Hanjin collapses into bankruptcy and receivership: Sursum Corda!

I have been predicting this sort  of high profile bankruptcy of a major liner company as inevitable for years now.  There are just too many loss making liner companies and sooner or later state support would reach its limits.  The whole matter of counterparty risk for the vessel provider companies has been misconstrued for years now on the false assumption that the liner companies were just too big to fail. 

Seaspan's Gerry Wang calls the Hanjin bankruptcy a nuclear bomb and mixing his metaphors a 'Lehman moment', but did not Wang see this coming?  For years, he was ordering aggressively and chartering out to loss makers like Hanjin.  His policies contributed to this!

This industry suffers from chronic overcapacity and low margins.  Further their business model based on China and head haul routes is in risk of becoming outdated with the slowing of Chinese growth and trade rebalancing as well as technologically obsolescent with the robotics, 3-D printing, etc.  I have always been in agreement with my friend Christopher Rex of Danish Ship Fund on this industry and its prospects. 

I have argued this time and again with my Wall Street investment bank friends. Hopefully, with this Hanjin case, they will start to wake up and understand better the container industry dynamics.  See some of my  blog articles on this subject over the years.  For example, I was very early to point out the large exposure of Danaos (NYSE: DAC) to financially weak liner companies. 

Danaos was somewhat fortunate with the HMM charters receiving shares in restructured HMM in return for reduced charter rates.  In the case of Hanjin, DAC has estimated exposure of US$ 560 million on Hanjin.  First estimates are creditor returns of 35% for secured claims. But only 5% for unsecured claims and zero on liquidation.  That is quite a mark down!

Over the years, Wall Street has made some bad shipping calls like the earlier reckless, irresponsible dry bulk speculative asset plays.  Investors in shipping stocks have frequently lost their shirts. 

Of course, the great thing about shipping markets as opposed to politics in the US and EU - where the usual reaction is to double up on failed policies, buy time and hide the truth from the public - is that you cannot hide financial losses, financial resources are limited and there are natural market corrections, asset write downs and consolidation.  Raw Schumpeter capitalism always prevails keeping the industry lean and mean over the long run, but not without significant volatility and market swings. 

It is not a good idea to get lost in the noise and ignore supply chain logistics that generates the underlying cargo demand for marine transport.

Hanjin Shipping wins Seaspan concessions: the inevitable for the vessel provider companies!

The current plight of Hanjin is representative for the Liner industry: substantial operating losses, need for recapitalization and over indebted balance sheet.  The container industry panacea of ever larger units to reduce unit costs and defend eroding earnings margins is not working out as hoped.  This has created more overcapacity with cascading.  Now there is talk of the Panamax sizes going for scrap. 

World trade growth is slowing. It is not clear that the old model of large ships for headhaul lines is going to meet the requirements of the future with trade rebalancing in China, robotics and the sharing economy of the future.

The cold truth is that there are already more liner companies than the market can support.  A large number of liner companies are making losses.  Some like NOL have been put on the block for sale and are being consolidated into other companies like CMA-CGM, others like HMM and Hanjin are staving off bankruptcy with financial restructuring.

Vessel provider companies like Seaspan and Danaos have built their fleets by every larger vessels that they let on term time charter to financially weak liner companies that want the larger units to defend themselves from the ordering and competition of the stronger liner companies but unable to carry the vessels themselves on their balance sheets.

I have repeatedly signaled out this risky business policy of the vessel provider companies on my blog.  I have stressed that it was not a sound and sustainable business strategy.  The vessel provider companies would face inevitable challenges in the future as the financial situation of the liner companies deteriorates, leading to bankruptcy and restructuring that would inevitably entail charter renegotiation.  I pointed out the heavy exposure of Danaos to HMM and Hanjin as major charterers.  I stressed the aggressiveness of Seaspan to service financially weak Asian liner companies with ever larger units.  Cosco for example recently announces losses of over US$ 1 billion in their liner business, one of their customers.

