Aug 6, 2011
Executives
Gerry Wang – CEO, Co-Chairman & Co-Founder Sai Chu – CFO
Analysts
Ken Hoexter – Merrill Lynch Mike Webber – Wells Fargo Urs Dur – Lazard Capital Markets Greg Lewis – Credit Suisse Justin Yagerman - Deutsche Bank
Operator
Welcome to the Seaspan Corporation conference call to discuss the financial results for this three and six months ended June 30, 2011. Hosting the call today is Gerry Wang, Chief Executive Officer and Co-Chairman and Co-Founder of Seaspan Corporation; and Sai Chu, Chief Financial Officer of Seaspan Corporation.
Mr. Wang and Mr.
Chu will be making some introductory comments, and then we will open up the call to Q&A. I'd now like to turn the call over to Mr.
Sai Chu.
Sai Chu
Good morning, everyone, and thank you for joining us today. Before we begin, please allow me to remind you that our discussion today contains forward-looking statements.
Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2011 earnings release and earnings webcast presentation slide available on our website.
I would like also to remind you that during this call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings, normalized earnings per share, and normalized converted earnings per share. In regards to such financial measures and for a reconciliation of such measures to the most closely comparable U.S.
GAAP measures, please refer to our earnings release. I will now pass the call over to Gerry, who will discuss or highlights for the quarter and our recent development.
Gerry Wang
Thank you, Sai. Please turn to slide three of the webcast presentation.
Good morning, everybody. During the second quarter of 2011, we took important steps to enhance our industry leadership and to position the company to further expand our contracted revenue stream, net earnings and the cash flow available for distribution.
First, our fleet remained fully secured, primarily on long-term fixed rate time charters. We continued to achieve strong utilization and all of our customers continue to perform in accordance with our charter agreement.
Second, we continue to expand our fully time charter fleet, by talking delivery of four newbuildings secured on long-term contracts with leading liner companies. Third, we paid out first dividend for newly issues.
Series C preferred shares and declared our second quarter dividends on both our common and the Series C preferred shares. And fourth, we took additional decisive steps to enhance our capital structure and financial flexibility in preparing for the next phase of our growth.
Utilization, Seaspan's business continued to operate as expected with high utilization rates. Our fleet remained fully secured, primarily on long-term fixed-rate time charters.
We continue to achieve strong utilization and our high-quality customers continued to perform in accordance with our charter agreements. For the three and six months ended June 30, 2011, we achieved a utilization rate of 98.9%.
We had 58 days of scheduled off-hire for the dry dockings of four vessels. In addition to planned off-hire, we had three days of unscheduled off-hire for the second quarter.
Redeliveries, Seaspan have four M Class 4,800 TEU vessels on charter to Maersk. Maersk has exercised its first one-year options to extend charters of the Maersk Merritt and Victor to second half 2012.
However, Maersk did not exercise its first one-year options to extend the time charters for the York and the Maersk Moncton. We expect these two vessels will be redelivered to us between October 2011 and March 2012 and we are actively discussing employment for those two vessels with potential charters.
Seaspan have no further charter expiries during 2012. Deliveries, we accepted deliveries of four newbuildings in the second quarter, the Berlin Bridge, the COSCO Vietnam, COSCO Glory and the COSCO Pride.
All of the vessels delivered under long-term contracts with leading liner companies. The 13,000 TEU COSCO Glory and the COSCO Pride are the largest ships in our fleet and are COSCON's first flagship vessels.
Subsequent to the end of the second quarter, we took delivery of 4,500 TEU Budapest Bridge, which has commenced charter to K-Line for 12 years with charter options to extend up to an additional 6 years. We now have 60 fleet vessels in operation, with six, 13,000 TEU vessels under charter to COSCON to be delivered throughout the first half of 2012.
Dividends, we declared second quarter dividends of $0.75 per common share and $0.6003 per Series preferred share. We intend to continue to follow a progressive dividend policy, seeking to substantially increase our dividends as we continue to grow our cash flows.
Financing, during the second quarter, we also maintained our focus on strengthening the Seaspan's capital structure by completing a second offering of our Series C preferred stock, raising net proceeds of $105.2 million. The offering price was $27.15 per share, a premium over the original $25 issue price.
Net proceeds and per share amounts include accrued dividends of approximately $580,000. Please turn to your slide four.
I'm pleased to announce the commencement of our next phase of growth where Seaspan will look to capitalize on what we believe is the most attractive newbuilding acquisition environment in over a decade. Pursuant to our right of first refusal with GC Intermodal, we reentered the newbuilding market for the first time since 2007 by signing contracts for the construction of three 10,000 TEU vessels out of seven sister vessels ordered.
In addition to realizing volume pricing discounts and a favorable payment terms, we have successfully managed to incorporate our innovative SAVER design, which we anticipate will provide significantly improved fuel efficiency and operational savings to our customers. Consistent with our strategy to diversify a high quality custom portfolio, we have entered into attractive 10-year fixed rate contracts for these vessels with Hanjin Shipping, the largest Korean liner operator.
We expect the transaction to serve as a template for future newbuilding orders, and it represents the first in a series of expected orders and our next phase of fleet expansion. Seaspan has options to purchase an additional 18 similar newbuilding vessels, which will be subject to Seaspan's right of first refusal with GCI.
These three vessels are scheduled for delivery in 2014 and we expect to fund their construction with proceeds of our recent Series C preferred share offerings, available excess debt capacity, and the cash from operations. We continue to be in negotiations with a Korean shipyard for the construction of large-sized newbuilding vessels.
