Fitch affirms Seaspan Corporation’s IDR at ‘BB’; Outlook Stable

KEY RATING DRIVERS

The rating affirmations reflect Seaspan's scale and franchise as a leading containership lessor, low leverage, predictable cash flows generated predominantly from longer-term leases, and solid liquidity. Seaspan's ratings are also supported by a strong operating platform, which includes ownership of a young fleet on long-term charters, solid profitability, and an experienced leadership team.

Seaspan's ratings are primarily constrained by the company's significant customer concentration, a high proportion of secured funding, and the specialized nature and relative illiquidity of containerships when compared with other large equipment lessors. Rating constraints applicable to the containership leasing sector include risks associated with the cyclicality of the global shipping industry and the potential for undisciplined industry capacity build-up that may negatively impact the financial performance of freight liners, pressuring containership lease rates and exposing Seaspan to potentially sizable impairment charges.

Seaspan is the largest containership lessor in the world with 132 ships accounting for 1.2 million of twenty-foot equivalent Unit (TEU) capacity as of March 31, 2023. Seaspan also has one of the largest order books in the industry, consisting of 57 ships with 685k TEU capacity, all of which already have contracted charter agreements attached. The company's fleet is the youngest among public peers with a weighted average fleet age of 5.3 years as of 1Q23, pro forma for the order book.

Seaspan has meaningful customer concentration risk, as the top three customers comprised more than 60% of lease revenues in 2022. Seaspan has not recognized impairments on its vessels since 2016, and Fitch expects impairment risk to remain low over the Outlook horizon given the young, in-demand fleet and the market position of the lessee base.

Driven by favorable industry trends, Seaspan reported a strong pre-tax return on average assets of 6.0% in 2022, above the four-year average of 5.0% from 2019-2022. However, Seaspan is exposed to interest rate risk, with approximately 30% of its debt carrying unhedged floating rates as of 1Q23, compared to 94% fixed revenues, and Fitch expects high-interest costs to pressure returns over the Outlook horizon.

Seaspan's leverage is among the lowest compared to Fitch-rated equipment lessors, with a ratio of gross debt to tangible common equity of 1.8x as of March 31, 2023. Fitch expects leverage will remain around 2x over the Outlook horizon.

Seaspan's largely secured funding profile constrains the rating. At March 31, 2023, unsecured debt represented 22.2% of total debt, down slightly from 24.1% a year ago. However, the recent take-private transaction triggered certain bond provisions that resulted in much of the unsecured debt being redeemed early. Pro forma for these activities, Fitch estimates the current unsecured percentage to be 15.0% of total debt. Fitch believes the unsecured funding percentage may decline further as the company draws on secured borrowing capacity to fund its order book. Fitch would view an increase in unsecured funding favorably, as it would improve funding flexibility in times of stress.

On March 31, 2023, Seaspan had $465 million of cash, $650 million of availability under its committed revolving credit facilities, and $2.5 billion of availability under its term loan facilities. Excluding newbuild financing, Fitch estimates liquidity sources (unrestricted cash and undrawn facility capacity) cover the next 12 months of debt maturities by approximately 2.5x, which is within the 'a' category benchmark range of over 2x.

Seaspan's parent company Atlas Corporation was acquired by the newly formed Poseidon Acquisition Corp in March 2023, taking the company private and effectively moving the outstanding publicly traded shares to Ocean Network Express, one of the company's shipping customers. The transaction did not add any incremental leverage to Seaspan's balance sheet and the current management team remains in place. While Fitch does not expect the transaction to affect Seaspan's rating, it does add incremental strategic uncertainty given the new ownership structure and the resignation of three independent directors from Atlas' board.

The Stable Outlook reflects Fitch's expectation that Seaspan will maintain its market position and generate consistent cash flows, while maintaining sufficient liquidity, an unsecured funding component above 10% of total debt, and leverage at or below 2.0x on a sustained basis.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--Material deterioration of the container shipping industry due to trade wars between large economies and/or exogenous shocks resulting in oversupply of containerships and sustained declines in lease rates and cash generation of re-chartered vessels;

--The default of one of the company's top lessees; elevated vessel impairments that erode Seaspan's equity base;

--Debt funded capital distributions to the parent; a sustained increase in leverage above 3.0x;

--A sustained decline in unsecured funding below 10%; and/or

--The decline of liquidity coverage below 1x.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--An increase in unsecured debt approaching 35% of total debt, which would enhance the firm's funding flexibility, and further diversification and improvement in the credit quality of the customer base would be positive for ratings.

--Positive rating momentum would also be contingent on the continuation of minimal impairments, maintenance of a manageable dividend payout ratio, leverage (gross debt to tangible equity) sustained at or below 2x, and liquidity coverage above 1.25x.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The senior unsecured long-term debt issued by Seaspan is equalized with the Long-Term IDR of the company and reflects average recovery prospects in case of stress given the presence of the moderate pool of unencumbered assets.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The unsecured debt rating is expected to move in tandem with the IDR, but a meaningful decrease in the proportion of unencumbered assets to unsecured debt could result in the unsecured debt rating being notched down from the IDR.

ADJUSTMENTS

The Standalone Credit Profile has been assigned below the implied Standalone Credit Profile due to the following adjustment reason: Weakest Link - Funding, Liquidity & Coverage.

The Earnings & Profitability have been assigned below the implied score due to the following adjustment reason: Historical and future metrics.

The Funding, Liquidity & Coverage has been assigned below the implied score due to the following adjustment reasons: Funding flexibility, Historical and future metrics.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories range from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance