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“Breaking up Is Hard to Do” – Neither Seaspan nor Mr. Wang Wish to Part Ways
Finding a replacement for Gerry Wang is hard to do or more likely Seaspan does not want to let him go. With Mr. Wang’s employment contract set to expire on January 1, 2013, the company has asked Mr. Wang to continue in his role as Co-Chairman and CEO through March 31, 2015, when the company’s right of first refusal with GCI expires. Mr. Wang has indicated his willingness to do so and Seaspan’s board is considering what further consideration it will offer over the extended period.
Seeing Value and Putting Cash to Work – Seaspan’s Tender
Contemporaneously, Seaspan commenced a tender offer, led by Citigroup, to purchase up to 10 million of its Class A common shares (approximately 14% of the shares issued and outstanding) at a price of $15/share, a premium of 43.5% to the prior day’s closing price of $10.45. The stock closed the next day at $12.16, an increase of 16.36%. A key condition of the offer, particularly in this period of volatility, is that there is no decrease of more than 10% in the share price or in the general level of market prices for equity securities in the main U.S. stock indices. Clearly the rich premium suggests that the board and management believe the shares to be grossly undervalued. As Gerry Wang commented, this offer “…reflects our confidence in the company’s future prospects and is an efficient way of returning capital to shareholders and increasing long-term shareholder value.” Interestingly all the directors and executive officers concur with his assessment as they have chosen not to participate. On the other hand, the contrarian might argue that the return of capital to the shareholders suggests that opportunities are for the moment scant, as the liners continue to struggle with lower volumes, pricing and overcapacity. Seaspan’s track record, however, belies that concern as they have consistently been able to raise equity and to tap new alternative sources and forms of capital as and when needed. Furthermore, the need for capital is less today due to a competitive shipyard space which can no longer demand large upfront payments deferring capital requirements into the future.
The 3rd Quarter in Pictures
We continue our periodic look at quarterly results for a basket of shipping stocks we’ve been tracking. As in the past, we look at the percentage change in stock prices, comparing the beginning price versus the closing price for the quarter 3Q2011 and 3Q2010. We also look at the percentage change in EBITDA for 3Q2011 versus 3Q2010 and 3Q 2010 versus 3Q2009. This is our version of the proverbial crystal ball.
Believe the Story or Bet on the Come
Yesterday, Jefferies held its Annual Shipping Conference and, according to Hamish Norton it was a record turnout with over 400 delegates and 40 companies represented. When we were queried about the mood, we hard pressed to provide an answer. There was neither excitement nor was their panic. The closest comparison we could come up with was window shopping. The presentations for the most part were excellent, but the audience appeared detached. Had they seen it all before or was the action taking place behind the scenes in the break outs and one-on-ones? Nonetheless, in line with our thesis, the tanker presentations seemed the most crowded. Genmar, for example, was sold out while the non-U.S. listed companies and service industries garnered the least attention. But then again this was a NY shipping crowd.
The state of the sectors was irrelevant, as all presenters found reason for optimism, well placed or not. Dry has clearly been on the rise, with speakers touting 40% non-deliveries and record scrapping. While on the wet side, consensus suggests 2012 will also be difficult, but the glass is half full with opportunities expected to arise as a result. Lastly, the container ship lessors seem to have blinders on banking on the liners’ liquidity and ability to access capital as losses compound even as they try to get rate increases.
We provide some of our favorite vignettes below.
Survival – It’s All about Liquidity and Gearing
Continuing our recent trend of playing with numbers, we have decided this week to focus on survivability, which, for our purposes, we measure in terms of liquidity and leverage. For a selected group of companies which have reported 1st half results, we have calculated the debt to equity and net debt to equity ratios. We also show the cash position of these companies, which compared to just a couple of years ago is substantially lower, a reflection of this difficult market. While we show both the debt to equity and net debt to equity ratios, the latter in deference to the analysts, we prefer the former as we believe the cash will be long gone before it can be applied to the debt.
Is New Better? – Costamare Prices
Last night, the shares of Costamare Inc. were priced at $12, or 25% below the midpoint of the expected range of $15 to $17. The company sold 13.3 million shares, the number expected, raising $159.6 million in proceeds, instead of the $260 million that was planned.
