Fitch Publishes First-Time ‘BB’ IDR to Seaspan Corporation; Outlook Stable
Fitch Ratings has published a first-time Issuer Default Rating (IDR) of ‘BB’ to Seaspan Corporation (Seaspan). Fitch has also assigned a ‘BB’ rating to the company’s senior unsecured notes. The Rating Outlook is Stable.
KEY RATING DRIVERS
Seaspan’s ratings reflect its scale and franchise as a leading containership lessor, enhanced funding flexibility following recent unsecured debt issuances, which increased the level of unencumbered assets, low leverage and solid liquidity. Seaspan’s ratings are also supported by a strong operating platform, which includes ownership of a young fleet on long-term charters, consistent operating cash flow generation, solid profitability, and an experienced leadership team.
Seaspan’s ratings are primarily constrained by the company’s significant customer concentration, a high proportion of secured funding, high dividend payout ratio and the specialized nature and relative illiquidity of containerships when compared with other large equipment lessors. Rating constraints applicable to the containership leasing sector include risks associated with the cyclicality of the global shipping industry and the potential for undisciplined industry capacity build-up that may negatively impact the financial performance of freightliners, pressuring containership lease rates, and exposing Seaspan to potentially sizable impairment charges.
Fitch’s sensitivity analysis for Seaspan incorporated forecasted quantitative credit metrics for the company under the agency’s stress case assumptions which included default of up to 15% of the company’s revenues, a nine-month delay in placing displaced ships with another operator at a 50% discount, and recognition of up to 15% of impairment charges of the net book value of the equipment held for lease. Fitch believes Seaspan has sufficient liquidity withstand the stresses without breaching Fitch’s liquidity coverage downgrade trigger of 1.0x, while maintaining leverage below 3.0x over the rating horizon.
As of today, Seaspan is the largest containership lessor in the world with 130 ships accounting for 1.1 billion of Twenty-foot Equivalent Unit (TEU) capacity and has one of the largest order books in the industry consisting of 45 ships with 664 million TEU capacity, all of which already have contracted charter agreements. The company’s fleet is the youngest among public peers with a weighted average fleet age of 5.0 years at May 31, 2021, pro forma for the order book and announced secondhand vessel acquisitions.
Seaspan has meaningful customer concentration risk, as the top three customers comprised more than 70% of lease revenues, with the largest customer (Cosco Shipping), accounting for 32% of lease revenue at 1Q21. Fitch believes that the latter exposure is partially mitigated by the Chinese government’s controlling interest in Cosco. Seaspan has not recognized impairments on its vessels since 2016 and Fitch expects impairment risk to remain low over the Outlook horizon.
The company has reported average pre-tax returns on average assets (ROAA) of 4.3% over the past four years and the annualized ROAA was 5.2% in 1Q21. The average remaining pro forma charter period of 6.8 years on Seaspan’s fleet provides good predictability to operating cash flows over the medium term.
Seaspan’s leverage is among the lowest compared to Fitch-rated equipment lessors, with a ratio of gross debt to tangible common equity of 1.6x as of March 31, 2021. Fitch expects leverage will remain at or below 2x over the rating horizon.
Seaspan’s mostly secured funding profile constrains the rating. At March 31, 2021, pro forma for $300 million of unsecured notes issued in April 2021, unsecured debt represented 17.6% of total debt; up from 6.5% yoy. Fitch would view an increase in unsecured funding favorably, as it would improve funding flexibility in times of stress.
At March 31, 2021, Seaspan had $276 million of cash on hand and $450 million availability under its committed revolving credit facilities and Fitch expects Seaspan will generate above $600 million of operating cash in 2021. Seaspan’s debt maturity profile is well laddered with less than $500 million of debt maturing within the next 12 months. In addition, Fitch anticipates the company’s dividends will be managed in the range of 25% to 35% of operating cash flows.
Fitch estimates the company’s liquidity coverage ratio (defined as cash on hand, borrowing capacity on committed facilities, future capex related secured financing commitments and expected operating cash flows over the next 12 months to debt maturities, dividends and purchase commitments over the next 12 months) was above 2x at March 31, 2021, which is solid for the ratings.
The Stable Rating Outlook reflects Fitch’s expectation that Seaspan will continue to improve funding flexibility and increase its unencumbered assets through the issuance of unsecured debt, while generating consistent cash flows, maintaining sufficient liquidity, and managing leverage below 2.0x.
The rating on Seaspan’s unsecured notes is equalized with the company’s Long-Term IDR, reflecting average recovery prospects in a stressed scenario based on the coverage from the pool of unencumbered vessels.
Factors that could, individually or collectively, lead to positive rating action/upgrade include an increase in unsecured debt approaching 35% of total debt, which would enhance the firm’s funding flexibility; lack of sizable impairments; further diversification and improvement in the credit quality of the customer base; maintenance of manageable dividend payout ratio, leverage (adjusted debt to tangible equity) at or below 2x and liquidity coverage above 1x. In addition, Fitch would view more clearly articulated financial policies related to leverage and funding profile targets favorably.
Factors that could, individually or collectively, lead to negative rating action/downgrade include material deterioration of the container shipping industry due to trade wars between large economies and/or exogenous shocks resulting in oversupply of containerships and sustained declines in lease rates and cash generation of re-chartered vessels; the default of one of the company’s top lessees; elevated vessel impairments that erode Seaspan’s equity base; debt funded capital distributions to the parent; a material and sustained increase in leverage from current levels; and/or the decline of liquidity coverage below 1x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Source: Fitch Ratings