Seaspan Corporation (NYSE:SSW)
Q4 2010 Earnings Call
March 14, 2011 8:30 am ET
Gerry Wang - CEO
Sai Chu - CFO
Michael Webber - Wells Fargo
Gregory Lewis - Credit Suisse
Welcome to the Seaspan Corporation conference call to discuss the financial results for quarter and year-ended December 31, 2010, Seaspan's dividend increase and progressive dividend policy, participation in a new containership investment venture with the Carlyle Group and the re-entering into the newbuilding market.
Hosting the call today is Gerry Wang, Chief Executive Officer, Seaspan Corporation, and Sai Chu, Chief Financial Officer of Seaspan Corporation. Mr. Wang and Mr. Chu will be making some introductory comments, and then we will open the call up to Q&A. I will now turn the call over to Sai Chu.
Before we begin, please allow me to remind you that this presentation contains certain forward-looking statements as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, concerning future events and our operations, performance and financial condition, including in particular, the likelihood of our success in developing and expanding our business, effect of benefits and results of our containership investment venture with Carlyle and others, and its effects on the growth of our business, expected company performance during 2011, 2012 and 2013, and our ability to significantly increase our dividends.
These forward-looking statements reflect management's current views only as of the date of this presentation and are not intended to give any assurance as to future results. As a result, you are cautioned not to rely on any forward-looking statements. Although these statements are based upon assumptions we believe to be reasonable based upon available information, they are subject to risks and uncertainties detailed from time to time in our periodic reports.
We expressly disclaim any obligations to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, or otherwise. We make no prediction or statement about the performance of our common shares.
I would also like to remind you that during this call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, cash available for distribution to common shareholders, and normalized net earnings and normalized earnings per share.
In regards to such financial measures and for reconciliation of such measures to the most closely comparable U.S. GAAP-measures, please refer to our earnings release, which is available on our website.
We will now begin our presentation. Please refer to our webcast presentation slides as provided on our website. In addition, you will find further details regarding our Q4 and full year results in our earnings release issued this morning before markets open and further details about the containership investment venture and related transactions in our press release and report on Form 6-K also issued this morning.
I will now pass the call over to Gerry, who will provide details on our highlights for the quarter.
This call will include discussion on our financial and operational results, our new progressive dividend policy, our containership investment vehicle with Carlyle, and our re-entry into the newbuilding market by signing a letter of intent for New Panamax 10000 TEU vessels.
Please turn to Slide 4. I'll begin by discussing the progress Seaspan has made during the past year and year-to-date 2011, which we believe has strengthened the company's position as a leading independent container charter owner. During the fourth quarter and the full year 2010, Seaspan's business continues to operate as expected, enabling the company to post strong operational and financial results.
First, our fleet remains fully secured on primarily long term fixed rate time charters, and we continue to achieve high utilization. Second, all of our customers continue to perform in accordance with our charter agreement. Third, we continue to grow both our fleet and revenues by taking deliveries of new vessels. Finally, we took additional decisive steps to enhance our capital structure and the financial flexibility and to position us to grow in the most attractive ship acquisition environment in over a decade.
During the quarter and until now, we have taken delivery of four vessels. Also China's shipping has exercised the two-year charter expansion opportunities for both CSCL Hamburg and CSCL Chiwan.
Our operating fleet continues to perform well; for the fourth quarter, we achieved a high utilization rate of 99.7%. This utilization included five days of scheduled off-hire for the dry-dockings of the Dubai Express. We incurred nine days of unscheduled off-hire for the quarter for CSCL Sao Paulo.
As highlighted in the earnings release issued this morning, our Board has made the decision to increase our new dividends by 50% to $0.75 per share for 2011, annualized. This would start with an anticipated $0.1875 per share quarterly dividend for Q1, 2011. This decision was based on the expectation that the company's cash available for distribution to common shareholders will increased significantly, as we take delivery of our fully constructed newbuilding fleet.
In making this decision, the Board also took into account the industry's strong fundamentals and the company's conservative business model, as well as the sustainability of the dividend.
On that note, we have pleased to announce that the Board has adopted a new, progressive dividend policy. The new policy will focus on increasing our per share dividends commensurate with projected cash flow increases, while preserving our long-term financial strength and our ability to undertake additional fleet growth.
