DPU up 5.4% QoQ. Pacific Shipping Trust (PST) posted a significant 72% YoY increase in 1Q09 revenue to US$15.2m, due to contributions from the four vessels acquired last year. This is the first quarter recording full contributions from all four vessels and 1Q revenue rose 4.9% QoQ. Cash earnings (net profit adjusted for non-cash items such as depreciation) rose 63% YoY and 4.8% QoQ to US$10.8m. The trust will pay out 0.98 US cents per unit, up 5.4% QoQ and 1% YoY. The small YoY increase in per share figures is due to the enlarged unitholder base after last year's preferential offering. The results were in line with our expectations.

CSAV renegotiation in focus… As announced last week, PST customer CSAV is asking ship owners (including PST) for a temporary reduction in charter hire payments. Two PST vessels are chartered to CSAV on 5-year time charters. We expect PST to agree to this renegotiation request as this is probably the best option PST has in the current environment. Discussions are still in preliminary stages but details are thin on: 1) whether the various ship owners will all agree to the request; 2) the exact quantum of the discount; 3) the size and type of compensation granted to owners.

Despite wide-spread issues in the ship financing arena, PST had so far managed to escape 'lender overhang' due to its fairly conservative business model; a fortuitous equity issue last year that strengthened its balance sheet; and importantly - the lack of loan-to- value covenants on its books. But the CSAV issue tilts the balance of power, in our view: a renegotiation likely qualifies as 'material change' in the trust's circumstances. PST's lenders could conceivably tack on a punitive spread to PST's cost of debt (increasing interest expense) or demand higher debt repayments. We understand that PST's lenders are reserving judgment for the moment, with no explicit renegotiation proposal out yet.

Valuation. We think it is too early to turn buyers of shipping trusts - we would prefer to wait until the shipping markets show concrete signs of stabilizing. For PST, significant uncertainty remains on the CSAV front. We also see a possibility that PST's board takes an even more prudent stance on distributions in the coming quarters in response to recent events. Counterparty risk (both CSAV and PIL), and lender reaction, remains our key concern, which we think is adequately reflected in our US$0.16 fair value estimate. Maintain HOLD.