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Rickmers Maritime Trust: 1 for 1 Rights Issue.

Thursday, May 2, 2013

I like rights issues when the money raised is used to fund yield accretive activities. Basically, it means I am investing more money for higher returns.

However, I don't like rights issues when the money raised is used to strengthen balance sheets. Returns, in all likelihood, would be watered down and investors end up immediately poorer.

In the last few years, I provided quite a few examples of rights issues, both good and bad, here in ASSI. Today, a full page ad and in full colour, no less, in The Business Times, encouraged unit holders to "SECURE YOUR 10% DPU YIELD" and "ACCEPT YOUR ENTITLEMENTS TODAY". This was an ad by Rickmers Maritime Trust (RMT).

It has been a long time since I followed developments at RMT. So, somewhat rusty, I went through the ad for details on the rights issue.

The main reason for the rights issue is to "repay bank loans and to strengthen balance sheet". OK, no need to read anymore. Flip the page.

Well, since it has been quite a while since I encountered a rights issue, curious me went on reading.

After the rights issue, RMT's gearing ratio will decline to 51.8%. So, then, is the balance sheet "strong" after the rights issue? It does not seem so. Gearing is still pretty high.

Since investors are probably in this for income, what about DPU? As this is a 1 for 1 rights issue, the number of units in issue will double. Since the proceeds are not used to fund yield accretive activities, DPU logically should reduce by half. However, in this case, it will stay unchanged at 0.6 US cent per quarter for FY2013 as RMT will double its income distribution to unit holders.

Therefore, it is not that the Trust is generating twice as much income as before, it is simply paying out twice as much as before with the same level of income!

Digging around a bit more, I discovered that a few of the charters will be expiring in 2014 and chances are for rates to reduce. Why? The charters are locked in at rates of above US$25,000 a day which is at least 3 times more than current spot rates for similar vessels!

This is why RMT only made mention of DPU maintaining at 0.6 US cent per quarter for FY2013. There is a chance and a high one that DPU will reduce in FY2014.

Thus, as an investment for income, beyond FY2013, RMT does not inspire much confidence. As an investment for growth, RMT simply does not make the cut.

If there is one good reason to invest in RMT, it is its NAV/unit of US$0.50 (S$0.60), post rights issue. Paying S$0.30 per unit, simplistically, investors will be buying container ships at half price! Unless they are corporate raiders, however, this fact is most probably only of academic interest to these investors.

So, to invest or not to invest? The answer lies in understanding our motivations and risk appetites as investors. Ask if the investment adequately compensates us for the risks we are being asked to undertake.

See research by S&P: here.


caleb Khoo said...
This comment has been removed by the author.
AK71 said...

Hi Caleb,

Thanks for sharing the link. :)

China Minzhong definitely presents more value for money now than a few weeks before. ;)

caleb Khoo said...
This comment has been removed by the author.
AK71 said...

Hi Caleb,

Being paid to wait while we remain vested in a fundamentally strong stock sounds like a good idea. ;)

Unknown said...

Dear AK71,

Goodness gracious. Aren't this an unscrupulous tactic?

Chinese Saying: Zhi Biao Bu Zhi Ben.
Translation: Solve Current not Root.

This may be a temporary solution but may backfire themselves, taking ludicrous High Equity Risks and potentially defaulting on due.

What's your stand? Tremble with fear*

Warmest Regards,

AK71 said...

Hi Ken,

This is just what a highly leveraged business with limited options in financing might have to resort to. Whether they have done anything unscrupulous, I have no comments.

Looking at the numbers, it is unlikely that RMT will default. It is, of course, a possibility but a very remote one.

What is more probable is a reduction in income in FY2014 and investors who are pumping more money into RMT for the promised 10% distribution yield at current price could be disappointed then.

Poh Soon said...

I had actually bought into Rickmers when it was 32cts. However, after the right annoucement i had decided to exit it sold at 34cts for small profit.

While i do not like the right issue for debt repayment, but it might be good apportunity to collect it when it gone weaker.

Looking back on the performance of Cityspring as reference, there is a chance for the price to tang below the right price though.

CitySpring right back then was 39cts, but the price eventually dropped to the low of 33cts after right issue.

I will seriously consider to buy Rickmers if it did tang below right issue price of 24cts.

AK71 said...

Hi Poh Soon,

There will be a bigger margin of safety at lower prices, everything else remaining equal, for sure. :)

However, with some estimating a drop in DPU in FY2014 by some 35%, to maintain a 10% yield, at the current exchange rate, we will turn buyers only at 19c per unit.

Unknown said...

Hi AK71,

I fell into Rickmers high dividend yield trap and bought at 0.36. Now I have no choice but to fall for Rickmers rights issue trap on 1 for 1 at 0.24. So disappointing with Rickmers. But what else can I do?

Unknown said...

Hi AK71,

I fell into Rickmers high dividend trap. I bought at 0.36. Now I am falling into Rickmers rights issue trap. So disappointing. But I have no choice. If I don't accept the rights issue, I need to keep the shares many, many, many more years before the DPU can cover my paper losses.

AK71 said...

Hi Dividend Chaser,

We all pay school fees to Mr. Market at one point or another. Don't take it too hard.

Pay attention to gearing ratio in future. A high gearing should be a red flag. :)

SnOOpy168 said...

Dividend Chaser, you are not alone here. I had to take up the rights issues too, otherwise ..... :-(

On consolation, they are currently restricted by their loans T & C to payout max of USD0.6c DPU.

Someone did pointed out that should for FY2014, to maintain this DPU, RMT may have to dig into their cash kitty.

Anyway, as AK said, school fees paid. On paper for now.

AK71 said...

Hi SnOOpy168,

This reminds me a bit of another Trust:

CitySpring Infrastructure Trust: Rights Issue.

Well, hopefully, the container shipping sector sees rates improving in 2014. This could happen if the global economy recovers vigorously as even a tepid recovery will not cut it.

AK71 said...

The writing was really on the wall back in 2013 when I said in this blog post that "as an investment for income, beyond FY2013, RMT does not inspire much confidence. As an investment for growth, RMT simply does not make the cut."

Now, this:
The slowdown in the charter market has direct impact on the Trust’s business. As a result, the Trust has taken the prudent step to suspend its distributions to conserve cash flow until charter conditions improve.

“It is a difficult decision to suspend distributions. We have been working hard to maintain
distributions... However, given the downturn in the charter market heading into 2016 and the uncertainty over how long this could persist, we have made the difficult decision to suspend distributions..."


AK71 said...

Singapore-listed containership owner Rickmers Maritime will not be able to pay USD 179.7 million of senior debt which is due in March 2017, the company said in an investor presentation filed to the Singapore Exchange. Furthermore, due to adverse market conditions which affected the company’s financial performance, Rickmers Maritime said it will not be able to meet on-going coupon and principal payments of the SGD 100 million (USD 73.1 million) 8.45% notes due in May 2017.

AK71 said...

Rickmers Maritime, a Singapore-listed trust that operates container ships, said it would be wound up after it was unable to reach an agreement with its lenders to restructure its debt or raise new equity.


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