I have always felt that Gerry Wang's assertions about having a leasing company business model were overstated and disingenuous to investors.  Seaspan lets its tonnage on time charter with operating risks.  With Hanjin in financial crisis, Wang took the hard line on charter negotiations for investor ears, but Seaspan is in a weak position with its exposure in large containerships.  It cannot easily withdraw and redeploy its vessels because the market for these units is not large.  Inevitably as its liner company customers begin to face financial difficulties, Seaspan has no choice but to accept cuts in charter rates to keep them going with their creditors as long as possible. 

Since the original writing of this piece, Hanjin's restructuring negotiations have not worked out and they are going into receivership.  Seaspan is hoping for a merger between HMM and Hanjin and that perhaps with some sort of state support, they might be able to avoid cuts in charter rates.  We will see over time how Seaspans fares.  This is a test for their exposure to other weak Far East charterers and possible state intervention to keep them afloat.

I restate again these points because I have often met dead ears in NY investment banking circles, still enamored with the containership industry.  Over time, the bankers and financial industry are going to have to face the reality:

• The containership industry is just as challenged as dry cargo with overcapacity. 
• The growth days from the global megacycle and China boom are over and gone.
• Liner companies will inevitably be forced to consolidate for survival. It is not clear that very large containerships will be needed to extent anticipated.
• Vessel provider companies are going to face a long period of thin margins as their liner company employment base shrinks in the consolidation process.
• Inevitably there is renegotiation risk on their charters that they will not be able to avoid with their liner company customers. 

Seaspan’s Yang Ming moment

Gerry Wang, Seaspan’s ebullient CEO, frequently refers to his business model as a ‘leasing” operation.  I have long questioned this.  In fact, Seaspan is a conventional vessel provider to liner companies.  Their contractual relations are long-term time charters with performance risk.  Yet this latest deal to order 14.000 TEU mega-ships and then charter them to Yang Ming Transport Corporation for their liner service has many interesting parallels to the ship leasing business that are illustrative of the business risks and rewards in the Seaspan business strategy.

Yang Ming recently announced consecutive losses TWD 2.6 billion (US$ 87 million) in the 2nd quarter 2013 earnings conference.  Revenue for the quarter was TWD 30 billion, a year-on-year decline of 14%, but a small quarter-on-quarter bounce of 9%.  The poor performance was blamed on depressed freight rates for the Asia-to-Europe trade lane from which Yang Ming derived about 27% of its revenue in 2012.

Yang Ming suffers from an over-leveraged balance sheet with too much debt and is struggling to shed assets for liquidity by selling off terminal operations and leasing them back.

Consequently, they are in no position to contract 14.000 containerships.  So they have now entered into an agreement to charter in ten additional 14,000-teu containerships from Seaspan, which are slated for delivery in 2015-16.  The logic is the usual in this business of ever-declining margins and over capacity:  “These mega vessels are expected to be deployed on the Asia-Europe route and are expected to bring unit costs to down better complement the fleet of the CKYH alliance,”  according to Jon Windham, a Barclay analyst covering them.

Seaspan initially ordered speculatively these mega-ships, paying US$ 110 million per unit at Hyundai Heavy Industries. With ten new units now committed to Yang Ming, Seaspan is now turning to Taiwan’s CSBC Corporation for five additional 14,000-teu vessels on the same price terms as the earlier Hyundai order as an added sweetener to this Taiwan deal.

No doubt, Seapan is offering Yang Ming a considerable service with these units that they could not afford to contract themselves.  Yang Ming is paying them a rate of US$ 46.000 per day upon delivery for the next ten years.

All this, however, cannot eradicate the bare facts that Seaspan is openly speculating in assets against charters often to financially weak liner companies in an industry that is suffering chronic overcapacity.  They wagering on an eventual cyclical market turn-around with increased box traffic.  Yet the heavy ordering of megaships contributes to over capacity. Unless there is real turn around in terms of increased container traffic and demand for box slots, this almost resembles a Ponzi scheme.

