According to market sources, Rickmers is planning to offer an annualised 2007 yield of about 8% to 9%, which at the mid-point will put it roughly in line with FSL. However, the trust will try to focus investorsÆ attention not on the initial yield, but on the fact that its entire structure is geared towards making acquisitions that will result in gradually increasing dividends as well as substantial asset growth.
The trust is sponsored by the Rickmers Group, a German-based charter operator with a fleet of 61 container vessels of varying sizes and 20 other types of ships including multi-purpose and bulk carriers. After the listing, Rickmers Maritime will be the exclusive owner and operator within the group of container ships larger than 3,450 twenty-foot equivalent units (TEUs) that also have long-term charter contracts, and as such the groupÆs growth vehicle within the container shipping space.
Over the past 10 years, container line shipping companies have chosen to charter a larger portion of their ships from third parties instead of buying them, suggesting good opportunities for companies like Rickmers to expand. According to shipping services provider Clarkson, chartered-in vessels accounted for approximately 50% of the top 10 container line shipping companiesÆ capacity at the start of 2007, compared with 15% in 1993.
According to RickmersÆ listing document, the total container ship charter market has grown to a combined value of about $13.9 billion last year from $8 billion in 2003.
The most obvious difference between Rickmers and FSL and Pacific Shipping Trust, which was the first shipping-focused business trust to list in Singapore, is that Rickmers will pay out only about 75% of its income compared with the 90% to 100% that the other two have committed to distribute. Looking at it another way, Rickmers would have been able to pay an annual yield of 10% to 12% if it too was to distribute 90%-100% of its cash income.
By comparison, FSL offers an annualised yield of 8.7%, while PST is currently trading at a yield of about 9.9%. The latter has fallen slightly from an IPO price of $0.45 in June to yesterdayÆs close of $0.43.
The quarter of RickmersÆ cash income that is not paid as dividends will be set aside and used to pay for future acquisitions and to reinvest and replenish the existing fleet as the ships age.
The fee structure is also set up so that the manager of Rickmers gets paid more if it can increase distributions on a sustainable basis, which means its interest is very much aligned with that of the unit holders. The first level of incentive payments will kick in if it can raise the distributable cash flow 12.5% above a minimum target of $0.024 per unit. The next two levels are triggered at 25% and 50% respectively.
These incentive payments are the only way the manager can increase its fees as it doesnÆt receive any additional fees just for acquiring additional assets, as the manager of FSL does.
ôThey wonÆt get paid just to do deals, they have to do good deals,ö notes a source close to the trust.
The structure is modeled on another shipping business trust û Seaspan Corp.- which is listed in the US. Like Rickmers, it too operates container ships only, has similar fleet and customer profiles and retains part of its cash for acquisitions. Since its IPO in August 2005, Seaspan has increased its fleet from a total of 23, of which 12 were on order, to the current 41, with 18 in the water and 23 on order. Supported by these acquisitions, the trust announced a 5% increase in distributions in October last year.
SeaspanÆs share price has risen 29% to $27.07 from an IPO price of $21, which has pushed down the yield to about 6.6% from 8.1% at the time of the listing.
Syndicate analysts suggest that Rickmers, which will have five ships in its portfolio at the time of listing and another five scheduled for delivery by March 2008, could see similar growth to its fleet over the next few years.
ôWe believe the company will seek a run rate of 10-15 acquisitions per year once up and running, which could bring the fleet to 30-45 vessels three years after the IPO,ö one analyst notes in a research report. He estimates that every vessel in the 4,250 TEU range that is acquired by Rickmers will result in an increase of about 2.4% to the cashflow per distributable unit in 2009, which means an addition of 10 ships would add about 24%. The 10 initial ships will have a combined capacity of 40.910 TEU.
The source notes that an addition of 10 vessels per year would potentially boost the asset value of the trust by at least $400 million every year, which compares with a total asset value of $680 million for RickmersÆ initial 10 ships (with charters, but pre-debt), as estimated by independent valuer Howe Robinson. The source also notes that there are nine ships in the group outside Rickmers Maritime that are currently under construction, which the listing vehicle has a right of first refusal to once they have secured a long-term leasing contract.
Rickmers is offering a total of 274.35 million new units, although only 169.7 million of those will be sold through the global offering which will be jointly arranged by Citigroup and Deutsche Bank. The remainder has been set aside for five cornerstone investors. Those five û Fidelity Investments Management, Bennelong Asset Management , Citigroup Global Markets, Templeton Asset Management and UOB Asset Management û will hold a combined 27.5% of the trust and are meant to help generate momentum in terms of bringing other institutional investors into the deal. However, none of the cornerstones has committed to a lockup.
The offer has a greenshoe of up to 33.9 million units, which will also be new and will account for 20% of the total share sale excluding the portion going to cornerstones. The public float will be 44.5%, or 49.1% if the greenshoe is exercised in full.
As the sponsor of the business trust, Rickmers Holding, will retain 28% of Rickmers Maritime, although more than half of its units will be subordinated to the trustÆs common units until March 31, 2009, to ensure other unit holders will receive a minimum quarterly dividend of $0.0214. If the trust is unable to meet those base payments (including payments in arrears), the subordination period will be extended.
The final split between institutional and retail investors has yet to be decided, but sources say it is currently expected that retail investors will get between 5% and 10% of the deal. DBS will be the joint lead manager and coordinator of that part of the offering.
The offer price range is expected to straddle the $1 mark, but will be set in Singapore dollars since that is the currency in which it will be listing. The fact that Rickmers has chosen to trade in the local currency is expected to help attract more retail investors to the deal and it could also make the trust more accessible to certain domestic institutions, market watchers say.
Rickmers charters its container ships to customers on long-term, fixed-rate contracts with the average remaining term of seven years for its first five ships and eight years for the additional five. These ships are chartered out to Maersk, the Evergreen Group and CMA CGM, which are three of the worldÆs largest container shipping lines, on a time-charter basis.
Time-charter means Rickmers not only leases the ships but also provides the crew and is responsible for maintenance and operational costs. These costs are built into the charter rates and some 80% them, including fuel, are hedged. However, some such as lubricants are not and do introduce an element of risk to Rickmers operations.
FSL leases its ships on a bareboat basis without a crew and without having to cover any costs related to the operation. PST leases its ships on a time-charter basis, but all of them are leased back to its sponsor, which one can argue brings up its own set of issues such as limited diversification.
The cyclical nature of the container shipping industry is also associated with risks. Some industry specialists project that the large supply of new container ships that will be coming to market over the next few years will exceed the demand and put further downward pressure on charter rates which have already declined substantially from their highs one to two years ago. RickmersÆ long-term contracts do reduce these risks somewhat, however.
The institutional bookbuilding is expected to launch on April 9, ahead of which Rickmers will announce a price range for the offering. The final price is set to be determined around April 23 to allow for a trading debut around April 26.
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