Pacific Shipping Trust announced that it might have to renegotiate charter rates down by about 30% for CSAV, which charters 2 of its fleet of 12 vessels. To note, we had highlighted in our last report that the key risk for PST's distributions would be in the form of counterparty risk with respect to CSAV. We estimate this will impact DPU by at least 13-15% in FY09 & FY10, and downgrade PST to FULLY VALUED at a reduced target price of US$0.15. Further risks stem from PST’s lenders invoking penalty clauses owing to the resulting material changes in charter contracts.

CSAV feels the heat. After a couple of downgrades by rating agencies earlier in April, Chilean container ship operator CSAV has decided to strengthen its balance sheet by US$750m – through a US$220m rights issue, as well as capitalising commitments with ship-owners and banks to the tune of US$400m. The re-negotiation with PST is thus, part of a broader co-operation and assistance framework to bail CSAV out of a difficult situation arising from huge operating losses.

And PST will be forced to cut DPU. Currently, CSAV's two charters account for about 30% of PST's revenue stream. Hence, we estimate revenue will be affected by about 10% in FY09-10, and lower our DPU estimates for FY09-10 by 14-16%. This translates to a DPU of about 3.2 UScts in FY09 and 3.4 UScts in FY10, down from 4.1 UScts in FY08.

Clouding sentiment for the shipping trust sector. While part of the reduction in charter hire may be capitalized in the form of shares to motivate ship owners, we feel the risks to DPU is heightened by reduced cash flows backing up the US$80m outstanding loan for the 2 CSAV ships. Diversion of cash flows to meet lender’s penal requirements cannot be ruled out. In line with lower DPUs, our DDM-based TP is also reduced to US$0.15. Downgrade to FULLY VALUED.