Cityspring Infrastructure Trust

[mikh]

So there, an (another?) instance of GIC/Temasek significant shareholding going/gone awry for those who take comfort in GIC/Temasek involvement offering investment "security" of sorts? Or should GIC differ from Temasek?

[Nick]

So there, an (another?) instance of GIC/Temasek significant shareholding going/gone awry for those who take comfort in GIC/Temasek involvement offering investment "security" of sorts? Or should GIC differ from Temasek?

There are 2 other business trust which counts Temasek Holdings as a substantial shareholder:

PST (5.89% stake as of June 2009)
HPHT (11.98% as of March 2011)

Temasek is also Manager of Global Investment Limited (trading at 9% yield) via STAM.

Cityspring is currently trading at 50.5 cents. Their NAV has been declining rapidly so I guess they need to top it up ?

[KopiKat]

Cityspring is currently trading at 50.5 cents. Their NAV has been declining rapidly so I guess they need to top it up ?

According to their SGX announcement (pg2),

The Bonds are rated BBB- and Baa2 by
Standard & Poor’s (Australia) Pty Ltd (“S&P”) and Moody’s Investors’ Service, Pty Limited,
respectively. If their rating falls to BB+/Ba1 or lower, Basslink may not make distributions to
CitySpring.
.
In November 2010, S&P placed the Bonds’ BBB- rating on CreditWatch with negative implications.
This is due to, in S&P’s view, Basslink’s increased vulnerability to refinancing the Bonds at higher
interest cost starting in 2015. In January 2011, CitySpring placed A$20 million (approximately S$26
million) in escrow for the benefit of Basslink, as a result of which, in February 2011, S&P removed the
CreditWatch and affirmed the Bonds’ rating at BBB- with a negative outlook.

http://info.sgx.com/webcoranncatth.nsf/V...cement.pdf

So, it seems like one of the key reason is they need to improve Basslink's credit rating so that it won't drop to BB+ and affect their ability to pay out dividend to Cityspring.

IMO, the greatest mistake made by the previous CEO is the acquisition of Basslink. It's like a python trying to swallow an elephant. Such a small Trust incurring so much debt for such a huge acquisition, for so little extra dividend back then! Now that the CEO had resigned, perhaps they are trying to clean up the mess. IMO, I think the best course of action is to sell off Basslink!

[Nick]

IMO, they should do a placement at Basslink asset level (rather than Group level) by seeking capital injection from a new investor in order to reduce the asset gearing and their overall exposure. Maybe they should have approached MIIF when they had $480 mil of cash to do an injection in return for a stake in Basslink haha !

[KopiKat]

IMO, they should do a placement at Basslink asset level (rather than Group level) by seeking capital injection from a new investor in order to reduce the asset gearing and their overall exposure. Maybe they should have approached MIIF when they had $480 mil of cash to do an injection in return for a stake in Basslink haha !

MIIF sold all their Oz and Euro investments to become Asia-centric in their investments, that's where the cash came from. So, unlikely they'll invest in Basslink. SPAus (also Temasek majority owned) would have been a possible investor and with their country knowledge, a better fit. But, their ASX shareholders would likely reject such a deal as they'd done with a similarly massive acquisition (Atlinta) previously.

I guess the best approach would be to re-package Basslink (to low gearing and good yield) and get it listed on SGX. Don't laugh.. it's highly possible as there'll always be enough suckers.. (oops.. I mean investors) who'll subscribe for any overly priced IPO (see HPH, PCRT, Amtek in recent times) as long as the timing is right ie. market is bullish.

[rafflesplaceguy]

Cityspring is currently trading at 50.5 cents. Their NAV has been declining rapidly so I guess they need to top it up ?

