ATCO - Atlas Corp

[walkie518]

I don't think they will issue; this idea seems to go against the grain

ATCO is almost there (BB) 

reminds me a little of Graftech for those who watched how Brookfield transformed the company ... took a while but look what happened 

$4.7Bn of total debt should be fairly manageable

[petec]

Would you mind elaborating on the Graftech analogy?

[ValuePadawan]

6 hours ago, petec said:

Would you mind elaborating on the Graftech analogy?

Graftech sold the large electrodes for electric arc furnaces to make steel. They used to sell them on the spot market before 2015 or so. There was a bust in the electrode price and a bunch of electrode producing capacity went offline permanently, then some time later electrode prices rocketed. While the prices were sky high, Brookfield bought Graftech out of BK and instead of selling on the spot market signed a lot of 3-5 year take or pay contracts at very good prices and because of the contracts they were able to finance the purchase of Graftech using predominantly debt. I'm assuming the similarity he sees is that ATCO is signing a lot of long term contracts at high prices and therefore due to the visibility of the cash flows they can more safely finance these assets or even use a bit more debt than would be prudent for a ship chartering in the spot market. Do I have that all correct walkie518?

[petec]

Makes sense, thanks. Although I don’t actually think the day rates are *that* high for the newbuilds. The industry is more rational than that. But the delta between the dayrates and the cost (because they got their orders in first) is good, and leverage drives good returns to equity. That’s my understanding. 
 

Then, separately, they’re signing their short term fleet onto 3-5y contracts at good rates. But that’s a smaller proportion of capital employed. 

[Xerxes]

On 5/7/2021 at 4:50 AM, Viking said:

It looks like Atlas is looking to build a utility type of container shipping company. A company that is little affected by the cyclical nature of the containership industry. We saw this during the pandemic when their business held up better then expected. 

Almost like Sokol/Bing are building a rail-road on sea 

[petec]

8 hours ago, Xerxes said:

Almost like Sokol/Bing are building a rail-road on sea 

I think that's exactly what they are getting at when they refer to container shipping as an infrastructure class. I am sceptical about the analogy. It is easier to add capacity in shipping than in the things I would class as "infrastructure".

[petec]

Seaspan just announced an expansion of their portfolio financing programme. If you're invested in Atlas you probably need to understand how this works because they see it as a key competitive advantage. My notes below.

• The portfolio financing programme started in May 2019 at $1bn. This expansion takes it to $2.5bn. It is "one of Seaspan's key competitive advantages" because it is both flexible and expandable:
  • The programme consists of a revolver, term loans, and private placement notes. The revolver and the term loans are floating and so far the notes are fixed rate. Prior to this announcement maturities extended out to at least 2026, and the programme can be expanded by issuing more debt under the same umbrella terms.
  • It is secured against a pool of ships, but the ships in the pool can change, so it is simpler than securing loans on individual ships and allows more flexibility to meet customer needs (e.g. changing lease terms without breaching secured loan terms).
• Latest expansion takes it from $1.72bn (actually $1.8bn, but it wasn't all drawn) to $2.5bn:
  • Revolver expands from $300m to $400m.
  • Bank loan facility expands by $180m.
  • Issuance of $500m private placement fixed rate sustainability linked non-amortising notes, with an average maturity of 12 years (range 10-15 years) and an average initial interest rate of 4.1%. There is no explanation as to why the interest rate is "initial" when the notes are described as fixed rate, but I assume the rate can change if the sustainability goals are or are not met.
• In addition, the terms of the bank facilities have been improved: pricing is down about 20%, the 2024 and 2025 maturities have been extended by 2 years, and the LTV has increased. In addition the lending syndicate has expanded to over 30 banks and over 20 institutional/insurance investors, and the whole programme is on upgrade watch by Kroll (currently BBB-).

Key takeaway for me is that 12 year fixed rate notes at 4.1%, and the repricing of the bank facilities, are both good for the ROE on the newbuild programme.

My first post on this contained an error so I have edited it.

