Published October 10, 2008

High interest costs force First Ship Lease to lower DPU

Lending banks invoke 'market disruption clause' in loan terms, allowing them to increase rates

By CHOW PENN NEE

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COMPANIES are coming out to reveal the impact of the tight credit conditions on their operations and their bottom line. Provider of bareboat leasing services, First Ship Lease Trust (FSL Trust), yesterday said that higher interest cost levied by FSL Trust's lending banks in the fourth quarter of 2008, has led the trust to revise the distribution per unit (DPU) guidance for the fourth quarter of this year (from 3.11 US cents) to 3.08 US cents.

Banks that lend to FSL Trust include German banks Bayerische Hypo-und Vereinsbank AG, Singapore and Landesbank Hessen-Thuringen Girozentrale, Singapore's OCBC Bank, and Japanese lender Sumitomo Mitsui Banking Corporation, Singapore.

In a statement to the Singapore Exchange yesterday, FSL trust said: 'Due to the turmoil in the global financial markets, the lenders have been unable to obtain interbank fundings at or close to the quoted London Interbank Offer Rate (Libor). As such, the Libor is no longer accurate in reflecting the lenders' actual funding cost, which has increased significantly.'

Because of this, the lenders have invoked a 'market disruption clause' in the loan terms during the recent interest rate resets. This allows the lenders to levy higher interest rates on FSL Trust based on their actual cost of funds rather than on the lower three-month Libor, plus margin, FSL Trust said.

The incremental increase in interest expense for the fourth quarter is about US$680,000, the trust said. 'The invocation of the market disruption clause by the lenders reflects the state of the current credit market and is not connected to the credit quality of FSL Trust,' Cheong Chee Tham, senior vice-president and chief financial officer of FSL Trust Management, said in a statement.

'The credit margins on our facilities at 100 basis points and 120 basis points remain unchanged,' he added. 'Unfortunately, the invocation of the market disruption clause has rendered our floating-to-fixed interest rate swaps ineffective as we are receiving three-month Libor under these swaps, whilst paying the higher cost of funds of the lenders during this interest period.'

And the invocation of the market disruption clause is likely to remain for at least three months. According to FSL trust, the clause will remain in effect until the next interest reset dates between mid-December and early January next year.

The manager of the trust is providing DPU guidance of 3.17 US cents for the first quarter of 2009 - provided the market disruption clause is not invoked for the next interest rate resets.

Other local shipping trusts said that their DPU has not been affected yet. Thomas Hansen, chief executive of Rickmers Maritime, told BT: 'As Rickmers Maritime retains a portion of its distributable cashflow, its DPU would not be immediately impacted should any of its loans be subjected to market disruption clauses.'

He added that, in the past, circumstances that led to market disruption clauses being invoked have been 'rare'. 'However, in the current market turmoil, one must be prepared for it,' he said.

Alvin Cheng, CEO of Pacific Shipping Trust Management said: 'We would like to assure unitholders that PST has not received any formal notice on the market disruption clause from its lending banks and as such, there will be no impact on our distributions to unitholders for the third quarter 2008.'

He added: 'We have enjoyed a very strong and supportive relationship with all our banks and the majority of our lenders have indicated that they have no plans to invoke such a clause at this point.'

For FSL Trust, the previously announced DPU guidance of 3.05 US cents for third quarter 2008 remains unchanged, while the first quarter 2009 DPU guidance of 3.17 US cents is 0.09 of a US cent higher than the revised fourth quarter 2008 DPU guidance of 3.08 US cents, it said.

Separately yesterday, FSL Trust also announced that American International Assurance Company has increased its stake in the trust from 8.995 per cent to 9.293 per cent.

The stake is held by the life insurance funds of American International Assurance Company Ltd, Singapore branch (AIA Singapore) and American International Assurance Company Ltd, Brunei branch (AIA Brunei) as well as the two Singapore-domiciled unit trusts and other investment funds managed by AIG Global Investment Corporation (Singapore) Ltd. An FSL spokesman said: 'It is inappropriate for us to comment on a substantial stakeholder's interest.'

In a third announcement yesterday, FSL Trust also said that it bought a 4,250 TEU containership, YM Enhancer, from a subsidiary of Taiwan-based and listed Yang Ming Marine Transport Corporation (YML). YM Enhancer has been concurrently leased back to YML for 12 years with a purchase option for YML at the end of the lease term.

The YM Enhancer was part of a three container vessel transaction that FSL Trust had entered into for a total amount of US$210 million.

The trust said that the acquisition of YM Enhancer is fully funded by FSL Trust's recently announced US$65 million revolving credit facility and the existing US$200 million revolving credit facility. FSL Trust has hedged its interest rate risk through interest rate swaps to fix the interest rate until the maturity of the facilities.

The acquisition of YM Enhancer will be accretive to FSL Trust's DPU from Q408 onwards, the trust said.