KBRA Affirms Ratings for Atlas Corp. and Seaspan

KBRA affirms the BB+ issuer rating of Atlas Corp. (Atlas, or the “Company”), a global asset management company based in Vancouver, BC, focused on assets in the maritime sector, energy sector and other infrastructure verticals. KBRA also affirmed the BB+ issuer rating of Atlas’ wholly-owned subsidiary, Seaspan Corporation (Seaspan), the BB+ rating on Seaspan’s $750 million senior unsecured notes (the “unsecured Notes”), as well as the BBB ratings of Seaspan’s $1.1 billion Term Loan due March 2028, $410 million Term Loan due March 2029, and $400 million Revolving Credit Facility comprising the secured Vessel Portfolio Financing Program (together, the “Facilities”). The ratings Outlook is Stable.

Key Credit Considerations

Atlas’ issuer rating is primarily driven by the BB+ issuer rating of Seaspan, the leading global containership lessor and Atlas’ largest wholly-owned operating subsidiary, which accounts for the significant majority of Atlas’ consolidated business, balance sheet and earnings, representing 96% of Atlas’ consolidated Adjusted EBITDA for TTM March 31, 2024 (1Q24). Therefore, in the absence of material debt obligations at the Atlas holding company level, Atlas’ rating is closely tied to the issuer rating of Seaspan. The rating also considers, to a lesser degree, Atlas’ smaller operating subsidiary, APR Energy (APR), which operates a fleet of power generation assets, including gas turbines and other equipment, and accounted for only 4% of Atlas’ TTM 1Q24 Adjusted EBITDA. The rating reflects the solid operating history of Seaspan, an experienced management team and diverse fleet of quality vessels on long-term charters, in addition to the Company’s moderate leverage, diverse funding sources, solid liquidity profile and significant unencumbered assets.

The ratings reflect Seaspan’s solid operating history, an experienced management team, its leading market position in the global containership leasing industry with its fully delivered fleet representing approximately 16% of the fully delivered leased global fleet (on a TEU basis) as of July 2024, stable cash flows generated through long-term charters, solid capital and liquidity profiles and diverse funding sources. As of June 30, 2024 (2Q24), Seaspan had 217 vessels in its fleet, including 176 delivered vessels and 41 vessels on order all with long-term charters contracted. Seaspan’s customer base is diversified across the largest container liners, albeit with some customer concentration inherent in the consolidated liner industry. As of 2Q24, Seaspan has $23.4 billion of gross contracted cash flows on its charters with an average remaining charter length of 8 years on a TEU-weighted basis. The significant contracted revenue base to leading liner counterparties provides revenue stability which helps to mitigate the historical cyclicality of the shipping industry.

The ratings are also supported by Seaspan’s consistent operating performance and solid financial metrics through various market cycles and disruptions. Earnings stability has been supported by the Company’s strong and stable vessel utilization rates which have averaged 99% since 2005. Seaspan has adequate liquidity supported by its strong operating cash flow generation, available credit lines and access to the capital markets. As of 2Q24, Seaspan maintained available liquidity of $1.2Bn, consisting of $473 million balance sheet cash and $700 million of undrawn commitments under available revolving credit facilities (excluding $1.1Bn of committed undrawn financing for newbuild vessels) which covers near term debt maturities with the nearest significant debt maturity not until 2028. In addition, at 2Q24, Seaspan had 36 unencumbered vessels with an NBV of approximately $1.9 billion which provides a potential source of additional liquidity.

Leverage (at both Atlas and Seaspan) on a debt-to-equity basis is moderate and was 2.1x as of 2Q24, up from 1.5x the year prior driven by increased borrowing to fund the Company’s newbuild vessel deliveries. This level is slightly above the Company’s target level (50-60% debt-to-tangible-assets) which equates to approximately 1.5x debt-to-equity at the high end of the range. The ratings are constrained by the inherent high customer concentration in leading liner companies, recent growth in the global fleet orderbook which presents potential future recharter risk, a funding profile that is predominately secured albeit with adequate diversity and the cyclical nature of the shipping industry.

The ratings of the secured Facilities are two notches above Seaspan’s issuer rating, reflecting strong collateral security with a diversified and in-demand 50-vessel portfolio (as of May 2024) that is considered strategically important to Seaspan’s operations and an overall adequate LTV. The vessel collateral appraised value was $3.7 billion as of May 2024, which exceeded the Facilities outstanding amount of $2.1 billion with an LTV of 56%. The senior unsecured Notes rating is the same as the issuer rating reflecting Seaspan’s significant unencumbered assets of $1.9 billion on a net book value basis as of 2Q24, which provides solid coverage (2.5x) over its $750mn unsecured debt obligations and supports potential recovery in a default scenario.

APR Energy operates one of the largest full turnkey mobile aeroderivative turbine fleets in the world along with a legacy exposure to diesel generators. Fleet utilization has decreased in recent years, primarily due to turbine contracts rolling off and reduced participation in certain markets. While reduced utilization has caused earnings volatility at APR, it represents a small portion of Atlas’ consolidated earnings and operations so does not materially impact Atlas’ profitability or other financial metrics, and is further mitigated by Seaspan’s relative stability.

Rating Sensitivities

The rating Outlook is Stable; therefore, a rating upgrade in the near future is not expected. However, if Seaspan continues to demonstrate earnings stability over time (particularly post newbuild absorption), maintains lower leverage with its targeted range, further diversifies its funding including a higher proportion of unsecured debt, and significantly increases its unencumbered assets, this could lead to consideration of an upgrade. A sustained downturn in global trade which leads to financial stress of a large charter customer without explicit government backing, a decline in vessel utilization rate or charter rates, or a decline in funding availability, such that earnings, leverage or liquidity metrics materially deteriorate, could lead to a downgrade. Changes in financial policies at the Atlas holding company level such that Seaspan’s capital or liquidity positions are impacted, could also lead to negative rating pressure for both Atlas and Seaspan.

Atlas’ issuer rating, in the absence of material debt at the Atlas holding company level, is closely tied to the rating of Seaspan as Seaspan represents most of Atlas’ consolidated balance sheet and earnings. KBRA notes that a future stand-alone debt issuance at the Atlas holding company level could be notched lower than the issuer rating depending on structural subordination and mitigants. If the proportion of Atlas’ consolidated business represented by Seaspan declines significantly, this could negatively impact the rating. Significant growth of APR or deterioration of its financial metrics that materially impact Atlas’ credit profile and credit metrics could also negatively impact the rating.

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