ATCO - Atlas Corp

[Uccmal]

I think their just bigger ships Myth.  The lease prices look only marginally higher over time on the same size of boats.  Suffice to say, each working boat generates a similar amount of distributable cash per unit size.  So, the more the merrier, assuming they all get leased immediately which they seem to. 

[Myth465]

I was more looking at the op ex rates vs the charter in rates. The bigger ones are more efficient and generate more revenue per op ex which is why I said they were more profitable, then again we dont get much detail on the interest expense, but I am guessing its still more revenue per costs. Some of the larger classes generate 2x the charter rate at only a bit more op ex. Which means for every ship coming online (interest expense not being considered) we should get more dropped to the bottom line.

[Uccmal]

I get you now...Thanks

[Grenville]

I may have asked board members before, but I can't remember the answer or the logic.

 

How do you guys feel about the preferred offering Seaspan did in 2009? It doesn't give me a ton of confidence in management when they sold such a nice chunk of the company to insiders. The terms of the offering were $200 million of prefs that pay 12% interest payable in shares and a conversion price of $15. It's a nice vehicle to compound ownership interest.

 

Based on the interest of the board in SSW at current prices, it doesn't seem like the conversion price of $15 was set high. I just wouldn't be happy if a company like Fairfax did the same sort of deal with insiders getting such great terms unless they were offered to other shareholders.

 

I'm curious to learn how you guys think about the offering and your confidence in the future with regards to management and the large shareholders.

 

http://ir.seaspancorp.com/releasedetail.cfm?ReleaseID=360939

 

[gaf63]

Dennis Washington's  Deep Water purchased another 399,000 shs. in May

 

http://ir.seaspancorp.com/secfiling.cfm?filingID=950130-10-1210

[Uccmal]

I may have asked board members before, but I can't remember the answer or the logic.

 

How do you guys feel about the preferred offering Seaspan did in 2009? It doesn't give me a ton of confidence in management when they sold such a nice chunk of the company to insiders. The terms of the offering were $200 million of prefs that pay 12% interest payable in shares and a conversion price of $15. It's a nice vehicle to compound ownership interest.

 

Based on the interest of the board in SSW at current prices, it doesn't seem like the conversion price of $15 was set high. I just wouldn't be happy if a company like Fairfax did the same sort of deal with insiders getting such great terms unless they were offered to other shareholders.

 

I'm curious to learn how you guys think about the offering and your confidence in the future with regards to management and the large shareholders.

 

http://ir.seaspancorp.com/releasedetail.cfm?ReleaseID=360939

 

 

Hi Grenville, I am not trying to rationalize this or defend it but I think we need to view it in context.  The time when they needed the cash was right in the middle of the credit crisis.  If they had issued an open rights or warrant offering, or an IPO, the stock would have really been hammered and the dilution may well have been much greater.  By doing it this way they contained the damage and were still able to proceed with the new build program.  This was only a month or so after Buffett loaned GS and GE money at similarly lucrative terms.  So, if the Washington Family wanted to make a similar deal somewhere else they could have.  Rather they chose to invest in the company they know so well which is a vote of confidence, or desperation.

 

FFH has done similar deals right at the bottom of the market that have pissed me off such as selling a huge number of common shares to MKL and Longleaf at insanely low prices.  They never phoned and offered me the same deal.  In that case though poetic justice came into play and I was able to by a flier on the stock at prices around what their friends paid. 

 

Al.

[Grenville]

I may have asked board members before, but I can't remember the answer or the logic.

 

How do you guys feel about the preferred offering Seaspan did in 2009? It doesn't give me a ton of confidence in management when they sold such a nice chunk of the company to insiders. The terms of the offering were $200 million of prefs that pay 12% interest payable in shares and a conversion price of $15. It's a nice vehicle to compound ownership interest.

 

Based on the interest of the board in SSW at current prices, it doesn't seem like the conversion price of $15 was set high. I just wouldn't be happy if a company like Fairfax did the same sort of deal with insiders getting such great terms unless they were offered to other shareholders.

 

I'm curious to learn how you guys think about the offering and your confidence in the future with regards to management and the large shareholders.

 

http://ir.seaspancorp.com/releasedetail.cfm?ReleaseID=360939

 

 

Hi Grenville, I am not trying to rationalize this or defend it but I think we need to view it in context.  The time when they needed the cash was right in the middle of the credit crisis.  If they had issued an open rights or warrant offering, or an IPO, the stock would have really been hammered and the dilution may well have been much greater.  By doing it this way they contained the damage and were still able to proceed with the new build program.  This was only a month or so after Buffett loaned GS and GE money at similarly lucrative terms.  So, if the Washington Family wanted to make a similar deal somewhere else they could have.  Rather they chose to invest in the company they know so well which is a vote of confidence, or desperation.