Of course, nobody can deny the tenacity of Gerry Wang and business standing of Seaspan in the liner industry.  Greek-listed container vessel companies like Danaos, Box Ships and Diana containers pale in comparison as poor relatives and much weaker management teams. 

The only really strong and healthy listed Greek containership company is  Costamare, whose largest vessels are 9.000 TEU.  They have a history of sustained profitability and they have not rushed into the megaships.  Many of their units are employed in feeder services, which are a growing and generally profitable subsector due larger ships on head haul routes, use of hub ports and increasing demand for distribution of boxes to smaller ports.

The business risks for Seaspan are similar to finance leasing companies in their business of high cost finance generally to a clientele of financially weaker shipping companies.  Sometimes the companies have liquidity problems and are looking to sell assets and lease them back.     Other times, they are expanding rapidly and have exhausted conventional lower cost bank finance.  The leasing companies bet on company turnaround and stronger markets to prop up their financially weak clients. 

Seaspan’s prime universe for these mega-ships is financially weak liner companies without the resources to order directly the vessels themselves.  Success of the venture depends critically on a market turn around.  Should this growth even finally level off with Far East trade rebalancing and slow recovery in Western economies leading to a belated and major shakeup in the Liner industry with few companies, some major bankruptcies, etc., then Seaspan might find itself badly exposed with such aggressive ordering.

So far Seaspan has managed to weather well the shock back in 2008 without a single order cancellation and is continuing its aggressive growth.

Cosco losses could lead to charter renegotiation in the containership sector

Macquarie Capital analyst, Janet Lewis, predicts that Cosco might continue in losses for two years or more. Cosco’s container wing, which was also loss-making in the first half, is set to take delivery of 28 new vessels in the near future. Will Cosco follow suit with containership owners to renegotiate down charter rates as they have done in the dry bulk sector?

There is considerable evidence that financial results in the containership sector are weakening this year. After the restocking boom last year in fight for market share, Maersk (OMX: MAERSKB) announced aggressive new building program for ever larger containership vessels in their on-going efforts to expand market share at the expense of peer companies.

Seaspan (NYSE: SSW), which has a pure vessel provider model and investor darling, followed suit with a new building program of their own. This group held on to all their new building contracts booked prior the 2008 meltdown, managed to cover their capex needs and take delivery. They turned heavily to Cosco (Coscon) and CSCL for employment. Seaspan is inordinately dependent on Cosco as their largest liner company customer relationship (in the order of 50% or more of their fleet from recent investor presentations).

Should Cosco be obliged to refuse delivery of new units or renegotiate existing time charter for lower rates, this would have a profound effect on Seaspan’s fortunes as well as other containership companies, who service their needs.

Seaspan shares have been falling in value since April. They have never fully recovered in share value from their pre-2008 levels.

Seaspan aiming for another giant containership order

After penning a US $2.5 bn deal at China’s Jiangsu Yangzijiang Shipbuilding for seven firm 10,000-teu vessels plus 18 options and then inking a letter of intent for 10 vessels of 14,000 teu at STX Offshore & Shipbuilding plus 10 options at $140m apiece, Seaspan is showing interest in 18,000-teu vessels and has approached South Korea’s Daewoo Shipbuilding, Hyundai Heavy Industries and Samsung Heavy Industries. There are never enough container vessels deals for its CEO Gerry Wang!

Seapan is a story of unlimited Chinese export growth. Despite the 2008 container market crash and massive losses of major liner companies in 2009, Seaspan avoided any cancellations in its newbuilding program. Since the market recovery last year, Seaspan has been aggressively ordering additional tonnage.

Whilst box rates have been under pressure, time charter rates have been rising with a moderate, steady increase that is now stabilizing. Margins have been satisfactory. Demand growth is expected to outpace supply with a forecasted 1,7% increase in fleet utilization this year as well as 5% appreciation in asset values.

Liner companies are moving to ever larger tonnage to escape the pressure on box rates and gain market share over competitors by shipping a larger number of containers on the same vessel.