I would now like to turn the call over to Sai, to discuss our financial results. Sai please.
Sai Chu
Thanks, Gerry. Please turn to slide five for a summary of three and six months results for period ended, June 30 2011 compared to the same period in 2010.
We began 2011 with 55 vessels in operation and accepted delivery of seven vessels bringing our fleet to a total of 62 vessels in operation at quarter end. Revenues increased substantially due to the increased number of operating days and higher time charter rates attributed to the delivery of our larger newbuild vessels.
Ship operating expenses increased, but at a lower rate than our revenues increased. This is consistent with the delivery of our newbuilds and the operating efficiencies achieved by the larger ships which have a lower operating cost per TEU.
Accordingly, our adjusted EBITDA increased by greater percentage in our revenues, due to the increased contribution margin on our larger vessels. The cash available for distribution to common shareholders increased by lower percentage than adjusted EBITDA, primarily as a result of the dividends related to the Series B and C preferred shares.
The preferred shares will issue to raise capital for growth purposes and will enhance our long-term future cash flows. Also, increased interest expense resulting from use of more debt to fund the vessels impacted EBITDA – I'm sorry, cash available for distribution.
Normalized net earnings increased at lower percentage relative to our revenue and adjusted EBITDA, due to higher interest expense as noted earlier for the larger vessels. Please now turn to slide six for our normalized per share metrics.
Our normalized converted EPS for the quarter was $0.24. Our Series C preferred shares are growth capital as noted.
Accordingly, the dividend will have a temporary diluted impact on our earnings until we deploy that capital into new ships that generate cash flow on delivery, consistent with our balanced long-term growth and value strategy. Dividend policy as Gerry mentioned, our Board declared a $0.1875 per share quarterly dividend for Q2, including the second quarter dividend, Seaspan has distributed $7.34 per share in cumulative common dividends since going public in August 2005.
Our board also declared $0.6003 per share dividend for this three months ended July 30, 2011 on a 19.5 Series C preferred shares, which was paid on August 1. Please turn to slide seven for our balance sheet information.
As of June 30, 2011, and December 31, 2010, the increase in our balance sheet from year-end reflects the growth in our fleet and cash proceeds from our Series B preferred share issuances on the asset side along with increased debt net equity from the Series C preferred shares and net income, less the payment of common and preferred shares. In terms of forward rough guidance, please refer to slide eight for the quarterly details of our vessel deliveries, dry docking, CapEx and converted share count guidance for 2011 and 2012.
We've also included an annual column for 2013 and 2014 to reflect the three ship order announce today. Please refer to our website under the tab Seaspan Fleet for details on our upcoming delivery dates, charter rates and OpEx rates.
In terms of deliveries, we've taken delivery of eight vessels thus far in 2011 including the recent delivery in the third quarter of the 4,500 TEU Budapest Bridge. We expect to take delivery of two more vessels in Q3, four more vessels in the first half of 2012 and the three Hanjin newbuildings announced in 2014.
All deliveries are subject to further changes based on customer scheduling requirements. The dry docking in terms of anticipated off-hire days, we expect approximately nine days dry docking in Q3, two in Q4, 34 in Q1 in 2012 and 24 in Q2, 67 in Q3, and none in Q4, for a total of 125 days for this whole year 2012.
We estimate 67 and 77 off-hire days for 2013 and 2014 respectively. These estimates are subject to change.
In terms of CapEx, we expect approximately $265 million in Q3, $36 million in Q4, and we expect $359 million in CapEx for 2012, $71 million in 2013, $194 million in 2014, representing total CapEx of $925 million, all of which we already have secured funding. We expect our distributable cash flows to grow as we continue to take delivery of our large 13,000 TEU ships on charter to COSCON, and the three 10,000 TEU ships to be chartered to Hanjin.
In particular, our cash flows were $190 million last year and we expect our cash flows to grow to approximately $250 million this year, $290 million in 2012, $300 million in 2013, and $320 million 2014. I would now like to review our expected converted share count for 2011.
This is relevant for the accurate calculation of our normalized converted diluted EPS. Based on no planned to common equity raises, our DRIP and tax and a conversion price of $15 per share for our Series A preferred shares.
We expect $86.5 million and $87.1 million for the third and fourth quarters this year, $88.1 million, $88.8 million, $89.4 million, and $90 million for each quarter sequentially in 2012, $92.5 million for 2013 and $95.7 million for 2014. Please note these projections are subject to change.
On the capital structure side, Seaspan have consistently demonstrated its ability to preserve its strong and flexible capital structure yet maintain long-term value. And now, as a result of increasing cash flows, it has the ability to support increase in common share dividends, pay down debt, and pursue growth in a balanced and controlled manner as we've begun to do.
We continue to work on innovative financing transactions to diversify our capital structure and create additional capacity for growth. I would now like to turn the call back over to Gerry to discuss recent developments, our business model, and general industry fundamentals.
Gerry Wang
Please turn to slide nine on the webcast where I will briefly outline Seaspan's strong build-in growth. The company has more than tripled its contracted fleet capacity since its IPO in 2005, representing a compounded annual growth rates of approximately 20%.
As I mentioned, of our new – nine newbuilding vessels to be delivered, two 13,100 TEU vessels are expected to be delivered in August this year, four 13,000 TEU vessels for the first half of 2012 next year, the six 13,000 TEU vessels for the remaining part of the total of eight units of the 13,000 TEU vessels and the long-term charter to COSCON. Additionally, we will have three 10,000 TEU vessels to be delivered for long-term charter to Hanjin Shipping during 2014.
