Danaos Corporation 2018 Form 20-F Summary
Business Context and Reporting Period
Danaos Corporation is a Marshall Islands-based owner and lessor of containerships. The filing is an annual Form 20-F for the fiscal year ended December 31, 2018, rather than a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A.
- Fleet: 55 containerships totaling 327,616 TEU as of February 28, 2019; Gemini, accounted for under the equity method, owned four additional vessels totaling 23,998 TEU.
- Fleet utilization improved to 96.8% from 96.4% in 2017.
- Revenue concentration remained high: approximately 88% of 2018 revenue came from five customers; CMA CGM, HMM and Yang Ming represented 35%, 24% and 16%, respectively.
Key Financial Metrics
| US$ millions, except per-share data | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | 458.7 | 451.7 | +1.5% |
| Income/(loss) from operations | (12.1) | 187.5 | Down 199.6 |
| Net income/(loss) | (32.9) | 83.9 | Turned to loss |
| Basic and diluted EPS | $(0.22) | $0.76 | Down $0.98 |
| Adjusted EBITDA | 317.8 | 310.4 | +2.4% |
| Net cash from operating activities | 164.7 | 181.1 | Down 9.1% |
| Cash and cash equivalents at year-end | 77.3 | 66.9 | Up 10.4 |
| Total assets | 2,679.8 | 2,986.4 | Down 10.3% |
| Total stockholders’ equity | 690.9 | 548.7 | Up 25.9% |
Reported operating performance was materially affected by a $210.7 million impairment charge on ten vessels and $51.3 million of refinancing-related professional fees. These items were partly offset by a $116.4 million gain on debt extinguishment. Excluding specified unusual items, adjusted EBITDA increased to $317.8 million from $310.4 million.
- Vessel operating expenses declined to $104.6 million from $107.0 million; average daily operating cost for time-chartered vessels declined to $5,619 from $5,661.
- Depreciation declined to $107.8 million from $115.2 million, while drydocking and special survey amortization increased to $9.2 million from $6.7 million.
- Interest expense declined modestly to $85.7 million from $86.6 million. The weighted average borrowing rate increased to 4.3% from 3.1%.
- Investing cash flow was negative $8.3 million, primarily reflecting vessel additions and advances. Financing cash flow was negative $148.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $7.0 million, principally from re-chartering certain vessels at higher rates, partly offset by lower utilization.
- Net income declined from $83.9 million profit to a $32.9 million loss, driven principally by the vessel impairment charge and refinancing expenses.
- Debt was substantially restructured in August 2018. Gross debt declined to $1.666 billion at year-end from $2.341 billion, while reported long-term debt net of deferred finance costs was $1.508 billion.
- Equity increased to $690.9 million from $548.7 million, primarily because 99.3 million shares were issued to lenders in the refinancing and Danaos Investment Limited contributed $10 million.
- Shares outstanding increased to 213.3 million from 109.8 million, materially diluting existing shareholders.
- Restricted cash of $2.8 million held in 2017 was eliminated after repayment of the KEXIM-ABN Amro facility.
Debt, Liquidity and Refinancing
- The August 2018 refinancing reduced principal debt by approximately $551 million, extended most maturities to December 2023 or June 2024, reset covenants and provided $325.9 million of new financing.
- New facilities generally bear interest at LIBOR plus 2.50%, with additional 4.00% PIK interest on $282 million of subordinated tranches.
- No borrowing availability remained under the credit facilities at December 31, 2018.
- Fixed principal repayments are scheduled at $113.8 million in 2019, $119.7 million in 2020, $119.6 million in 2021 and $89.8 million in 2022. Total scheduled principal payments are $1.671 billion, including substantial final payments in 2023 and thereafter.
- The facilities require minimum liquidity of $30 million, minimum interest coverage of 2.50x, maximum consolidated net leverage of 7.50x initially declining to 5.50x, and progressively higher collateral and market-value-adjusted net-worth requirements.
- Management stated that the company was in compliance with applicable covenants at December 31, 2018 and that the refinancing alleviated the substantial doubt about going concern disclosed in the prior-year filing.
Guidance, Outlook, Risks and Unusual Items
- Contracted charter revenue totaled approximately $1.577 billion: $366.7 million for 2019, $664.6 million for 2020-2021, $430.0 million for 2022-2023 and $116.1 million for 2024-2028. These amounts depend on charterer performance and exclude the effect of greater-than-estimated off-hire.
- Twenty-two vessels had charters expiring between March and December 2019. Management expected that many would need to be re-chartered at prevailing low spot-market rates.
- Management expected containership demand to modestly exceed supply growth in 2019 and 2020, but noted continuing pressure from fleet growth, a global orderbook equal to approximately 13% of existing capacity and weak rates on major trade lanes.
- Seven vessels were scheduled for scrubber installation at an estimated aggregate cost of $21.6 million; $5.0 million had been paid by year-end and approximately $16.6 million was expected in 2019. Two additional installations were optional as of February 28, 2019.
- Hanjin Shipping’s bankruptcy remains a material contingency. Danaos has an unsecured claim of $597.9 million; a Korean appellate court upheld a $6.1 million award plus interest and legal costs, but the bankruptcy trustee appealed to the Supreme Court of Korea.
- The company received an NYSE notice in December 2018 for failure to meet the $1.00 minimum average closing-price requirement and stated that it intended to cure the deficiency.
- The company has not paid dividends since 2008. Dividend payments are restricted until specified equity-raising and debt-amortization conditions are met, and remain subject to covenant compliance and board discretion.
- Key risks include weak charter rates, vessel-value declines and further impairment, customer concentration and counterparty defaults, refinancing and covenant compliance, floating LIBOR exposure, foreign-currency costs, environmental regulation, sanctions, operational incidents and potential loss of NYSE listing.
- All 15 million lender warrants expired unexercised on January 31, 2019.
Most Important Facts for Investors to Verify
- Whether cash flow from operations can cover fixed and variable debt amortization, interest, maintenance capital expenditures and scrubber-related spending.
- The status of the $50 million follow-on equity raise required under the refinancing and the potential dilution from additional equity issuance.
- Actual re-chartering rates and utilization for the 22 vessels whose charters expire in 2019.
- Compliance with minimum liquidity, collateral, leverage, interest-coverage and market-value-adjusted-net-worth covenants.
- Whether the $210.7 million 2018 impairment adequately reflects vessel values and whether further impairment charges could arise.
- The ultimate recovery and timing of the $597.9 million Hanjin claim, including the pending Supreme Court appeal.
- Progress and final cost of scrubber and ballast-water compliance projects.
- Continued qualification for U.S. shipping-income tax exemptions and avoidance of passive foreign investment company status.
- NYSE compliance and the potential market impact of lender and other registered shareholders selling their shares.