Legg Mason to launch high income paying maritime financing trust


#1

Originally published at: https://whichinvestmenttrust.com/personal-viewpoint-much-to-admire-with-legg-masons-proposed-maritime-trust-except-for/

See also: https://whichinvestmenttrust.com/legg-mason-to-launch-high-income-paying-maritime-financing-trust/
Blue Ocean Maritime Income is looking to fill a gap left by banks exiting a multi-billion dollar industry. Legg Mason subsidiary EnTrustPermal, is to launch Blue Ocean Maritime Income, a US$250m direct lending investment trust to capitalise on the shipping industry’s US$80bn annual debt requirements. EXPECTED TIMETABLE 17 September: Commencement of the Placing and Offer…


#2

It would be great to see more information on this, maybe a prospectus and analysis.

The dividend sounds great.


#3

Wow! This takes me back to when I worked at Lloyds as a Marine Underwriter! So, more of stepping in to cover banking business. Are they still keeping the best for themselves or is this really supporting businesses that has been let down by banks withdrawal from the sector? Trade War can’t be helping. Need for LNG carriers might be useful. But the hardest part for me is Legg Mason! More homework…


#4

Yeah, you are right, it is another replacement for banks @james_pigott. Pretty good yield on offer, but will depend on the quality of the management.


#5

@rabsteel the prospectus was in the original post. here https://whichinvestmenttrust.com/wp-content/uploads/BMAR-Prospectus-17-Sept-2018.pdf


#6

Seeing them on Friday…


#7

Let us know what you think @james_pigott

It’s such an unusual concept that i don’t know what to make of it because I’ve nothing to compare it to.


#8

@donnat A trust launched late last year that invests in the equity of shipping; see SHIP for Tufton Oceanic Assets, but you are right. It’s on its own, although it will mainly deal in senior debt.


#9

Oh I’ve not heard of them but I’ll look them up.

You are a mind of information @james_pigott thanks a lot :slight_smile: :+1:


#10

This is my personal view of this trust and in no way forms advice or recommendation to buy.

There are still some unanswered questions, but here is my synopsis of this new trust having just come from a meeting with the main fund manager and brokers. The fund manager, Svein Engh has over 30 years’ experience in financial markets and is a specialist in Maritime business. He takes a conservative approach and has banking background. He backed off from taking on more risk in previous roles in 2006 due to markets being “too frothy” so I think he is a safe pair of hands. This is his third time he is building a book from scratch and has a member of the team who has been with him each time, so he is not alone. Last fund was $11bn with Fortis Bank. Using an Investment Trust this time allows him to be nimbler than using a banking structure, and gives him more pricing power, more on that later. Overall, I think the team and the vehicle are of good quality.

So, what of the market? Each sector in the Shipping world has its own cycle. Currently Dry Bulk has been coming off its lows in 2016, Containers are behind that, currently at their all-time lows and Tankers are still falling but the end is in sight. So, this is not like other assets in that it is really at a low currently. New builds take about 2 to 2½ years to build and so there is a lag between orders and supply. There is always a tussle between supply and demand of shipping. In 2008 to 2010 the market was swamped with delivery of new builds ordered in the mad heights of a global boom. It has taken until now for that oversupply to be absorbed. The new orders have only just shown signs of rising so it will still be a while before that supply is delivered.

The benefits of that are that in a rising market, the default risk reduces, the value of the ships increases so that the LTV improves, and these deals include a percentage of the value of the ships when they mature, which therefore increases. The effect of Trade Wars is factored in and in fact is muting what could be a trading boom for shipping.

Not only is this sector at the bottom of its cycle but the correlation with equities is low and also, between the 3 sectors is also a low correlation. The fund manager can therefore move around within the asset class subject to how things are changing. Overall seaborne trade behaves like a geared play on global GDP.

The trust. The main area of deals is Europe, then Asia, and the US. The banks have halved their business and the overall market is about $80-100bn p.a. of debt. The rates are a staggering Libor + 9-10%! The loans are senior secured on the actual ships in question. There is a buffer (15-20%) between the loan remaining (they are amortising) and the value of the ship(s). This is checked quarterly (which is more often than banks used to do). As I mentioned earlier, there is a claim on the ship to and if the loan is repaid early there are conditions which ensure this claim is met.

They are mainly operating in the Primary market and are dealing with companies where the fund manager is well known. Cases exist where they have sealed the deal even though they were more expensive because the market knows it will be managed and they can help should restructuring be required, rather than a Hedge Fund which is manly operating in the Secondary market and looking for pricing anomalies. They have a good reputation. Management is key. They actively manage the loans, meeting with senior management monthly, running covenant tests quarterly. Making sure there are no surprises and keeping the loan reducing ahead of the devaluation of the asset. The older the ships, the faster the pay-down is set. Since they deal in both markets (primary and secondary) there is no dealing internally between the Blue Ocean funds.

