Seaspan results reflect drop in interest rates
Containership charterer Seaspan's third quarter net loss of $38.6 million reflects a non-cash loss of $54.7 million related to a change in the “fair value” of financial instruments related to interest rate swaps that the company takes out to protect its investors from interest rate swings, said Sai Chu, chief financial officer of the company.
The value of those instruments fell when interest rates declined in the third quarter after the Federal Reserve cut rates in the wake of the sub-prime mortgage crisis.
Seaspan reported net profit of $9.3 million in the same period the prior year.
Chu explained that rather than order ships speculatively, Seaspan builds ships that it charters to liner companies for long periods, then tries to lock in costs.
Since long-term loans for shipbuilding are not available, the company fixes interest costs through the use of interest rate swaps over the length of those agreements with carriers, an average of 13 years.
“That swap fixes the interest rate for the life of the revenue contract that we have. When the rates go up and down, there is volatility in this change in fair value,” Chu said. “It’s not a true cash change, it’s strictly an accounting adjustment. Whatever the interest rate is we pay the same amount of interest. The cash return on our ships is the same.
“Some of our interest rate swaps qualify for hedge accounting and some don’t,” he said. “With those that don’t you see this gain or loss on the income statement.”
If rates go up, he said, the company stands to have a upward accounting adjustment. That’s just what happened in the second quarter of this year when the company net earnings benefited from a non-cash charge of $18.5 million.
The company also reports a “normalized net earnings” figure that excludes the effect of the non-cash unrealized interest rate swaps. In the third quarter that figure was $16.1 million in earnings versus $9.5 million in earnings in the same 2006 period.
Revenues were $54.2 million for the quarter compared to $30.1 million in the same period a year earlier.
Seaspan results reflect drop in interest rates
