s business, shareholders’ approval is not required under Chapter 10 of the SGX Listing Manual.”

A) Implies delivery would not be earlier than 31 March 2015.

What does B) imply ?

From my understanding, for transaction in the ordinary course of the Company’s business, no shareholders’ approval is required only if transaction value is less than Market Cap

Market Cap of SSC = USD 436 x 0.26 / 1.25 = USD 91 m.

Value of acquisition = USD 80 m

Since acquisition value is less than market cap , B) applies – no shareholders’ approval is required.

But if the “USD 80 m transaction” happens within 12 months of the “USD 33 m - 2 x PCTC transaction” – they may be treated as one transaction – in which case, shareholders’ approval would be required as transaction value of USD 113 m would have exceeded market cap of USD 91 m .

Does B) imply that the two transactions are at least 12 months apart? I would say so – unless SSC could obtain waiver from SGX

The Company has yet to disclose on the completion of the USD 33 m transaction.　

(vested)

[greengiraffe]

As usual, I salute your detail and thoughtful analysis.

This time I really learn a few tricks from you in terms of the details.

Thanks for that confident details. I m convinced.

In Ows
We Trust
GG
Minor Core

Gearing would not be as bad (or as high) as many have thought as the delivery of the new vessel would not happen until about 2 to 4 years from now.

By then:
1) More cash (equity) would have been generated to fund the purchase of new vessel – hence less debt needed.
2) Debt A (to fund the purchase of MV Boheme + Sirius) would have been paid down to about 9 m (in 2 years) and fully paid off (in 4 years)
3) Debt B ( to fund the purchase of 2 x PCTC vessels) would have been paid down to 75% ( in 2 years) and 50% (in 4 years) – assuming equal monthly/yearly principal repayments over 8 years – similar to that of Boheme + Sirius.
4) Overall, gearing = total debt / total asset value , would still be less than 70%, I reckon.

(vested)

Not necessarily true. If we are acquiring existing shipbuilding contracts, delivery of the vessel could take place in the coming months. Without information from the Management, it's hard to be certain when the delivery is.

In any case, the debt is secured by a bond-like income stream. I don't imagine why it will be difficult financing this deal when Shipping MLPs in the US are trading at higher gearing.

Hi Nick,

Good speculation on your part - not that we encourage speculation but looking at things differently, what u mention is a good possibility as well.

Anyway, Ow is not a SorChai... for him to gear SP Ship to position for a new lease of life is eye opening. It has been 6-7 long years since Ow liquidated the boom & bust bulk shipping sector and for him to continue SP Ship's track record in a new but related form - there must be good reasons.

POISED FOR GROWTH is the theme for the latest annual report.

In Ows We Trust
Vested
Minor Core
GG

Ha-ha !

I guess my “speculation” on “delivery time” of the new vessel is “too pessimistic or conservative”.

“New build” covers “recently built/already built”; “being built” & “to be built” – until more disclosures are made – “speculation” continues…………….”

But how earlier could it be ?

http://infopub.sgx.com/FileOpen/SGXAnnou...eID=314096

It has been disclosed that :

A) “The abovementioned acquisition is not expected to have a material impact on the Group’s net tangible assets and earnings per share for the current financial year ending 31 March 2015.”

B) “As the purchase is in the ordinary course of the Company’s business, shareholders’ approval is not required under Chapter 10 of the SGX Listing Manual.”

A) Implies delivery would not be earlier than 31 March 2015.

What does B) imply ?

From my understanding, for transaction in the ordinary course of the Company’s business, no shareholders’ approval is required only if transaction value is less than Market Cap

Market Cap of SSC = USD 436 x 0.26 / 1.25 = USD 91 m.

Value of acquisition = USD 80 m

Since acquisition value is less than market cap , B) applies – no shareholders’ approval is required.

But if the “USD 80 m transaction” happens within 12 months of the “USD 33 m - 2 x PCTC transaction” – they may be treated as one transaction – in which case, shareholders’ approval would be required as transaction value of USD 113 m would have exceeded market cap of USD 91 m .

Does B) imply that the two transactions are at least 12 months apart? I would say so – unless SSC could obtain waiver from SGX

The Company has yet to disclose on the completion of the USD 33 m transaction.　

(vested)

[Boon]

In FY20110331, SSC borrowed USD 35 m (Loan A) to fund the purchase of Boheme (Cost = USD 50 m) & Sirius (Cost = USD 16 m)

Loan A (USD):

Principal = 35 m

Principal repayment = being paid down by equal monthly installments and the final monthly installment will fall due on 1 June 2018 – as stated in AR.