Seaspan has distributed $6.965 per share in cumulative dividend since going public in August 2005. During 2010 and year-to-date in 2011, we completed several financing transactions that have further improved our financial flexibility and strengthened our position as a leading independent charter owner of containerships, as we enter into our next phase of growth.
Sai will provide details on those transactions later in our presentation.
I would like now to turn the call over to Sai to discuss our financial results.
Please turn to Slide 5 for our Q4 and annual results. Revenue has increased substantially due to the increases in operating days and higher time charter rates on newly delivered vessels. Our ship operating expenses improved, as the increases were lower relative to the revenue increases, consistent with the growth of our fleet and the operating efficiencies from the larger ships, which have lower operating cost per TEU.
Adjusted EBITDA increases outpaced revenue due to efficiencies from lower OpEx per TEUs from the larger ships and lower relative G&A increases. Cash available for distribution increased at a lower percentage than adjusted EBITDA due to the use of more debt this year to fund our vessels.
Normalized net earnings also increased a little relative to previous metrics due to higher interest attributable to more debt drawn to fund larger vessels, as cash from the Series A preferred share offering and from operations was used to fund installments in 2009.
Please turn to Slide 6 for our normalized per share metrics. Our normalized converted EPS increases were also lower relative to the previous metrics due to dividends from a full year of the Series A preferred shares and the Series B preferred shares issued in May. We expect that each of our converted share metrics will grow substantially over next few years to the deliveries of our contracted newbuilding's.
In terms of the dividend policy, we have received various views from shareholders on our dividend policy, ranging from a full payout to reduced payout to pursue growth opportunities. These are highly appreciated, helpful, and taking into consideration our Board's decision to adopt a progressive dividend policy and for assessing long-term value creation for our shareholders.
Our Board has now increased the dividend twice in less than a year, including the 25% increase for Q2 last year, with a focus on ensuring a sustainable, balanced and growing dividend over time. Please note, we have the ability to increase the dividend when we eliminated the equity funding gap for a contracted newbuilding program and limit our capital structure subsequent to the completion of the two financing transactions in the fall of last year.
Furthermore, it is important note that the recent $250 million Series C preferred share offering is for growth, and not meant for funding our dividend increases. However, the declaration and payment of any dividend will remain subject to the discretion of our Board.
Please turn to Slide 7 for our balance sheet information as of December 31, 2010 and 2009. The changes year-over-year are reflected with the growth in our fleet and the use of more debt to fund our CapEx this year.
To the forward guidance, please refer to our website for details of our vessel deliveries, charter rates, OpEx and other key information. Slide 8 provides quarterly details of our vessel deliveries, dry-docking, CapEx and converted share count guidance for 2011 and 2012.
On the capital structure side, you may recall that during the beginning of the financial crisis on our Q3 2008 earnings call, we initiated our plan to complete our equity funding for our contracted newbuilding program. We were clear that our objective was to achieve greater financial flexibility and strength, yet protect long-term shareholder value.
During Q4, we completed our plan, executing two transactions almost a year in advance of the requirement. These transactions created an increase in our capital structure to consider an increase in our dividend in addition to providing some growth capital. Also, in January, we issued $250 million of our Series C preferred shares. To our knowledge, the non-investment grade Perpetual Preferred market is limited to few issuers, and it was the first time there was an issuance done by a shipping company of this type of security.
We were very pleased with the reception for the market and a strong execution for this new issue. Importantly, this transaction represents the first substantial step in expanding our capital structure for future growth, and it has in several years, since we have had sizeable available growth capital. We expect to deploy this growth capital in a manner that is accretive to our shareholders. We've learnt many hard lessons that positions us well for our third five-year growth plan.
In the near term, we expect to execute several financing transactions that we believe will provide value to our shareholders. We greatly appreciate the support from our investors and banks, and look forward to working with you on new transactions as we enter our next growth phase. While we continue to achieve greater strength and flexibility in our capital structure, we are very pleased with what our team has achieved in two-and-a-half years and are quite excited with another step-gain in our market leadership position. With this new venture, we are in an even stronger position to grow our business.
Turning to Slide 9, I would now like to provide some further details on our participation in new containership investment venture. We have entered into an investment venture with the Carlyle Group, Tiger Management Ltd., an affiliate of the Washington Family, which will invest up to $900 million of equity in containership assets, primarily newbuilding vessels strategic to the Greater China area.
