Company & Equity Overview
Seaspan Corporation (NYSE:SSW) is a holding company focused on leasing vessels in the container ("box ship") segment. SSW has been public since late 2005 and boasts the world's largest publicly-traded container fleet. Its fleet includes 84 live vessels and 10 newbuilds, with TEU sizes ranging from smaller regional carriers (2,500 TEU) to large ocean liners (14,000 TEU). Other container-leasing firms include Costamare (NYSE:CMRE), Danaos Corp (NYSE:DAC), Global Ship Lease (NYSE:GSL), and Diana Containerships (NASDAQ:DCIX).
SSW currently trades close to $15, offering a dividend yield just shy of 10%. Seaspan has performed poorly over the past year as the underlying container market rates have weakened, but they have been mostly isolated from market turmoil due to their massive charter backlog. SSW has recently avoided a major hurdle by repurchasing all their Series-C Preferred Equity and raising additional funds to support potential expansion initiatives.
Following new equity raises, SSW has approximately 105M shares outstanding for a current market capitalization of $1.58B. SSW also has around $500M in face value of preferred equity, $140M of which is convertible to common equity at $18/sh.
Over the past month, Seaspan has concluded a four-step financing transition, which has improved the company's footing, but also confused many of its investors. Three of these steps involved raising new equity, which was essential to completing the fourth step of redeeming all 13.32M shares of Series-C Preferred Equity (SSW-C). This 'C-Series' equity carried devastating terms if SSW failed to redeem prior to January 2017. Prior to discussing the recent equity issuances, we will review the legacy Series-C and why it was such a burden.
Series-C Preferred Equity
In early 2011, Seaspan Corp. was still recovering from the devastating market plunge of two years previous and despite their relative financial strength, the markets demanded onerous financing terms.
SSW ultimately was able to raise capital by selling 10M shares of Series-C Preferred Equity, with a par value of $25/sh and an interest rate of 9.5% (link to final prospectus). The initial raise provided SSW with $241M after underwriting proceeds, but additional offerings raised the number of outstanding shares to nearly 13.7M. The annual interest ("dividend") expense on this class alone was over $30M.
Beyond the painful interest rate of 9.5%, the Series-C also contained onerous provisions within a "fail-to-redeem" clause. After 30 January 2016, SSW would be able to 'call/redeem' shares at $25, but if they failed to redeem any of these shares by 30 January 2017, the interest rate would increase by 1.25x per quarter, until reaching a maximum of 30% per annum. If SSW hadn't redeemed all the shares by the end of 2017, the interest rate at that point would have reached an annual rate of 23.2% - for an annualized expense of over $75M!
Clearly that wasn't an option. SSW had to act. They needed $340M in cash to settle the issue. They ultimately repurchased the final Series-C shares on 3 June, effective 20 June.
Three Part Equity Raise
SSW had a few options to choose from, namely: reduce common dividends, spend cash on the balance sheet, raise new equity, and attempt to float junior debt.
Ultimately, Seaspan was in a bit of a tight spot with the container market worsening and also facing the prospects of needing future flexibility to take over their partners in the "GCI" Joint Venture. Despite having ample operating cash flow, SSW decided to keep last year's dividend increase modest and to keep this year's dividend flat.
However, that was only tiny savings comparably. With approximately 99M common shares outstanding even the savings of $0.05/qtr on dividends only amounted to $20M in a year - not even 10% of the amount needed.
Without putting the balance sheet and future bank agreements in jeopardy, SSW had no choice but to raise fresh equity. They did so in 3 parts:
- On 17 May, SSW issued $140M of Series-F Convertible Preferred Equity to a private investor at a 6.95% dividend rate with a conversion price of $18/sh. SSW common stock traded around $16 at the time of issuance, so the conversion strike represented a premium of around 10-13% to the current equity rates.
- On 24 May, SSW issued 5M common shares at $14.70 per share while the CEO and top insider Dennis Washington agreed to purchase an additional $15M worth of equity. In total, just over 6M new shares were issued for proceeds of around $85M.
- On 9 June, SSW issued $100M (4M shares) worth of Series-G Preferred Equity at an 8.2% dividend rate. This offering is set to conclude 16 June, so it's not clear if the underwriters have purchased more.
In total SSW raised over $325M in fresh equity, while simultaneously eliminating a previous overhang of nearly $340M. The previous interest rate expense was nearly $30M per annum and was poised to explode higher. The new interest rate expense is $18M on the preferred equity side plus implied dividend commitments of around $8-$9M on the common equity.
The overall dilution was approximately 6M immediately (around 6%) and around 7.8M common shares implied at the $18 strike price for the Series-F. Altogether the total dilution in common equity was just over 12%, but $340M of residual preferred equity at 9.5% will be ultimately replaced by only $100M at 8.2%. Even at the new diluted share count of 112M, the annual 'interest' savings would be over $0.20/sh, enough to finance a $0.05/qtr dividend increase next year even at the larger share count.
Series-D or Series-E Lurking?
Unlike the tough terms on the Series-C, Seaspan raised the Series-D (full prospectus here) on far better terms: a 7.95% dividend rate, the right to redeem at $25 after January 2018, and zero "fail-to-redeem" clause. SSW can therefore decide to never redeem these shares and simply pay a 7.95% dividend. SSW currently has 4.98M of these shares outstanding (annualized expense of $9.9M).
The Series-E is also on similar terms (full prospectus here), with an 8.25% dividend rate, the right to redeem after February 2019, and no "fail-to-redeem" clause. SSW currently has 5.37M of these shares outstanding (annualized expense of $11.1M).
SSW eliminated a major hurdle with the Series-C Preferred and they can now coast with preferred equity, which has comparably weaker rights. Dilution to the common ("A-Series") is never enjoyable, but the consequences of either weakening the balance sheet or allowing the Series-C to escalate would be far worse.
I don't currently own any shares in SSW, but have previously dabbled with the common equity and I follow this company closely along with other shipping firms on behalf of Value Investor's Edge. SSW is easily the safest play on the container sector and frankly the only container common equity of 'investment grade' in this tumultuous market.
All of these moves were a net positive to shareholders (although I personally would have preferred raising more Series-G and less common equity), but I've sensed a lot of confusion in the marketplace, so hoping this piece helps provide some clarity.
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