First Ship Lease Trust prices IPO slightly off the top

The ship financing company's 8.69% yield helps attract investors to the $333 million offering as equity markets remain volatile.
First Ship Lease Trust, SingaporeÆs second business trust with a focus on the shipping industry, has priced its initial public offering at $0.98 for a total deal size of $333.2 million.

The final price, which was two US cents below the top of the indicated range, translates into a tax free annualised 2007 yield of 8.69% and a premium to net asset value of 5.4%.

The maritime financing company, which buys ships from various shipping operators and then leases them back through long-term contracts, was said to have attracted decent demand despite the current volatile markets with between 70 and 80 investors in the book. However, given that the company is a yield play with a stable income, the turbulent trading environment including a 5.2% fall in the Singapore benchmark index during the four weeks that FSLÆs order books were open, may actually have helped.

ôThe company is perceived as a defensive play and the current market helped draw some investors into the deal,ö says one source. At the same time though, he adds, the participation of hedge funds was quite limited as those are the first ones to reduce their risk exposure when markets start to get choppy.

ôThis is a risky trade to put on if you are looking for short-term growth. It is a play on yield and the growth of that yield,ö the source says.

According to the sources, the institutional portion of the offering was two times covered after deducting the 33% of the deal that was sold to three cornerstone investors. About 70% of the demand came from Asia and 20% from the US, while the remainder was generated out of Europe. The deal was said to have been sufficiently covered at the top of the $0.92 to $1.00 range, but in the interest of achieving a better aftermarket the company and joint bookrunners Deutsche Bank and JPMorgan agreed to leave something on the table.

Whether that worked or not wonÆt become clear for another week, however, as the stock is due to start trading only on March 27.

However, the still quite modest level of demand suggests that the company may not have been entirely successful in distancing itself from Pacific Shipping Trust. The latter was the first business trust to list in Singapore in June last year and since then it has been trading mainly sideways.

Sources close to FSL argue that this vehicle has a less risky profile than PST because of its greater diversification both in terms of the number of customers it leases its ships to and the type of ships in its fleet. FSL, which currently has 13 ships in its portfolio, will also be debt-free at the time of listing, which will facilitate growth by acquisitions since it will have plenty of room to lever up, they say. By comparison, PST had a gearing of 88% when it came to market.

FSL offered a total of 340 million units, of which 120 million went to the cornerstone investors. Singapore-based Penta Investment Advisers, GermanyÆs DWS Investment and the Singapore arm of Dutch investment firm AIG Global Investment will each own 8% of the business trust at the time of listing.

Of the remaining 220 million units, 213 million was sold to institutional investors through a bookbuilding exercise that closed last Thursday. The remaining 7 million will be sold to Singapore retail investors in a separate offering which opened yesterday evening (March 19) and will run until March 22..

The offer includes an overallotment option of up to 34 million units, which will come out of the sponsorÆs share if exercised and could reduce its stake to 25.2% from 32% at the time of listing. If that happens the portion of the trust in public hands (excluding the cornerstones) would increase to a maximum of 50.8% from an initial 44%.

Based on the price range, the trust had offered an annualised yield of as much as 9.25%, but the pricing at the top of the range meant it will now yield slightly less than PST which trades at a yield of about 9.9%. One source noted that the limited room for growth of PST, as a result of its already high gearing, suggests it is poised to continue to trade at a yield premium.

PSTÆs share price has fallen slightly from an IPO price of $0.45 to yesterdayÆs close of $0.42.

The yield offered by FSL is well above the 6.75% yield offered by TemasekÆs infrastructure trust CitySpring at the time of pricing. Since it listed on February 12, that yield has fallen further as the share price has rallied to S$1.51 from S$0.89. FSLÆs indicated yield is also higher than most of the Singapore-listed Reits, which tend to trade at an average of 4.5% to 5%, but sources say the higher returns are partly a result of the fact that the life of a container ship or bulk vessel is only about 25-30 years û much shorter than for a piece of property.

The ships in FSLÆs initial portfolio have an average age of about five years.

The trust is targeting a minimum 5% growth in its income available for distribution in the first half of 2008, 10% in the second half and 15% in the first half of 2009 above that forecast for 2007. To support this growth the sponsor will subordinate 50% of the dividends it is entitled to and the management company will subordinate its management fees until June 2009, giving priority to other unit holders.

If the minimum distribution growth targets are met, FSL will have an annualised
distribution yield of 9.13% in the first half of 2008, 9.56% in the second half of 2008 and 10.00% in the first half of 2009 based on the offering price, the company noted in a release issued yesterday.

The trust is sponsored by Singapore-based First Ship Lease, which has been involved in the maritime leasing business since 2002 through its predecessor First Ship Lease. The sponsor is also the sole owner of the management-trustee company, FSL Trust Management, which will allow it to keep day to day control of the business.

The investor demand for this type of listing vehicle will be put to another test shortly as Rickmers Maritime is close to launching its own ship leasing company with the help of Citigroup, also in the form of a business trust. According to sources, it is hoping to raise about $300 million and may offer an even higher yield of more than 10% at the bottom of the price range.

According to a banker, the pre-marketing of the Rickmers started a bit late to attract any attention away from FSL or result in a proper comparison between the two and in any case he says ôthere should be enough money in the market for both.ö
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