Seaspan has successfully tied up some long-term charters with Hanjin Shipping for several newly contracted TEU-10.000 newbuildings. Hanjin normally fixes in small to medium-size ships for around seven years and large vessels for more than 12 years. Hanjin was a breakthrough for Seaspan given its past close relations with German KG containership investors.

Seaspan has attracted a lot of investor interest this year. As with all listed companies, these large block expansion deals attract investor interest on future expectations. Its shares soared to excess US$ 20 levels in April, only to fall back to present US$ 15 levels. The company has been slowly recovering from it lofty pre-2008 meltdown levels, but it remainsl far away yet.

The question is where Seaspan is going to employ these envisaged TEU-18.000 units? The group has been relying increasingly on Chinese state controlled liner companies COSCO and CSCL to back its new orders.

Full speed ahead for Seaspan targeting a US$ 105 mio preferred offering

Seaspan is continuing its aggressive expansion plans and looks to use the new funds from this offering for further vessel acquisitions. It has been mulling an giant order of 20 units of 14.000 teu vessels at South Korea’s STX Offshore & Shipbuilding yard. The offering is priced like a junk bond with accrued dividends of 9.5% per year.

Seaspan last ordered vessels in 2007. Its fleet currently numbers 55 containerships with 12 newbuildings due for delivery by April 2012. Since the 2008 meltdown, Seaspan held on to its orderbook and made strenuous effort to take delivery all tonnage as ordered. They covered these new units with period employment from Chinese Coscon and CSCL, which now comprises 70% of their total revenue.

Two months ago, Seaspan signalled its intention for up to 22 post-panamaxes of 10,000 teu at China’s Yangzijiang Shipbuilding in a deal worth up to US $2.1 bn. But the company will only firm up orders once it has long-term charters in place.

Seaspan's bottom line only recently turned back into the black. The company said it made US$ 50,55 mio to 31 March on a net basis, from a loss of US$ 36,61 mio in the same three months of 2010.

The company future is intimately tied to insatiable Chinese demand with the strategy of its now almost legendary CEO Jerry Wang.

Seaspan eyes Tiger scheme: structural change in Chinese container market

Seapan's move to raise capital by a US$ 250 mio preferred shares together with a proposed US$ 75-100 mio minority stake in a containership venture with Tiger Group are raising eyebrows. Aside from possible Clayton Act violations stemming from Seaspan CEO Gerry Wang also running the new fund which may invest in competitive container companies, the nature of the fund illustrates Chinese policy to maximize its future container transport needs though Chinese-built vessels and Chinese liner companies.

Seaspan announced recently (January 21), a public offering of 9.5% Series C Cumulative Redeemable Perpetual Preferred Shares. The company had been examining for some time alternatives to raise capital to cover their ambitious CAPEX program. The use of preferred shares appears to be a means of raising capital with minimum dilution to shareholders.

The Tiger investment fund vehicle would invest in container shipping assets, primarily newbuilding vessels strategic to China. Seaspan is placing its future in Chinese liner trades, which now represent more than 70% of their fleet employment.

Seaspan told investors:

“We also anticipate that we would have a right of first refusal for some negotiated duration with respect to any containership asset opportunities that are developed by the vehicle. We believe that any investment by us in the vehicle could enhance our ability to pursue current growth opportunities in the container shipping market by leveraging the vehicle’s access to capital and customer relationships. We also believe that an investment in the vehicle would allow us to continue to increase the scale of our business and realize volume discounts for newbuilding orders that we would not otherwise be able to achieve.”

The role of Gerry Wang, the Seaspan CEO who is going to also run the new fund which may invest in competitive container companies is confusing. Whilst Seaspan is based in Hong Kong, it is a US-listed company subject to the Clayton Act.

The Clayton Act states: "No person shall, at the same time, serve as director or officer in any two corporations that are, by virtue of their business and location of operation, competitors..."

