The firm recently sold $250 million in preferred shares aimed at buying ships and paying down debt. These shares (SSWprC) are a compelling income play. The 9.5% coupon makes the issue seem distressed. But this yield is more likely attributable to several benign factors. One, average long-term borrowing rates for shippers typically range from 8% to 10% for the highest quality firms, according to Jefferies' Mavrinac. Two, Seaspan didn't pay the debt rating agencies for a rating, and with the issue being on the small size, this has kept many institutional investors away. And three, shipping is a less-followed sector, as are preferred shares.
Given the favorable outlook for the container industry, Seaspan's finances and management that Webber regards as solid, a dividend that's taxed at only 15% for individual investors, and of which 70% is deductible for qualified corporate investors, this preferred appears to be an unusual opportunity.
The preferred also enjoys a uniquely defensive feature in being cumulative. This means that any dividends that are missed must be entirely made up before the company can pay a common share dividend. With dividends a key for attracting investors, the preferred's cumulative character makes dividend payment highly likely under virtually all scenarios save bankruptcy.
Intermediate-term risks to Seaspan, as well as to all other shippers, include a slowdown in global growth, especially in the major emerging markets-including China, India and Brazil-that have been driving trade in commodities and finished goods. Nearer term, dry bulk imports to and exports of finished goods from Japan will significantly slow in the aftermath of the disaster.
Generally, Omar Nokta, head of research at the boutique research firm Dahlman Rose, also sees risks associated with the sector being cyclical, seasonal and susceptible to external shocks such as the one we've just witnessed in the Far East. This can lead to volatility in charter rates and asset values. And Nokta reminds investors that the "changes in the regulatory and environmental regulations may limit the useful life of vessels and may require additional upgrades and capital expenditures that could affect cash flows and income."
Clearly, shipping is a challenging investment. But it is an essential sector in an increasingly globalized economy that can diversify a portfolio geared to growth while offering attractive dividend income. As of early April, many leading shippers look relatively cheap, and could become even more so if the tragedy in Japan drives prices down even further.