Asia's inaugural business trust IPO runs into headwinds

High yielding trust backed by container ships fixes IPO price below indicative range ahead of Singapore retail offer.
AsiaÆs first business trust to seek a listing has met with lukewarm response from institutional investors, forcing it to lower the price and bump up the yield.

After the institutional tranche closed Friday, Pacific Shipping Trust (PST) fixed the price of its offering at $0.45 per unit for a total deal size of $99.9 million. The Singapore listing candidate had initially hoped to raise up to $115.4 million by pricing its IPO between $0.50 and $0.52 per unit, but with two days left of bookbuilding û on a day when Asian stock markets took a heavy beating û the range was lowered to $0.45 to $0.48.

The book wasnÆt fully covered at the low end of the initial range, but was believed to have attracted enough investors to carry it at the final price, according to a source. About 55-60% of the demand was said to come from Singapore.

According to people close to the transaction, many investors had failed to properly understand this new asset class, while others felt it wasnÆt a natural fit into a traditional portfolio.

A business trust is similar to a real estate investment trust in that it takes income-generating assets and puts them in a trust that is sold to investors in the form of units. The units are then listed on a stock exchange where they can be traded like an equity. Because the trust is committed to paying virtually all of its net income as dividends, however, it also acts a lot like a fixed-income instrument.

Any income generating asset can be put into a business trust, and in this first Asian attempt to put one together it is container ships. PST has bought the ships from its sponsor, SingaporeÆs second largest container shipping company Pacific International Lines (PIL), and will lease them back at combined fixed charter rate of $94,600 per day for a stable annual income.

ôSome investors are believed to have hesitated because they were sceptical about the shipping cycle turning down but in the initial years this is a pure yield play that has nothing to do with shipping as the sponsor has guaranteed a flow of revenue for at least 10 years which will give a yield starting from 9%,ö one observer says.

Because the trust will also be paying down debt every year, it will have less interest costs and more money available for dividends in subsequent years and the yield is expected to rise by about 50 basis points per year, he added.

The IPO comprises 222 million units, or 65.9% of the total trust, of which 95% is expected to be sold to international institutional investors. The remaining 5%, or 11.1 million units, will be offered to Singapore retail investors at a translated price of S$0.715 per unit between May 20 and 24. The units are scheduled to start trading on the Singapore Stock Exchange on May 26.

DBS is the sole bookrunner and underwriter for the offer, while ABN AMRO Rothschild and Dnb NOR Markets are acting as co-managers.

Outside the IPO, PIL will subscribe to the remaining 115 million units in the trust, which will give it a 34% stake at the time of listing. There is an overallotment option to sell a further 13.9 million shares, or 6.3% of the base deal, that will come out of PILÆs stake if exercised. The additional shares could boost the total deal size to $106.2 million.

PST will pay an annualised yield of 9% in 2006 and 9.49% in 2007, based on the final issue price and projections for a distributable income of $10.2 million this year and $14.4 million in 2007. The trust is committed to passing on 100% of its distributable income on a quarterly basis for the remainder of 2006 and in 2007, and 90% thereafter.

A 9% yield is well above the 10-year US Treasury yield, which is currently trading at 5.05%, and the just over 5% annual yield offered by Singapore-listed REITs, making PST an attractive defensive investment.

The final price values the trust at a 4.4% premium to net asset value, which at the time of listing will amount to $144.3 million, or $0.43 per unit. The NAV includes long-term debt of $127 million taken up to help pay for the ships, which gives an initial gearing of 88%. This will fall as the loans will be amortized over 10 or 12 years starting from June this year.

PST will comprise eight container vessels with an estimated remaining useful life of 22 years and a combined capacity of 13,864 twenty-foot equivalent units (TEU). It will buy the vessels from its sponsor for a total of $271 million, or at a 7.5% discount to their appraised value. It has a right of first refusal to buy another 13 vessels from PIL and may also acquire vessels from, and charter them to, third parties as part of its growth strategy, according to the listing document.

The trust will be managed by PST Management Pte, which is wholly owned by PIL and which will receive an annual management fee of 4% for its work.

Privately held PIL is one of AsiaÆs largest ship owners. As of January 1 this year, it owned and operated more than 100 vessels with a total capacity of more than 130,000 TEU as well as a fleet of more than 250,000 TEU of marine containers.

PIL generated revenues of $2 billion in 2004 and remained profitable both during the Asian financial crisis and the downturn in the container shipping market in 2001/2002. However, to further mitigate any potential concerns from PST investors that a collapse of the sponsor could threaten the trustÆs revenue stream, the syndicate decided to get a credit rating for the company.

That assessment was done by Standard & PoorÆs and resulted in the company getting an investment grade BBB rating. This is the highest credit rating of any shipping company, except for three US shippers which operate only in domestic waters, and should have made investors comfortable with the level of risk.

Another challenge to overcome for the underwriters was the IPO of another business trust based on dry bulk vessels and product carriers, which went public on Nasdaq on April 7 (with a secondary listing in Singapore). That trust, Omega Navigation Enterprises, was offered to investors at $19 to $21 per unit, but ended up fixing the price at $17 for an annualized yield of 11.7%. It then fell to $16 on the first day and as of the end of last week, it was trading at $15.85.

A source familiar with both offers say there are several differences between Omega and PST, one of the most important being the fact that Omega will not be paying down any debt in the initial years. This suggests that when it starts to use part of its income to do so, there will be less money for dividends, meaning yields are poised to fall. Omega also paid a premium for the ships it acquired.

ôInvestors did notice how OmegaÆs IPO struggled and rather than figuring out the difference between the two, they thought maybe it was better to stay away altogether,ö the source says.

Bankers believe that as investors become more familiar with this new asset class, however, there will room for other business trusts to follow as they do have clear benefits for both the issuer û who is able to raise cash for other purposes û and the investors, who get a stable and typically high yield. An additional benefit for investors of Singapore-listed business trusts is that the dividend will be tax free, which is not the case for dividend on stocks.
¬ Haymarket Media Limited. All rights reserved.
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