Business Context and Reporting Period
Company: Global Ship Lease, Inc. (GSL)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Model: GSL owns a fleet of containerships and charters them under long-term, fixed-rate time charters. As of December 31, 2008, the fleet consisted of 16 vessels, all chartered to CMA CGM S.A. (the "Initial Charterer"), which is the Company's sole source of operating revenue.
Accounting Structure: The financial statements reflect a merger consummated on August 14, 2008, between GSL and Marathon Acquisition Corp. The 2008 period is split into a "Predecessor" period (Jan 1 – Aug 14) and a "Successor" period (Aug 15 – Dec 31). The Predecessor period includes historical data from CMA CGM's operations of the vessels prior to the sale to GSL.
Key Financial Metrics
| Metric | Successor Period (Aug 15 - Dec 31, 2008) |
Predecessor Period (Jan 1 - Aug 14, 2008) |
Full Year 2008 (Combined) |
Full Year 2007 |
|---|---|---|---|---|
| Operating Revenue | $39.1 million | $58.0 million | $97.1 million | $335.1 million |
| Operating Income | $14.9 million | $21.9 million | $36.8 million | $30.2 million |
| Net Income (Loss) | $(44.0) million | $7.4 million | $(36.6) million | $16.8 million |
| Net Cash from Operating Activities | $14.0 million | $20.7 million | $34.7 million | $56.6 million |
| Total Assets | $966.6 million | N/A | $966.6 million | $674.6 million |
| Long-Term Debt | $542.1 million | N/A | $542.1 million | $401.1 million |
| Stockholders' Equity | $295.0 million | N/A | $295.0 million | $87.5 million |
Note: The 2008 Net Loss was primarily driven by a $55.3 million unrealized loss on interest rate derivatives due to falling LIBOR rates, which did not qualify for hedge accounting.
Material Changes vs. Prior Period
- Revenue Composition: The Company transitioned from a cargo-carrying model (Predecessor) to a pure time-charter owner model (Successor). Consequently, voyage expenses (fuel, port charges) were eliminated from the cost base in the Successor period, significantly improving operating margins despite lower total revenue compared to 2007.
- Net Loss: The Company reported a net loss of $44.0 million for the Successor period, compared to a net income of $7.4 million for the Predecessor period. This deterioration is almost entirely attributable to the $55.3 million mark-to-market loss on interest rate swaps.
- Debt Levels: Long-term debt increased to $542.1 million from $401.1 million in 2007, reflecting additional borrowings to fund the acquisition of four vessels in December 2008.
- Equity: Stockholders' equity increased significantly to $295.0 million due to the capital structure changes resulting from the merger with Marathon Acquisition Corp.
Guidance, Outlook, Risks, and Contingencies
Credit Facility and Going Concern
The Company has an $800 million senior secured revolving credit facility. As of the filing date, outstanding borrowings were $542.1 million. The facility contains a leverage ratio covenant (borrowings vs. charter-free market value of vessels). Due to the global economic downturn and a significant decline in containership market values, management believes the leverage ratio likely exceeds 100%.
- Waivers and Amendments: On February 10, 2009, an addendum suspended the 75% leverage test until April 30, 2010, replacing it with a 90% threshold requiring cash pledges and a 100% threshold allowing lender prepayment demands. On April 29, 2009, lenders waived the requirement to submit vessel valuations until June 30, 2009.
- Dividend Restriction: The Company agreed not to declare or pay dividends to common shareholders during the waiver period (through June 30, 2009).
- Going Concern: The auditors have included an emphasis of matter regarding the Company's ability to continue as a going concern. If the Company cannot obtain further amendments or waivers by June 30, 2009, and the leverage ratio remains above 100%, the lenders may declare an event of default, potentially requiring immediate repayment of borrowings.
Future Acquisitions
The Company is scheduled to purchase the vessel CMA CGM Berlioz in July 2009 for $82 million and two newbuildings in Q4 2010 for approximately $140 million (net of deposits). The ability to fund these acquisitions depends on obtaining further lender consent to borrow under the credit facility despite the likely high leverage ratio.
Key Risks
- Concentration Risk: 100% of revenue is derived from a single charterer, CMA CGM. The financial health of CMA CGM is critical to GSL's cash flow.
- Market Volatility: The container shipping industry is in a severe cyclical downturn with excess capacity, leading to depressed vessel values and charter rates.
- Interest Rate Risk: The Company has swapped the majority of its debt to fixed rates, locking in costs but preventing benefit from falling LIBOR rates, resulting in significant unrealized losses on the swaps.
Investor Verification Checklist
- Credit Facility Status: Verify the outcome of discussions with lenders regarding the leverage ratio covenant and whether a permanent amendment or waiver was secured after June 30, 2009.
- Dividend Policy: Confirm if the dividend suspension was lifted and if any dividends were declared for subsequent quarters.
- Vessel Valuations: Review updated charter-free market valuations of the fleet to assess the actual leverage ratio and potential impairment of vessel assets.
- Acquisition Funding: Confirm whether the Company successfully secured financing to purchase the CMA CGM Berlioz and the two newbuildings as planned.
- Derivative Accounting: Monitor the impact of interest rate swap mark-to-market adjustments on future earnings, as these do not qualify for hedge accounting.