A line in DBS V\'s report today on First Ship Lease Trust is turning me very cautious abt shipping trusts. \"In the results announcement, management disclosed that the value of its vessels (without taking into account the long term leases) is US$896m, representing 175% of the outstanding indebtedness of US$513m. One of the loan convenants mandates a minimum coverage ratio of 145%. Thus, this leaves room for vessel values to drop by only 20%. In the event that a breach occurs, we believe that DPUs will be cut and cashflows will be used to meet the coverage ratios.\"
It depends on the accounting rules here. How often will the assets be revalued (once a year?) and if so will mark to market apply? If it does then I think we\'re all in for a big shock. As far as values are concern it will definately nosedive in the face of a severe reccession and also falling steel prices. By any accounts purely on a asset valuation 20% is a mild recession. Vested at $0.40
Sale & Leaseback has never been perceived as a safe model in a recession. Esp one when stagflation is a high possibility. The Shipping Trusts are faced with falling charter rates, stubborn high fuel costs and ever increasing financing costs. Everything is going against them now. The value of an asset is determined by the cashflows that the asset can generate over a period of time. If the quality of the cashflows deteroriate, it makes absolute sense that the asset will be devalued. In this case, the ship chartering rates have plunged from the peak, yet people are still so hopeful that these Shipping REITS can survive the downturn. I don\'t see the logic here.
Well, the logic with FSLT is that it is not exposed to charter rates (directly) or fuel cost as their model is based on bareboat charter. The real \'concern\' here is 1. Stability of the lessee ie: they continue to pay their rental charter rates as agreed upon and on time. 2. Mark to market - based on ship values (steel) Apart from that it is an excellent buy at this levels. Again it is purely a bet that either one of those 2 scenario plays out or not. By the way, if it does, FSLT could go to $0.02!! Well that is according to one of the many recent reports by brokerage houses.
\'tanjm\' posted the following in another forum. he makes very great sense to me. I personally am fond of shipping trusts/reits because their businesses are relatively much more easier to analyse and predict than most other businesses on SGX. Many of the REITs/trusts on SGX are now priced as though they will default tomorrow and assets sold at fire sale prices. In fact, I will stipulate that it is possible that one of the shipping trusts or REITs will run into trouble over the next several months or few years. However, if the REIT/trust does NOT run into trouble, you are looking at a stock that will probably triple or quadruple in value over the next 3-5 years (is my guess). So what can you do? Buy the almost entire universe of reits/trusts (it is a pity we don\'t have a reit etf), with only a small fraction of your investible amount in any one stock. A reasonably pessimistic example (in my opinion): You allocate $5000 per stock for a portfolio of 10 stocks with a 5 year horizon. 1 stock bankrupts, leaving you with a 80% loss. 3 stocks run into trouble, selling off assets but otherwise are intact, and leaving you with average of 20% capital loss. The other 6 gain an average of 2.5 times (DPU goes lower but stabilises, yields compress from their current high level). Your capital gain is 12% per annum (76% over 5 years). If you count dividends, then your gain is even higher considering the very high dividend yields they are commanding now. Those dividends will feel very nice even as the market might be tanking. As a matter of fact, I\'m personally slightly more optimistic than the above scenario. To summarise, unless you believe the doomsday scenario, just buy the universe of such stocks and trust in statistics. Note: doomsday scenario = great depression = 20% unemployment. Property market depressed for couple of decades. Foreign reserves severely dented, banking system is mostly wrecked, world trade never recovers to previous levels yada yada yada.
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