Global Ship Lease, Inc. — 2017 Form 20-F Summary
Business context and reporting period
This is an audited annual report for the fiscal year ended December 31, 2017, not a standalone quarterly filing. Global Ship Lease owns and charters containerships under fixed-rate time charters. At year-end, its fleet comprised 18 vessels with capacity of 82,312 TEU and a capacity-weighted average age of 13.0 years. Sixteen vessels were chartered to CMA CGM, which was also the company’s largest shareholder, holding approximately 44.4% of common shares.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Time charter revenue | $159.0 million | $166.5 million |
| Operating loss | $15.3 million | $20.5 million |
| Net loss | $74.3 million | $65.1 million |
| Net loss available to common shareholders | $77.3 million | $68.2 million |
| Operating cash flow | $57.8 million | $71.2 million |
| Cash and cash equivalents at year-end | $73.3 million | $54.2 million |
| Total assets | $675.2 million | $776.3 million |
| Debt principal outstanding at year-end | $414.8 million | $494.2 million |
Revenue fell 4.5%, mainly as several charters renewed or stepped down at lower daily rates. Utilization remained 98.4%, with 102 off-hire days, including 62 days for regulatory drydockings. Vessel operating expenses were $43.5 million, down from $45.7 million; depreciation was $38.0 million, down from $42.8 million. The 2017 operating loss was about 9.6% of revenue and net loss about 46.7% of revenue.
A fleet-wide review resulted in a non-cash impairment charge of $87.6 million in the fourth quarter, covering five vessels. The comparable 2016 charge was $92.4 million. Excluding impairment, operating expenses were $86.7 million in 2017 versus $94.6 million in 2016. Interest expense rose to $59.4 million from $44.8 million, principally reflecting refinancing-related costs as well as the new debt structure. The company reported positive operating cash flow, but it declined by $13.4 million year over year.
Year-end current assets were $77.4 million and current liabilities $57.0 million; cash was $73.3 million. The balance sheet reported debt carrying value of $398.5 million, compared with $414.8 million principal outstanding. The company paid $3.1 million in Series B preferred dividends; no common dividend was paid in 2017.
Material changes and financing
- In October 2017, the company refinanced its former 10.0% notes, revolving credit facility and secured term loan with $360.0 million of 9.875% first-priority secured notes due 2022 and a $54.8 million secured term loan, plus cash on hand. The 2022 notes and term loan are secured by all 18 vessels.
- The new debt requires at least $20.0 million of unrestricted cash at quarterly test dates. Required combined amortization is $40.0 million annually in 2018–2020 and $35.0 million thereafter, subject to the financing documents. The notes mature in 2022; the term loan matures no later than October 2020 and carries interest at LIBOR plus 3.25%.
- 2017 interest expense included an $8.7 million premium on redemption of the former notes and write-offs of unamortized financing items, including $1.3 million of original issue discount and approximately $4.3 million of deferred financing costs.
- The company’s new debt reduced reported principal outstanding from $494.2 million at 2016 year-end to $414.8 million at 2017 year-end, while replacing near-term 2019 notes with 2022 notes and a term loan.
Outlook, commentary and risks
Management described improving charter rates and vessel values during 2017 and a more favorable market into early 2018, while cautioning that the recovery was not yet sufficiently sustained to avoid fleet-wide impairment testing. It provided no quantified earnings or revenue guidance. Management stated that existing cash and expected cash generation should meet operating needs and debt service for the next 12 months, including drydockings; this depends on charter receipts, market conditions and continued covenant compliance.
Management’s impairment estimates rely on future charter rates, utilization, operating costs, drydock costs and residual values. Its sensitivity analysis indicated that a 10% reduction in assumed post-charter rates would increase the theoretical impairment charge by approximately $73.5 million; a 5% reduction would increase it by approximately $33.9 million.
- Customer concentration: CMA CGM is the principal revenue source. A failure to pay or perform could materially affect cash flow and could raise going-concern uncertainty. Charterhire was current at year-end.
- Rechartering exposure: Several charters could end or become terminable from 2018 onward. Replacement rates, charter duration and vessel utilization depend on a cyclical market with continuing capacity-supply risks.
- Leverage and restrictions: Debt service, minimum-liquidity requirements, a term-loan debt-service coverage test and restrictive covenants constrain financial flexibility and may limit dividends or acquisitions.
- Related-party governance: CMA CGM is a major shareholder, charterer and, through CMA Ships, ship manager. A CMA CGM executive joined the board in September 2017; conflicts of interest and non-arm’s-length terms are disclosed risks.
- Other exposures: The company identifies vessel impairment and valuation risk, drydock and environmental-compliance costs, off-hire, aging vessels, insurance limitations, interest-rate and foreign-exchange exposure, and industry and trade disruptions. It does not carry loss-of-hire insurance.
After year-end, the GSL Tianjin charter was extended at $11,900 per day; OOCL Qingdao’s charter was extended at $14,000 per day; and the company agreed to acquire a 2,800-TEU vessel for $11.3 million, with a planned 12-month CMA CGM charter at $9,000 per day. These are subsequent developments, not 2017 results. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the 2018–2020 charter expiries, charterer options and expected cash receipts, especially for CMA CGM and OOCL vessels.
- Check compliance with the $20 million minimum-liquidity covenant, term-loan coverage tests and required debt amortization.
- Assess the assumptions supporting the $87.6 million impairment and the disclosed sensitivity to lower future charter rates and vessel values.
- Confirm the terms, delivery, financing and charter commencement for the announced $11.3 million vessel acquisition.
- Verify the ability to maintain Series B preferred dividends and any future common dividends under debt covenants, available cash and applicable law.