The other aspect of these moves is that Chinese policy seems to be moving more to a Japanese "Keiretsu" model of interlocking business relationships and shareholdings and Seaspan is following along with this trend. We have already began to see a similar direction in the Capesize trades, where a growing share of the iron-ore business is going under long-term contracts including transport and less emphasis on spot markets. Key suppliers like Vale are building their own fleets. Further the Chinese are very keen on supporting their domestic shipbuilding industries, who have increased dramatically their capacity over the last few years to become major players.

Finally, this system depend on perpetually high growth rates in the Chinese export model, where money is constantly being channeled into new capacity. Already there are signs of overheating. Seaspan has a franchise on special relations with China, but should there be a downturn where expectations are disappointed, Seaspan will be affected with such concentration in this market.

For the time being the 'smart money' continues to give strong support to this group. Wells Fargo Securities" Michael Webber upgraded Seaspan to “outperform”, calling the company “best of breed” within the containership sector(among vessel providers to liner companies, as Seaspan has no cargo system of its own and depends on liner companies to employ its vessels):

“Seaspan currently has 11 vessels scheduled for delivery in 2011 and three in 2012, which are fully financed and will increase its capacity by 53% to over 400,000-teu,” he told clients, adding: “We believe Seaspan will have capacity to materially increase its dividend and potentially fund additional growth and pay down debt, as we expect Seaspan to generate roughly US $412 mio and US$ 528 mio in Ebitda in 2011 and 2012, up 43% and 28% [year to year], respectively.”

This mirrors the China growth story with aggressive growth and high returns on growth of multiples. The underlying investment returns on DCF with residual asset value are much lower. Seaspan's asset-heavy vessel provider business model with long-term time charters is by nature a low margin business, where higher returns can only be generated by high capital gearing and rapid growth. What makes this especially appealing is that Chinese business is considered virtually "risk free" counter party risk.

Gremlins returning to haunt container market

This year market a remarkable turnaround in container shipping. In 2009, major container operators took massive losses, 10% of the global tanker fleet was laid up. Projections were for two more years of losses before recovery. Ultra slow steaming soaked up surplus tonnage capacity together with robust economic recovery in Asia. Resumption of exports to EU and US head haul trades have led to a resurgence of profits. Basic over supply of tonnage remains. Head haul routes are weakening again.

Maersk is cutting its Asia-Europe capacity by 10% for the winter period in line with changing market demand. Volumes are expected to remain weak throughout the coming four months, as the seasonally weak winter period approaches.

Conversely, Singapore's NOL Group has posted net profit of US$ 282 mio for the third quarter, turning around a US $138 mio loss last year. Revenue to 30 September grew 55% to US$ 2.4 bn. Its cumulative nine-month profit is now US$ 283 mio. It lost US$ 530 mio during the same period last year. Revenue for liner shipping improved 60% to $2.2 bn in the third quarter. Containership unit APL’s core pre-tax and interest earnings were $301 mio, compared to a loss of $130 mio in 2009. Average revenue per feu was $2,799, up 21%, while volumes grew 29% to 2 mio feu.

Container port operators in mature economies face strong cost competition from emerging markets due to excess capacity and slowing growth rates as this year's sharp rebound in container shipping cools off. Port congestion was returning in the fast growing emerging markets, but sluggish growth in the mature markets meant continued excess capacity in many ports, including New York/New Jersey and Antwerp. Customers seeking the over-capacity are starting again to squeeze the liner operators and there is increasing cost competition.

This has not discouraged more asset-oriented shipping players to move into the containership sector. A number of Greek operators like Paragon and Diana have bought container vessels at current price levels and put them on charter, looking to build up a presence in the sector. More established operators like Seaspan have continued their aggressive CAPEX plans, absorbing all newbuildings due this year, putting them on charter with increasing reliance on major Chinese liner operators.

There remains a lot of optimism in financial circles that pre-2008 growth levels will return rather than a prolonged 'new normal' scenario or at least this appears to be their story to investors in these companies to back their large deals and aggressive asset expansion financied by bank debt and plans for follow-on share offerings. They argue continued robust Asian growth regardless of Western economies. Also, attractive is the long-term employment by liner companies with strong balance sheets or sovereign risk that are considered too big to fail and unlikely to renegotiate rates downwards in poor market conditions. Tanker and drybulk sectors charters are generally for shorter period of time and more prone to renegotiation.