According to their SGX announcement (pg2),

The Bonds are rated BBB- and Baa2 by
Standard & Poor’s (Australia) Pty Ltd (“S&P”) and Moody’s Investors’ Service, Pty Limited,
respectively. If their rating falls to BB+/Ba1 or lower, Basslink may not make distributions to
CitySpring.
.
In November 2010, S&P placed the Bonds’ BBB- rating on CreditWatch with negative implications.
This is due to, in S&P’s view, Basslink’s increased vulnerability to refinancing the Bonds at higher
interest cost starting in 2015. In January 2011, CitySpring placed A$20 million (approximately S$26
million) in escrow for the benefit of Basslink, as a result of which, in February 2011, S&P removed the
CreditWatch and affirmed the Bonds’ rating at BBB- with a negative outlook.

http://info.sgx.com/webcoranncatth.nsf/V...cement.pdf

So, it seems like one of the key reason is they need to improve Basslink's credit rating so that it won't drop to BB+ and affect their ability to pay out dividend to Cityspring.

IMO, the greatest mistake made by the previous CEO is the acquisition of Basslink. It's like a python trying to swallow an elephant. Such a small Trust incurring so much debt for such a huge acquisition, for so little extra dividend back then! Now that the CEO had resigned, perhaps they are trying to clean up the mess. IMO, I think the best course of action is to sell off Basslink!

I too agree that they should have try to sell off Basslink to reduce gearing. But I suspect any potential buyers will also know this and Cityspring will not be able to get a good price. It may even have to sell for a loss.

Cityspring takes up a very small stake in my portfolio and I'm still pondering my next course of action. I picked up the rights (including excess rights) in the earlier round of capital raising. I then did a partial divestment to reduce my holdings when the stock market recovered, lifting share prices across the board.

Ironically, Cityspring should be in a better shape after this rights issue. And I do like the defensive nature of the assets.... Hmmm.....

[Nick]

Cityspring is currently trading at 50.5 cents. Their NAV has been declining rapidly so I guess they need to top it up ?

According to their SGX announcement (pg2),

The Bonds are rated BBB- and Baa2 by
Standard & Poor’s (Australia) Pty Ltd (“S&P”) and Moody’s Investors’ Service, Pty Limited,
respectively. If their rating falls to BB+/Ba1 or lower, Basslink may not make distributions to
CitySpring.
.
In November 2010, S&P placed the Bonds’ BBB- rating on CreditWatch with negative implications.
This is due to, in S&P’s view, Basslink’s increased vulnerability to refinancing the Bonds at higher
interest cost starting in 2015. In January 2011, CitySpring placed A$20 million (approximately S$26
million) in escrow for the benefit of Basslink, as a result of which, in February 2011, S&P removed the
CreditWatch and affirmed the Bonds’ rating at BBB- with a negative outlook.

http://info.sgx.com/webcoranncatth.nsf/V...cement.pdf

So, it seems like one of the key reason is they need to improve Basslink's credit rating so that it won't drop to BB+ and affect their ability to pay out dividend to Cityspring.

IMO, the greatest mistake made by the previous CEO is the acquisition of Basslink. It's like a python trying to swallow an elephant. Such a small Trust incurring so much debt for such a huge acquisition, for so little extra dividend back then! Now that the CEO had resigned, perhaps they are trying to clean up the mess. IMO, I think the best course of action is to sell off Basslink!

I too agree that they should have try to sell off Basslink to reduce gearing. But I suspect any potential buyers will also know this and Cityspring will not be able to get a good price. It may even have to sell for a loss.

Cityspring takes up a very small stake in my portfolio and I'm still pondering my next course of action. I picked up the rights (including excess rights) in the earlier round of capital raising. I then did a partial divestment to reduce my holdings when the stock market recovered, lifting share prices across the board.

Ironically, Cityspring should be in a better shape after this rights issue. And I do like the defensive nature of the assets.... Hmmm.....

How defensive can highly geared assets (with no loan repayment plan in place) be ? In my opinion, such assets are extremely risky and should be priced as such !

