Ship leasing trust seeks Singapore listing

A high yield of up to 9.25% is expected to be secondary to the capital growth potential in terms of attracting investors to Singapore's fourth business trust.
A maritime financing company is the latest business trust to seek a listing in Singapore, hoping to raise up to $340 million in the process. Just over one-third of the US-dollar denominated offering will be taken up by cornerstone investors.

The issuer, First Ship Lease Trust (FSL), will be the fourth business trust to list in Singapore since regulations were put in place to allow their existence. A business trust is similar to a real estate investment trust (Reit) in that it allows all the companyÆs cash earnings to be passed on to investors, which makes it an especially useful vehicle for companies with large depreciating assets. It can be set up using any type of asset that pays a relatively stable income.

Temasek-sponsored CitySpring, which was the most recent business trust to list earlier this month, is initially made up of water and gas utility assets and will eventually invest in infrastructure assets across Asia.

The first trust listed in June last year under the name of Pacific Shipping Trust. Like FSL, it too owns ships that it leases out in return for a daily hire rate that provides investors with a steady yield. They also both have capital growth potential that could come either from expanding their respective fleets or from higher leasing rates.

However, the two trusts have their dissimilarities too, and since Pacific Shipping Trust has been trading mainly sideways since listing, it should come as no surprise that FSL and its joint bookrunners Deutsche Bank and JPMorgan will spend the roadshow making sure investors are aware of those.

One key difference, according to people familiar with the offering, is that FSL will lease its ships to a range of operators and the initial 13 ships in its portfolio will represent different types of ocean-going vessels, including container ships, chemical tankers and dry bulk carriers. FSL, which focuses on non-tax driven leasing activities (where the investors donÆt get any tax benefits), will also be independent from any single ship operator, giving it a lot of flexibility with regard to future acquisitions and lease-backs.

By comparison, Pacific Shipping Trust at present owns only container ships and they are all leased to its sponsor Pacific International Lines, which is privately owned and the second largest container shipping company in Singapore.

FSL Trust has a more diverse range of ships and customers û five in total at the moment, including well-known and publicly traded shipping companies such as TaiwanÆs Evergreen Marine and Indonesia-based Berlian Laju Tanker. The bookrunners will argue that this results in less renewal risk since the trust isnÆt dependant on one particular part of the shipping sector which could be suffering at the time the leases expire.

FSLÆs listing document states that no single sector will account for more than 38% of its revenues and no single lessee for more than 30% this year. In the long-term, the trust aims to keep the single sector exposure to a maximum 40% and the lessee exposure to 25%.

The trust 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. It has already put in place a $250 million seven-year term credit facility that will be available to finance future dividend-accretive acquisitions. Again, this is different to Pacific Shipping Trust, which had a gearing of 88% at the time of listing, and is expected to appeal to investors looking for capital growth.

Still, FSL has no defined pipeline of potential acquisitions, which investors have shown that the do like on other business trusts and Reits. However, the pool of potential ship acquisitions is much larger than for a Reit which typically has to bid for each asset in competition with other potential buyers. Perhaps because FSL also helps to arrange lease financing it has so far had no problems finding willing sellers.

ôOn the shipping side (FSL Trust) is really unique, because it can pick and choose what ships to acquire and lease back. Ironically, this company also does better if the market is down because a lot of shipping companies then prefer to lease their ships rather than own them in order to free up capital that they can use in the operations,ö one observer say.

ôIn a way it is a little bit of a anti-shipping cycle business with a very stable income profile,ö he adds.

The fact that the average remaining lease term of its initial portfolio assets is nine years means the company is also not that exposed to the short-term swings of the shipping cycle and shipping rates.

Driven by the increased demand related to ChinaÆs booming industrial production, the value of ships rose to historical highs in the second half of 2003, which increased the demand for ship financing. Since then, charter rates and vessel values have declined but remain and relatively high historical levels. According to FSLÆs listing document, the non-tax leasing market transaction volume grew by 107% in 2005 and by 42% in 2006.

The total offer will consist of 340 million units, of which 120 million will be bought in equal parts by the three cornerstone investors û Singapore-based Penta Investment Advisers, GermanyÆs DWS Investment and the Singapore arm of Dutch investment firm AIG Global Investment. The three investors will each own 8% of the business trust at the time of listing.

Of the remaining 220 million units, 213 million will be placed with institutional investors and seven million will be offered to Singapore retail investors. The price is $0.92 to $1 per unit, which compares with a net asset value of $0.93 apiece.

Based on the price range, a base lease revenue of $472 million, and a forecast of an annualised dividend per unit of 8.52 US cents for 2007, the trust will pay an annualised dividend yield between 8.5% and 9.25% for the period between listing and the end of this year. In 2007 the divided will amount to 100% of the net distributable income and in subsequent year at least 90%. The dividends will be tax-free for all investors.

Pacific Shipping Trust is currently trading at $0.43, which values it at a 2007 yield of 9.93% and on par to its NAV. Its share price is down slightly from the IPO price of $0.45, which had already been lowered from a targeted range of $0.50 to $0.52.

The yield offered by FSL is, however, well above the 6.75% yield offered by CitySpring at the time of pricing and since it listed on February 12, its yield has fallen further as the share price has rallied to S$1.52 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 warranted by the fact that the life of a container ship or bulk vessel is only about 25-30 years. The ships in FSLÆs initial portfolio have an average age of about five years.

ôYou get paid back a little bit of the loss you see in the asset value,ö one source say.

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. In case the distributable income isnÆt enough to meet the targeted payments, dividends will also be accumulated and paid in arrears to make up any shortfall in the following quarters until and including the first half of 2009.

The trust is sponsored by Singapore-based First Ship Lease Pte., which has been involved in the maritime leasing business since 2002 through its predecessor First Ship Lease Ltd. The sponsor has German connections which is evident by the fact that its beneficial shareholders include German shipping firm Schoeller Holdings (which also leases two container ships from the trust), as well as HSH Nordbank and Bayerische Hypo- und Vereinsbank. Nordbank is the worldÆs largest ship mortgage lender, while Bayerische Hypo is one of the worldÆs largest ship financing companies.

The sponsor will retain 160 million units, or 32% of the trust, and is also the sole owner of the management-trustee company, FSL Trust Management Pte., which will allow it to keep day to day control of the business. The trust will pay an annual fee of 4% of the cash lease rentals to the manager and 0.2% of the value of the assets to the trustee. In addition, there will be an incentive fee for the manager if the growth of the dividends exceeds the targeted amount.

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%. 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%.

The offer will officially launch next Monday (February 26), but the response during the two-week pre-marketing period is said to have been good. The bookbuilding will run until March 9 with the pricing scheduled for March 12. The trading debut is set for March 19.

CLSA and Macquarie Securities are acting as co-lead managers, while OCBC Bank will be the coordinator for the retail offering.
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