Seaspan's share price has outperformed this year from US$ 8 levels to the present US$ 13.20 despite the weakening conditions in the underlying container freight markets. Seaspan remains highly leveraged but it has long-term employment not subject to these market fluctuations. Still its share price remains very far from the lofty US$ 30 pre-2008 levels, but this is the same pattern for nearly all shipping stocks since the meltdown.

The basic problem is that there is still a large order book overhang of tonnage and even some new ordering. The slow steaming has been masking the existing over capacity and some are even calling for these measures to become permanent. The sector would be exposed to the effects of trade rebalancing when and if this every takes place.

Seaspan's China gambit

Seaspan is a non-operating containership owner with a very ambitious fleet expansion plan. They have been struggling since the 2008 GFC to finance their aggressive CAPEX program. Their business plan is highly dependent on continued Chinese export growth. The two top customers are Coscon and CSCL  (70% total revenue) both Chinese state owned enterprises.  90% of their contracted revenue is from China and Japan. The company is highly leveraged and has recently filed a shelf registration for a new share issue.

Seaspan is a vessel provider business model. It owns and operates container vessels with long term charters to major liner companies. It has no container logistical system of its own as do the major liner companies like Maersk, CSCL, MSC, CMA-CGM, Neptune Orient and Orient Overseas. It is largely an asset play backed by long term charter parties with substantial rate discounts and subject to earnings margin pressures over time from inflation, currency fluctuations and increased repair costs as the fleet ages.

It has a very impressive Board of Directors, including Graham Porter (Chairman of the Tiger Group), John Hsu (partner of Ajia Partners, one of Asia's largest privately-owned alternative investment firms), Peter Lorange (former President of IMD) and Peter Shaerf (managing director at AMA Capital Partners). Seaspan's CEO Gerry Wang appears to have very good personal contacts with the Chinese SOE's in shipping. He is always been extremely bullish on Chinese growth prospects.

The container sector was one of the most sharply hit by the sudden and deep economic slowdown in 2008 GFC. The major liner companies suffered heavy losses in 2009, with aggregate industry losses running into tens of billions of dollars. As an effect of industry wide losses, the liner companies heavily cut capacity, idling their own capacity and returned the chartered tonnage to non-operating owners. Normally, most liner companies own approximately 50% of their tonnage and charter in the remainder to cover their cargo volume projections.

These major operators made substantial adjustments in terms of order cancellations and deferrals of newbuilding deliveries well into 2011-2013. There was probably more speculative vessel ordering in the container sector than any other sector of the shipping market. A very large part of the orderbook are the large post Panamax size vessels for long haul routes.

The great attraction for non operating owners' investment has been the term charter cover from the liner companies. The current order book stands at 30% of the current fleet, down from about 55% at its peak in mid 2008. It is important to understand the current order book mix in terms of the owners.  The German KG market and asset providers in non-operating owners like Danaos Shipping and Seaspan constitute greater than 50% of the current order book, remaining is covered by the liner operators like Maersk, APL, and CMA CGM etc, who actually control the underlying commercial business with end-users in the sector.

Seaspan fared well in 2009 closing the year with record profits of US$ 145 mio as opposed to the losses of the two prior years: 2008 (US$ 199) mio and 2007 (US$ 10) mio. They reported no charterer default or renegotiation problems. This year for the 1 H, Seaspan is again in loss position, but due to sizeable changes in fair value of financial instruments resulting in a loss of $223.2 million for the six months ended June 30, 2010 compared to a gain of $92.5 million in 2009. The change in fair value loss for was due to decreases in the forward LIBOR curve and overall market changes in credit risk.

