Rickmers Maritime Trust - Did it pay too much compensation to Polaris for cancelled vessels?

6/3/2015 - Rickmers Maritime Trust has a secured revenue of US$220.1 mln over the next five years.

The Trust already has about 64% of its fleet committed for the year.

During 2014, Rickmers Maritime Trust unexpectedly retired a convertible loan well ahead of scheduled repayments over the next two-and-a-half years.

The loan was settled for US$39.2 mln on May 30, two months after Polaris Shipmanagement Company Ltd didn't exercise its right to convert it into units of the Trust on March 31.

Polaris is a controlling unitholder of Rickmers Maritime Trust.

The Trust recorded an US$11.4 mln gain on the settlement of the convertible loan during Q2.

In order to understand the origin of the convertible loan, it is important to recap the developments at the Trust since its listing in May 2007.

But before that, let us look at its recently announced earnings for Q4 2014:

Revenue: -12% to US$31.9 mln
Profit / (loss): US$11.2 mln vs (US$ 8 mln)
Impairment of goodwill and vessel: Nil vs (US$20.8 mln)
Cash flow from operations: US$20.7 mln vs US$27.3 mln
Dividend: 0.60 US cents per unit vs 0.60 US cents per unit

Revenue was lower due to a reduction in charter rates on four vessels which had their charters renewed during the year.

The Trust recorded an US$2.9 mln exchange gain on medium-term notes in Q4.

It didn't record an impairment of vessels and goodwill in Q4 as it had already charged an US$63 mln impairment in Q3.

On a full year basis, the Trust recorded a loss of US$16 mln compared to a profit of US$23.5 mln in 2013.

Now, let us get back to the curious case of settlement of the convertible loan from its controlling unitholder.

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Within a year of listing on the SGX Mainboard in May 2007, Rickmers Maritime Trust called for an Extraordinary General Meeting (EGM) to seek its independent unitholders' approval to buy 13 vessels from its controlling unitholder, Polaris Shipmanagement Company Ltd.

The unitholders approved the transaction at the EGM on May 5, 2008.

According to page 10 of the circular for the EGM, nine of the vessels had a capacity of 4,250 TEU each, whereas the remaining four vessels could carry 13,100 TEU each.

Mitsui OSK Lines Ltd had committed to charter five of the smaller vessels immediately after their deliveries to the Trust in 2008, while Hanjin Shipping Co Ltd had committed to charter the remaining four after their deliveries in 2009.

AP Moller-Maersk A/S had committed to charter all of the four 13,100 TEU vessels after their deliveries in 2010.

Rickmers Maritime Trust agreed to pay US$1.35 bln for those 13 vessels from Polaris.

Polaris continues to own a 15.62% direct stake in the Trust.

By way of background, the Trust is ultimately owned by Mr Bertram RC Rickmers who continues to own an aggregate 33.15% stake in the Trust (refer page 71 of the circular).

The US$1.35 bln consideration was arrived at based on a price of US$72 mln for each of the vessels chartered by Mitsui OSK Lines Ltd, US$69 mln for each of the vessels hired by Hanjin Shipping Co Ltd and an average price of US$177.9 mln for each of the vessels hired by AP Moller-Maersk A/S (see page 14 of the circular).

Rickmers Maritime Trust had signed term sheets for US$627.5 mln worth of loans to pay for the nine 4,250 TEU vessels which were chartered to Mitsui OSK Lines Ltd and Hanjin Shipping Co Ltd (see page 19 of the circular).

To pay for the four 13,100 TEU vessels that were chartered by AP Moller-Maersk A/S, the Trust had planned to use the cash on its books and raise US$650 mln through the issue of new securities.

So far, so good.

But the charters to Hanjin and AP Moller-Maersk A/S didn’t work out as planned.

After the collapse of Lehman Brothers in September 2008, the Trust was finding it difficult to raise the funds to pay for seven of these vessels.

Rickmers didn’t take delivery of the three 4,250 TEU vessels chartered to Hanjin and the four 13,100 TEU vessels chartered to AP Moller-Maersk A/S.

Polaris agreed to waive the Trust's obligation to purchase those seven vessels worth US$918.7 mln, if Rickmers paid US$64 mln in compensation.

The Board of Directors of the Trust's Trustee-Manager acknowledged the vessels were a "cash positive investment" with "secured revenue of about US$1 bln".

But the Directors added that reducing the capital commitments of the Trust and restructuring its obligations were the key priorities in order to maintain it as a going concern.

So, in August 2010, Rickmers Maritime Trust called for another EGM to seek independent unitholders' approval to pay the US$64 mln in compensation to its controlling unitholder Polaris.

The independent unitholders approved all the resolutions at the EGM on September 6, 2010.

The US$64 mln compensation was less than 7% of the total purchase price of US$918.7 mln of the seven vessels which it wasn't buying anymore.

The Directors pointed out, "Ordinarily, a buyer who defaults on a memorandum of agreement to purchase a commercial vessel would be expected to forfeit a 10% deposit and be liable to compensate the seller for any further damages."

In other words, the Trustee-Manager was trying to convince the independent unitholders to approve the compensation because it was less than what any other defaulter would have paid in such circumstances.

