SHIPPING RECOVERY

Personally, I am not too concerned about DPU at the moment...as long as it is above 1 US cent per quarter, I am happy with it. My concerns lies in the LTV ratio and equity-indebtedness test. These are the risk faced by investors buying into a Trust whose asset\'s valuation are at a bottom. I like to buy things at the bottom so a shipping trust makes sense. It is good to see that the fleet\'s valuation increased by 5% since Oct 09 hence signaling that the shipping sector may have bottomed out. Once the shipping cycle starts to peak (most likely a decade time), then it is time to sell haha ! I think the same thing applies to REITs and so on. My 2 cents.

Dear Grandmaster89, I wish things are as simple as that. Shipping Trusts to me, is a flawed investment instrument. You are buying depreciating assets which have little or no opportunity to appreciate in value. In the case of a property REIT, there is every chance that a second-handed purchase property can be more expensive than what it cost to build. In the case of a Shippin Trust, that possibility comes once in probably 50 years, which was what happened in 2007/08. Which is why all these ship owners were rushing to asset securitize their new purchased vessels with their supposedly secured long term contracts. We all know that these \"secured\" long term contracts are long term as long as the customers can make money from the supplying of cargo. If not, the customers will come back and squeeze the charteres of vessels. Ship owners are effectively transferring the risk of owning new builds to the investors while they earn near-risk free returns by collecting the DPUs. That is why I admire the management of Courage Marine. They put money where their mouths are. I had the chance to speak to them during a AGM some years ago about Shipping Trust and they told me that they considered it before but decided against it cos they felt uncomfortable. Now, if the management of a shipping company that I admire feels uncomfortable, there\'s no way I will risk my money betting against them. Cheers.

Hi MacGyver, The term \'depreciating asset\' is flawed. If we examine the price of second-hand vessels from 2004 - 2007, we will notice that they have been appreciating. Vessel prices are determined by supply and demand - high demand and low supply will push the fair valuation of vessel upwards. Similarly, the reverse is true and we saw vessel values plunging by over 40% in the space of months. Over the past few months, vessel valuation have started to recover slightly hence signaling that the bottom has been reached. FSLT\'s portfolio of vessels registered a 5% increase in charter-free valuation to US$623 million from Oct 09 to March 10. Hence it is incorrect to picture, vessels as straight line depreciating objects. There is a good chance that vessels bought in 2009/10 will appreciate in the value over the next decade. I believe in the late 1980s, a whole new breed of \'asset plays\' were created - trading of vessels by buying low and selling high. Courage Marine did something similar with their capesize vessel last month haha ! Similarly, properties too do depreciate. Only freehold land doesn\'t depreciate but more often than not REITs do not own the land. Properties depreciate as rapidly as vessels. I can\'t think of any building that can remain attractive without extensive renovation being done on it after 3 decades. The REITs depreciate their properties just as well and so do lease-hold land (if they own it) though they make up for it through \'asset enhancement schemes\'. We must understand that shipping trust isn\'t a ship operator. It is an alternative source of financing for ship operators which makes it more like a bank. A pure-play shipping trust shouldn\'t be operating vessels nor buying vessels from its sponsors. I do agree with you about \'asset-dumping\'. This isn\'t prevalent among the shipping trust only - quite a number of REITs have their own property sponsors and so too does Hyflux Water Trust. I refuse on principle to invest in such a system due to the potential conflict of interest. This is why I chose to invest in FSLT since it lacks a shipping owner as its sponsor. FSLTM is free to finance any shipping operator in the world. REITs and Shipping Trust belong in cyclical industry. The value of the underlying asset will affect the Trust performance - loans, counter-party risk, acquisitions and so on. Shipping valuation is at the bottom hence we see ugly things like LTV ratios, equity to indebtedness test, counter-party risk and so on coming out of the carpet. These 3 scary little things are tied to vessel valuation - if it is low, you are dead. But since, you are at the bottom, the risk is minimized and the upside is huge. REITs on the other hand are nowhere near their bottom. If the property market crash, a lot of smaller REITs will undergo what the shipping trust are under-going today. Nobody bothered about LTV ratios prior late 2008 in the shipping trust. Ugly things will only pop up in a crisis. Cyclical trust industry - good source of dividends or pure-play turnaround counters. ? :blush: Love to hear your views Cheers!