 

FFH has done similar deals right at the bottom of the market that have pissed me off such as selling a huge number of common shares to MKL and Longleaf at insanely low prices.  They never phoned and offered me the same deal.  In that case though poetic justice came into play and I was able to by a flier on the stock at prices around what their friends paid. 

 

Al.

 

Hey Uccmal,

 

I appreciate hearing your viewpoint on the transaction! Good points and I agree context is key. I'm going to look at the details of the offering a little closer and go back and look at the FFH equity raise. I just want to think about these financing deals the right way.

 

-G

 

 

[twacowfca]

I may have asked board members before, but I can't remember the answer or the logic.

 

How do you guys feel about the preferred offering Seaspan did in 2009? It doesn't give me a ton of confidence in management when they sold such a nice chunk of the company to insiders. The terms of the offering were $200 million of prefs that pay 12% interest payable in shares and a conversion price of $15. It's a nice vehicle to compound ownership interest.

 

Based on the interest of the board in SSW at current prices, it doesn't seem like the conversion price of $15 was set high. I just wouldn't be happy if a company like Fairfax did the same sort of deal with insiders getting such great terms unless they were offered to other shareholders.

 

I'm curious to learn how you guys think about the offering and your confidence in the future with regards to management and the large shareholders.

 

http://ir.seaspancorp.com/releasedetail.cfm?ReleaseID=360939

 

 

Hi Grenville, I am not trying to rationalize this or defend it but I think we need to view it in context.  The time when they needed the cash was right in the middle of the credit crisis.  If they had issued an open rights or warrant offering, or an IPO, the stock would have really been hammered and the dilution may well have been much greater.  By doing it this way they contained the damage and were still able to proceed with the new build program.  This was only a month or so after Buffett loaned GS and GE money at similarly lucrative terms.  So, if the Washington Family wanted to make a similar deal somewhere else they could have.  Rather they chose to invest in the company they know so well which is a vote of confidence, or desperation.

 

FFH has done similar deals right at the bottom of the market that have pissed me off such as selling a huge number of common shares to MKL and Longleaf at insanely low prices.  They never phoned and offered me the same deal.  In that case though poetic justice came into play and I was able to by a flier on the stock at prices around what their friends paid. 

 

Al.

 

Hey Uccmal,

 

I appreciate hearing your viewpoint on the transaction! Good points and I agree context is key. I'm going to look at the details of the offering a little closer and go back and look at the FFH equity raise. I just want to think about these financing deals the right way.

 

-G

 

 

 

 

Context is everything.  M. P. Did a similar transaction to try to save Delta Finance and lost his shirt.

[ERICOPOLY]

"I don't understand why it's so cheap.  It's not like it's hard to see the dividend power -- they say in the latest quarterly release that $40.368m cash was generated "available for distribution".  On today's price that's a 22% yield."

 

I believe that there are 3 issues or concerns by the market holding this one back:

 

1- They rely on big international banks to lend them money for the ships that remain to be delivered. These lines of credit could be cut if banks run into trouble. Similar to when the banks did not want to provide funds on some private equity deals because they were tight for cash.

 

2- Some ships will come for renewal over the next few years. Current spot rates are lower than these leases, so terms on renewal should be less favourable. This one is also linked to the strength of the Chinese economy.

 

3- They need to raise $140 million in equity between mid 2011 and mid 2012. It creates uncertainty since we don't know what will be the terms. However, it has been decreased from the $180 to $240 million range that they provided before which is excellent news.

 

These 3 things all have macro all over them, so despite a structure that seems to deliver free cash no matter what, it seems to explain why SSW swings so much when the market gets scared.

 

Another concern for me are these $200 million preferreds convertible at $15. They also pay 12%. So the "parent" did help Seaspan to get through this crisis, but it is not like it was free.

 

Nonetheless, it seems cheap to me as well. I figure that they could make $3 in FCF by mid 2012. That is assuming some bumps along the way, so it is attractive.

 

Cardboard

 

 

 

I keep coming back to your comments here.  Thanks for the help.

 

#1 is worrying me.  The CEO is aggressive-- acquiring another ship opportunistically and then hiking the dividend before letting us know that he has his ducks in a row on the ships he ordered in 2007 -- you know, the ones he had to cut the dividend for.  Then talking about wanting another 20 or 30 ships.  Maybe he's already pulled off a new financing deal and not mentioned it, but it is starting to make me question whether he is exercising enough caution.