In total, we have approximately $6.9 billion in contracted revenues. Please turn to slide 10, I will briefly outline what this growth will mean to our cash flows.
Based on our projections, we estimate that our fleet will generate approximately $700 million per year of contracted revenues, $500 million of adjusted EBITDA and $300 million of cash available for distribution to common shareholders beginning annually in 2013. We expect approximately $750 million for year of constructive revenues, $540 million of adjusted EBITDA and $320 million of the cash available for distributing the common shareholders in 2015 for in deliveries of the three newly contracts 10,000 TEU vessels during 2014.
In addition, it is worth noting that we have no required debt maturities until Q2 2015. this figures on the chart exclude any further incremental growth.
Please turn slide 11, I will briefly discuss the industry's current fundamentals. On the supply side, the order book currently stands at above 25% in effective loading capacity or about 8% per annum on average.
This will be further reduced by demolitions and potential order consolidations and the conversions. Whereas, for container cargo demand, which is a durability of our global economic growth, we expect it to continue expand at 8% to 10% per annum.
Therefore we expect cargo demand and ship supply growth would generally remain in balance through 2011 and 2012. As for the freight rates corrections on some of the main trade lanes, it is part of the market dynamics between shippers and carriers.
Apart from the demand-supply balance, we have noticed load factor to be as high as 90% for some of the main trade lanes. As far as the charter rates are concerned, long-term charter rates for large modern vessels remain strong, despite the current moderation in freight rates and the spot charter rates.
From an investment perspective, we believe the opportunities are tipped in favorable owners with the strong balance sheet. Please turn to slide 12 where I will reiterate our vision for the future.
We have entered into our next phase of growth by contracting three 10,000 TEU, three efficient vessels. Our overall strategy is to continue to grow our fleet in a controlled and balanced fashion.
The growth will primarily focus on designing, owning and charter large few efficient contained vessels to various credit-worthy customers and long-term charters. We believe maintaining a young and a moderate fleet coupled with our diversified creditworthy charter portfolio that serves our fundamental long-term interest.
As a ship leasing franchise, it is critical to have a strong balance sheet overtime, diversify our capital structure and enhancing our financial strength, including conservative leverage, remain one of our top priorities. As we grow our fleet, Seaspan is committed to following our progressive dividend policy and at substantially growing our common share dividend over time.
Seaspans objective is to enhance or leadership role in our industry. Our ultimate goal is to create long-term value to shareholders.
Please turn to slide 13. Operator, please start our Q&A session.
Operator
Thank you. (Operator Instruction).
Our first question comes from Ken Hoexter from Merrill Lynch.
Ken Hoexter – Merrill Lynch
Hey, good morning, Gerry and Sai. Just, if I look a couple weeks ago, one of the yards put out their release about the 10,000 TEU container ships that had bought, seven of them with options for 18.
So, I just want to know the difference in terms of numbers. Does that mean you still have four that are committed to that you just don't have contracts with charters for it?
Gerry Wang
Ken, seven vessels have been firmly ordered and options exercised the seven vessels are on charter to Hanjin Shipping, out of which three would be for Seaspan and the other four would be for the joint venture with Carlyle.
Ken Hoexter – Merrill Lynch
So, you had a 50-50 split with the Carlyle side right? So, how does that work if there's – or is that at the end of the term it's got to be 50-50, not for every order?
Gerry Wang
Correct, because we have seven, we decided to take three to start with and Carlyle would take the four, that's was out of the seven in total
Sai Chu
Ken, it's Sai. That's – the right of first of refusal and that's measured annually
Ken Hoexter – Merrill Lynch
Yeah. Okay.
Sai Chu
The next time we order, as example, we can take an additional one depending – and then you relook at it and say, at this point we've got three or seven if we have ten as an example then, you can adjust it to five for total.
Ken Hoexter – Merrill Lynch
Okay. And it said that there were I guess purchased at about 100 million per vessel, including not just the seven but the 18 options as well.
What – can you talk about what level or rate the chartering was for? And is that correct on the purchase price for those?
Gerry Wang
Ken, we cannot comment specifically on the prices of the charter rates for competitive reasons because as you know we still have 18 optional vessels are under – or discussions with our charters and we want to make sure that we have to be a competitive element in it.
Ken Hoexter – Merrill Lynch
But let me jump to the quarter, I appreciate that. It was good to see you entering the newbuild market again.
On the G&A for the quarter, Sai, doubled to $5 million. Can you comment on that level of increase?
Is that related to the joint venture and to Gerry as well?
Sai Chu
Yeah, there several factors that effected the G&A this quarter. They were some significant expenses related to some of the growth initiatives, professional fees related to the joint venture and other things that we've been working on in addition, Gerry, there was an adjustment fro Gerry's compensation which certainly reflects his value to the organization and to the shareholders.
Ken Hoexter – Merrill Lynch
Let me just wrap up with – thanks for that, Sai. If I could just wrap up with some kind of appetite for in today's market for large vessels I guess, another was a lot of expectation or rumors of the 18,000 TEU vessels and that Seaspan and the joint venture might be involved in that.
Can you talk a little bit about the appetite in the market for those additional vessels or for larger vessels in the market right now? What – how you see orders going.
I guess, do you see the pace now pricing up, slowing down, with what you see in the economy? Just obviously we're seeing a slowing going on right now, but what your outlook on ordering is?