Edited May 25, 2021 by petec

[Parsad]

Business in Vancouver article on Atlas and shipping:

Container cargo carriers revel in COVID-19 pandemic boom time - Transportation | Business in Vancouver (biv.com)

Cheers!

[glider3834]

1 hour ago, Parsad said:

Business in Vancouver article on Atlas and shipping:

Container cargo carriers revel in COVID-19 pandemic boom time - Transportation | Business in Vancouver (biv.com)

Cheers!

I thought this part of article was interesting 

 

Meanwhile, the consolidation of the ocean carrier sector from around 20 major lines five years ago to 10 that account for 85% of container capacity today has increased shipping capacity discipline and firmed up freight rate integrity. 

Alan Murphy, founder and CEO of Denmark-based Sea-Intelligence, said those factors, along with improved shipping and supply chain communication processes, will further insulate the industry from the wild container freight rate fluctuations that at times in the past five years have driven those rates to below cost on the transpacific and other major trade lanes.

“So … I don’t think we’re ever going to get back to below-cost rates, which we saw in 2016.”

[petec]

Rather depends on how you define cost...

[bluedevil]

Two items of interest on ATCO:

 

1 - shipping rates continue to go skyward.  This is obviously good for ATCO in terms of locking in its older ships on spot duty to 4-5 year deals.  Rates are remarkably 4x last year.  Seaspan has about 30 ships coming up for re-hire next year that will be re-chartered in this environment. 

https://seekingalpha.com/news/3703500-containership-charter-rates-top-records-8500-teu-charters-jump-4x-yy

I worry though that this is going to fill coffers at a lot of Seaspan's competitors for the next 4-5 years and repair a lot of balance sheets that were more exposed to spot market and make it harder for Seaspan to be the consolidator in the industry and increase competition for ships in the medium term.

 

2 - In much more unambiguously bad news, this WSJ journal article states that "The order tally [for newbuilds] has been so strong that some yards have stopped giving quotes for new vessels and are trying to renegotiate existing orders for more than 20 ships as the price of steel plates used to build vessels has doubled since the end of 2020, according to people involved in those deals."  Given Seaspan's newbuilds at end of last year, I think by definition Seaspan is likely getting a lot of pressure to re-cut deals.  I would have though the yards would be sophisticated enough to hedge exposure to steel input costs, but the volatility has been crazy.  Would be a true shame if Seaspan can't get these deals to hold. 

https://www.wsj.com/articles/ship-orders-surge-as-carriers-rush-to-add-capacity-11623179052?mod=markets_featst_pos3

 

Perhaps this is why the share price has gone sideways while charter rates have skyrocketed.

 

[ValuePadawan]

1 hour ago, bluedevil said:

 

2 - In much more unambiguously bad news, this WSJ journal article states that "The order tally [for newbuilds] has been so strong that some yards have stopped giving quotes for new vessels and are trying to renegotiate existing orders for more than 20 ships as the price of steel plates used to build vessels has doubled since the end of 2020, according to people involved in those deals."  Given Seaspan's newbuilds at end of last year, I think by definition Seaspan is likely getting a lot of pressure to re-cut deals.  I would have though the yards would be sophisticated enough to hedge exposure to steel input costs, but the volatility has been crazy.  Would be a true shame if Seaspan can't get these deals to hold. 

https://www.wsj.com/articles/ship-orders-surge-as-carriers-rush-to-add-capacity-11623179052?mod=markets_featst_pos3

 

Perhaps this is why the share price has gone sideways while charter rates have skyrocketed.

 

I would be very surprised if Bing renegotiated those deals. If he did I'm sure he would take more than his pound of flesh and would be positive for the return on each vessel. 

[Xerxes]

On 6/11/2021 at 10:48 AM, bluedevil said:

1 - shipping rates continue to go skyward.  This is obviously good for ATCO in terms of locking in its older ships on spot duty to 4-5 year deals.  Rates are remarkably 4x last year.  Seaspan has about 30 ships coming up for re-hire next year that will be re-chartered in this environment. 

https://seekingalpha.com/news/3703500-containership-charter-rates-top-records-8500-teu-charters-jump-4x-yy

I worry though that this is going to fill coffers at a lot of Seaspan's competitors for the next 4-5 years and repair a lot of balance sheets that were more exposed to spot market and make it harder for Seaspan to be the consolidator in the industry and increase competition for ships in the medium term.

 

2 - In much more unambiguously bad news, this WSJ journal article states that "The order tally [for newbuilds] has been so strong that some yards have stopped giving quotes for new vessels and are trying to renegotiate existing orders for more than 20 ships as the price of steel plates used to build vessels has doubled since the end of 2020, according to people involved in those deals."  Given Seaspan's newbuilds at end of last year, I think by definition Seaspan is likely getting a lot of pressure to re-cut deals.  I would have though the yards would be sophisticated enough to hedge exposure to steel input costs, but the volatility has been crazy.  Would be a true shame if Seaspan can't get these deals to hold. 

https://www.wsj.com/articles/ship-orders-surge-as-carriers-rush-to-add-capacity-11623179052?mod=markets_featst_pos3

 

Perhaps this is why the share price has gone sideways while charter rates have skyrocketed.

 

 

On steel prices, all Bing has to is to grab a fistful of steel via Stelco shares as a hedge.

 

Q1 transcript - 

"Bing Chen -- President & Chief Executive Officer

The total amount of cash flow versus the market sale price, we have not seen those opportunities where the sell prices is greater or equal to the free cash flow that we can generate from the operating of these vessels as I use the example just now for the 4,250 today. 4,250 today, as I mentioned earlier, for $27,000 a day for five years, taking out OpEx of somewhere around $5,500 per day. So we still have a net cash flow of roughly about $30 million at the end of five years, assuming I scrap the vessel at the end of five years, that the scrap value will be somewhere between $5 million to $7 million. And today, probably more like $7 million with the high steel price. So for 4,250 with a -- by then, it will be 25, 26 years old with a net cash flow of somewhere around $30 million -- $36 million -- $35 million, $36 million. Today, the 4,250 in the market that people want to buy somewhere around $28 million to $30 million. So that's why we think we will continue to evaluate on a real-time basis. At the same time, I think our strength of operating the assets and get the maximum utilization and also get the preferred charter terms from our customers, and that's the preferred way to go."

 

To me high steel prices, also forces shippers to get rid of their very old vessels at the very wrong time, i.e. when the economy is roaring and when they need it. So that feeds on itself in an up-cycle and in reverse in a down cycle. As a CEO, Bing is paid to have the right T&Cs and make sure that the company is not exposed to a squeeze. Easier said than done, I guess.

 

"

Randy Giveans -- Jefferies -- Analyst

Got it. Okay. So and then I guess, second question, unlike a lot of your peers, you don't disclose the time charters, durations, rates for your smaller vessels. So with that, can you maybe provide some color on the current average charter durations and rates for your 2,500 to 5,000 TEU vessels? And I guess any kind of coming up in the near term? And what kind of charter durations are you looking at for those?

Peter Curtis -- Chief Commercial Officer

Yes, it's Peter here. That's a good question. We actually have various situations. Generally speaking, we address our roll-offs along the lines of Graham has been mentioned, the strategic requirements of our customers. What you see in the market today is an ability to access longer-term durations against this high demand for tonnage. And that's exactly what we're doing. Nonetheless, dealing with our customers day in, day out, we're achieving multiyear charter periods.

