Danaos Corporation 2016 Form 20-F Summary
Business context and reporting period
Danaos Corporation is a Marshall Islands corporation that owns and charters containerships to major liner companies. The filing is an audited annual report for the fiscal year ended December 31, 2016, prepared under U.S. GAAP. The filing is not a quarterly report, although the request identifies the period as 2016 Q4.
As of February 28, 2017, Danaos owned 55 containerships totaling 329,588 TEU. Gemini Shipholdings, in which Danaos held a 49% equity interest, owned four additional vessels totaling 23,998 TEU and was accounted for under the equity method.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $498.3 million | $567.9 million | Down 12.3% |
| Income from operations | $(212.6) million | $244.4 million | Declined by $457.0 million |
| Net income/(loss) | $(366.2) million | $117.0 million | Declined by $483.2 million |
| Basic and diluted EPS | $(3.34) | $1.07 | Turned negative |
| Adjusted EBITDA | $350.6 million | $418.3 million | Down 16.2% |
| Cash flow from operations | $262.0 million | $271.7 million | Down 3.6% |
| Cash flow from investing | $(9.4) million | $(13.3) million | Lower use of cash |
| Cash flow from financing | $(251.1) million | $(243.9) million | Higher debt repayments |
| Cash and cash equivalents | $73.7 million | $72.3 million | Up $1.5 million |
| Restricted cash | $2.8 million | $2.8 million | Essentially unchanged |
| Total assets | $3.13 billion | $3.66 billion | Down $535.1 million |
| Total stockholders’ equity | $487.7 million | $841.9 million | Down $354.2 million |
Major 2016 charges included a $415.1 million impairment loss on 25 vessels, a $15.8 million Hanjin bad debt expense, a $29.4 million impairment loss on ZIM securities, a $12.9 million loss on the sale of HMM equity securities, and a $16.3 million equity-method loss from Gemini. Interest expense was $83.0 million, compared with $84.4 million in 2015. The weighted average borrowing rate was 2.6%.
Gross debt was $2.527 billion at December 31, 2016, compared with $2.775 billion at December 31, 2015. All debt was classified as current because of covenant breaches and waivers that extended only through April 1, 2017. The filing states that there was no remaining borrowing availability under existing credit facilities.
Material changes versus the prior comparable period
- Revenue declined primarily because Hanjin Shipping cancelled charters for eight vessels, certain vessels were rechartered at lower rates, fleet utilization weakened, and the Federal was sold in January 2016.
- Hanjin revenue recognition ceased effective July 1, 2016. The eight vessels were rechartered on short-term charters at materially lower market rates.
- Fleet utilization declined to 94.6% from 99.0%; excluding off-charter days for the former Hanjin vessels, effective utilization was 97.3%.
- Non-cash vessel impairments increased to $415.1 million from $41.1 million, reflecting weak containership values and the loss of Hanjin charters.
- Vessel operating expenses decreased 2.9% to $109.4 million, and average daily operating cost declined to $5,637 from $5,720.
- Operating cash flow remained positive but declined by $9.7 million. Debt repayments increased to $251.1 million from $243.2 million.
- HMM agreed to a 20% charter-rate reduction through December 31, 2019, or earlier charter expiration for certain vessels. Danaos received HMM notes and shares; the shares were sold for $38.1 million, resulting in a $12.9 million loss.
- Five CMA CGM vessels remain subject to purchase options at $78.0 million each. None had been exercised as of February 28, 2017.
Guidance, outlook, risks and unusual items
Management expected containership charter rates to remain under pressure in 2017 because of weak demand, excess fleet capacity and scheduled newbuild deliveries. The filing states that approximately 7% of global containership capacity was idle at the end of 2016 and that the orderbook represented approximately 16% of existing global capacity.
Contracted revenue from the operating fleet totaled approximately $2.077 billion as of December 31, 2016, including $379.9 million for 2017 and $332.2 million for 2018. These amounts depend on charterer performance and exclude the cancelled Hanjin charters. Twenty-four of the 55 vessels had charters expiring between March and December 2017, creating significant rechartering exposure at depressed market rates.
The company breached minimum security cover, consolidated net leverage and consolidated net worth covenants as of December 31, 2016. Temporary waivers covered the breaches and lenders’ acceleration rights only through April 1, 2017. Approximately $2.4 billion of debt was scheduled to mature by December 31, 2018, including a $2.062 billion final payment due under the Bank Agreement. Management stated that available cash and expected operating cash flow were insufficient to fund these maturities without refinancing.
The auditors and management disclosed substantial doubt about Danaos’s ability to continue as a going concern, arising from covenant breaches, negative working capital and the need to refinance debt. The financial statements were nevertheless prepared on a going-concern basis and contain no adjustments for a possible restructuring or failure to continue operations.
Other significant risks include dependence on a limited number of financially pressured liner customers, vessel-value declines, interest-rate exposure, foreign-currency costs, environmental compliance expenditures, refinancing risk, potential charterer defaults, and restrictions on dividends and additional borrowing. Cash dividends had been suspended since 2009 and were generally prohibited under the financing arrangements.
Danaos submitted a $597.9 million unsecured claim against bankrupt Hanjin Shipping for unpaid charter hire, expenses and loss of profit. The claim was not recognized as an asset on the December 31, 2016 balance sheet.
Most important facts for investors to verify
- Whether the covenant waivers were extended or replaced after April 1, 2017 and whether lenders waived acceleration rights.
- The terms and feasibility of refinancing or restructuring the approximately $2.4 billion of debt scheduled to mature by the end of 2018.
- Actual performance of the 24 vessels whose charters were scheduled to expire during 2017, including achieved replacement rates and utilization.
- Recovery prospects and treatment of the $597.9 million Hanjin unsecured claim.
- Whether additional vessel or investment impairments are required if charter rates and vessel values remain depressed.
- Charterer credit quality, particularly HMM, CMA CGM, ZIM, Yang Ming and other customers representing a substantial portion of revenue.
- Whether the contracted revenue backlog is collected as scheduled and whether counterparties honor amended charter obligations.
- Compliance costs and capital requirements related to sulfur-emissions and ballast-water regulations.
- Potential dilution or governance effects from 15 million cashless warrants expiring January 31, 2019 and the controlling Coustas family ownership.