NOL perpetual securities are treated as equity, instead of debt

Fair value S$1.38
52-wk range (S$) 0.98 - 2.01

Details of the perpetual capital securities issue
Neptune Orient Lines (NOL) announced it has mandated four banks as joint lead managers in its issuance of S$-denominated perpetual capital securities. The size, pricing and distribution rate of this issue have not been finalised and will only be available after its currently ongoing meetings with investors. NOL has the option to call the perpetual securities in full and at par at the end of five years and every distribution date thereafter. The issue will have semi-annual distributions and, after a 10-year period, the distribution rate will see a step up of 1.5% p.a. NOL also has the discretion to defer distributions to perpetual security-holders. However, if NOL falls into arrear in the distributions to perpetual security-holders, it will be restricted from distributing dividends to ordinary shareholders. In addition, deferred distributions are cumulative and bear interest at the distribution rate. NOL said the proceeds of this issue will be primarily applied to its working capital needs.

Financial implications
The high 1.5% step up in the distribution rate after
10 years should be punitive to NOL if it does not call the perpetual securities back within 10 years. This shows the management’s intent and confidence to service the distributions and, eventually, call the securities. And since accounting standards dictate that these perpetual securities are treated as equity, instead of debt, this issue will improve NOL’s gearing ratio, without diluting shareholders’ interests. NOL’s cost of borrowing should also lower with the improved gearing ratio.

Maintain HOLD
NOL had previously said its expected delivery of 32 vessels over the next three years is fully covered by its existing credit lines, which are without attached gearing ratio covenants. With the proceeds from this issue of perpetual securities, NOL’s cash position will be strengthened further. This positions NOL well to navigate through the difficult environment the container shipping sector is currently facing, despite recent increases in freight rates. Thus, we maintain our fair value estimate of S$1.38/share and HOLD rating on NOL.