Bing Chen -- President & Chief Executive Officer

Yes. Just -- this is Bing. Just to add what Peter is saying that specifically, for example, for 4,250, currently, what we've been signing is between three to five years. At five years at the rate about $27,000 per day. So this is what the rates we've been signing and also the duration. One of the questions you might ask is that, OK, you might probably haven't seen a huge spike in the Q1 revenue in consideration of the current market rate. But really, what we have been -- our approach has been really taking a long-term approach in the sense that if you compare a 5-year $27,000 per day the contract versus a two year or three year, $30,000 or $32,000 per day. You will see a short-term -- will see a short-term spike on the revenue. But after one or two years, your vessel will be for uncertainty versus what we have taken is for a longer period of time. So we are actually seeing the next three, four, five years a very stable cash flow. And also on a total cash flow basis, for example, if looking at 4,250 on $27,000 a day, you get close to $40 million of contracted cash flow. So overall, I think for us, we're taking the current benefit over a stable, sustainable period of time, that is also consistent with our long-term cash -- long-term contract business model."

 

On rates, they are trading off short-term spikes in rates with long-term contract. I completely agree. Do not get addicted to short-term spike a market rate. I recall the only way, Cameco, the Canadian uranium producer, survived the post-Fukushima era was by having 5+ year contracts with large utilities. The go-go days of 2008-10, where the price for a pound of uranium went through the roof, did not bring any front-loaded economic benefit to Cameco. In fact it led to the creation of spot uranium market and a lot of juniors. Post-Fukushima era, however, the sport market was largely  below the long-term contracts that Cameco had in place. Atlas (or Seaspan) is a utility business like, so I am guessing it will be the same model, but instead of having very large fixed cost in terms of mine, they have leverage.

 

On a different note, FFO for Q1 was about 0.60 cents per share while dividend was $0.125 per share. Looking at this figure not knowing the company, one would say, great, there is a lot of room to increase the dividend. We know that that is not the path they are taking and they will keep it as flat. However, it is just interesting that a company with a dividend yield of +3.4% has so much "runway" between its FFO and dividend per share. (i.e. it is not chocking by paying the dividends). Does that mean that the share price needs to go up meaningfully to bring that dividend yield to a more moderate yield. 

 

 

 

 

 

Edited June 14, 2021 by Xerxes

[petec]

Atlas continues to move the chess pieces around on the balance sheet.

 

• Atlas is redeeming $335m of Series E and G paying 8.25% and 8.2% from cash.
• They're also restructuring the $600m of Fairfax debt due 2025/6/7 into $300m of debt and $300m of prefs
  • The debt remains at 5.5% and matures in 2025 and 2026. Fairfax's mandatory redemption and put rights are eliminated and, as I read it, removes any collateral requirements.
  • The prefs are at 7% for 5 years and then rise 1.5% a year until they reach 11.5%.
  • The deal also comes with 1m warrants for Fairfax exercisable at $13.71.
• Net/net:
  • Slightly smaller balance sheet (cash used to repay E and G prefs).
  • Slightly lower cost of prefs for 5 years.
  • Greater flexibility from changing the terms on the Fairfax debt.
  • Slight warrant dilution.

 

[bluedevil]

Seaspan is reportedly close to another large order — this time for 20 ships at 7,000 TEU, at cost of 1.52 billion. 

 

https://splash247.com/seaspan-closes-in-on-20-boxship-order-in-china/

[petec]

5 hours ago, bluedevil said:

Seaspan is reportedly close to another large order — this time for 20 ships at 7,000 TEU, at cost of 1.52 billion. 

 

https://splash247.com/seaspan-closes-in-on-20-boxship-order-in-china/

 

Wow!

[Castanza]

5 hours ago, petec said:

 

Wow!

+1 to that, just when you think they have already pushed the limits with new orders they tack on 20 more. Can't say I'm not worried about being over extended. Hey if the contracts are there the contracts are there. Awaiting the details as always.....This is a 17ish % position for me currently. 

[ValuePadawan]

1 hour ago, Castanza said:

+1 to that, just when you think they have already pushed the limits with new orders they tack on 20 more. Can't say I'm not worried about being over extended. Hey if the contracts are there the contracts are there. Awaiting the details as always.....This is a 17ish % position for me currently. 

https://imgur.com/gallery/8QmIp Dear mother of God. They believe its raining gold and they didn't just bring out the bathtub but all the pots and pans and the kitchen sink.

