Back in November 2018, Atlas Corp. (then Seaspan Corporation) laid out its plans for the future of the company in its Investor Day presentation. An important part of the plan was to improve its credit profile. Strengthening the balance sheet through de-leveraging and improving liquidity are mission critical, as is improving flexibility and reducing the cost of capital. The balance sheet is the bedrock which provides financial strength and stability, which are requisites in shipping and critical for the future growth of the company. Ultimately, the goal was to achieve an investment grade credit rating, which would allow the company to reduce its cost of funding, scale its asset base, and mark the successful culmination of the plan’s immediate goal.
Last week, Seaspan Corporation, a wholly-owned subsidiary of Atlas Corp., announced that it had received a Senior Secured rating of BBB- and a BB corporate rating from Kroll Bond Rating Agency (“KBRA”), an achievement which reflects its position as a global leader in containership leasing with an 8% market share, stable revenues, and strong customer relationships. Size is important as it provides economies of scale which helps drive higher levels of operating profit and cost efficiency — ultimately improving incremental return on invested capital. The assigned ratings carry a stable outlook, backed by Seaspan’s long-term contracted business model which ensures strong, thru-cycle cash flows.
The credit ratings for Seaspan reflect the following key credit considerations:
With about 90% of its revenue generated through time charters, Seaspan had $4.5 billion in contracted future revenue as of Q1 2020. The average remaining length of its long-term time charters was 4.4 years.
Since 2011, Seaspan’s fleet has had a 98% utilization rate due to long-standing relationships with a select group of market leading liner companies. Seven of these companies (COSCO, Yang Ming, ONE, CMA CGM, MSC, Hapag-Lloyd, and Maersk) control nearly 80% of the market, while 67% of Seaspan’s fleet, as a percentage of TEU, is on contract to three of them. While the high customer concentration provides Seaspan with stable revenue from world leading liner companies, there is concentration risk, which Seaspan mitigates by focusing on long-term time charters and staggering the charter maturities.
While Seaspan remains committed to expanding its total fleet and further unencumbering itself, this remains a variable credit risk. Purchasing vessels is a significant capital expense and can lead to additional leverage and prevent Seaspan from unencumbering its current pool of assets. A material change to Seaspan’s encumbered assets is not expected in the near or medium term. Here we see the concern as somewhat overblown as the company has historically focused on credit-accretive growth with all acquisitions backed by strong returns on invested capital and long-term contracts.
The economic effects of the COVID-19 pandemic may impact Seaspan and its group of lessees. Although COVID-19 has caused global disruption, thus far Seaspan has maintained operations and has not experienced material impact to its business. However, uncertainty surrounding the duration of the pandemic can lead to continual downward pressure and have a lasting impact on global trade.
While Seaspan itself is viewed more as an equipment leasing company than a shipping company, it remains subject to shipping industry volatility due to the customer base it serves. Seaspan has taken multiple precautions and maintained access to the financial markets by adjusting its capital structure. To protect itself, Seaspan continues to sign long-term time charters and is actively monitoring customer behavior.
Although Seaspan’s customer base is highly concentrated, its focus on long-term charters to the world’s leading liner companies provides insulation from near to medium-term market events. However, any shift in its customer base could negatively impact the strength and value of the collateral.
More specifically, the highly prized BBB- rating was assigned to Seaspan's innovative portfolio financing program ("Program"), which closed in 2019 and has since grown to over $1.7 billion. Representing the central piece of the capital structure, the Program consists of a $1.2 billion term loan, a $300 million revolving credit facility maturing in May 2024 and a $255 million term loan maturing in December 2025 (“Facilities”). Through the program, Seaspan refinanced 15+ secured credit facilities into this flexible program financing. The investment grade rating for the Facilities reflects a strong collateral package consisting of 48 vessels (40% of Seaspan’s fleet) which are highly diversified, on long-term time charters, and strategically important to Seaspan. Last valued at $2.7 Billion as of Q1 2020, the collateral value of the vessels exceeds the project debt profile by nearly $1.0 billion. Further, the Facilities are backed by a corporate guarantee from Seaspan and all the vessel-owning special purpose vehicles within the collateral package. As of Q1 2020, approximately 80% of Seaspan’s debt was secured. Although Seaspan had 123 vessels as of April 2020, nearly 40 vessels are unencumbered, which the company can add to the collateral package. This provides more capital structure flexibility and grants greater access to the unsecured credit markets. Moreover, the debt structure allows Seaspan to swap portfolio vessels according to parameters (vessel age, concentration, size, charter length) maintaining the quality of the collateral throughout the life of the debt. While a changing collateral package can create uncertainty and volatility, KBRA took comfort from Seaspan’s nearly 20 years of successful active fleet management.
The company has been single minded, relentless, and disciplined in its approach to deploying capital for value creation, including a specific focus on balance sheet management and liquidity. This has paid off handsomely as evidenced by a quarter-end liquidity position of $382.9 million and a net debt-to-equity ratio of approximately 1.2x. As a result of the pursuit of cash flow optimization and improvement in its debt capital structure, both of Atlas’ subsidiaries, Seaspan and APR, are fully funded to the end of 2022. Moreover, Atlas, as a platform and despite challenging economic conditions, continues to enjoy access to the global capital markets. The renewal of Seaspan’s $150 million unsecured corporate credit facility on a two-year term is a testament to the business' capital market relationships and its lenders’ belief in its capital structure strategy. The investment grade rating marks a milestone in the company’s progress with its capital plan objectives, including consolidation of credit facilities and deleveraging. For the future, Seaspan intends to diversify its funding sources through the institutional credit markets as a means to reduce its overall cost of funding and improve its flexibility and amortization profile.
Of all the credit rating agencies out there, our question was why did Atlas choose KBRA? At the macro level, there is not much investable capital from the public markets in the shipping space making it less attractive to the major rating agencies. These agencies were also less inclined to differentiate Seaspan from the shipping methodologies used for operating businesses such as its liner customers, highlighting the gap in thinking between the company and the agencies. On the other hand, being the proverbial “Number 2” worked to KBRA’s advantage and they seized the opportunity. KBRA was open minded and more than willing to make the effort to fully understand the business model and work their way through more nuanced situations. The institutions and other ratings consumers happily accept the Kroll ratings and perhaps more importantly the company can take advantage of KBRA’s strong position in the private placement market.
The process of reshaping the balance sheet and creating a suitable credit profile began back in 2018 and the journey is likely never ending but achieving the investment grade was a critical step on the path. While we emphasized the result, we need to recognize the steps that contributed to that critical achievement. Here are some of the highlights:
Repaid approximately $1 billion of debt post-acquisition of GCI and reconstructed its balance sheet / maturity profile including five quarters of de-leveraging (Q3 2018 to Q3 2019) to position Seaspan/Atlas for future growth
Enhanced credit profile while growing its fleet over past three years from 88 vessels to 123 vessels and expanding its platform through acquisition of APR
Over the past three years:
Unencumbered vessels grew from four (book value of $22mn) to 30 as of June 30, 2020 (book value over $1.0 billion)
Lowered net debt / equity from 1.7x to 1.1x as of June 30, 2020 (1.2x pro forma for acquisition)
Improved Seaspan fleet utilization (>97% in COVID environment vs 91.6% in Q1 2017)
Grew revenue (+44% on TTM basis) and CFO (+85% on TTM basis)
To paraphrase the Grateful Dead: What a long, interesting trip it's been.