Gerry Wang
I can, I'll look at from three angles, number one those are larger vessels represent tremendous improvements in terms of fuel savings. You look at our 10,000 TEUs with SAVER design, we're looking at anywhere between 20% to 30%, since our fuel saving depending on the cruising speed that is substantial.
This is similar to the airline industry. American Airlines ordered a number of 747 and other fuel efficient aircraft, I call it a paradigm shift to be honest with rising cost in the horizon, the line measures continuing to make sure that the fuel efficiencies is an important factor in the operations.
Second, you look at how have ordered? We deliver the liner measures probably have done their part in terms of ordering.
I would think, the ordering would be primarily coming from the independent owners, like Seaspan and others. The third angle to look at is, I think the appetite for larger vessels as we mentioned to be very strong.
For the main case Asia to Europe and Asia to North America, you need larger vessels like 747, 400s and Airbus 380 to be fuel efficient to reduce the cost per TEU. That's the only way to maintain the competitive rates.
I don't think that will change and at this point of time the newbuilding prices require a capital and also with building to those of vessels in terms of design, features quite impressive, I'm talking about features such as very advanced propulsion system, a very advanced dynamic cal forms and other things. And it's pretty good timing with the weakness of the shipbuilding market, it's pretty good entry point.
Those are the comments that I would like to share with you.
Sai Chu
Thanks, Gerry. Thanks for the time.
Thanks, Sai.
Sai Chu
Thank you. Ken.
Operator
Thank you. And our next question comes from Mike Webber from Wells Fargo.
Mike Webber – Wells Fargo
Hi. Good morning, guys.
How are you?
Gerry Wang
Thank you.
Sai Chu
Thanks. Mike.
Mike Webber – Wells Fargo
Hey, I want to jump back into the acquisitions and the orders. I know you can't give a rate.
Can you guys talk to the kind of return you guys are looking at so we can try to get a sense on what this is going to mean looking forward?
Sai Chu
Certainly Mike, it's Sai. It's definitely within the range that we expected for the ships internally doesn't account for, just an IRR basis, we're taking into account no real appreciation in the asset values or charter rates.
It's definitely where we expect it to be and we're taking to account those other aspect of – certainly are very favorable return structure.
Mike Webber – Wells Fargo
Right. So, something along the lines of the 1,300 – the 13,000s?
Sai Chu
No, we would say that they return better than 13s.
Mike Webber – Wells Fargo
Okay. Great, that's helpful.
In terms of, can you give some color on when those would be delivered? I don't think I saw those broken out in the release.
And then, also, I think you're paying for these with available capacity and some of the proceeds. Can you talk to whether or not you'll be breaking those out into a separate facility and what degree of leverage you think you'll put on those?
Sai Chu
Yeah, certainly, that's a good question. Well, first off, we have capacity within our capital structure with the excess growth capital from the preferred C, in addition to available excess debt capacity.
So, that more than takes care of that order and, so we obviously have the ability to go and raise a lot more debt. Given our gearing ratio so, but eventually we will go out and obtain debt financing against those vessels really for more growth capital.
Mike Webber – Wells Fargo
Okay. And then, I guess, to a similar level that you have on your other assets, is that pretty fair?
Sai Chu
Well, we can certainly leverage those up higher. It just depends on the financing structure and the source that we use.
So, it can arrange certainly 65% would be considered at the low range, but we can look at financing up to 80%, but it's not likely that we do that, but somewhere in that range between 65% to 75% would be a appropriate range to use and again that's feeds into more growth capacity in our capital structure.
Mike Webber – Wells Fargo
Fair enough. And I mean, in terms of delivery, it would be 2013, 2014, somewhere in that timeframe?
Gerry Wang
Yes, and Mike, just one, one minor comment on the financing. Obviously we've been discussing with various banks, especially the Chinese export agency banks.
The discussions are very encouraging in terms of the financing that would be available to us and as Sai mentioned that we don't need it, but certainly it could be fairly easily available to us.
Sai Chu
That's an addition to the traditional bank market where we've got lots of capacity as well. So, we're quite comfortable in obtaining additional growth capital for in the near term.
Mike Webber – Wells Fargo Securities
Got you. Fair enough.
And I just want to make sure I heard that right. And also, in terms of delivery on when you guys think you will be getting your fleet?
Gerry Wang
Well, we're looking at early 2014, but that could change. typically the vessels would be available towards second half of 2013, but we're talking with the charters.
Currently, we're looking at first quarter of 2014 as the delivery time, but those deliveries dates can change.
Mike Webber – Wells Fargo Securities
Fair enough. In terms of the options, can you give us some thoughts there on your timing?
I think you kind of touched on it a little bit before, but how do you think about exercising those throughout the last half of the year? And I guess is that totally dependent on the availability of charters at that point?
Gerry Wang
Correct. Mike, we've been talking with other potential charters to cover the 18 option of vessels, they're staggered options.
So we don't have to access as option for all 18 vessels at one go. Plus, at the end of the day, we just want to make sure that we continue to diversify our charter base to have long-term charters.
And Seaspan have never signed newbuilding contracts on speculation. We would always sign newbuilding contracts together with long term charters simultaneously, so that wouldn't change.
So, we expect June second half of this year, the discussions will progress and hopefully we can secure more orders and exercise some of the options and we'll go from there.
Mike Webber – Wells Fargo Securities
Fair enough. Gerry, you mentioned that the options are staggered.
Can you give us a sense, I mean, maybe just a ballpark in terms of when these things are going to expire? Are they just in big kind of tranches or how should we think about those?
Gerry Wang
You know, they're staggered in, frankly, in five vessels each. And there's some flexibility, even within five vessel pack.
We have the right to exercise one up to five. And the other option already building has been carrying tremendous flexibility to facilitate our chartering pursuits.
And the shipyards have been extremely cooperative in terms of giving us the flexibility to secure the long-term charters. And also, I mentioned the payment terms are extremely favorably and probably the best I've ever seen my life.
That's part of reason why we have decided to have a total of 25 including those options as it goes, at the end of the day, with the flexibilities and extremely favorable payment terms that gives us, gives Seaspan the upper hand. And then one of the reasons that we do not want to disclose a newbuilding prior to charter rate is for competitive reasons.
Once all the orders finished obviously, all the information will be available in accordance with the policy over those years.
Mike Webber – Wells Fargo Securities
Fair enough. No, that's really helpful.
Gerry, you also mentioned that you guys had, you're still in negotiations on the 14,000s. Can you give us a little bit of a sense of color there in terms of timeframe.
And I guess this is going to be going on concurrently with the 10,000 TEU vessels. Can you give us an idea about when we might see something firm shaping up with those?
Gerry Wang
Mike, it's hard to pinpoint exact timeframe, but we're actively discussing with our Korean shipbuilders and our charters, and just part of the negotiations, we hope, while to more contracts can be concluded soon. And we are very busy with the negotiations that I can confirm.
Mike Webber – Wells Fargo Securities
Fair enough. I just have one more and I'll turn it over.
Ken asked earlier about the G&A bump and I just wanted to make sure we're clear on it. I mean, in terms of a run rate for the rest of the year, if you can give some color there.
And then, just to be sure that bump just included the seven firm orders that are actually placed and then, if you guys do exercise more, we could see another step up in G&A. Is that a way that we should be thinking about it?
Sai Chu
No, I would say that there are more sort of one-time cost that ended up in our G&A. So, I would say that it's probably about a 0.5 million or so that's kind of one-time, although there could be some additional costs coming through the rest of the year.
So, I would probably put the range at about 0.5 million the last – for the quarter.
Mike Webber – Wells Fargo Securities
Half a million less than Q2, kind of on a run rate for the rest of the year?
Sai Chu
Yeah.
Mike Webber – Wells Fargo Securities
Okay. All right, great.
All right, I'll turn it over. I appreciate the time, guys.
Thanks.
Sai Chu
Thank you.
Gerry Wang
Thanks Mike.
Operator
Thank you. And our next question comes from Urs Dur from Lizard Capital Markets.
Urs Dur – Lazard Capital Markets
Good morning
Gerry Wang
Good morning, Urs.
Urs Dur – Lazard Capital Markets
One of the details been gone over, but I was just listening in. Can you – you mentioned the redeliveries of two ships and the extension of four ships.
So, what was the decision factor on the redelivery of two and the extension of the others?
Gerry Wang
We have four M Class vessels on charter to Maersk and they have options to expand the charters on annual basis. They decided to for their own scheduling purpose, their own fleet department decided to exercise option for the two vessels, whereas the other two vessels would be re-delivered to us.
Urs Dur – Lazard Capital Markets
Right.
Gerry Wang
And we are in active discussions with other charters for the two vessels, and again the two vessels, in terms of revenue, it doesn't really have a material impact on our business.
Urs Dur – Lazard Capital Markets
Oh, sure. It's more of a market question.
Where is the – where are the market rates right now for those vessels? How – what are your expectations as to equal the contract they were on and/or to beat it and/or to charter under where it was last done?
What's your expectation?
Gerry Wang
The charter rates for this type of vessels would between $20,000 to $22,000 fairly consistent with our original contract.
Urs Dur – Lazard Capital Markets
So, you think there's sufficient demand to re-charter them without a problem?
Gerry Wang
Yes, it's just a matter of what length and who the charter is and other things. We're pretty careful in terms of picking the charter and also the length of the charter.
And also, those ships that are getting very old. Obviously, we're looking at other ways of getting around the problem and I cannot be specific about exactly what we do, but we're actively pursuing solutions to deal with those two vessels.
Urs Dur – Lazard Capital Markets
Great. No, that's fine.
And everyone else is really asked very detailed questions. How about giving us your view on what your counterparties are facing in regards to a market?
Are you seeing some real tightening margins and dropping container box rates? There's some tightening margins and clearly there's a move to big ships in your ordering and all of that's excellent.
But, in the near-term, we have some softness in the container space. How do you view it, as seasonal?
Do you expect some improvement in charter rates that we actively see? And again, I know that you're not necessarily exposed to those except for maybe those two ships.
What's your view in the second half of this year and next year in underlying demand given all the worries that we see out there on the macro level?
Gerry Wang
Our overview is, you look at demand side and the supply side, as I said in the presentation. We see pretty good balanced, on the supply side, we see on average of 8% to 10% in the effective loading, at the end of the day, 10,000 TEU and you wouldn't be able to load 10,000 laid-in.
So, you have to discount by 10% at least. Then, on the demand side, obviously shipping is a derived demand.
And typically, Urs, economically we use growth rate of 3%, 4%, a multiple by three times, so you easily get 8%, 9%, 10%, in terms of cover demand for container boxes. So they are pretty much match.
I think the major factor in the overall dynamics in terms of freight rates has been the relationship between the shippers and carriers. Obviously, last year, the carriers managed to increase the freight rates more than frankly what the demand-supply would dictate.
And obviously, of course the shippers fought back and they managed to get more than what the demand and supply would dictate in terms of reduction in freight rates. So, those things are just going on and part of the market dynamics.
But if you look at fundamentals from demand-supply side, we're seeing a pretty good situation. As I mentioned, for some trades, especially Asia to Europe the load factor is approximately 90%.
Is it possible to meet a lot of people, why the fare rates still falling against 90% load factor. So I think during second half of this year, you will see more pressure to continue on the freight rates, given in the continuation of the shipper carrier dynamics, but for next year, my feeling is we'll see moderations in terms of some recovery on the freight rates.
As far as charter rates are concerns, spot rates have been up and down depending on what vessels you have in mind. Larger vessels, fuel efficient vessels are in great demand and slow steaming will continue, demolitions will kick in, and the layouts will kick in, the deliveries will kick in and as of the end of the next year it won't be as bleak as bad as painted by some other people.
So that –- those are the viewpoints we have.
Urs Dur – Lazard Capital Markets
Okay. Fair enough, I really appreciate the insight and thanks for your time.
Congrats on the orders.
Gerry Wang
Thanks.
Sai Chu
Thanks Urs.
Operator
Thank you. And our next question comes from Greg Lewis from Credit Suisse.
Gerry Wang
Hi Greg.
Greg Lewis – Credit Suisse
Hi Gerry. Gerry, could you provide a little bit of color on, well, I think clearly Seaspan has done a good job of securing its vessels on contracts with – very strong counterparties.
Could you talk a little bit about some of the more recent line of companies, for instance, like the containership company – that company recently went, I guess filed started to fall. Are there other smaller companies out there or sort of all the weak little line of companies have already sort of gotten washed out at this point?
Gerry Wang
Yes, the small ones Greg, always vulnerable in terms of the exposure to the ups and downs of the market conditions, and our policy is to make sure we deal with the creditworthy customers so that we can stay in the game on long-term basis. Cyclicality is part of the business, it's the dynamics that we have to deal with, that's one of the reasons why we go for long-term charters, to hedge ourselves against ups and downs of the market.
If the market conditions continue to deteriorate, obvious small ones will have additional challenges in terms of having enough revenue to cover their costs. But then as I said, next year situation should be more towards the moderation in terms of the freight rates demand and supply balance.
So I wouldn't expect too much blood on the floor for lack of better expression and the strong ones would continue to do well, given their balance sheet, given their financial strength and the weak ones obviously having tough time, but I wouldn't anticipate a lot of going under, to be honest.
Greg Lewis – Credit Suisse
Okay. And just thinking about these smaller – the smaller liner companies that are out there operating in the niche markets.
Could you sort of quantify on a percentage basis how much of that is sort of the liner industry as a whole, is it 5%, is it more than that?
Sai Chu
It's even less than 5% to be honest and you know, you look at the overall picture in terms of the container shipping and the main trades are Asia Europe, Asia – North America and the intra Asia trades are dominated by the major players. And still called niche players, they only account for very small percentage of the overall business in terms of the key capacity.
As I said, the larger operators – the ship operators are all thinking about what would happen next year, the year after next until 2014-2015. They have been actively looking at how to reduce their per TEU cost.
That's one of the reasons why we've seen the surge of the newbuilding orders and those orders are primarily for replacing the old vessels. I will be in constant speaking to the CEOs of majority of the liner majors, none of them has indicated to me that the newbuilding orders that they have secured are for the growth in terms of increase in the fleet size.
All of them have said to me, Gerry, you know, those newbuilding orders, when they delivered, they will be replacing our existing 5100 TEU 6,000 TEUs it gives – obvious those vessels that's not just competitive anymore. They are too small for the main trades and too large for the small trades and they are just not efficient.
To give you a little color on our 10,000 TEU, the fuel consumption of our 10,000 TEUs is the same as the 5,000 TEU. So imagine the fuel efficiency you would have by sticking to the larger vessels for the economy of scale and fuel saving.
That's the primary drive behind, that is the fuel efficiency in this business.
Greg Lewis – Credit Suisse
Okay, great. And then Sai, really just a technical question and I apologize if you already mentioned it earlier on the call.
In terms of thinking about those $100 million new containerships that you purchased. What's like the payment schedule going to look like.
In other words, is the initial bound deposits, are those going to be funded with equity or are they going to be funded with debt that's going to be capitalized? How's that going to sort of look like?
And then, just to follow-up on that, is it traditional 20, 20, 20 and 20, or is it going to be like a bullet at the end? Could you sort of provide a little color on sort of the CapEx deposits for those newbuildings?
Sai Chu
Yes, I mean the payment terms as Gerry have said are the best that you have seen in his life. So you can imagine what that would look like, primarily heavy tail.
Greg Lewis – Credit Suisse
Okay, heavy tail. And then – but there is an initial deposit required.
Sai Chu
Yeah, it's a modest initial deposit so you can imagine it, it could be 5%-10%.
Greg Lewis – Credit Suisse
Okay. Okay.
Sai Chu
An, in terms of our capital structure we do have available debt and equity. So we would obviously it is fungible in a way.
So it's really just utilization of both sources.
Greg Lewis – Credit Suisse
Okay.
Sai Chu
And over time, the model as you would look at, I guess you would not look at pro rata on that debt to equity is one way of handling it. It's not going to make a material difference really on the numbers initial couple of years.