As of their annual report filed last March, Seaspan had contractual CAPEX obligations on an additional 26 containerships over the next 30 months over an in addition to the existing fleet of 42 vessel in operation. Whilst there have been rumors of possible new order cancellations, Seaspan so far has maintained its orderbook.  It appears that they are highly dependent on COSCO in chartering this new tonnage. The employment contracts with their two Chinese SOE charterers are subject Chinese law and dependent ultimately on the Chinese legal system for enforcement. Indeed, this year, they turned aggressive and also added one additional new acquisition chartered to United Arab Shipping Company for two years and Gerry Wang has made statements about opportunities to pick up units in the troubled German KG markets.

Considering the industry environment with the major liner companies cancelling orders and lately reletting larger post-Panamax tonnage, this represents a remarkable contrarian business strategy with backing from a BoD of major industry figures, who apparently believe strongly in a robust world economic recovery with shipping markets bouncing back to former levels in the near future, ostensibly driven by renewed Chinese export growth and internal infrastructure development as a return the pre-2008 GCF situation.

Financing this program has not been easy. The total purchase price of the 21 vessels was estimated to be approximately US$ 2.6 billion. The remaining five units were covered by leasing arrangements with Peony Leasing Limited, or Peony, an affiliate of Bank of Scotland plc and Lloyds Banking Group. As these units were contracted during the market boom, Seaspan faces a valuation problem with the decline in prices for new orders today. They have "gearing” covenants in their senior debt that prohibit them from incurring total borrowings in an amount greater than 65% of our total assets. Further they were blocked from drawing the remaining approximately US$ 267 million available under their US$ 1.3 billion Credit Agreement on which they were relying heavily to support their CAPEX program.

In May 2010, Seaspan issued 260,000 Series B Preferred Shares for US$ 26 million to Jaccar Holdings Limited, an investor related to Zhejiang Shipbuilding Co., Ltd. of China ("Zhejiang"). These preferred shares are perpetual and not convertible into common shares. They carry an annual dividend rate of 5% until June 30, 2012, 8% from July 1, 2012 to June 30, 2013 and 10% from July 1, 2013 thereafter and are redeemable by the Company at any time for US $26 million plus accrued and unpaid dividends. This appears to be a shipyard-extended credit facility for their reported two orders in this yard.

Compare this to established liner-owner operators like Neptune Orient Lines (NOL) and Orient Overseas (OOIL), integrated logistics players with proven container shipping capabilities available at attractive valuations. For example, OOIL's three principal business activities are segmented under International container transport and logistics services (OOCL, OOCL Logistics, and China Domestic), Ports and Terminals (Kaohsiung and Long Beach) and Property Investments (Wall Street Plaza in New York and Beijing Oriental Plaza in Beijing). OOIL’s container shipping operations is amongst the most cost effective in the container shipping industry with the Company consistently outperforming its peers with the highest profit margin among major container line operators.

OOIL has always had one of the most conservative and strongest balance sheets in the container shipping industry and has consistently kept the net gearing to the lowest. The company has no major issues in meeting its capital commitments and capital expenditure. At the end of FY 2009, OOIL had vessel capital commitments of US$ 712 mio and US$ 1.27 billion in free cash. It's capital gearing is 58%.

Seaspan's second quarter earnings conference presented a very rosy picture of a company with a low debt ratio, impressive built-in future growth revenue of US$ 7 billion and fantastic compound annual growth rate (CAGR) of 40%. Suffice this to be based entirely on their assumptions of a V-shaped world economic recovery and deeming their situation a few years ahead. . Their present leverage is very high and they would be not going through the trouble and expense of a shelf registration if they were not concerned about the need to raise equity to maintain their covenant obligations and cover their CAPEX needs. Indeed, one can presume it likely that this is an exercise to woo potential interest for a possible IPO offering.

The issue is whether peer companies like NOL and OOIL offer more value to investors because of their integrated logistics business models, their diversity of revenues sources, and their stronger balance sheets. All this is in the context of an uncertain environment in terms of economic recovery and rebalancing of trade flows. All these companies are dependent on continued emerging market growth in the Far East.