The problem with CTS is their failure to plan an appropriate capital structure for the Trust. 100% debt acquisition of Basslink was highly ambitious. Failing to come out with a plan to repay the loans is downright foolish. The Management says the Group gearing, Group NAV and accounting profits don't give a true picture of the Trust shape, instead we should look at cash earnings. The problem is that when you pay out huge chunk of your cash earnings, you do not retain income for asset renewal nor are you able to amortize your loans. As a result, the metrics which they deemed unimportant will deteriorate. Unfortunately, while they may deem it unimportant, the fact that they need to tap on equity twice to strengthen their B/S tells us how 'unimportant' those metrics are.

At the moment, there are only 2 business trust in a decent shape - PST and Ascendas India Trust. The former's Management was astute to adopt a sustainable capital structure which allows debt to repaid and the equity to be regenerated while the latter's Management kept to a low gearing and sought organic growth primarily. For CTS to prosper, they need to re-examine their capital structure and determine the best way to keep the Trust in a sustainable footing. Developing Indian real estate and chartering out vessels may be more risky operationally but as a Trust (this is what we are investing in), I daresay that they are more solid and 'defensive' than CTS. Though, technically, I wouldn't consider any of the biz trust listed here to be defensive.

(Not Vested in any business trust)

[rafflesplaceguy]

I had a quick look at the past financials of Cityspring for the last 3 years especially the cashflow statements. I excluded certain one-off items. Cityspring has been retaining cash after repaying of borrowings and distributions to unit holders. But the net cash retained has always been small, about $1M to $5M a year. Of course, this is hardly enough and will take a long time to accumulate enough to pay off the borrowings...

On the topic of getting an investor at the Basslink level, I suspect taking this step may not be as easy as it sounds. Firstly, there will be a dilution of control for Cityspring and depending on the financial terms of the stake sales, it may result in a gain or loss to Cityspring, though I think a loss is more likely. Furthermore, any stake sales at Basslink level may have to get Australia regulatory clearance (and I can think of a number of them). The lenders to Basslink would also have to give their blessings. And there would be minority shareholder(s) to contend with at Basslink in the future.

On the other hand, the injection of fresh equity by Cityspring (via unitholders) will result in, amongst other things, 1) persuade S&P that Basslink is now more stable and will be in a better position in the debt markets when the time comes for refinancing, 2) better position Basslink for sale with the enhanced capital position (though any sale of Basslink is really hypotetical), 3) reduce interest payments and size of the (interest) hedging positions required.

Speaking of S&P, I think they (or one of the other major rating agencies) recently downgraded the credit ratings of the big 4 australian banks because of their heavy reliance on the international bond markets for their funding. S&P thinks that the international bond markets are likely to be volatile, affecting the banks ability to borrow and the rates they have to pay to borrow. This could also be link to why Citispring wants to do an equity raising now when liquidity is still around and there would be less debt to refinance when the current tranche of borrowings matures.

---

Cityspring is currently trading at 50.5 cents. Their NAV has been declining rapidly so I guess they need to top it up ?

According to their SGX announcement (pg2),

The Bonds are rated BBB- and Baa2 by
Standard & Poor’s (Australia) Pty Ltd (“S&P”) and Moody’s Investors’ Service, Pty Limited,
respectively. If their rating falls to BB+/Ba1 or lower, Basslink may not make distributions to
CitySpring.
.
In November 2010, S&P placed the Bonds’ BBB- rating on CreditWatch with negative implications.
This is due to, in S&P’s view, Basslink’s increased vulnerability to refinancing the Bonds at higher
interest cost starting in 2015. In January 2011, CitySpring placed A$20 million (approximately S$26
million) in escrow for the benefit of Basslink, as a result of which, in February 2011, S&P removed the
CreditWatch and affirmed the Bonds’ rating at BBB- with a negative outlook.

http://info.sgx.com/webcoranncatth.nsf/V...cement.pdf

So, it seems like one of the key reason is they need to improve Basslink's credit rating so that it won't drop to BB+ and affect their ability to pay out dividend to Cityspring.

IMO, the greatest mistake made by the previous CEO is the acquisition of Basslink. It's like a python trying to swallow an elephant. Such a small Trust incurring so much debt for such a huge acquisition, for so little extra dividend back then! Now that the CEO had resigned, perhaps they are trying to clean up the mess. IMO, I think the best course of action is to sell off Basslink!

