The shipping bubble has burst spectacularly. We expect steepdeclines in asset prices, in line with the deleveraging cycle. The threeSingapore-listed shipping trusts were all formed at, or very near, the peakof the shipping cycle. Consequently, their ships were priced at highvaluations. They then continued to grow aggressively by gearing up. Webelieve valuations in 2009 will be focused on survival. The biggest threatto the sector is the loan-to-market value (LTV) covenant, which canpotentially lead to lower (or zero) distributions or distressed assetsales. Pacific Shipping Trust is the only trust without LTV requirements.We expect capital commitments to be another overhang on valuations in 2009? growth, previously a positive, has now become a burden. We have a NEUTRALrating on the sector
First Ship Lease Trust: Covenant concerns

First Ship Lease Trust (FSLT) is currently trading at a trailingyield of about 35%, which we feel is unsustainable even in our best casescenario because of debt repayment terms. We estimate that DPU would fall7.5% to 40% YoY over 2010-12. FSLT has the most diversified portfolio ofthe three Singapore-listed shipping trusts. However, we do not believe anysub-segment is completely immune to the reversal in the shipping andleverage cycles. We also note that FSLT has suspended its acquisitionprogram as it awaits better debt and equity market conditions.Unfortunately, its ability to hunker down and ride out the cycle is limitedby debt covenants. Another 20% decline in fair market value, which is notimpossible, is required for FSLT to breach the loan-to-market valuecovenant, triggering a technical default. Distributions could be reduced,or even cut to zero in such a scenario. We have adjusted our estimatesslightly and our fair value inches up from S$0.43 to S$0.46. Maintain HOLD.

Rickmers Maritime: US$1.1b order book is a burden

Rickmers Maritime (RMT) expects to take delivery of 10 new vesselscosting over US$1.1b from now to 2010. Despite an aggressive acquisitionprogram, RMT has been able to defer an equity issue by ramping up gearingin the near term. This increased leverage comes at a price ? stringent debtrepayment terms mean an equity issue can only be postponed for so long. Allin, we estimate that RMT needs around US$600m in fresh equity. At currentprice levels, any issue would be highly dilutive. We believe order bookconcerns will define 2009 for RMT. Worst case solutions to 'disappear' theorder book will be, in our opinion, the best case scenario for unitholders.Another major concern is the potential breach of the loan-to-market valuecovenant on existing debt. Maintain HOLD with S$0.40 fair value.

Pacific Shipping Trust: Rights issue over and done with

Pacific Shipping Trust (PST) raised about US$92.3m in grossproceeds from its preferential offering (PO) in 3Q08. Sponsor PacificInternational Lines (PIL) had agreed to subscribe for both its pro-ratedshares as well as any unsubscribed units. Its stake in PST has consequentlyincreased from 34.64% to 59.2%. The PO proceeds are being used to financePST's 2008 acquisitions. As of 30 September, PST is geared at 0.8xdebt-to-equity. PST is the only Singapore-listed shipping trust without aloan-to-market value covenant on its loan documents. The PO has come at theprice of a smaller free float but demonstrates the willingness of PST'ssponsor to support its trust. Charters to PIL account for about 70% ofPST's annual revenue. In essence, the risk quantum for PST has become aproxy for the risk of the parent company. PST's share price has fallen 68%over 2008. It is currently trading at a 32% trailing yield.