[ERICOPOLY]

There is some news today -- expected, but welcome anyhow:

 

HONG KONG, CHINA--(Marketwire - 10/22/10) - Seaspan Corporation (NYSE:SSW - News) announced today that it has signed two financing transactions that position the Company to fully finance its built-in fleet growth and increase its financial flexibility.

 

 

http://finance.yahoo.com/news/Seaspan-Transactions-iw-4049444085.html?x=0&.v=1

[Uccmal]

That financing deal and the apparent need not to dilute shareholders anymore has put a real fire under the stock.  I have held this for about two years and watched it do nothing until last week.  I wonder if a dividend increase will be coming?

[Myth465]

I am a happy camper. This is one of my largest holdings. I think we will see consistent dividend increases as long as new ships come online. I am up about 30% or so and have been adding along the way. $2 in divs will look great versus my basis, and given where REITs trade it could do wonders for the share price.

[ERICOPOLY]

This one is fueling my returns this year.  I had a 50% portfolio weighting with cost basis of $11 when it was trading at $10 this summer.

 

I was just checking the newbuild order book:

http://www.seaspancorp.com/fleet-newbuild-orderbook.php

 

It looks like by this time next year they'll have most of the ships in place.  Should be good for another 50%-100% return from here.

 

So I haven't sold anything.

 

[UhuruPeak]

This one is fueling my returns this year.  I had a 50% portfolio weighting with cost basis of $11 when it was trading at $10 this summer.

 

Eric, it always amazes how willing you are to still bet big on some companies even now that you don't need to grow the portfolio anymore.  Btw, are you not in BAM anymore? Every time I see the quotes I want to kick myself for not having followed you last year when you mentioned it!

 

PS: also long SSW, large-ish line, clearly helping my performance this year as well

[ERICOPOLY]

even now that you don't need to grow the portfolio anymore.  

 

Need vs Want.  It's a struggle to keep them in check.

 

My grandmother has a very expensive property near Sydney with a view to the west overlooking Pittwater that's been in the family since 1949 (my father and grandfather built it themselves) -- it's a 5 minute walk down to Whale Beach.  This is where I've been spending a month the past few North American winters.  She is 93 and the place is expensive -- I want to keep it in the family when the time comes, and I'm trying to beat the clock.  I've been taking vacations there ever since I was 6 months old -- I have a lot of memories there.  I don't really need the property, but I want it.  It would cost 1/3 of my present net worth -- so I'm trying to grow it.

 

Not in BAM anymore, sold it along the way to buy ICO (not in that anymore either).  I would have done well if I'd kept it in BAM, but I did slightly better with ICO because it worked out sooner and I made further gains with the money after I sold ICO.

 

 

 

[Myth465]

Eric has the best ideas on concentration and risk that I have come across.

[UhuruPeak]

Eric has the best ideas on concentration and risk that I have come across.

 

No argument from me there!

[finetrader]

You guys are becoming more and more convincing!

I'm quite late to this one but have join the party this morning by opening a position.  (not the first to do it, but hopefully not the last!)

 

For me, distributable cash is equivalent to cash flow from operations. (would take out a few elements like share-based compensation though)

If I get it properly, the thesis on SSW is that they should have about 300M$ distributable cash in about 2 years.

Would be nice to have a sense of the free cash flow generation then.

Way to do it would be to take distributable cash minus maintenance capital expense (ex:new vessel replacing old one)

A quick glance tells me that FCF is quite high as the majority off the new vessels is adding to the float as opposed to replacing an old on)

Any guidance regarding FCF?

 

[Myth465]

They have a presentation online that they update quite often

 

http://files.shareholder.com/downloads/SSW/1049196086x0x412574/f8dd52cc-e6ee-4204-b8aa-fb63efca1cd3/SSW_Q3_10_Presentation_-_FINAL.pdf

 

http://files.shareholder.com/downloads/SSW/1049196086x0x409788/10ff9790-5417-4c1b-b036-66088c4546ec/LATEST_Seaspan_Company_Presentation_September_2010_FINAL.PDF

 

You are right though, its not broken out or clarified. I assume it includes maintenance, interest, and all cash expenses (similar to a reit, and I believe Maintenance Capex would be Dry Docking). As far as replacement, these assets last 30 years. You may want to call Investor Relations, thats a good question.

[ERICOPOLY]

I'm wondering how much money could be realized by scrapping their fleet.

