Seaspan Corporation (NYSE:SSW) has been busy this year. Through a series of transactions, the company raised roughly $750 million in capital, which it plans to use to fund its upcoming newbuild deliveries as well as refinance some higher cost capital. It's that latter goal that the company was recently able to complete after it redeemed the rest of its Series C Preferred Shares. It's a move that made a lot of sense given that a looming deadline would make those preferred shares much more expensive.
Seaspan Corporation's preferred method of raising cash
Seaspan Corporation's initial offering of Series C Cumulative Redeemable Perpetual Preferred Stock was completed in early 2011. At that time the company priced $250 million of the shares at an initial rate of 9.5% per year. Those funds were intended to provide the company with cash to make vessel acquisitions or investments. A few months later the company priced another $100 million shares, which further bolstered its cash position to take advantage of growth opportunities.
At a 9.5% annual yield, the price for this series of preferred stock was rather steep, but given the company's capital needs it was the price it needed to pay to fund its ambitious growth plans. Further, by going the preferred route the company wouldn't risk overextending itself with debt, nor diluting existing shareholders. It's that hybrid feature of the preferred that's appealing, which is why Seaspan Corporation isn't the only containership leasing company that uses preferred stock to finance growth. In fact, just last year rival Costamare (NYSE:CMRE) issued $100 million of Series D Preferred Stock at an initial yield of 8.75%. Costamare chose this route to raise cash for vessel acquisitions and investments so that it too could avoid additional debt and dilution.
Reading the fine print
One problem with Seaspan Corporation's preferred stock is the fact that this particular series was about to get much more expensive. That's because one of the features was a provision that would lead to a substantially higher dividend rate if Seaspan Corporation didn't redeem them by a specified date. In this case the dividend rate would increase by 1.25 times on each dividend date after January of next year up to a maximum of 30%.
This wasn't the only time Seaspan Corporation has had to include a dividend escalation feature in its preferred shares. The company's recent offering of Series F Cumulative Preferred Shares is another example. While these shares feature a lower initial yield of 6.95% for the first five years, that rate will increase by 1% every year after the fifth anniversary until it hits a maximum of 10.5%. That said, there is an acceleration feature whereby the rate jumps to 10.5% if the company doesn't complete a material transaction by the end of next year. That material transaction is either the acquisition of all the membership interests in its Greater China Intermodal (GCI) joint venture with the Carlisle Group (NASDAQ:CG) or the acquisition of all the assets owned by that joint venture. In other words, this particular series of preferred stock was issued to effectively guarantee that Seaspan Corporation has the capital it needs to facilitate Carlisle Group's exit of its investment in the joint venture.
Given these dividend escalation provisions Seaspan Corporation is often left with no choice but to redeem its preferred shares before they get more expensive. That's certainly the case with the Series C redemption and could be the case next year with the Series F Preferreds if the company doesn't take out Carlisle Group's interest in its GCI joint venture to stave off that escalation clause.
Containership companies like Seaspan Corporation and Costamare rely on preferred shares to raise capital in order to fund growth. However, this capital doesn't come cheap and it often can get more expensive due to the fine print, though it can be a better short-term option than more debt or dilution. That said, the somewhat short-term nature does force these companies to reshuffle their capital deck so to speak, which is what Seaspan Corporation is doing by making the smart move to redeem its Series C before they get too expensive.