This venture provides us with the ability to manage our growth through a right of first refusal for up to 50% of new containership investment opportunities through March 31, 2015.
Seaspan is uniquely positioned to capitalize on growth of the purchasing power of this venture, and we expect that we will continue to exceed the industry's historical 10% compounded growth rate. We anticipate funding up to $100 million investment in the new venture over a period of up to five years, depending on the new venture's investment opportunities. There are no immediate needs to fund this amount, and we intend to fund our investment through a combination of internally generated cash flow, available debt capacity and/or new capital.
On the recommendation of Seaspan's conflicts committee, the members of our Board of Directors, without an interest in the transactions, unanimously approved the investment in the new venture and the related transactions. Going forward, all decisions by Seaspan relating to the right of first refusal and the right of first offer will be subject to approval by the conflicts committee of Seaspan's Board of Directors.
The conflicts committee of our Board of Directors also approved Gerry's new employment agreement and his transaction services agreement, pursuant to which Gerry will continue to provide transaction services following his employment term. He will serve as Seaspan's CEO until January 1, 2013, and will continue to serve in a leadership capacity to execute his vision as Co-Chairman of Seaspan thereafter.
I'll now turn the call back over to Gerry to discuss the benefits of this transaction, as well as to discuss our business model and general industry fundamentals and our participation in the new venture.
Let me briefly outline why this new venture is of benefit to Seaspan and its shareholders. Our participation in this new venture with Carlyle significantly enhances Seaspan's competitive position. Through the combination of Seaspan's outstanding industry expertise and customer relations, together with Carlyle's financial resources and the global business network, we have the scale and the ability to place large containership orders in order to obtain attractive returns and newbuilding design constructions from the shipyards. We will also be able to obtain attractive financing arrangements for these vessels.
In conjunction with this new venture, we have re-entered into the newbuilding market and assigned a letter of intent to order a significant number of newbuilding vessels of 10000 TEUs and other sizes from a leading Chinese shipyard. We are also talking to other Korean and Chinese shipyards for further potential orders of different sizes or of the same size.
These New Panamax 10000 TEU vessels have incorporated Seaspan's new innovations for improved fuel-efficient and environmentally friendly designs, and represent a popular new class.
Seaspan's right of first refusal under this venture with Carlyle on this potential order and/or on future opportunities provides us with the ability to selectively and cost efficiently grow our fleet in a controlled and balanced manner in ways that Seaspan could not undertake on its own.
And speaking about growth, please turn to Slide 10 where I would briefly outline Seaspan's strong building growth. The company has more than tripled its constructive fleet capacity since its IPO in 2005, representing a compounded annual growth rate of approximately 30%. All of our twelve remaining vessels are to be delivered by approximately April of 2012. In total we have approximately $6.5 billion in constructive revenues.
Turning to Slide 11, we wish to outline what this growth will mean to our cash flows. Based on our projections, we estimate that we will exceed approximately $700 million per year of constructive revenues, $500 million of adjusted EBITDA and $300 million of cash available for distribution to common shareholders, beginning annually in 2013, at which point all of our current newbuilding programs will be complete.
In addition, it is worth noting that we have no significant debt maturities until 2015. These figures on the chart exclude any further incremental growth.
Please now turn to Slide 12. I would like to briefly provide an overview of the industry's fundamentals. On the supply side, we would see an increase of tonnage as result of newbuilding deliveries, whereas on the demand side it is expected to be stable for 2012 and 2011. As a result, freight rates may experience some pressure.
In a general sense, 2010 was a very good year for the industry. We expect that the industry will moderate for 2011 and 2012. However, we believe 2013 will be a good year, as demand is expected to outpace supply as the order work at the shipyard is currently very low, beginning in 2013. We are optimistic about the launch and prospects of the containership industry. And we believe we are well positioned to strengthen our position as a leading independent container chart owner.
Now please turn to Slide 13. We are entering our third five-year plan as mentioned by Sai in the earlier message, with the first five years as a new and growing private company, to our second five years as a new public listed and a growing company. For our third five-year plan, Seaspan will continue to focus on growing on business, particularly in a controlled and balanced fashion. We will continue to enhance our financial strength and flexibility, as demonstrated by the recent $250 million prefered share offering.
We will continue to focus on providing high quality assets to customers, with strong credits. Our customers are undergoing a paradigm shift, as they face high fuel prices and aging fleets. We believe they will require new and innovative ship designs to drive down their cost and improve environmental performance, while looking to phase out their older vessels.
Lastly, Seaspan is committed to following a progressive and sustainable dividend policy, and our focus will remain on creating long-term shareholder value.
Please turn to Slide 14. Before we begin our Q&A, please let me make two further remarks to summarize our views.
First, we believe this is an attractive time to invest in containerships. That's the reason the financial crisis and dislocation and created a compelling opportunity to acquire vessels at attractive prices and employ them in a manner that would generate attractive returns on capital on long-term basis.
Second, we believe our participation with the Carlyle Group and others in the new venture, and particularly our right of first refusal on container investment opportunities positions us well to continue to grow our business in a balanced and a controlled fashion.
We'll now begin our Q&A session.
(Operator Instructions) Our first question comes from Ken Hoexter of Merrill Lynch.
It's (Scott Lever) in for Ken. Will all the proceeds from the Series C be used for the vessels that are under this recently signed letter of intent?
No, first off we have an LOI, but we haven't established how much we will execute on that. The $250 million is there for growth and it has not been set aside for this LOI or the Carlyle venture.
Ken Hoexter - Merrill Lynch
Maybe I am not just so clear as to why you chose to do it through this side venture as opposed to making a larger investment directly through Seaspan. And then Gerry, I just want to understand on the contract why you chose to set, I guess take it as a retirement as executive? I guess it is far in advance.
There are probably some benefits of working with Carlyle to have this financial strength, so that we have the scale and the purchasing power for following things: No.1, to be able to have attractive prices and returns; No. 2, to be able to obtain attractive financing arrangements; and No.3, that would enable Seaspan to really, using the rights of first refusal to select what best fits in with our growing profile.
As I said, Seaspan wants to grow in a controlled and balanced fashion. We want to use this venture to give us the flexibility so that our kept-up structured balance-sheet will continue to stay in a healthy situation. And those are the primary points that we have as the benefits to the company. We have also discussed with several other potential partners that we have decided to work with Carlyle for a number of reasons. Our Board and the management have been working very hard to make sure our shareholder interests are well protected. And we think this venture will give us the opportunity to capitalize on the growing opportunities available in the marketplace.
As for my employment contract, basically I feel Seaspan has grown over all those years, our (bench) is very deep, our executive team is very strong. Our Board and I have looked into the way to best utilize my time and energy. I feel, for me to stay on the strategic side, on the customer side, would be the best use of my time and energy, and also is in the best interests of the company going forward.
I consider this as a very natural progression, and I'll continue to work very hard with our executive team and with our Board to continue to execute on our growth strategy to make Seaspan truly the leading franchise in the space.
Ken Hoexter - Merrill Lynch
Just a follow up if I may; thank you Gerry for that. On the new venture, did I catch you right? You said your first refusals were up to 50% of the vessels through 2015. I just want to understand the terms over there. And then can you just define, when you say progressive dividend, is that just going to grow with earnings? What does progressive mean?
In terms of the right of first refusal, yes, we have up to 2015 March, we have 50% under this agreement. Now, we can actually exceed that. But then the right of first refusal would terminate. Given the industry opportunity, it's highly unlikely that we would exceed 50%, because this is one of the reasons that we did choose to partner with Carlyle. The scale of the opportunity is at many multiples of billions, and it gives us the flexibility to decide which assets to take and which customers to add into our portfolio.
In terms of the progressive dividend policy, I think that we've made very clear, and as we've said, we appreciate all the feedback from investors. We understand that investors value a long-term sustainable dividend that's growing over time, and that is what a progressive dividend policy is in our Board's view. I think they've demonstrated through the two dividend increases that have occurred in less than a year that they are prepared to reward the investors and provide value through increasing that dividend.
However, it will be balanced in terms of that growth, between the opportunities and returning capital and value to shareholders and deploying that capital into new growth opportunities.
So it is a range that the Board is working with, but they have a view of increasing it over time.
Ken Hoexter - Merrill Lynch
If you could just clarify on your last sentence there on the refusal. You just mean, if you refused more than 50% it expires; I just want to understand what you were saying there.
Let me clarify that. We have the choice, under this right of first refusal, we can exceed 50% if we wish; we can take a 100% of the transactions that are contemplated, but that would result in this agreement terminating early. So if we do 50% throughout that period, they're looked back at every year, but if we stay at 50%, this agreement continues.
Our next question comes from Michael Webber, Wells Fargo.
Michael Webber - Wells Fargo
Obviously a lot to get here; I want to touch on something that I think, Ken mentioned previously just on the acquisitions, kind of starting there in-house at Seaspan. I know you can't comment on how many vessels you are going to be looking to acquire yet, and it's probably contingent on you signing charters and getting financing.
But in terms of helping us think about scale here, in terms of your equity debt, should we be thinking that there's a possibility you guys could reinstate a bit of an equity funding gap, if you acquire maybe 12 to 13 of these, or should we think that whatever you do, you're going to be fully funded from an equity perspective here on up?
I think what's important is, we as a team have learnt some pretty hard lessons over the last few years, as everyone has in the financial crisis. Certainly, going forward, growth is still at the forefront, but managing risk and managing equity risk funding is very important to our shareholders and to the Seaspan management and Board.
Now going forward, I think that we've demonstrated that we do have a competitive advantage in how we have execute. I don't want to give away that competitive advantage, but it can give you a high degree of confidence that we will be able to take on growth, we will manage that equity funding risk. And we never want to get in a position where we have a large equity overhang. And I think we've demonstrated our ability in the last two-and-a-half years to manage asset growth and manage financing risk.
And I think that given our experiences as a management team and the transactions and structures that we've developed internally, we are very comfortable in growing our business to exceed the compounded growth rate in our industry.
Michael Webber - Wells Fargo
With regards to the JV, can you give a little color on how quickly you think you'd be making the investment, and then whether or not this could potentially act as maybe a sale leaseback partner for Seaspan in the future, if you do need to come up with additional funding?
I think what's important is, this is really what I said before, a step gain in our capital structure, and giving us many different capacities to consider transactions and flexibility. And I certainly don't want to discuss all of them over the call. But Seaspan on its own has tremendous flexibility in its capital structure and access to capital.
I won't say how much, but certainly most people in our industry. And when we combine it with the Carlyle structure and what we can do, there's a lot of different choices for us to fund growth and deliver returns that we believe are going to be secure for our investors and managed in terms of risk.
Michael Webber - Wells Fargo
And Gerry, you mentioned kind of the rationale behind entering the JV as partially to grab better economies of scale with shipyards and reducing returns through that method. Can you talk a little bit or quantify kind of the scale you'll be able to get through the Carlyle transaction, And again, most of these economics are probably going to come from upfront, kind of purchase price discounts.
Can you quantify that for us to some degree and maybe something you've seen out in the market, maybe not a nominal value, but maybe the percentage in terms of a discount you will be able to get on a larger transaction?
First of all, that economic scale also reflects the ability with a larger order to push through a new design. We'd be coming with three ships, five ships, 10 ships frankly speaking would be very difficult to push the shipyard to accept the design that you want.
I think there is a tremendous benefit there in terms of pushing our new design concepts through. Our new design will focus on lighter ships, fuel efficient ships. We feel we've achieved a better ship design which is very fuel-efficient, which is very good at loadability. And the second part of it, yes, of course with a large scale of the order book, we would achieve savings on the purchase price.
Sort of a simple say of looking at it, we managed to have the optionalities that we are building. The small-order typical shipyard wouldn't give you the options you want. The options will give us tremendous flexibilities as to when we want to enter, as to which charters we want to sign, as to which shipyards we want to work with. We can decide now the excessive options and decide to work with another potential shipbuilder to build the same ships. So that's the second part.
The third part pertains to the exact discount. I would think that it would be somewhere between 3% to 5%, if I may quantify that. Again, all those things are tied up with each other in terms of the new designs in terms of the payment terms, in terms of the optionalities we want to have. So that would be those benefits associated with the large scale of purchasing power.
Michael Webber - Wells Fargo
But I mean in terms of being able to quantify that and maybe on a percentage basis, are we are talking in the 5% to 10% range in terms of a discount?
If we factor all the other things in and quantify them, I would tend to agree with it.
