Agreed. And it won’t just be the Washingtons. There’s another big shareholder that needs cash flow, as discussed extensively on this board.
But also: while the hypothetical ROEs look great, I did point out that we don’t know the real IRR because we don’t know the lease terms (nor, indeed, the rates the ships will earn when the leases end). Also, these assets have *relatively* short-lives, and an x% ROE on a short lived asset is much less valuable than the same ROE on a long-lived one. Treat my maths as a paper exercise only.
I think the bolded part is key. Wouldn't returns be significantly lower once you account for required debt payments? The company has been trying to reduce the scheduled principal payments (which is fine by me and makes sense...to an extent), but these ships ultimately have a ~25y useful life.
So if you assume the required debt payments on these vessels are amortized over say 15y, IRRs on these recent deals look weak.
When Sokol joined Seaspan as Chairman, he berated the previous management team for levering up to build new ships, and then when the downturn hit, their balance sheet didn't allow them to buy (almost) new ships at less than 50% of cost (ie, the Sam Zell strategy - your competitive advantage is your opportunistic buying which gives you an asset cost base that is >50% lower than everyone else).
Newbuild ship costs haven't dropped by that much, and with charter rates not looking that different from ~2015 (I think) it seems like they're just doing what the previous management did. How is this point of view incorrect?
Depends on the timing of debt repayments but assuming they’re back end loaded IRRs could be quite high.
What’s your source on new build costs? Not that it matters much since the vast majority of capital deployed has been in acquisitions.
I agree the economics look good if debt repayments are back-end loaded but then the risk just gets transferred to lenders, and I believe most of the debt is recourse. I understand the "but this time the industry is an oligopoly" argument though, which might/should result in vessels not being scrapped before their useful lives (ie, like what happened during the last downturn).
Maybe I'm just a grumpy old credit guy, but creditors should want their principal back well before the useful life for the above reason, plus most customer credit ratings aren't that strong either. IMO the prices Atlas is paying for these vessels does not provide much margin of safety if there's a repeat of a ~2016-type downturn.
Newbuild cost is from a Jefferies report which sources from Clarksons, which is the same industry publication usually quoted in Seaspan's presentations. I don't know how to post pictures on here, but here's the data (I'm eyeballing it from graphs - I don't have the exact numbers):
- 8.5-9.1k TEU 5-year ranges:
NB costs: ~$82-90m, vs currently ~$87m
5y old vessels: $25-$70m, vs currently ~$50m.
- 13-14k TEU 5-year ranges:
NB costs: ~$105-115m, vs currently ~$105m.
5y old vessels (data only for 13k TEU): ~$85-$110m, vs currently ~$90m.
They seem to be buying stuff mostly in the ~11-12k TEU range (the last 2 acquired 12k TEU vessels were 2y old and $88m each), and I'm guessing the 5 12.2k TEU newbuilds they just ordered cost ~$500m, so [assuming similar charter rates] it seems like the economics between their acquisitions and newbuilds is similar.
Btw I own Atlas shares.