Most of the money raised should be invested in the first 4 months and all done before the year is up. The initial yield is just 3% or so, given the deployment timing. Ultimately it will be nearer 7%. There is no plan to link to RPI like Alternatives. It will be paid quarterly and there maybe an income reserve if things go well. It will be a concentrated portfolio of about 10-12 investments. Clearly though it hopes to issue more shares since it could become a $1bn trust without causing any issues to how it is managed. The target is an 8-10% total return on NAV.

This brings me to the only issue I have, and it is a big one; there is a Performance Fee. I don’t particularly have an issue with these per se, but this one is triggered at a 7% return. OMG, that is just the yield! So, any capital return counts as outperformance, really! The fee is 15% of any “outperformance” and 5% is paid in cash at the end of the year and the remaining 10% is paid over the subsequent 2 years assuming the hurdle is still exceeded, capped at 5% on closing NAV in any one year. I am sending my opinions on this to the team to see what they say. I hope market sentiment can push back on this. At least raise the level to 9% or more. I have yet to work out what it equates to since the 10% later payment is not detailed enough, but I will update once known. It is pure greed and trying to emulate BioPharma Credit which is a totally different kind of investment, given the underlying binary outcomes.

The management fee is 1% and the OCR is expected to be about 1.34% including the management fee.

There will be no gearing. Continuation votes at 5 years and then rolling every 3 years. 14.99% buyback powers.

Conclusion. It is US$ based, as this in the currency of shipping, so there is currency risk but over the long term this should even itself out. The team is solid. The market is rising in general. Global GDP needs to chug along as it is susceptible to this, although some sectors are not so, like Dry Bulk. Containers are GDP dependant and Tankers are oil price dependant. The performance fee is a real sticking point. Very cross it is there. The uncorrelation with other classes is also a big attraction but I will leave it to you. If you have any questions I will try and answer them. Deadline is 16th October. Good luck!


#11

I was quite excited reading this until I saw the performance fee. I am not against performance fees but they have to be difficult to archive rather than being a given.

I will not be investing in this with that type of fee structure.

Thanks a lot for your description though @james_pigott it was perfect.


#12

it sound like it is a really well designed investment approach and I think it could do really well but the performance fee is not really a performance fee it is just the fee for doing the minimum they say they will achieve.

It’s a no from me on that basis.


#13

Yeah I agree with you @andytheinvestor it is not a performance fee at all it is just the fee but they’re too scared to call it what it is.

It’s a bit like the 2 and 20 that the hedge fund guys charge as a default. It’s all about getting rich quick at your investors expense just in case the proverbial excreta hits the fan.


#14

Wonderful analysis from @james_piggott . I guess the key will be getting out at the right time because the realisable value of ships seems to plummet in recessions. The cyclicality puts me off.


#15

Cheers @james_pigott that is a really helpful post.


#16

@mickbeaman Ok, it is cyclical, but if you hold the debt, things are less volatile. So long as the companies are of quality and have been around the block you should still be paid. The issue is making sure the value of the ship does not fall further than the remaining debt. The fund manager has been doing this for 30 years so I would say he has a proven history of surviving such cycles.


#17

Oh, this is tough. The whole idea ticks all the boxes for me, except one. I think the hurdle of the Performance Fee (PF) is too low. However, the net yield to an investor is still massive and can’t be found elsewhere in the market. I would prefer to see a higher management fee to actually cover the expense of finding and completing deals in the primary market, and a PF that is less likely to be triggered each year. Instituations, for whatever reason, seem to filter out trusts with high fees so it may lose out if the management fee is higher than 1%.

The duration of these deals is also short with the average at 3 years and longest at about 7, so there is a lot of work going on here. I’m torn between getting this for clients who want income or just letting it go. I would be buying in the secondary market anyway. So I suppose I hope it issues more shares to stop it going above a 5% premium!! Your comments would be welcome. Anyone thinking of going in?


#18

This is a really inciteful description of this fund, you know what you’re talking about @james_pigott

There was one bit I’m not sure I fully understand where you wrote:

The benefits of this are that in a rising market, the default risk reduces, and the value of the ships increase so that the LTV (loan to value) improves. Also, these deals include a percentage of the value of the ships when they mature, which therefore increases.

Do you mean when they sell the ships they get a cut of the proceeds?

The performance fee is shocking. I really like the investment premise of this fund but I don’t think I can stomach that performance fee.


#19

@chrisbu I have since learnt that some of the deals are structured like this. So, yes, a percentage of the value of the ship is paid at the end of the term, but the ship is most likely not sold. I don’t know what situation triggers this kind of deal though.


#20

Thanks @james_pigott. It is genuinely a type of investment I’ve never come across before. If they refashion their fee structure I’m in there.