Mike Webber - Wells Fargo
I want to kind of piggyback on a question on your new operating contract, Gerry, specifically on your 25% basis points on nominal transactions. Can you guys just give some color in terms of the rationale for that set-up rather than say, traditional compensation, and maybe why this structure is going to be better?
I think what's important to note is the independent Conflicts Committee went through a very detailed process. They worked with the compensations and specialists, along with our financial advisor to really make an evaluation of the compensation package for Gerry. Obviously, I wasn't part of that decision making, but I was briefed on how it was undertaken. They certainly looked at really tying in incentives for Gerry, and relative to his value to the company and towards shareholders and having interests in line. They also looked at market comps in terms of what was out there.
And in addition, if you look at how we've executed our business, generally most people in the industry or companies pay third party brokerage for that business. And that's how it occurs here at Seaspan; Gerry generates that business directly.
All those different considerations were discussed within the Conflicts Committee, and they put together a package and looked at different options. And you can imagine the different alternatives in terms of compensation, and they felt this was the most appropriate package to align Gerry's incentives along with the incentives of shareholders. And that's how it was determined.
Mike Webber - Wells Fargo
From a modeling perspective, would this contract be in effect for the most recent signed LOI, and any further transaction that comes out of that?
Yes, it would be.
Mike Webber - Wells Fargo
Finally, before I turn it over, you'd mentioned in your Pro I guess a couple of weeks ago that you guys are looking to acquire your manager. And the question on I guess the IDRs which are probably attached to the manager, would those be included in that acquisition, and if so, how have you guys thought about valuing those, or is that something you guys are able to comment on?
At this time, there has been no decision. There are ongoing reviews and analysis and negotiations at this time, and I can't comment any further. However, I can assure you that the independent Conflicts Committee is working very closely with financial and legal advisors to evaluate the opportunity and determine if it is in the best interests of the company's shareholders to move forward on the transaction and provide value. And at the right time, they'll make that decision and we will announce it when that time comes.
Our next question comes from Gregory Lewis of Credit Suisse.
Gregory Lewis - Credit Suisse
Sai, could you talk a little bit about the preferred share issuance in terms of, I guess that was $250 million at a coupon between 9% and 10%. What type of leverage upon that new piece of equity do you think is going to be used to sort of get those IRRs at the 10% threshold or higher?
Well, I think what's really important and why this is a really good transaction for us, if you look at where we are today and where we will be in two years, we've always looked at expanding our capital structure and bring in different sources of capital. And for a while, we have identified that; we felt that what we wanted to do is bring in equity capital and not have permanent dilution to our shareholders.
We preferred instrument works very well for us because it brings on equity capital that opens up our balance sheet and allows us to use available debt capacity that we can't otherwise use. So if you look at a 9.5% dividend on that and you combine it with our existing all-in costs of 6.2% and new capital that we are going to bring in on the debt side, the weighted average cost of our capital is quite reasonable, and quite frankly we believe one of the best costs of capital in our industry. So, from that perspective it works quite well.
And in terms of leverage, we have been pretty transparent about the type of leverage that we can use. But we can also use higher leverage in different structures as well.
Obviously in our business you wouldn't want to have too much equity into a transaction, but certainly an equity range of the 50 to 60 range and up to 70 or 80 is possible.
Gregory Lewis - Credit Suisse
So it sounds like that could potentially be $1 billion of the assets.
It could be. I mean, certainly, we have a lot of flexibility in our capital structure, and we can take on growth that is going to exceed the industry growth rate.
Gregory Lewis - Credit Suisse
And then you mentioned, roughly that the Carlyle transaction is going to be about $900 million. And I'm assuming that's sort of the cash component of that transaction. Is that the right way to think about that?
Yes, that's the cash equity that Carlyle, Tiger, Seaspan and the Washington Family would be investing, and Siaspan's going to kick in about a $100 million.
Up to a $100 million; again, that's not required immediately to how they deploy capital.
Gregory Lewis - Credit Suisse
Given Seaspan's $100 million contribution, I guess that's roughly 10% or 11%, is that going to be sort of Seaspan's joint venture ownership, or the other entities are really just providing financing, that Seaspan can get a bigger share of that JV?
No, we don't necessarily get a larger share of that JV. We're quite frankly a passive investor as are most of the investors in that.