I too agree that they should have try to sell off Basslink to reduce gearing. But I suspect any potential buyers will also know this and Cityspring will not be able to get a good price. It may even have to sell for a loss.

Cityspring takes up a very small stake in my portfolio and I'm still pondering my next course of action. I picked up the rights (including excess rights) in the earlier round of capital raising. I then did a partial divestment to reduce my holdings when the stock market recovered, lifting share prices across the board.

Ironically, Cityspring should be in a better shape after this rights issue. And I do like the defensive nature of the assets.... Hmmm.....

How defensive can highly geared assets (with no loan repayment plan in place) be ? In my opinion, such assets are extremely risky and should be priced as such !

The problem with CTS is their failure to plan an appropriate capital structure for the Trust. 100% debt acquisition of Basslink was highly ambitious. Failing to come out with a plan to repay the loans is downright foolish. The Management says the Group gearing, Group NAV and accounting profits don't give a true picture of the Trust shape, instead we should look at cash earnings. The problem is that when you pay out huge chunk of your cash earnings, you do not retain income for asset renewal nor are you able to amortize your loans. As a result, the metrics which they deemed unimportant will deteriorate. Unfortunately, while they may deem it unimportant, the fact that they need to tap on equity twice to strengthen their B/S tells us how 'unimportant' those metrics are.

At the moment, there are only 2 business trust in a decent shape - PST and Ascendas India Trust. The former's Management was astute to adopt a sustainable capital structure which allows debt to repaid and the equity to be regenerated while the latter's Management kept to a low gearing and sought organic growth primarily. For CTS to prosper, they need to re-examine their capital structure and determine the best way to keep the Trust in a sustainable footing. Developing Indian real estate and chartering out vessels may be more risky operationally but as a Trust (this is what we are investing in), I daresay that they are more solid and 'defensive' than CTS. Though, technically, I wouldn't consider any of the biz trust listed here to be defensive.

(Not Vested in any business trust)

Nick, I largely agree with your comments but noticed I said defensiveness of the assets. I din say the Trust was defensive.

---

I collected the past 5 quarter worth of NAV data from Cityspring and it seems to be pretty volatile.

Unit-holder's Equity
2Q 2010: $435.4 million
3Q 2010: $603.4 million
4Q 2010: $428.7 million
1Q 2011: $355.1 million
2Q 2011: $346.9 million

Over the past 12 months, NAV has been declining. I am not too sure why it is declining at such a rapid pace considering its losses aren't large enough to wipe out $250 million in the space of 12 month ?

If there is some other factor that is pressing down its NAV, perhaps the NAV may not be a good gauge on the company's health ? I think Cityspring mentioned that equity isn't an accurate way to measure its financial health ?

Thanks for comments.

(Not Vested)

Nick, the volatility in the NAV is mainly because of the changes in the fair value of the hedging positions (upon mark-to market at every balance sheet date) and the fluctuation in exchange rates (SGD:AUD) used for consolidating the Basslink operations.

[Nick]

Kim Eng released a research report titled 'Staying one step ahead' today with a Hold rating - http://www.remisiers.org/cms_images/KiEn...072011.pdf

This very same analyst highlighted the poor state of the B/S and gearing issues for Basslink in Nov 2010 by crafting a very critical report titled 'At the mercy of credit rating agencies'. The report is available at the very first post in this thread. Kudos to her for bringing this issues to light thereby giving investors ample knowledge about the risk and troubles facing Cityspring back when it was trading at 59.5 cents.

Cityspring closed at 50.5 cents today. It has projected a post rights DPU of 3.28 SG cents.

(Not Vested)

[cif5000]

http://info.sgx.com/webcoranncatth.nsf/V...30035C7B8/$file/Joint_News_Release_-_Ground-breaking_Final_5_July_2011.pdf?openelement

Twice the capacity of SingSpring. No prize for guessing who will hold the asset when operation begins in 2013. That will call for another fund raising exercise at the very least.