But before we take a closer look at this particular offering, a broader look at the IPO market provides an interesting perspective. From Jefferies Maritime Group’s Market Update dated November 1st, we gleaned the following facts about the current state of the equity market:
Be Prepared – Seaspan Renews Shelf
Last week, Seaspan announced that it had filed a universal shelf registration on Form F-3 to replacing the existing one that recently expired. The new registration is intended only to provide Seaspan financial flexibility for future growth and does not reflect a change in its financing strategy. Currently, there are no specific plans to utilize the shelf to issue new securities.
As is typical of a shelf, the company will be able to offer and sell up to $1 billion of various from time to time. Seaspan will use the net proceeds from the sale of securities for capital expenditures, for repayment of indebtedness, for working capital, to make vessel acquisitions or for general corporate purposes, unless specified otherwise.
First Bank of Teekay
As Justin Yagerman aptly put in his piece about this deal “Teekay Tankers or Teekay Bankers?”, providing further evidence that the reduced availability of shipping debt is affecting the cost of capital, the structure through which it is lent and, as result, who provides it, Teekay Tankers (TNK) announced this week that, in a deal structured by Deutsche Bank , it has drawn down $115m of its revolving credit facility and used the funds to provide what is effectively a first preferred ship mortgage bond secured by 2x 2010-built VLCCs owned by a Far Eastern shipowner.
So what does this deal mean? Maybe it means that TNK’s Peter Evensen, a former commercial banker at JPMorganChase and predecessors, missed the documentation of a ship mortgage loan. More likely, what it means is that those with the combination of liquidity and flexibility the understanding that there are a lot of different ways to make money in shipping (think Denis Washington providing preferred stock to Seaspan and Seacor forming Sea Tiger) are finding that they can achieve ROCE’s that compare favorably with the historical financial performance of shipping assets, without taking market risk that is outside their commercial comfort zone.
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From The Playbook
When you’re good and connected, anything is possible. Last week, Seaspan announced that it had purchased a newly delivered 4,250 TEU newbuilding containership for approximately $43 million from Zhejiang Shipbuilding Co Ltd of China. Based upon information provided by our neighbors, this is a very favorable price, approaching the newbuilding low prior to 2004, calculated at $10,000 per TEU. The price likely compares favorably with their Samsung newbuildings, which formed the core of its initial fleet.
Seaspan has fixed the vessel to United Arab Shipping Company on time charter for a period of two years at the strong rate of $20,500 for the first year increasing to $20,850 for the second. Continue Reading
Promises Kept
There are lots of things you can say about Seaspan, but one thing that stands out is the fact that they stay on message. But perhaps even more importantly they walk the talk. While there is more than enough debt to complete the newbuilding program, there has been an equity gap ranging from $180 to $240 million which was to be filled by “common or other equity and/or other forms of capital over the period from the second quarter of 2011 to the second quarter of 2012.” One would say, in these days of readily available equity, no problem. However, the company had one self-imposed condition. Dilution of the existing shareholders was to be avoided.
Last year, the founding shareholders purchased preferred shares. This year, a wholly owned subsidiary of the company entered into a sale-leaseback transaction with an affiliate of a leading publicly traded Chinese bank. Seaspan sold the bank one of its 13,100 TEU vessels it had contracted to build at Hyundai for up to $150 million and, upon delivery its subsidiary will charter it back from the Chinese bank/owner. This can be viewed as a “head lease” and is in all likelihood a bareboat charter. The original 12-year time charter between Seaspan and COSCO Container Line will remain in place with its terms unchanged. This sub-lease, if you will, provided “Chinese content” as well as substantial credit support to the transaction for the Chinese bank/owner. The transaction is non-recourse to Seaspan and therefore is from a legal/commercial perspective an operating lease. However as the subsidiary is 100% owned it will be capitalized on Seaspan’s consolidated balance sheet for accounting purposes. The terms of the charter-back are undisclosed, but the economics, due to lower borrowing costs today as opposed to when the deal was done, may have improved.
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