Sunday, 28 May 2017

Differences Between First Ship Lease Trust and Rickmers Maritime

For investors in First Ship Lease Trust (FSL), the question at the top of investors' minds is: will FSL go the way of Rickmers Maritime and be wounded up? This is my third time investing in FSL and the previous 2 attempts have ended in major losses. I certainly do not wish to lose money on it a third time, which explains this series of blog posts on shipping trusts.

Rickmers is currently in the process of winding-up, after their failure to secure re-financing of their loans. Although this is the triggering point for winding-up, it is not the only challenge facing Rickmers. Would FSL face the same challenges and end up being wounded up as well?

One of the differences between FSL and Rickmers is their business models, which is discussed in detail in A Comparison of Shipping Trusts' Business Models. Essentially, FSL started off with a ship financing business model (but progressively took on a ship rental business model for reasons beyond their control) while Rickmers had a ship rental business model. In good times when demand for ships is high, Rickmers' ship rental model would provide better returns than FSL's ship financing model. However, in bad times when demand for ships is low, FSL's ship financing model allows a faster return of capital than Rickmers' ship rental model. 

Another difference between the 2 shipping trusts is the diversity of ships. Rickmers specialises in container ships, especially Panamax container ships of 3,450 and 4,250 twenty-foot equivalent units (TEUs). Panamax ships refer to the largest ships that can pass through the Panama Canal, which is an important route for ships sailing between Asia and US east coast. In Jun 2016, the Panamax Canal was expanded to accommodate larger container ships of above 10,000 TEUs. Classic Panamax container ships became less useful now that bigger container ships can pass through the expanded Panama Canal. Daily charter rates for classic Panamax container ships fell as a result. Rickmers provided a discussion of the challenges facing the classic Panamax container ships in its Annual Report for FY2016. The figure below, taken from Rickmers' Annual Report, shows the fall in charter rates for classic Panamax container ships.

Fig. 1: Average Daily Charter Rates of Classic Panamax Container Ships

FSL also has 4,250 TEU classic Panamax container ships. Like Rickmers, its charter rates for these ships would fall drastically when the charters expire in 2020. However, FSL has a more diversified fleet of ships. Besides Panamax container ships, it also has feeder containers of 1,200 TEUs, product tankers of various ranges, chemical tankers and Aframax crude oil tankers. The diversity in ships allows FSL to better manage the low demand in any one segment of the shipping industry.

Like Rickmers, FSL has a lot of ships whose charters have expired or are expiring. In 2017, 9 out of its 22 ships will be completing their charters and be redelivered to FSL. When the ships are redelivered, new employment needs to be found for them, likely at lower charter rates. However, this is not the first time ships have been redelivered to FSL. FSL had in the past encountered unexpected customer defaults on the charters and had to redeploy the ships at low charter rates. Fig. 2 below shows the historical charter rates that FSL had. Figures in red mean a decline in charter terms/rates whereas figures in blue mean an improvement in charter terms/rates. "BBC" refers to bare boat charters while "TC" refers to time charters. For time charters, the bare boat charter equivalent (BBCE) revenue is about 60% to 65% of time charter revenue.

Fig. 2: FSL's Historical Charter Rates

As shown in the figure above, it is not a one-way decline when ships are redelivered to FSL. While most ships experienced a decline in charter terms/rates after redelivery, the Medium Range (MR) tankers and Aframax crude oil tankers saw improvements in charter terms/rates in recent years after redelivery.

In its Annual General Meeting presentation in Apr 2017, FSL disclosed the current and average time charter rates in the past 5 years for its ships (see columns in blue in Fig. 2 above). Except for the Panamax container ships, the charter rates that FSL currently have are not too far off the current and 5-year historical average charter rates. Thus, there is a chance that the redelivered ships will not suffer too large a decline in charter rates after redelivery. My estimates for FSL's BBCE revenue for FY2017 is USD62M, which is a 15% decline from FY2016 after redelivery of the 9 ships (see Sustainability of First Ship Lease Trust's Cashflows for more info).

There is, however, 1 key risk that FSL has which Rickmers does not have, which is customer credit risks. Rickmers' customers are all major shipping companies such as Mitsui OSK Lines, CMA CGM, Maersk Line, etc. which could survive the industry downturn better than others. They did not default on the charters with Rickmers. On the other hand, FSL's customers are smaller players. FSL had encountered a no. of defaults in the past, resulting in loss of attractive charter rates. In fact, a major risk facing FSL currently is whether Yang Ming Marine Transport Corp, which chartered the 3 Panamax container ships at high rates, would default or fail. If it does, it would have a large impact on the viability of FSL.

Finally, FSL has only 1 group of creditors while Rickmers has 4 groups. It is easier to negotiate with 1 group of creditors instead of 4 groups.

In summary, there are differences between FSL and Rickmers. FSL might not go the way of Rickmers and be wounded up. The major caveat is Yang Ming does not default or fail. If it does, all bets are off.


See related blog posts:

4 comments:

  1. How about hph trust? Can they be considered as peer comparison?

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    Replies
    1. HPH Trust and FSL operate in different segments of the shipping industry. They might not be directly comparable.

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  2. is hph yield sustainiable? from first glance, it seems tad high, or is this normal in the shipping industry? i recall that rickmers or fsl had a hi div yield too.

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    Replies
    1. The high yield of HPH Trust is partly due to the share price coming down. It recently announced that it would increase debt repayment in the next 5 years, thus reducing distributions to shareholders.

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