www.shaproperty.com

I REFER to the Dr Money column by Larry Haverkamp, 'Trust the way to make money?' (The New Paper, 26 May).

While Mr Haverkamp is entitled to his view, we are surprised that he has ignored relevant and salient information that was stated in the Prospectus of Pacific Shipping Trust, information that we had on at least two occasions highlighted to him.

First, as we had pointed out to Mr Haverkamp in our phone conversations with him, it is not meaningful to compare the depreciation methodology of a ship to a handphone.

Handphone values are driven more by perception rather than functionality as they are increasingly regarded as a fashion statement.

Powerpuff could be the flavour of the month, but next year when Spider Man (or whatever) takes over, the Powerpuff phone may be devalued significantly or even to zero even though it remains perfectly functional.

SHIPS REMAIN FUNCTIONAL

Fortunately, container ships do not suffer the same fate. They typically remain functional and can generally be gainfully employed throughout their useful life of between 25-30 years.

Mr Haverkamp has highlighted the accounting effects of depreciation which is not incorrect.

But this is only half the story. He has chosen to exclude the earnings capabilities of the ships over their entire life span of 25-30 years.

As we've stressed, even though the present charter agreements run out in 8-10 years' time, the ships do not become incapable of generating income or have zero resale value beyond the eighth or 10th year.

The Prospectus showed figures from Drewry Shipping Consultants Limited, a leading shipping consultant, which listed the second hand prices of 10-year vessels from 1996 to 2005.

Neither do we have reasons to believe that they will face difficulties being deployed again at the end of the existing charter agreements, as the supply-demand situation for these vessels is well explained in the Prospectus.

In Mr Haverkamp's article, the terminal value of his handphone was stated nil. This is not the case for ships. Their scrap value is the price of steel multiplied by the tonnage of the ship.

In addition, Mr Haverkamp failed to point out to your readers that when the loans on PST's vessels are paid down over the course of the charter periods, the entire revenue streams and any capital appreciation from a sale, net of expenses, flow wholly to unit holders.

Unlike companies, business trusts, in common with Reits, distribute income out of cash profits rather than accounting profits which are net of depreciation.

All things remaining equal, this manner of distribution generally accelerates rather than thwarts returns on capital for investors.

But whether the income is distributed out of cash or accounting profits, depreciation is provided for in PST's books.

The yields of 9 per cent in forecast period 2006 (annualised) and 9.5 per cent in projection year 2007 were based on projections of future cashflows and economic depreciation.

Such projection is based on the assumptions set out in the Prospectus of PST and the units of PST being purchased at the issue price of 45 US cents of the initial public offering of PST.

In 'Corporate conflicts of interest,' Mr Haverkamp again presented one side of the picture.

While conflicts exist, how they are addressed is not revealed even though they had been conveyed to him both in the phone conversations and in the Prospectus.

These conflicts are addressed not just in theory, but in practice as well, evidenced by the independent valuation and the independent financial adviser's evaluation of the charter rates.

Having more than half of the Board represented by independent directors and having in place procedures for interested party transactions all ensure good corporate governance.

Mr Haverkamp made it all seemed a sinister affair that PST should buy its initial portfolio of eight ships from Pacific International Lines (PIL), and that PIL should own a third of the trust.

Many trusts, whether business trusts or REITs, have at their initial public offering a sponsor who provides the backing to the business and whose long-term commitment is critical for investor confidence.

That's the message we get from our investors. They want to be assured that PIL is not quitting the scene after kick-starting the business.

We note from the response to the IPO that investors do not share Mr Haverkamp's view.

Despite the very volatile market conditions in the week before and during the IPO launch, the institutional book was fully covered and the retail tranche was 10 times subscribed.
- Captain Subhangshu Dutt
CEO, PST Management Pte Ltd