Author Topic: SSW - Seaspan  (Read 129677 times)

Packer16

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Re: SSW - Seaspan
« Reply #210 on: May 19, 2011, 07:39:36 PM »
The probabilty of default can be estimated from the bind/pfd market.  So you can value the equity based upon distributable cash flows and probability adjsut the equity value by the probabilty of default.  For a B credit like Seaspan the 5-yr cum probability of default is 27.5% and the 10-yr is 36.8%.  So one way to risk adjust the DCF multiple is by reducing it to reflect the probability of default (which in this case would be 30%).  Therefore, a 10x unlevered multiple is equal to 7x B rated leverage multiple.

I have found this helpful in my analysis of leveraged firms as it provides me a discount to compare firms with different amounts of leverage.  These cum probilities decline to 3 to 5% at the A- rating so the effects on value for firms with greater than A- rating is very small.

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Re: SSW - Seaspan
« Reply #211 on: May 19, 2011, 07:46:32 PM »
Packer, interesting analysis.  How does the amount of debt vs equity factor in?  That is, if SSW had just 10% debt, would a B rating still take 30% off of the DCF multiple?  Or is the thinking that at 10% SSW would achieve an A rating?

Packer16

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Re: SSW - Seaspan
« Reply #212 on: May 19, 2011, 07:53:25 PM »
The lower debt would result in a higher rating.  Another way to approach probabilty of default is the pricing of debt securities but the rating model (if the firm is rated) is simpler to apply.  This idea is described in detail in "The Little Book of Valuation" by Damadoran, a great read for this and other valuation techniques.

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txlaw

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Re: SSW - Seaspan
« Reply #213 on: May 19, 2011, 08:58:14 PM »
This is a real interesting discussion because I've had the same sort of debate internally about how ATSG should be valued by the market. 

I almost always use a debt-adjusted earnings yield-oriented valuation for going concerns that I think will be around for a while.  However, one sector where I don't really adjust for debt is the financial sector, where the whole point is to establish a company that borrows capital and deploys it in order to earn a spread. 

So the question I've been asking myself is whether a leaseco is more like a finance company than other companies.  In a way, with a company like SSW or ATSG, the company is set up primarily to borrow capital, buy assets, and lease the assets such that the leaseco captures the spread between its finance costs + depreciation and the rents it receives.  When I think about it that way, I can sort of see valuing the company by applying a multiple to owner earnings, which you can sort of think of as distributable cash flow, assuming no growth or shrinking of the business.

I still use a debt-adjusted valuation method for ATSG.  But I do wonder what the market would do if the company distributed all its owner earnings rather than growing the business.

Myth465

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Re: SSW - Seaspan
« Reply #214 on: May 19, 2011, 10:33:58 PM »
Humm I use debt adjusted valuations unless I am almost certain of the cash flows. I also like to see leases matching the life of the asset. SSW and ATSG provide a high level of certainty inmo. For some reason I am very comfortable with ATSG expanding, but not with SSW. There just seems to be more barriers with the freighters inmo.

txlaw with regard to ATSG, do you look at cash flow to EV, and how do you feel about the expansion? At some point I hope they distribute all of their earnings, but right now I like the expansion because the demand seems to be there, they avoid paying taxes, and the debt is at an extremely low rate when compared to SSW.

How do you guys feel about SSW paying 10% interest.


Packer16

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Re: SSW - Seaspan
« Reply #215 on: May 20, 2011, 03:58:05 AM »
You are right about SSW becauswe its customers are all AAA so the adjustment probably should be adjusted downward.  The current yield of the C preferred is somewhere in the 8%s, so the market thinks there is higher risk than there AAA customer profile would imply.

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Re: SSW - Seaspan
« Reply #216 on: May 20, 2011, 07:04:55 AM »
You are right about SSW becauswe its customers are all AAA so the adjustment probably should be adjusted downward.  The current yield of the C preferred is somewhere in the 8%s, so the market thinks there is higher risk than there AAA customer profile would imply.

What do you think about the seniority structure's impact on the market implied B rating?  It's something like this:
1. Bank Debt
2. Pref Shares - C (listed)
3. Pref Shares - A & B (unlisted)
4. Common

Pref shares are junior to bank debt, which makes up 60% of the asset financing.  Is there an implied discount of the C prefs awarded by the market?  That is, because they are the most senior form of capital, should the bank debt be rated higher than the pref shares?

In a way this is indicated by the 6% fixed rate on the debt, but that was then and this is now (for better or worse).

txlaw

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Re: SSW - Seaspan
« Reply #217 on: May 20, 2011, 07:14:07 AM »
Humm I use debt adjusted valuations unless I am almost certain of the cash flows. I also like to see leases matching the life of the asset. SSW and ATSG provide a high level of certainty inmo. For some reason I am very comfortable with ATSG expanding, but not with SSW. There just seems to be more barriers with the freighters inmo.

txlaw with regard to ATSG, do you look at cash flow to EV, and how do you feel about the expansion? At some point I hope they distribute all of their earnings, but right now I like the expansion because the demand seems to be there, they avoid paying taxes, and the debt is at an extremely low rate when compared to SSW.

How do you guys feel about SSW paying 10% interest.


That's pretty much what I mean when I say debt-adjusted, looking at OE and EV.  If I were just buying the whole thing, assuming pay off of debt, what would I pay?  And what would that number look like given the passage of time?

But then there is the question of whether a leaseco is similar to a finance co.  We never talk about adjusting for debt when discussing banks or insurance companies, right?  It's always about ROE.

And are leasecos similar to REITs?

Also, utilities that the market likes seem to trade on ROE metrics.  Imagine if Sprint traded on OE with the same multiple as AT&T!

I like ATSG's expansion plans given their projected unlevered ROIC on the new planes, but I do wonder what Mr. Market would do if ATSG were allowed to pay a dividend.

I wish I had looked at SSW when all you guys were talking about it a while back.

txlaw

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Re: SSW - Seaspan
« Reply #218 on: May 20, 2011, 07:27:10 AM »
I like ATSG's expansion plans given their projected unlevered ROIC on the new planes, but I do wonder what Mr. Market would do if ATSG were allowed to pay a dividend.

The one caveat to the unlevered ROIC comment is that ATSG seems to use EBIT over capital invested, but those newly purchased planes, though durable goods, are depreciating assets. 

So the unlevered ROIC measure overstates economic return on capital invested.

ERICOPOLY

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Re: SSW - Seaspan
« Reply #219 on: May 20, 2011, 07:41:11 AM »
How do you guys feel about SSW paying 10% interest.

I hope they aren't borrowing at 10% to buy assets at 12%.