Seaspan Secondary Sends Share Price To Snipe Land

| About: Seaspan Corporation (SSW)

Deep within the bowels of every ship resides the greasy, grimy, sweaty, snipes and snidgets that keep the screws turning, the boilers burning, and the lamp lights lit. Whenever a reading drops significantly, be it a tank level or instrument value, top-siders say "its dropped into snipe land". And, although brown-shoes and air-dales are reluctant to enter the engineering spaces, the mates and techs that work there are tight nit bunch of hard working sailors who, despite our aversion to that brightly burning ball in the sky and anything not flavored with fuel oil, will take care of shipmates under any circumstance.

Recently, Seaspan Corporation (NYSE:SSW) has raised capital though the placement of perpetual preferred stock, and common shares. The net result has whipsawed the share price from a high of 24.48 to near 23.00 until the secondary common hit the market. Then prices dropped below the 200 DMA to open at 21.39; share price has gone to snipe land.

However, comparing the recent offerings to the prior composite offer that I criticized here, longs are in a lot better position and could benefit even more once the dilution washes through the system. This article will compare the two offerings, and provide a basic overview of the company outlook, including new build that the company has committed to.

Comparing the offers

The old common offering was for the issue of 8,530,000 common Shares, for general corporate purposes, which may include funding vessel acquisitions. Concurrent with the common stock offering was a note offering for 128 million dollars. Per the prospectus, this was also for general corporate purposes, which may include funding vessel acquisitions.

My criticism of the prior share offer was because the company was going to loan up to 2,530,000 Class A common shares, which it would not receive any proceeds from the sale. The totality of the funds received from the sale of the borrowed shares was to compensate the distributor of the borrowed shares, once those shares were repurchased and returned. In other words, one of the syndicate members was going to short the stock.

I didn't get into the note offering in my last article, but was looking into it for personal reasons, awaiting the announcement of pricing. This is because it was a convertible note, and I was curious to see what both the coupon and conversion rate was going to be on each of the $1,000 principle notes.

The initial conversion rate for the notes will be Class A common shares for each $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $ per Class A common share). Upon conversion, we will pay or deliver, as the case may be, cash, our Class A common shares or a combination of cash and our Class A common shares, at our election. (rate and conversion price blank as per initial prospectus)

When these offerings were announced, the stock gaped down to open at $23 dropped to a low of $19.68 within three days. The board, obviously aware that the offering was not being welcomed with open arms by the public markets, scrammed the offering with a sparsely worded press release.

In contrast, the new common offer is limited to 3,500,000 shares, with an option to purchase up to an additional 525,000 Common Shares within 30 days. As with the prior offer, the company intends to use the net proceeds of the offering for general corporate purposes, which may include funding vessel acquisitions. This offering of common shares quickly followed on the heels of a preferred share offer of 2 million shares.

Company Outlook

Right now, the company operates a fleet of 71 vessels ranging in size from 2500 TEU to 13100 TEU. The ships are chartered under fixed rate, long term contracts to a diverse set of operators. There is however, some concentration in operation, which weighs on the business risk of the company if it should lose favor with certain operators. Below is a summary of the fleet, including their disclosed operating rates.

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Both the older, canceled offer and the newly closed offer state that proceeds could be used for general purposes, including new builds. And, since the market peak in 2008, orders for new builds, as a percentage of the global fleet has declined. Nevertheless, Seaspan has a number of new vessels under contract.

The current order book represents approximately 21.6% of global fleet capacity and is heavily weighted towards larger post-panamax vessels greater than 8000 TEU. We believe demand for large fuel-efficient ships will remain strong as container liner companies seek to reduce costs and achieve operating efficiencies, creating opportunities for ship owners with the necessary operational and financial capabilities.

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One of the major concerns shareholders should have is that the company's aggressive build out and desire to acquire additional capacity will inevitably result in additional secondary offerings, or place pressure on earnings available for distribution as a dividend. However, the company claims that now is the time to build and acquire because prices are attractive and the net return on capital would be accretive to cash flow.

We intend to continue to expand our fleet primarily through entering into new building contracts with shipyards, but believe that there will also be select opportunities to acquire existing or new building vessels from other ship owners, shipbuilders due to defaulting purchasers under construction contracts, or banks and other lessors that may acquire vessels upon borrower or lessee defaults. We believe we are well positioned to take advantage of current market opportunities. We believe that we will be able to fund the remaining payments for the containerships that we have contracted to purchase through the availability under our credit facilities, including future credit facilities, other financings, current cash balances and operating cash flow.

If this is true, then now would be an attractive time to pick up additional shares of Seaspan Corporation. The new builds would fit into the existing time charters and provide surety of cash flows well into 2022. (See the current Earnings Presentation) Provided the company follows through on its promise to fund expansion with current credit lines and cash flows, as the fleet expands, dividend distributions should follow.

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The current drop in share price, although precipitous in relation to industry peers, makes the shares an attractive target for both value and income investors. The company has taken steps to assure shareholders that additional dilutive offerings are not forthcoming, and that the business environment is attractive to current investment levels.

No one likes to stay in snipe land for long, so expect the price of Seaspan to creep topside once again. If your portfolio is shy in the transports or light on income, consider SSW to fill the void.

Disclosure: I am long SSW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.