Gregory Lewis - Credit Suisse
So in other words, Seaspan will be managing the vessels?
We will be managing the vessels. That's one of the benefits of the transaction in the technical operations. We get additional scale from taking ownership management functions.
Gregory Lewis - Credit Suisse
And do you believe that once these vessels are up and running, that's going to be able to, since you're going to have these economies of scale, do you think that's going to be able to lower your overall OpEx, SG&A per vessel per day?. Is that sort of the rationale behind this?
Absolutely; I mean when we talk about scaling the business, it's looked at in all facets of the business. Certainly, on the operating side, I mean Jerry stated a goal previously of up to 100 ships, and that's on Seaspan. With the Carlyle venture, and depending on the size of the ships, the numbers can be quite significant. So obviously when we bring that type of business to a supplier, we're going to realize better savings than somebody with a smaller fleet.
Gregory Lewis - Credit Suisse
Shifting gears a little bit, clearly it looks pretty opportunistic on the CapEx, I mean between Seaspan and Carlyle. And I think Sai mentioned that it's billions of dollars. Given the fact that Seaspan is out in the market looking at making billions of dollars of investments, and we've already seen some, whether they are liner companies or other entities making large scale transactions for deliveries in 2013, and 2014, does that give you any concern potentially that the market rebound in 2013, 2014 could be somewhat muted?
Well, it's a good question Greg. Basically, what we are looking at is, firstly in terms of the order book for 2013, 2014 right now it's still very limited. Number two, how much we are going to deliver? If it is high, if you have very well-priced assets, regardless of what happens, the key is to have the capital, to be able to buy low. I think at this point of time, if you look at the competitive landscape we are very well positioned.
Today's asset market is in our favor, so we can order ships at the designs that we want, at the prices that we pretty much dictate, to be honest. So that gives us the entry advantage. That's the second point.
The third point is, when we look at the changes over all those years, when we first started our business following the Asia financial crisis, we managed to order multiple units. We are one of the largest owners in multiple units than some still have in the industry.
We are partnering with others for executing the large-scale of order book. That brought us a tremendous economics, and that was what we did. And we've seen, in terms of the cycles, the market is coming to the point where it presents one of the best entry points to order ships that would be well designed, that would be well-priced, and we believe that would give us offshore advantage.
In terms of the industry dynamics, I think with the rising fuel price, there is a paradigm shift that is the operators looking at fuel-efficient modern ships to lower their TEU cost. That means a lot of older vessels would be phased up. So that would be one thing to keep in mind.
Another thing, with the rise in price, the slow steaming will continue to exist maybe for a long time. So that would be also to the benefit of the tonnage you are talking about. So we will look into all those things, plus the stable demand increase over all those years, compounding at sort of 10% on an annual basis. So we are confident that the demand and supply situation will be in pretty good shape.
But in terms of our own business, in terms of the unique situation that we are in, we would only order ships if our newbuilding contracts created would be kind of at is signing the contracts charter at the same time. So whatever happens, in 2013, 2014, wouldn't really cause any problem throughout, because the contract by then would have been entered into when we simultaneously signed the newbuilding contracts.
So all those things are the elements in our decision-making process and we feel very comfortable. And since the entry point, this is one of the best entry points in history and we want to come in with the scale, with purchasing power, with the size that potentially would benefit Seaspan very well through, as I stated, a balanced and a controlled role.
And this venture with Carlyle gives Seaspan the ability to select the vessels, the charters, the builders, the timing of deliveries, all those things. So the first right of refusal gives us maximum flexibility to manage our capital structure, to manage our balance sheet, to manage the equity requirements, to manage financing all those things. So we consider the venture as a very good one for the company, if we look at this venture from more different angles.
Our next question comes from Justin Yagerman of Deutsche Bank.
This is (Josh Ketzerfaun) for Justin. I just want kind of clarify one thing, I guess when you Gerry and when Seaspan is looking for new investments now. Are you looking for them for Seaspan or for the JV? And then to participate and then to go through the right of refusal process, how does that work?
Well, basically I will look at business form the bigger picture. At the end of the year, I am a strong believer, you have the scale, you have the size, you have the purchasing power, you can really strike better deals, as we talked about 5% to 10% discount in terms of the economics that we could obtain through large scale of all the book and the purchasing power related to that.
