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Rickmers Martime Winds Down. My thoughts on Position Sizing, the True Value of Ships and Prospect Theory

As human beings we tend to be risk seeking(gungho in taking on risks) when we should be risk adverse (afraid of taking risk) and vice versa, often at the wrong time.

In the case of Rickmers Maritime, I am not sure which is the case.

Rickmers Maritime is a business trust that I wrote about in the past that operates a collection of container ships. They were charter out during the good times at rates of US$25,000/day and now that the charter is coming to an end, the prevailing charter rates is closer to US$5,000/day.

This resulted in a plunge in cash flow, and the repercussion is that they are suppose to repay $200 mil in loan in 2017 and couldn’t get the debts to be refinance because the discounted cash flow of the ships are much less than in the past, and to the potential lenders, it does not warrant to lend them that much.

Rickmers stopped paying dividends, then Rickmers Maritime wanted to restructure their existing debts, where the bond holders would take on new restructure facilities and take on losses outright, prolonging the repayment.

This deal was a no no for the Rickmers Maritime Bond Holders and thus they do not wish to restructure this deal and take the losses.

This week, Rickmers Maritime ran out of means to get themselves out of the situation and would be winding down the trust.

Usually in this situation, the most senior bond holders would get their first take on the trusts assets (which usually are put to liquidation), then the more junior bond holders and then the equity holders.

Straits Times announced that they have found a buyer for the entire fleet of container ships at US$113 mil. Other than the ships, the trust do not have much assets of note, this means that many of the more junior bond holders and all the equity holders are wiped out.

The alluring thing about Rickmers Maritime is that, had you based on what the asset is worth on paper, you would think that the debt to asset ratio is safe.

The vessel values are based on historical cost and some how there was no impairment, if the true future value of the ships are much less.

The vulture deal to purchase the fleet at US$113 mil shows us how much the ships are actually worth.

Second level thinking is important here, when looking at financial statements in asking questions about the financial line item. One good one is whether these items on assets are valued at cost and what is the real value? What are the assets value based upon?

Ships are Commodities, just like General Industrial Properties

Ships by itself, unless very uniquely spec, in my opinion are not worth much without a charter contract.

This is the same as general industrial properties without some demanding specifications.

My friend likes to say industrial properties are just 4 walls.

What gives this and ships value is the quality of the tenants/charterers, the duration and terms of the contract.

Without the contract the ships are worth much less.

This is why I grew tired of this debate by the Sabana shareholders that state that the sponsors are selling the properties into the trusts at an expensive price and this disadvantaged the shareholders.

My question is: why can’t this property sell much higher than the properties around it?

Suppose I have this industrial property in Changi that Amazon are interested in, and they can pay for it. They decide to rent it from me at 3 times the prevailing market rent, and rent it for 10 years with 2% annual escalation.

I decided to sell this whole property and contract to my friend. Do you think I would sell it at the prevailing market rent?

This example, might sound extreme, but where does this stop? Does that mean that after this episode all the REITs should not take any sale and lease back? What is your solution to find properties that rent well, not sale and leaseback, are downright bargains when there are so many REITs, private equity funds and listed businesses looking for good deals?

If there is one good thing that came out of this exercise, at least I know how much is the market value of these 4250 TEU container ships (for my FSL review)

Prospect Theory

We all have the psychological deficiency that losses affect us more than winnings. This is asymmetrical.

In this case, the bond holders would rather cling on that they have 5% chance they would not lose 100% of their money and be more risk seeking about it.

They hope that:

  1. A white knight comes along and save them
  2. The container rates suddenly turn up to $15,000-$20,000/day

In my latest research, the container rates did turned up from $5,000 to $10,000/day. This came probably too late, and I am not sure whether the lenders are ok with that.

The right thing to do perhaps is to be Risk Adverse and take the deal, since to save Rickmers Maritime is to let it run longer, in the hopes that container rate does turned.

Diversification and Concentration of your Portfolio and its Relation to Risk Assessment Level

Many people are invested in Rickmers Maritime and their results would differ.

However, what we should think about is our levels of diversification and concentration in a single stock as such.

If Rickmers Maritime is a winner, you would want to concentrate 10% of your portfolio in it.

However, most likely it is not, and right now it is at the other end of the spectrum. Had you have 10% of your capital deployed, this would be wiped out.

Are you ok with 10% of $10,000 being wiped out? how about 10% of $100,000? or 10% of $700,000?

What is the significance of that absolute amount of money?

This is an aspect to think about.

Diversification is the solution to minimize these blow ups. However, that is sometimes the wrong way to think of things.

Many would go with the frame of mind that to minimize blow ups, I will buy small positions and be very diversified.

There are some mitigating actions. I talked about how I prospect businesses and determine my position sizing in my Expected Return Model.

If you do not diversify, you can have better focus on each of your position, and carry out better and more in-depth risk assessment.

You might be able to determine at an early stage you got it wrong, take the loss or the small profit and run away with it.

Diversification nowadays seem to equate to “I don’t need to know things in depth” and that is dangerous.

The better frame work is understand how much you could possibly lose in a position, are you ok with it, be diversified enough so that in the event the position really blows up, it doesn’t affect the overall objective (often wealth accumulation or financial security) all that much. Build better competency in assessing the business especially the scenarios that could likely go wrong.

Thinks will blow up in your face. You need to figure out the system that takes care of blow up regardless of your confidence in the situation.

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Sunday 23rd of April 2017

I am also invested in Rickmers. It is just sad that they bite the dust & so is my money.

The total lost of my investment in Rickmers is roughly my one month pay or a full year dividend from my portfoilio. I can still stomach this episode.

However, my portfolio also consist of M1 & Sabana which are subject to a lot of noises. I am staying away from anymore injection in this 2017.


Saturday 22nd of April 2017

Hi Keith, I am vested in Rickmers Maritime. I am just an average investor. My thoughts:- 1. Diversification is important. Luckily this counter make up 2 % of my portfolio. 2. On hindsight, I should had sold out when dividend was suspended. other signals are net debts much higher than market cap and shareholders funds. Asset coverage ratio was also very low. 3. I shall learn from this episode and move on. 4. Thanks for this write-up about Rickmers.


Saturday 22nd of April 2017

Unmasking error and intellectual one-upmanship are admirable. But compelled to find faults in others and being contrarian for the sake of being contrarian are of very little value. And coming up with argument lacking in facts and substance is just sad. You should stop criticizing what we do with our Sabana REIT investment.


Saturday 22nd of April 2017

Your argument is flawed. Why would Amazon want to rent your industrial property at 3 times the market rate? This is not the market rate, it is a artificially prop up rate. Using a false market rate as an input to DCF model to come up with an inflated price for an asset is fraudulent.

DCF model is an alternative desktop valuation model. Theoretically, all valuation methods should yield the same price for an asset. I suggest you study more on valuation methodology and REIT valuation before making statements like "This is why I grew tired of this debate by the Sabana shareholders that state that the sponsors are selling the properties into the trusts at an expensive price and this disadvantaged the shareholders."


Saturday 22nd of April 2017

I disagree. The reason why Amazon would rent out at 3 times the rent is not discussed here. And if we are talking about DCF, the cash flow is important here. Specifically its quality and the quantity of it. It is even more so for an asset that has a limited land lease. When you sell the whole asset, you are selling the asset, with the contractual lease.

This is similar to selling a precision engineering business which is able to generate a much better cash flow than its peers. if a buyer comes along to buy it and low balls you by saying "on average most precision engineering business cash flow is x instead of y, so i will buy it from you with x* 10 times. Would you accept the deal?

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