 

Here is an article from late 2008

http://blogs.telegraph.co.uk/finance/theasiafile/5990607/Container_ships_are_a_load_of_old_scrap/

 

Quoting:

A leading executive from one of China’s biggest shipbuilding and operating firms told me that some analysts fear that even brand new $100m container ships may be worth more as scrap metal than ocean-going transports.

 

I'm not really sure how much of a discount the ships sold for, but I'm guessing it wasn't greater than 70%.  So let's say it's like 30% of the market price of a new ship -- were brand new $100m ships going for $30m in late 2008?  Or were they going for more, like let's say 40%?  Somewhere in there perhaps is the truth... and if the quote is accurate then scrap value is somwhere between 30% or 40% of the cost of a new ship.  Or perhaps this is a completely wrong assumption... can somebody help me out here?

 

Here is what I'm getting at...  steel prices will likely triple (or more) in nominal terms over 30 years.  They might be depreciating these ships on paper, but I think in reality there will be no depreciation.

 

Their fleet on average is only 5 years old.  Therefore, I'm sort of banking on the cash flow to be entirely distributable to shareholders and let the depreciating dollar (rising steel prices) pay off the cost of these ships (cancel all of the debt upon scrapping in addition to return of invested capital).

 

Who knows, perhaps scrap value will be substantially higher than the initial cost of the ship?

 

 

 

[Myth465]

In the inflation thread, when you said in High Inflation for a long period of time, SSW may be able to scrap 1 ship and payoff there debt. That really got me thinking, and provides a decent floor / security. Hopefully the older ships are scrapped, increasing cash flow when rates adjust upwards.

[finetrader]

'Therefore, I'm sort of banking on the cash flow to be entirely distributable to shareholders and let the depreciating dollar (rising steel prices) pay off the cost of these ships (cancel all of the debt upon scrapping in addition to return of invested capital).'

 

Sounds like a good plan.  But i'm not sure about the rusting effect on the metal though. I mean, scrapping a 30 year old rusted ship most probably is worth much less than scrapping a brand new one.

 

gonna try to find info about it..

[Uccmal]

This stock is behaving in Mr. Market's usual baffling manner.  The earnings, cash flow, and distributable cash are entirely as expected, and as forecast, probably better with the refinancing risk reduced.  And the stock sells off.  Business too boring and predictable? 

 

The questions from analysts are at their usual level of stupidity as well.  They cannot seem to get it through their heads that Seaspan leases ships at long term locked in rates.  As such, spot prices, and short term rate fluctuations, and utilization rates are of little relevance unless they persist for years.

 

http://seekingalpha.com/article/232859-seaspan-ceo-discusses-q3-2010-results-earnings-call-transcript

[ERICOPOLY]

'Therefore, I'm sort of banking on the cash flow to be entirely distributable to shareholders and let the depreciating dollar (rising steel prices) pay off the cost of these ships (cancel all of the debt upon scrapping in addition to return of invested capital).'

 

Sounds like a good plan.  But i'm not sure about the rusting effect on the metal though. I mean, scrapping a 30 year old rusted ship most probably is worth much less than scrapping a brand new one.

 

gonna try to find info about it..

 

On the conference call he talked about the major liners replacing 25 to 30+ yr old ships -- not because of rust, but because they are simply inefficient.  They are harder to load, they are not fuel efficient, and relatively high polluters.  True there would be some rust but my guess is that these commercial ships are maintained fairly well and rust would be superficial.

 

I hope you find the scrap estimates -- perhaps in the quarterly or annual reports there will be mention of cash flows from scrapping old ships.  Those ships are probably depreciated to zero so the scrapping should show up as a taxable gain.

 

[doc75]

This stock is behaving in Mr. Market's usual baffling manner.  The earnings, cash flow, and distributable cash are entirely as expected, and as forecast, probably better with the refinancing risk reduced.  And the stock sells off.  Business too boring and predictable? 

 

The questions from analysts are at their usual level of stupidity as well.  They cannot seem to get it through their heads that Seaspan leases ships at long term locked in rates.  As such, spot prices, and short term rate fluctuations, and utilization rates are of little relevance unless they persist for years.

 

http://seekingalpha.com/article/232859-seaspan-ceo-discusses-q3-2010-results-earnings-call-transcript

 

I really appreciate Mr. Market some days...

 

I generally feel we're heading for a serious contraction in the market but couldn't resist picking up some SSW today.  I noticed that Wells Fargo downgraded them today based on the recent upswing and the expected seasonal wallow.