Income Statement and Dividend paymentsA quick look at its 2015 income statement shows what we'd expect - the biggest costs are depreciation, ship operating costs, and interest payments:
For REITs we need to check how much of earnings are paid out as dividends:
In 2014 and after, they have paid out more than 100% of their earnings. This means they are paying out of their depreciation.
Debt structureThe table below shows all debt, including preferred shares, and when it is due:
Can repayments be covered? All required payments are shown below: the minimum interest repayments, plus rolling over the loans/notes on maturity, plus operating leases:
How much is of the variable rate debt is hedged at fixed rates? Not much. And not for long. Out of approximately 3.4bn floating rate debt:
On the bright side, most of their swaps require payment of LIBOR at 5%, so when they expire, these repayments drop. The 2015 interest payments would be 92m lower if there were no swaps. On the other hand, finding long term projects - 8 to 17 year leases on assets with a 20 to 30 year lifespan - is a risky business in the long term. A spike in interest rates could cause problems. More on this below.
RevenueWhen their charter contracts expire? They have some expirations in 2016/17, and more after 2020:
By 2018 they will have a number of ships with expired charters:
- 25 panamax vessels (23 x 4250 TEUs and 2 x 4600 TEUs)
- 2 X 8500 TEU ships
- 2 x 1000 TEUS, expected delivery in 2017 which they have not charted out yet. May be deferred to 2018.
Stress Test3 ships are charted to Hanjin, at rates far above market. Hanjin has requested a fee cut of 30%, Seaspan refused and said they'd rather take the ships back. Unlikely, but what if it did happen? If they did take the ships back and re-lease them out at current market rates, I estimate revenue/earnings would drop by 33m7
What if the LIBOR rose to 5%? ...which last happened in 2007. I estimate that 2015 interest and operating lease payments would raise by 56m if this happened:
If LIBOR rose to 2%, 2015 interest and operating lease payments would raise by about 15m.
ConclusionGood way to play the container shipping cycle, while getting paid to wait out the downturn.
The main risks are:
- The shipping cycle downturn may go on for more than 3-4 years, if demand decreases, or if more supply is bought onto the market.
- Since 2014, Seaspan's dividends are greater than earnings. Hopefully they are only doing this for a few years to ride out the cycle. Management cannot lower dividends, as this would hammer the stock price, making equity raising difficult. This is not a company that grows organically to build long term shareholder value. Think of it as a bond, paying out the difference between its lease rates and costs as a yield (with occasionally a bit of capital returned as well).
- They are exposed to rising interest rates.
- About 60% of their 2015 revenue came from China companies (YM, COSCO, CSCL, and COSCON).
- The container cycle will recover by 2020, when Seaspan has more vessels coming off fixed-rate charters, and,
- Interest rates don't rise too much.
1 See "Illustration of an interest rate swap" here as an example.↩
2 This entry will be armortised away later if the swap is held until it ends.↩
3 Page 54 of the 2015 Annual report: "Although we have entered into fixed interest rate swaps for much of our variable rate debt, the difference between the variable interest rate and the swapped fixed-rate on operating debt is recorded in our change in fair value of financial instruments rather than in interest expense." Why....? ↩
4 This is done in the press releases for their results, e.g.: see Section B "Normalised Net Earnings and Normalised Earnings per share" here. ↩
5 Based on: a) 2018 minimum contracted revenue of 794m (2015 Annual Rpt footnote 14a), b) Revenue of USD 5.1K/day for a panamax and USD 10K/day for a 8500 TEU vessel, c) Utilization rate 97%, d) Operating cost for 10000 and 11000 TEU vessel of 15K/day, and for 14000 TEU vessel of 15k/day (from "Daily Operating Cost" graph, p23 here), and e) Excludes latest announcement of 2 11000 TEU craft bought from CGI.↩
6 Assuming dividends of 202m, based on 1H 2016 annualised dividend for both common and preference shares↩
7 Assuming current charter rate of 10000 TEU vessel of USD 12K/day, and 97% utilization rate.↩