Greg Lewis – Credit Suisse
Okay. Now, in other words – and the only reason I was highlighting that is because, during previous newbuild cycles, you had your initial costs.
Say, it might have been X and then it was – there was a carry cost with that that might have been anywhere from 5% to 10% of the actual. The all-in costs ended up being 5% to 10% higher.
It doesn't sound like we should be expecting that this time around.
Sai Chu
I think that these are 2014 deliveries so the bulk of that CapEx comes later, till the next couple of years in terms of modeling, they are not going to have a single impact. There are only three shows.
Greg Lewis – Credit Suisse
Okay guys. Thanks very much for the time and have a good summer.
Sai Chu
Thanks Greg. Bye.
Gerry Wang
Bye.
Operator
Thank you. (Operator Instructions).
Our next question comes from Justin Yagerman from Deutsche Bank
Justin Yagerman - Deutsche Bank
Hey guys, how you are doing?
Gerry Wang
Good. Thanks Justin.
Justin Yagerman - Deutsche Bank
I'm backing into a purchase price of about $98 million at $46,000 a day with around 10% down. I mean, am I in the ballpark?
Gerry Wang
Your guess is pretty good. As I said once all the orders are completed all the numbers will be disclosed on our website and it is our policy to have them disclosed with this point of time because we still have options to be exercised and we're discussing with our potential charters at Whitfield.
For competitive reason, we're not in a position to disclose them but your numbers are consistent.
Justin Yagerman - Deutsche Bank
Okay. And if you don't – if you didn't want to disclose it, I mean, I apologize for just fact checking with you.
Does that mean you think you can get more for the next vessels because, I mean, the day rate seems fairly consistent with deals we've seen done. Does that imply that rates are going up or that your vessels are more attractive than market?
What's the thought process there?
Gerry Wang
Not possible, I mean that's one of the visions why we do not want to disclose, you know it's part of the negotiations we're doing right now. Let's see.
Justin Yagerman - Deutsche Bank
Okay. Well, good luck with that.
You said at the beginning of your prepared remarks that all charters are performing right now. Obviously, COSCO's a big client, been in the headlines on the dry side, not on the container side.
But, I just wanted to put people's fears to rest. Can you tell us definitively that you've got no issues with COSCO?
Gerry Wang
Yeah, we've got no issues. So the charter part is performing well and we expect them to perform well.
And we do not really comment on media news and that's just our policy.
Justin Yagerman – Deutsche Bank
Okay, perfect. And then, the Maersk vessels that are being redelivered, what do you think fair market value and you don't have to give me a firm number, but just a ballpark for those vessels right now is?
And how marketable are they in an environment where you yourselves and others are talking about newer fuel efficient tonnage being much more desirable and really this bifurcation that's taking place in the marketplace?
Gerry Wang
Well, the demand for the size is still pretty good. The demand of those fuel efficient vessels that wouldn't be delivered until '13, '14 Q3 is down the road.
So in the meantime, there's still demand for the traditional classic type of vessels and we see good demand and we're actively talking with potential charters to cover those fuel vessels, we're pretty confident, the employment for the TEU vessels and even for the two vessels that have been extended for one year would be covered in the near future.
Justin Yagerman – Deutsche Bank
Okay. The dynamics of these new charters are interesting because you've got a Korean liner chartering Chinese vessels.
I mean, is that something that's now commonplace in the market or is there a general acceptance for these Chinese vessels, I mean, you guys said that you're current in negotiations and I know with 18 options, you've probably tapped that yard a bit, you know, are with Korean shipyards. How are you thinking about this, it sounds like we're in a world where the Chinese vessels are being a lot more accepted than they had been in the past and I would just like to get some comments on this?
Gerry Wang
Well, two things, okay. Number one when charters – charter vessels look at who the owners are.
That's the primary consideration, then we ship out, you know, it would be a Chinese shipyard, Korean shipyard, other shipyards would be a secondary consideration, because then the charters kind of on the owners to and make sure the ships would be built in and would be delivered in accordance with all the requirements that would be specified in the charter body, first thing. Second thing our policy is for 10,000 TEU or less.
We will look at favorably into the Chinese shipyards. As for sizes over 10,000 TEUs 14, 16, 18 whatever they are, we'll look at primarily Korean shipyards with fewer from size perspective.
The Koreans have more experiences whereas, for smaller vessels the Chinese can build them just as well as others. So, that would be the consideration we have in our mind.
Justin Yagerman -- Deutsche Bank
Okay. And the last question, I guess, is a broad one.
As we stand here today, there's a lot of macro issues, but you guys still sound exceptionally confident in your ability to continue to grow the fleet and find opportunities, you know, how independent of the global macro economy do you think this story of saving fuel and upgrading efficiency of fleets is? And so, I guess, asked a different way, if we're heading towards 0% growth or a double-dip in the U.S.
and potentially globally? How do you think about liner reaction to that from a newbuilding perspective?
Is there still going to be demand for newer more efficient vessels?
Gerry Wang
All right. Just the answer – the simple answer is yes.
If you compare this with the airline business and the airlines are also going through some tough times. But at the same time, the fuel efficiency is such a big factor, it's really a situation where the operators have no choice but to upgrade their fleet to become more efficient.
That's the only way to compete. As I said for the to 40% to 45% of the operating cost is, you know, fuel cost the banker cost.
So, to achieve a serving 20%, 25%, 30% on this number one cost item is substantial. If you don't have fuel efficient vessels, you just cannot continue to compete effectively in this business.
