ATCO - Atlas Corp

[petec]

An update on how these notes priced, conversion prices, etc  -

https://www.sec.gov/Archives/edgar/data/1794846/000119312520319538/d63418dex991.htm

I must confess I'm not sure I understand the net effect of the capped call transactions, i.e. why they are choosing this structure. Anyone have any insight on that?

It makes my brain hurt frankly. gfp's post is useful but I don't fully understand the benefit of synthetically increasing the conversion price, rather than just increasing it. I assume it is to do with tax or accounting.

Anyway the net effect seems to be that they have raised 5-year debt at a total cost of 5.5% which could convert into shares at $17.85.

The bit that really confuses me is that Seaspan has the right to redeem the notes at par if the shares are over 130% of the unadjusted conversion price, which is $13. Doesn't that hugely reduce the value of the convertibility feature to the buyer?

[gfp]

I'm not an expert on these financings but what I understand is that the lenders (bond buyers) get a convertible with a 13 conversion price and ATCO spends some money (accounted for like original issue discount I believe) to synthetically bump that number into the 17's as far as the cash-for-dilution goes.  There was probably not an attractive market for converts that had a strike in the 17's.  Why they chose this structure - who knows - it was likely the most compelling option the bankers presented to them.  It doesn't sound uncommon but I'm sure it will create a little accounting noise around share price movement since Atlas holds the call spread if I am understanding it correctly.

For me, what was/is important was that the derivative trades and the convertible issuance caused the market price of ATCO to decline for no reason other than hedging to facilitate those derivative trades.  And that was/is an opportunity if you want more Atlas around 10.

[Nelg]

Thanks for your thoughts petec, especially re the Panama canal. I have heard Atlas allude to this in calls but not explain it in that detail (or I didn't pick up on it). Are there any other sources/data you can share for this - particularly on your comment "the limits on ship size are imposed by port capacity and journey length (you can't use huge ships on short journeys because the dwell time in ports is too long)"

Their corporate debt is basically split ~20% revolver, ~60% TL, and the rest FFH notes, and scheduled repayments are a few hundred m/year. But I take your points and think you're putting out better ones than me.

On your MidAmerican question: "15/0.73=20x eps in 18 years for a CAGR of 18%, partly driven by an increase in leverage? That seem fair?"

It's fair to say that though he was likely also responsible for the ~2x increase in earnings from 1990 to 1991 too (he cut 25% of employees in the first few months of 1991, and started a few-year trend of increased load factors on the geothermal plants)...but I don't know if they raised equity in 1991. Anyway, it's a good record however which way you cut it, and it is more anomalous that he did that while also substantially improving the business quality.

[gfp]

As some more color on the "why this structure" question - here are some quotes from Sokol and Chen (and the PR for the upsized, closed offering)

"This initial offering by Atlas's subsidiary, Seaspan, within the institutional unsecured credit markets resulted in providing low-cost unsecured capital for future growth and enhanced our balance sheet and capital structure while also providing increased financial strength. The transaction was an important step toward our objective of achieving a corporate investment grade credit rating. The capped call structure also provides protections to holders of our common shares by mitigating future dilution while setting a higher than market exchange price," commented, David Sokol, Chairman of the Board of Directors of Atlas.

"We are pleased to access the unsecured institutional credit markets with a structure that provides protections for current equity holders and an effective capital solution for our stakeholders. This offering further demonstrates our prudent decision-making regarding our capital structure, which is based on stringent financial discipline that ensures we are well-positioned to seize opportunities while reducing the Company's overall cost of capital. We believe that the exchangeable notes will offer our institutional investors a great opportunity to participate in our continuing quality growth, while optimizing our capital structure and operating platform for existing investors over the long-term," remarked Bing Chen, President and CEO of Atlas.

The notes will be exchangeable under certain circumstances at the option of the holders into Atlas common shares, par value $0.01 per share ("Atlas shares"), cash, or a combination of Atlas shares and cash, at Seaspan's election, unless the notes have been previously repurchased or redeemed by Seaspan. The notes are not guaranteed by Atlas or any of its or Seaspan's respective subsidiaries. The notes will mature on December 15, 2025, unless earlier exchanged, repurchased, or redeemed. The exchange rate will initially equal 76.8935 Atlas shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $13.01 per Atlas share). The exchange rate will be subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. After giving effect to the cap price established in the capped call transactions, the initial effective exchange price on the notes of $17.85 per Atlas share represents a premium of approximately 75% over the last reported sale price of the Atlas shares of $10.20 per share on the New York Stock Exchange on December 16, 2020.

http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20201222:nPn1SK3nKa&default-theme=true

[gary17]

this stock is clearly benefiting from the huge increase in freight price....is that understanding correct?
i wonder how sustainable this is and what this means....

[ValuePadawan]

New CFO as well https://ir.atlascorporation.com/2021-01-11-Atlas-Announces-Appointment-of-New-Chief-Financial-Officer?asPDF=1

[bluedevil]

Atlas will see some benefit from the increased rates, as they have a small set of ships that are on shorter term charters (mostly older/smaller boats).  Most contracts are on long term charters, so it won't necessarily benefit Atlas that much, and even when ships come off charter, they often give the liners options to extend for a year or two.

Atlas has a large number of ships on big contracts that are coming off charter in 2022 and 2023, but again often with liner options.  The big question in my mind is whether Atlas can use the booming prices that are currently prevailing to try to negotiate some favorable extensions of those contracts while the market is hot.  They don't need to fully capture the prevailing rates, but just use the hot market to secure second charters at good, profitable rates.  If they can do that, the biggest risk facing the company will have been removed and I believe will lead to a re-rating of the stock higher.  Fingers crossed!

[petec]

Interesting to see the contex index (which tracks spot rates for smaller vessels) is at its highest level since before the GFC, and roughly double the average level since then.

Atlas doesn't have a huge amount of exposure to spot rates but this will help at the margin. It's also suggestive of tight supply and demand conditions, which can't quickly be fixed by increasing supply given the size of the current order book. 2021 will be an interesting year.

[petec]

Thanks for your thoughts petec, especially re the Panama canal. I have heard Atlas allude to this in calls but not explain it in that detail (or I didn't pick up on it). Are there any other sources/data you can share for this - particularly on your comment "the limits on ship size are imposed by port capacity and journey length (you can't use huge ships on short journeys because the dwell time in ports is too long)"

Sorry only just seen this. No, I can't give a specific source, but I think Seaspan have mentioned it on conference calls and I have heard it from other sources also. It makes intuitive sense. The longer you're at sea the more you save by cramming more containers onto one ship. But if you're not at sea long, then the time taken to load and offload them offsets the benefits. I believe even the trans-Pacific route is too short for the the really big ships, which are only optimal on Asia-Europe routes. I may have misremembered that specific datapoint but the overall point stands.