Loan Tenure = roughly 8 years

Hedging = interest rate swaps = swap floating interest rates of the bank borrowing to fixed interest rates

Security
- At 31 March 2014, a vessel of the Group with carrying amount of US$40.3 million (2013: US$42.3 million) has been mortgaged as security to secure a bank borrowing (see note 21).(from page 66 of AR2013/2014)
- it looks like ONLY the Boheme is being used as collateral for bank borrowing..

FY Ending = ( Principal Repayments / Loan Outstanding at year end / Interest Expensed / Carrying amount of the vessel mortgaged as security, at year end )
Actual:
FY20110331 = (2.344 m / 32.656 m / 0.763 m / 48.0 m)
FY20120331 = (4.404 m / 28.252 m / 0.899 m / 45.1 m)
FY20130331 = (4.520 m / 23.732 m / 0.814 m / 42.3 m)
FY20140331 = (4.520 m / 19.212 m / 0.690 m / 40.3 m)
Projections:
FY20150331 = (4.520 m / 14.692 m / ? / 38 m )
FY20160331 = (4.520 m / 10.172 m / ? / ? )
FY20170331 = (4.520 m / 5.652 m / ? / ? )
FY20180331 = (4.520 m / 1.132 m / ? / ? )
FY20190331 = (1.132 m / 0 / ? / ? )

FY Ending = ( LTV = Loan Outstanding at year end / Carrying amount of the vessel mortgaged as security, at year end )
Actual:
Initial = ( 35 m / 50 m = 70%)
FY20110331 = (32.656 m / 48.0 m = 68%)
FY20120331 = (28.252 m / 45.1 m = 63%)
FY20130331 = (23.732 m / 42.3 m = 56%)
FY20140331 = (19.212 m / 40.3 m = 48%)

More speculations from another angle
1) Initial LTV = 70% for Loan A
2) Assuming LTV = 70% applies for future loans
3) Equity needed for 2 x PCTC vessel = 0.3 x 33 m = 10 m
4) Cash left = 18 m ( 31- March- 2014) – 10 m = 8 m
5) Equity needed for new vessel = 0.3 x 80 m = 24 m
6) At 31-March-2015, assume V = 38 m for Boheme
7) Base on LTV of 70%, Boheme could be “re-mortgage” to secure additional loan of = 0.7 x 38 – 14.692 = 12 m
8) Sirius could be mortgaged to secure a loan amount to = 0.7 x 16 x 11 / 15 = 8 m, assuming 16 m fully depreciated over 15 years charter period.
9) 12 + 8 + 8 (cash) = 28 m > 24 m
10) If SSC could obtain loans at LTV ratio of 70% for ALL of its vessels, it looks like it could manage to fund its new USD 113 m acquisitions without the need for equity raising – even assuming the delivery of the new vessel happens on 31-March-2015.

(vested)

As always, an analysis is only as good as its underlying assumptions.

[Drizzt]

thanks for the calculations. I believe it is in their interest not to do a placement or rights issue. they would like to leverage up and then amortize.

theoretically the weakest point in this equation has to be the counterparty risk. it is as if they are doing leverage bonds. the house of cards come down when the blue chip charterers are in a big funk.

[Nick]

Pacific Shipping Trust previously secured financing for its 9 vessel acquisitions at 85% LTV - http://www.valuebuddies.com/thread-154-p...ml#pid7371

Perhaps, SSC will secure its financing at LTV > 70% ? Have to see what the financing details are in the upcoming quarterly results assuming the vessels were delivered before 30 Sept 2014.

(Vested)

[Boon]

Pacific Shipping Trust previously secured financing for its 9 vessel acquisitions at 85% LTV - http://www.valuebuddies.com/thread-154-p...ml#pid7371

Perhaps, SSC will secure its financing at LTV > 70% ? Have to see what the financing details are in the upcoming quarterly results assuming the vessels were delivered before 30 Sept 2014.

(Vested)

Hi Nick,

I believe higher LTV loans are available in the market – question is at what cost ?

There is always a trade-off - higher LTV loans tend to have higher interest rates than lower LTV loans - these rates reflect the higher level of risk involved in issuing such loans.

If SCC could secure higher LTV loans without having to pay higher borrowing costs – that would be great.

Any idea on borrowing cost of PST's 85% LTV loans ?

(vested)

[Boon]

Very interesting insights on shipping finance.