Further on page 12 of the circular, the Trustee-Manager said:

"In the event of a default on the Affected Memoranda of Agreement, Rickmers Maritime would be liable to pay US$10 million each (in contractual deposits) for four of the Affected Vessels (namely, the Maersk Vessels) and 2% per annum plus 3-month US$ LIBOR on any unpaid amount of the total purchase price pertaining to the Affected Vessels from the day the same became due to the relevant Affected VesselCos up till the date of actual payment. In addition, Rickmers Maritime’s failure to take delivery of and pay for the Affected Vessels could, under the contracts and at common law, result in claims based on the drop in value of or the purchase price of the Affected Vessels."

Therefore, the Directors of its Trustee-Manager said that they believed the compensation represented "a fair and reasonable settlement figure."

So, in short, the issue is that it seems to us that interest of 2% plus 3-month LIBOR should have been calculated on US$207 mln, whereas the Trust claimed to be liable to pay 2% plus 3-month LIBOR on US$918.7 mln.

The interest works out to be US$4.9 mln, compared to the Trust's initial claim of US$21.8 mln.

We sent the questions below to the company’s CFO on October 7 last year, but still have not had a reply.

This is a great shame, because we always aim to present both sides of the story, and if we have made a mistake, we would only be too happy to be corrected.

However, no correction has come forward to date.

So below we present the information as we currently have it, and of course if we do get a reply from the company we will update this story accordingly.

But there are more details in the 2008 circular to approve the purchase which could make shareholders wonder how fair and reasonable the settlement figure was.

Question

1. Did it pay too much compensation to Polaris for cancelled vessels?

Our rationale for asking this sincere and honest question lies in the circular, seeking unitholders' approval for purchasing the vessels from Polaris in 2008.

On page 16 of its original circular in 2008 mentioned that in case of default by the Trust it would be liable to pay interest at 2% per annum over 3-month US$ LIBOR on the unpaid amount from the date it became due to the date of actual payment.

It added, 'This shall be the relevant VesselCo's sole remedy and the said VesselCo shall have no claim against Rickmers Maritime for any further loss and damage, howsoever caused. If Rickmers Maritime's default continues for a period of more than five business days, the said VesselCo shall have the right to rescind, cancel or otherwise terminate the Memorandum of Agreement by giving notice in writing to Rickmers Maritime.'

Furthermore, 'In the case of the Maersk Vessels, the deposit, together with interest, shall be forfeited to the relevant VesselCo. This shall be the said VesselCo's sole remedy and the VesselCo shall have no claim against Rickmers Maritime from any further loss and damage, howsoever caused.'

KPMG Corporate Finance Pte Ltd - the Independent Financial Adviser to the Independent Directors of the Trustee-Manager - reiterated the above consequences of default on page 61 of the circular in April 2008.

Critically, the Trust was only liable to pay the interest at 2% per annum plus 3-month US$ LIBOR only on the unpaid amount of the three 4,250 TEU vessels, which was about US$207 mln (ie, the price of three Hanjin vessels at US$69 mln per vessel).

Therefore, we cannot figure out why the Trust said that the interest payable was based on the US$918.7 mln purchase price of all seven vessels.

The Trust also warned of possible claims due to non-delivery of the vessels.

But its 2008 circular clearly said that Polaris had no claims beyond the interest on the unpaid amount of the three 4,250 TEU vessels and the deposits for the four 13,100 TEU vessels.

Question

2. Was it really required to compensate Polaris for the four 13,100 TEU vessels?

Now let's take a look at the compensation for the four 13,100 TEU vessels chartered to AP Moller-Maersk A/S.

According to the circular in April 2008, in case of default by the Trust, Polaris could have forfeited the US$10 mln deposit on each of the four 13,100 TEU vessels.

So, that adds up to US$40 mln compensation in total.

But as per page 16 of its circular in April 2008, the Trust was required to deposit a US$10 mln deposit for each of the 13,100 TEU vessel in cash or by way of a bank guarantee issued to Polaris at least one year before the expected date of delivery of the vessels.

Therefore, the security deposits were to be made between July and September in 2009.

Moreover, the Trustee-Manager was required to communicate the choice of form of deposit - cash or bank guarantee - at least six months before the deposit becomes due.

Therefore, Rickers Maritime Trust had more than a year-and-a-half to re-think before the actual deliveries of the four 13,100 TEU vessels.

And if the deposits were indeed paid during 2009, it should have reflected in the balance sheet and the cash flow statement of the Trust for the year ended December 31, 2009.

But we couldn't spot any such entry in the Trust's FY2009 annual report.

If the Trust had not paid the deposits as stipulated by the agreement, wasn't the contract automatically terminated?

In that case, was the Trust still required to compensate Polaris with an amount equivalent to the security deposits?

(Read the full story to get all 6 questions)

In an email on October 7, we invited the Trust (ir@rickmers-maritime.com), its CFO (g.low@rickmers-maritime.com) and its IR agency (bob.ong@newgatecomms.com.sg, joanne.loh@newgatecomms.com.sg) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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