Business Context and Reporting Period
Danaos Corporation, a foreign private issuer, filed this Form 6-K on January 28, 2021. The filing provides preliminary estimated financial results for the three months and year ended December 31, 2020, and details a proposed $1.25 billion debt refinancing strategy. The company operates a fleet of 60 cellular containerships, with an additional 49% equity interest in five vessels owned by Gemini Shipholdings Corporation.
Key Financial Metrics
Preliminary Results for Three Months Ended December 31, 2020
- Operating Revenues: Approximately $119 million (vs. $110.2 million in Q4 2019).
- Net Income: Expected between $42 million and $44 million (vs. $33.8 million in Q4 2019).
- Adjusted EBITDA: Expected between $82 million and $84 million (vs. $78.1 million in Q4 2019).
- Interest Expense: Expected to be $11.6 million (vs. $17.1 million in Q4 2019).
Preliminary Results for Year Ended December 31, 2020
- Operating Revenues: Approximately $461 million (vs. $447.2 million in 2019).
- Net Income: Expected between $152 million and $154 million (vs. $131.3 million in 2019).
- Adjusted EBITDA: Expected between $317 million and $319 million (vs. $310.6 million in 2019).
Liquidity and Debt Position (as of December 31, 2020)
- Cash and Cash Equivalents: Approximately $65.7 million.
- Total Debt (Gross): $1,505.8 million.
- Net Debt: $1,440.1 million.
- Net Debt to Adjusted EBITDA Ratio: Approximately 4.5x.
Material Changes vs. Prior Period
Revenue and net income increased year-over-year primarily due to contractual increases in charter rates for long-term charters and the contribution of additional acquired vessels. These gains were partially offset by lower non-cash revenue recognition under U.S. GAAP and increased operating expenses due to fleet expansion. Interest expense decreased by $5.5 million in Q4 2020 compared to Q4 2019, driven by a 2% decrease in debt service costs and lower outstanding debt.
Guidance, Outlook, and Strategic Initiatives
Proposed Debt Refinancing
The Company plans to implement a $1.25 billion refinancing to reprofile a substantial majority of its outstanding senior secured indebtedness. The plan includes:
- Private Offering: Up to $300 million of senior unsecured notes due 2028.
- New Senior Secured Credit Facility: Up to $815 million with Citibank N.A. and National Westminster Bank plc, secured by 48 vessels.
- New Sale-Leaseback Agreement: Up to $135 million for five vessels with Oriental Fleet International Company Limited.
The refinancing is intended to simplify the financing structure and reduce cash required for debt service. Completion is expected in March or April 2021, subject to market conditions.
Fleet and Market Outlook
As of December 31, 2020, the company had contract coverage of 89% for 2021, 57% for 2022, and 35% for 2023. The average remaining duration of charters for the fully owned fleet was 3.1 years. Management expects to re-charter 25 vessels expiring in 2021 at rates equivalent to or higher than current charters, assuming prevailing market rates continue.
Risks and Contingencies
- COVID-19 Impact: While the second half of 2020 saw a rebound in freight volumes and rates, the pandemic continues to pose risks regarding global economic activity, charterer liquidity, and crew changes.
- Refinancing Uncertainty: The proposed notes offering and debt refinancing are subject to market conditions and may not be consummated on the contemplated terms or at all.
- Asset Valuation: Vessel values are volatile; the filing notes that estimates of market value may not be indicative of prices achievable upon sale.
Investor Verification Checklist
- Confirm the final audited financial results for the year ended December 31, 2020, as current figures are preliminary estimates.
- Verify the successful closing of the $300 million notes offering and the $815 million credit facility, noting they are subject to market conditions.
- Monitor the re-chartering rates for the 25 vessels with charters expiring in 2021 to ensure they meet management's expectations of maintaining or increasing rates.
- Review the final pro forma leverage ratios post-refinancing to ensure compliance with the new financial covenants (e.g., maximum net debt to EBITDA of 6.5x).
- Assess the valuation impact of the ZIM and HMM securities holdings, which saw significant increases in value in late 2020.