Especially, you will look at the landscape of what has been done by the liner majors, starting from Maersk lines and APR and OCL and all the others and all of them have fuel efficiency and new orders in place and that provides a compelling pressure to the fellow operators to have to have the fuel efficient vessel to match the dynamics come up in two, three years, which will be dominated by fuel efficient vessels. So, that's just the industry dynamics and this point of time, given the downturn, the pressure on the shipbuilders, the fuel efficient designs have become possible.
We fought very hard frankly during '06 and '07 for the SAVER design, our design. At that point of time, the shipyards would not be in a position to accommodate our requirements.
And during downtime, of course, innovations can be pushed through. That's exactly what's being happening and we are very pleased to see the developments and the fuel efficient design vessels that will be the – I call it must-have in order to compete on the main trades for the liner majors.
Justin Yagerman – Deutsche Bank
All right. Thanks for the color.
I appreciate your time, guys.
Gerry Wang
Thank you.
Sai Chu
Thanks Justin.
Operator
Thank you. And our final question comes from Michael Webber from Wells Fargo Securities.
Mike Webber – Wells Fargo Securities
I had a couple of follow up questions. With regards to the dividends, I know you guys have an awful lot on your plate now in terms of growth and you guys adopted the progressive dividend policy not so long ago.
I guess this is for Sai or Gerry. When you think about the next 12 months, I mean, is a dividend hike along the lines of what we saw last go around in the $0.25 range, something that you guys could put on your plate in addition to what's going on here in terms of newbuild orders?
Sai Chu – Seaspan Corporation
Hi, Mike. It's Sai.
I think the important thing is where we've gone in the last year, we've increased the dividend twice by almost 90% from $0.40 up to $0.75. And again, I think that what's important is we've – over the capital of course of the last couple of years, we worked very hard and really increased the strength in our capital – in our capital structure and capacity and the flexibility.
So certainly, there is a significant amount of cash flow available and capacity for us to do several things, including to grow the business, increase the dividends. So we are pretty comfortable that there is capacity to increase the dividend.
And it's certainly a call our Board to balance out the, you know, where they think the best value for our shareholder is in the long-term. But we certainly, you know, expect that we can't increase the dividend again.
Then the Board has adopted a progressive dividend policy. They understand and recognize the value that investors plays in the dividend, but most important the sustainability in this dividend.
And at this point, it is very sustainable at a very low payout ratio, relative to our cash available for distribution, in addition the cash flows are growing. So we can sustainably increase this dividend and through the cycle out there that we are seeing despite some of the headline and headwinds that we are seeing.
We feel that we've got the strongest customers in the industry by performing and they are going to continue to perform in our view. So we believe that dividend are good today and has room to grow.
Mike Webber – Wells Fargo Securities
Okay. Is it fair to characterize, just in terms of priority, that that kind of secured dividend growth is unequal footing with the growth you guys are talking about right now?
Sai Chu
I think it's difficult to be able to give color today because, you know, I think that we have tremendous opportunities to grow our fleets. We are not going to comment the rumors but we can assure you that there is significant interest from the liners and all of the options including potential large orders that we can place in Korea.
So, having said that, it's going to be balanced at the time and we spend a lot of time analyzing the different scenarios. And we're comfortable with the dividends.
We can't say it's going to be 50% here and 90% there.
Mike Webber – Wells Fargo
Right.
Sai Chu
It's too early to tell. The most important thing is we see that there is ability of to continue increasing it and balancing out all those needs.
Mike Webber – Wells Fargo
No, that's helpful. I appreciate the color.
I guess, one – it's been a long call. So, I just have one more.
You guys talked the last couple quarters about potentially bringing the manager in-house. Is there been any progress made towards that?
And, I guess where does that fall in terms of priorities for you guys over the next couple quarters?
Sai Chu
Well, there continue is to be good dialog between our independent directors on the conflicts committee and the shareholders on the manager. If it's done, it's going to be done for the right reasons at our pricing value that make sense to our common shareholders.
And certainly, it's got to get resolved shortly because one way or the other because we the current management agreement expiries at the end of December.
Mike Webber – Wells Fargo
Right.
Sai Chu
We can't give color on, we're happy where it's going to go because it's handled by conflicts committee and those shareholders. But certainly, we'd expect decision at our Q3 call or earlier.
Mike Webber – Wells Fargo
Okay.
Sai Chu
That certainly that's the timeframe I think it's fair.
Mike Webber – Wells Fargo
Got you. Great.
No, that's really helpful. Thanks a lot for your time guys.
Sai Chu
Thank you.
Gerry Wang
Thank you.
Operator
Thank you. And this concludes are question-and-answer session for today.
I'd like to hand the conference back over to Mr. Gerry Wang.
Gerry Wang
I just want to say a few words to conclude the earnings call. So, thank you very much for taking the time and to listen to us.
We are going through little bit ups and downs of the market conditions and a lot of negative headwinds in the marketplace. The comment I want to make here is in a way used to ups and downs of the market and part of the business is to deal with the cyclicality of the market conditions.
Our business is built through this long-term charters, with creditworthy customers, to effectively hedge ourselves against the potential risks. And we're doing everything possible to make sure that we are in the position to take advantage of the opportunities presented during this volatile period of time.
And as far as our business is concerned, business model is concern, we're doing pretty well and our revenue and operating expenses are in great shape. And that we'll continue to operate and we are looking forward to speaking to you at next quarter.
In the meantime have a great summer. Thank you very much.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program.
You may now disconnect and have a wonderful day.