Under that big picture, obviously, Seaspan will take part of the allocation selected by Seaspan carefully in terms of picking which ship, which charter, which delivery time, and to the best suitability to the company. And then obviously the other ships will be picked up by the venture. This is no difference than the term that I used frequently, which is indication. This indication like in banking, in commercial debt market gives you the purchasing power that you need, while benefiting both parties. And I consider this as win-win situation that gives me the leverage, that gives me the power to grow and negotiate and get the best for all the parties involved.
Thanks for that extra color. And then when it comes to this LOIs that you signed, that was signed by Seaspan correct?
And then I guess the JV, depending on how it materializes, whether if the JV takes the majority or some other the vessels in Seaspan that is to be determined later. But this is so signed by Seaspan, but still potentially thrown into the JV.
Seaspan has the first right. So Seaspan controls the decision making on what Seaspan takes first and then it goes through to the other parties after that.
We have formulated mechanism, when it comes to dealing with the allocation of assets in between the different parties involved. I think the big picture thing is that gives us the size and power to go up to business.
And you said that you were passive on the actual JV, so I would assume that Carlyle really controls the investment decisions?
Well there's a transaction committee that's been put in place. Seaspan is not on that transaction committee.
Yes, there will be a transaction committee and they will decide what to invest from the joint venture perspective. And as far as the letter of intent is concerned, we're in the process of working without charters to formularize the charger agreement. As I said, Seaspan would not order any new builds without secured long-term charters attached. And that's our policy and we're going to stick with that. This arrangements where the Carlyle gives us the flexibility to select what do we want, so I consider this as a win-win situation for both parties.
And in the bank market, I guess a lot of banks were burned by financial sponsors during the downturn. And I know that there are some banks that kind of are make commitments not do business on the shipping front with private equity firms or other kind of just capital providers. I guess, has Carlyle and the JV gone out to banks yet or wind up term sheets or had preliminary discussions with major lenders to make sure financing is obtainable?
That's one of the reasons why we decided to team up with Carlyle. We have had extensive discussions with primarily the Chinese banks, and we are very confident that we will be to get the debt financing that we need for the venture.
First off, let's talk about Seaspan. From our point of view, we have great access for banking markets in Europe, in Asia, anywhere. So we can quite comfortably generate we believe over $1 billion of new debt funding capacity for us this year.
For Carlyle, obviously, we've demonstrated in our history, we're very selective about who we do business. We identified a while ago that we would want to have a strategic partnership with our investor at some point in time, and we've gone through a process where we've evaluated different partners.
And obviously, we would not enter into an arrangement with a partner that would restrict our access to banks. And in fact, Carlyle is a well-recognized and reputable financial sponsor, and that's done well.
So in terms of access to capital on the debt side for Seaspan and for this new venture, I think you can safely assume, there are no issues and we have better access on a individual and combined basis than we believe anyone else in our industry.
And one last question before I turn it back over. I know it's just been formed now, but with regard to exit strategy, I know there is some other JVs forums that maybe give the public ship owner the ability to have some sort of first right to merge or purchase the JV.
Is there any type of provisions like that here, or is this just kind of up in the air?
There is the first right of offer. So there is a mechanism, where this joint venture, we do have that first right of offer.
That will be for a corporate type of transactions, while not just being one off?
They could be individual ships.
I am showing no further questions at this time. And I'd like to turn the call back over to Mr. Gerry Wang for any closing remarks.
Thank you very much for taking the time to speak with us. One of the key points to reiterate is the dividend increase from $0.50 to $0.75 on an annual basis. So we increased dividends over the last 12 months twice, including this time. And this is a tremendous demonstration of confidence in our franchise, in the cash flows, in the cash generating capability we have.
And the second point I want to reiterate is we are very confident in managing our growth in a very controlled and balanced fashion. So that we wouldn't be run into a situation where there is potential high in our capital structure or in our balance-sheet. So we want to make sure that we will run our business very conservatively. And we want to drive very hard to maximize the shareholder value on long-term basis.
Again, I thank you very much for taking the time to participate in this call. I am looking for to taking to you again for the next quarter. Thank you very much and have a good day.
Ladies and gentleman, that does conclude today's conference. You may all disconnect and have a wonderful day.
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