Hi GrandMaster89, We can argue until the cows come home and we are still only talking theory. If you go to the ground and talk to commercial bankers, then you will understand what I mean. There are millions of bankers lining up to finance property deals but there are only a handful out there for shipping deals. So who has the bargaining power? Whether it is REITs, or Shipping Trusts, I find a disparity in cashflow. Short term financing used to support long term debts. Can it work? Maybe it can in the short run but long term, it is sure to collapse. Hence, I don\'t touch either. You mention asset appreciation for vessels from 2007-2009. This is what I meant by once in a long long time. Maybe you can check, other than 2007, when was the last time that a second-hand ship cost more than a newbuild. On the other hand, I can show you many many examples of second-hand property more expensive than first-hand property. You know the reason why? Because property is fixed. You cannot exchange a property from New York with a property from Shanghai. But I can exchange 10 vessels plying Europe route to be deployd in Asia if the European rates are not good. You mentioned Courage Marine. But do you know they paid for that vessel in cold hard cash? Which is why they can sell off the vessel without the need to inform their bankers. In reality, if you want to sell a vessel, the bankers have a big say to determine if their loans can be recover and whether it breaches their covenants. Cos that vessel could be a part of a syndicated loan from a couple of banks. End of the day, like you mentioned, it is a game of demand vs supply. By asset securitizing the supply, you added another complication in financing costs. I am not smart enough to understand all these financing stuff, so I better stick to something I know. Cheers.

For Courage Marine & other shipping stocks whose fans are reading this>>>> 0704 GMT [Dow Jones] HK dry bulk shipping stocks higher vs HSI\'s 1.5% rise, as Baltic Dry Index extends recent gains (+0.5% at 4,209 yesterday, +10.7% over past 4 sessions). Macquarie says BDI up by around 39% over past 1 month, but dry bulk share prices down 18% over same period. House thinks freight rates will likely roll over in near term based on falling Chinese steel prices, but given disconnect between freight rate, share prices, \"we encourage investors to use the market correction to question which long-term winners they want to own in this space at newly attractive prices.\" Recommends China Shipping Development (1138 HK), as says stock trading near 52-week low. CSD +4.7% at HK$9.93, Pacific Basin (2343.HK) +4.0% at HK$5.20, China Cosco (1919.HK) +4.7% at HK$8.54. (susanna.tai@dowjones.com)

GrandMaster89, Read article below for my fear of shipping recovery. Shipping rates on the Asia-Europe trade route have dropped for more than 12 consecutive weeks because of a hasty resumption of idled capacity and new vessel deliveries. Almost 30 per cent of what had been a rebound in the freight rates over the past year has been wiped out since March as nearly one million 20-foot equivalent units (teu) of idled vessels have been reintroduced into operation in the year. The weekly capacity on the Asia-Europe trade route is expected to rise 15 per cent to 48,550 teu next month from January, industry sources said. Most of this increase is derived from the revival of idled vessels. At the same time, 10 new 13,000 teu vessels are to be deployed by Maersk Line and CMA CGM in the trade lane. The idled fleet dropped from a peak of 1.5 million teu in December to less than 550,000 teu on May 24, shipping consultant Alphaliner said in a weekly report. As June and July are the peak seasons for the trade lane, it expects the laid-up vessels to further decline to 450,000 teu by the end of this month. \"Capacity management is the perennial weakness of the shipping lines because the industry is very fragmented and lacks a market leader to stabilise the market,\" Geoffrey Cheng, a transport analyst at Daiwa Capital Markets, said. Tung Chee-chen, the chairman of Orient Overseas (International) (SEHK: 0316), warned of the problem more than two months ago. \"Any imprudent reintroduction of capacity currently idling or laid up, if mismatched with demand, could see fresh rounds of rate cutting,\" he said in March. Since then, the freight rates on the Asia-Europe trade route have fallen 17 per cent. Transpacific trade, however, is subject to yearly contracts and is less volatile. Average freight rates from the mainland to northern Europe fell to US$1,802 per teu for the week to May 23, compared with US$2,164 during the week to March 5. Laid-up vessels compared with the global fleet have dived to 4.1 per cent from 11 per cent last year. China Shipping Container Lines (SEHK: 2866), however, said rates on the Asia-Europe trade route had reached the bottom. Freight rates had stabilised and demand from Europe had increased, its investor relations manager Frank Fan said