Guide to Shipping Finance in Hong Kong - by Mayer Brown JSM - 2011

http://www.mayerbrown.com/files/Publicat...n%20HK.PDF
________________________________________________________________________________________________________________

Ships are floating work-horses to some and objects of great beauty to others. They depend on their mobility for their income, but unlike other transportation assets they do not need to return to a home base, nor need they visit the same port twice. Ships can last for half a century or more without mishap, yet at the same time regularly disappear, collide and cause loss of life and widespread environmental damage. They are the cheapest means of transporting large volumes of goods, yet go up and down in value according to cycles which can be independent of other markets and difficult to predict. Different vessel types throw out different problems.

But one thing that is constant is that they are expensive to build and operate, which means that financial assistance is usually needed by their owners................................

What distinguishes ship financing from other types of lending is its international nature, the fact that it is, like ships themselves, not tied to geographical boundaries. A Hong Kong shipowner can easily borrow from a Chinese bank based in Tokyo to buy a second-hand ship, with the purchase money being paid in Germany..................................................

That foreign currency will usually be the US Dollar which has become accepted as the universal currency of shipping. A ship’s income will be in US Dollars and ships tend to be bought and sold in US Dollars, so it makes commercial sense (to avoid currency fluctuations) for loans to be funded in US Dollars.................................

(vested)

[Boon]

thanks for the calculations. I believe it is in their interest not to do a placement or rights issue. they would like to leverage up and then amortize.

theoretically the weakest point in this equation has to be the counterparty risk. it is as if they are doing leverage bonds. the house of cards come down when the blue chip charterers are in a big funk.

It looks like these days, counterparty risks could be mitigated with "Charterers Default Insurance".

http://www.seacurus.com/newsletter/issue9.pdf

(vested)

[Drizzt]

thanks for the calculations. I believe it is in their interest not to do a placement or rights issue. they would like to leverage up and then amortize.

theoretically the weakest point in this equation has to be the counterparty risk. it is as if they are doing leverage bonds. the house of cards come down when the blue chip charterers are in a big funk.

It looks like these days, counterparty risks could be mitigated with "Charterers Default Insurance".

http://www.seacurus.com/newsletter/issue9.pdf

(vested)

its good to list out the things they can insure against. what i do know is the following, capsize, terrisiom, war, problem that affect earnings. Insurance other than crew and maintenance is a large part of the cost from what i understand.

the problem is not just 1 year of income that you can claim back from insurance.

you buy because it assures you a blue chip charterer for 10 to 15 years.

i doubt you can insure against a lost of potential 8 years of future cash flow right.

[Drizzt]

The insurance provides an indemnity against loss of hire resulting from a default by the vessel’s charterer; it protects the owner against unpaid invoices, the cost of laying up the vessel between charters and most importantly any shortfall in hire realised at re-fixing.

So what is a typical loss scenario? Let’s assume that the vessel has undertaken a six-week voyage and after one week the charterer fails to make a hire payment.
Further investigation reveals that the charterer is unable to honour their financial obligations. The insurer accepts that the charterer is essentially insolvent and as such, any settlement of the outstanding charter hire is unlikely. The insurer indemnifies the insured for eighty percent of the unpaid hire invoices while the vessel completes the voyage and claim payment is made within 30 days.

Once the vessel reaches destination, the owner takes redelivery of the vessel and if necessary repositions the vessel to facilitate a refixture. Whilst the vessel is laid up awaiting new employment, the insurer reimburses the insured for eighty percent of an amount equal to the loss of hire less any expenses the shipowner is saving by not operating the vessel e.g. bunkers. Once refixed, the insurer will typically indemnify one hundred percent of any shortfall in the charter hire for the balance of the indemnification period.

It is possible to structure protection that will extend beyond the point of uncertainty and then ‘roll’ the cover forward. The value of having bought cover in 2007 has never been more apparent than now. The financial landscape has changed for the foreseeable future; without doubt, regulators will be taking a much closer look at anks’ activities. Investors too, will be ever more wary of the shipping sector and the impact that highly leveraged balance sheets can have on the industry as a whole.

An illustrative example of what default insurance could cost would be as follows: assuming the shipowner gets $20m annual revenue from the charterer, the premium on a two-year policy indemnifying two years’ worth of revenue would be around 2.5% of $40m. For a two-year policy indemnifying seven years’ worth of revenue, the premium would be higher, at around 6% plus of $140m.

Charterer default insurance can prove attractive to those companies that want to keep counterparty risk to an absolute minimum, and are prepared to pay for it.