First Ship Lease Trust - Acquisition of 3 Container Ships for US$210 Million

This evening, FSL Trust surprised me by announcing the acquisition of three (3) container ships from Yang Ming Marine Transport Corporation, a listed Taiwan-based shipping company and the 16th largest container liner company in the world. After all, it was less than a month ago on April 21, 2008 when FSLT announced that it had acquired 2 crude oil tankers from Geden Shipping (a Turkey-based company) for US$140 million. I was not expecting another acquisition so quickly, to be frank.

With this most recent acquisition, FSLT has fulfilled its target of US$300 million of acquisitions for FY 2008, with just 5 months into FY 2008. In fact, the acquired vessels make up a total of US$350 million, which means FSLT needs to draw down on its remaining US$200 million credit facility AND arrange with its lenders to finance the remaining US$50 million. In the press release, it was mentioned that FSLT Management are trying to increase the second credit line to about US$265 million in order to acquire all 3 vessels. The first 2 have been acquired on a 12-year lease and will be delivered by end-May 2008 and end-June 2008. For the third vessel, financing and documentation has yet to be completed and assuming FSLT can complete it soon, the vessel will be delivered by end-Oct 2008.

According to the announcement, the acquisition is immediately accretive and will add US 0.02 cents for the 2Q 2008. This will raise DPU to 2.77 US cents for 2Q 2008, while DPU for 3Q 2008 will hit US 3.05 cents per unit. This is NOT factoring in the accretion from the third vessel, which FSLT will announce in due course once financing and documentation are completed. Therefore, using the DPU of 3.05 US cents per unit, we arrive at a full year DPU of 12.2 US cents. Using an exchange rate of 1.36 to the USD, full-year DPU is about 16.59 SGD cents. Based on the closing price of $1.13 this evening, the projected future yield is about 14.68%. If we factor in the potential accretion from the last vessel, we can expect an additional 0.09 US cents per share DPU (2 vessels add 0.18 US cents, so one vessel adds 0.09). Thus, full year DPU will rise to 12.56 US cents or 17.08 SGD cents; giving a yield of 15.1%.

Suffice to say that FSLT Management is being extremely aggressive in their acquisitions; with the aim being (I suspect) to increase the unit price through yield compression. The purpose of this would be to eventually issue equity to fund future acquisitions as FSLT has now reached its targeted debt-equity ratio of 1:1. Management had indicated that any subsequent acquisitions would preferably be funded by equity, assuming equity can be issued more cheaply than obtaining debt. At the unit price level of $1.13, it certainly does not make sense for Management to issue new units as the cost of equity is too high.

Thus, Management is taking a big risk that the unit price will adjust upwards significantly so that equity issuance can be done at a higher premium to the current market price. This will enable less dilution for existing unit-holders and allow the trust to "finance" itself once again. Once the debt-equity ratio falls below 1 due to equity issuance, the Trust can then turn to debt once again to continue to fund purchases; and the cycle continues. This is the best-case scenario assuming it pans out, and Mr. Market shall be the one to decide if this will occur.

Meanwhile, as a shareholder, I will continue to enjoy the higher dividends which are going to come from yield accretion. As mentioned before, I am treating FSLT as a steady dividend play with regular cash inflows (preferably increasing over time). Any capital gains are an added bonus, and I shall review FSLT again once more information on financing and Management's future plans are elaborated on in a separate press release in future.