 

Does anyone have any inkling how they will raise the capital for this order? They surely are going to have issues generating the cash for these ships internally right? What do you guys/gals think, tap the equity markets or can they get quite creative with their portfolio financing program?

Edited June 17, 2021 by ValuePadawan

[Saluki]

1 hour ago, ValuePadawan said:

https://imgur.com/gallery/8QmIp Dear mother of God. They believe its raining gold and they didn't just bring out the bathtub but all the pots and pans and the kitchen sink.

 

Does anyone have any inkling how they will raise the capital for this order? They surely are going to have issues generating the cash for these ships internally right? What do you guys/gals think, tap the equity markets or can they get quite creative with their portfolio financing program?

 

My understanding of how this segment works is that won't place an order unless they have contracts/commitments on specific routes with specific carriers (big ship sizes are better for some ports, medium for others), so they wouldn't be buying this many ships on spec.  I would assume that once you have contracted cash flow in place, the financing should be available.  Maybe uncle Prem wants some more fixed income convertible debt?  

[Xerxes]

I maybe wrong but I do recall hearing in the conference call that they had stated that they want to have their critical mass of new vessels on much higher TEUs.

 

These 7,000 TEUs seems a bit contradictory to that.

[petec]

They stated on the last call that they can borrow 80-100% of the value of the new vessels. They just used cash to repay prefs when they didn’t need to. My guess is they’re fine for equity. 
 

And as for 7000teu, if they’re anything they’re opportunistic. Day rates are mental in that size class, and they’re the optimal ship for some routes. They’ve been very clear they only buy when they have leases in place. So if this news is true, their customers want 7000teu, and who are they to argue?

 

I hope it’s true!

[Castanza]

1 hour ago, Xerxes said:

I maybe wrong but I do recall hearing in the conference call that they had stated that they want to have their critical mass of new vessels on much higher TEUs.

 

These 7,000 TEUs seems a bit contradictory to that.

 

Who says they are near critical mass 

 

44 minutes ago, petec said:

They stated on the last call that they can borrow 80-100% of the value of the new vessels. They just used cash to repay prefs when they didn’t need to. My guess is they’re fine for equity. 
 

And as for 7000teu, if they’re anything they’re opportunistic. Day rates are mental in that size class, and they’re the optimal ship for some routes. They’ve been very clear they only buy when they have leases in place. So if this news is true, their customers want 7000teu, and who are they to argue?

 

I hope it’s true!

 

Exactly, why would they fight what the market is demanding? And if they hold true to their earlier statements as you said then why not secure more builds. If the contracts are there then the contracts are there. In 5-10 years will there be more or less demand? I would say more. 

[petec]

59 minutes ago, Castanza said:

 

Who says they are near critical mass 

 

 

Exactly, why would they fight what the market is demanding? And if they hold true to their earlier statements as you said then why not secure more builds. If the contracts are there then the contracts are there. In 5-10 years will there be more or less demand? I would say more. 

Definitely more. Rates may be lower, as supply will be higher, but capital costs will have been repaid by the time contracts roll and the rest is gravy. 
 

One has to bear in mind very few ships have been added to the global fleet for a long time. In some ways this has been a long time coming. What Atlas are setting themselves to do is grow in the boomtimes in a contracted, low risk way, and then harvest huge cash flows through the bust, when they will de-lever and probably acquire some cheap assets. 

[Xerxes]

To be fair, there is no evidence of Atlas' peers growing in a non-contracted way and speculating big on the directionality of the market. It is a more rational market for everyone, which doesn't set Atlas apart, but keeps the overall industry healthy (and benefitting Atlas by extension).

[petec]

22 minutes ago, Xerxes said:

To be fair, there is no evidence of Atlas' peers growing in a non-contracted way and speculating big on the directionality of the market. It is a more rational market for everyone, which doesn't set Atlas apart, but keeps the overall industry healthy (and benefitting Atlas by extension).

Do you know of a good source to prove this? Ie showing total ship orders?