Danaos Corp current report, Q2 FY2018

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Business Context and Reporting Period

This Form 6-K filing by Danaos Corporation (Danaos) covers the month of June 2018, with a report date of June 25, 2018. The filing primarily announces a Debt Refinancing Agreement (RA) entered into on June 20, 2018, with lenders holding approximately $2.2 billion of debt maturing on December 31, 2018. The transaction aims to reduce debt, extend maturities, and reset financial covenants.

Key Financial Metrics and Capital Structure

  • Debt Reduction: The RA contemplates a debt reduction of approximately $551 million.
  • New Credit Facilities: The Company will enter into new facilities with an aggregate principal of approximately $1.6 billion, maturing on December 31, 2023.
  • Interest Rates: Base rate is LIBOR + 2.50%. Two facilities incur additional PIK interest of 4.00% on approximately $282 million.
  • Equity Issuance: In exchange for debt write-downs, the Company will issue 99,342,271 new shares of common stock, representing 47.5% of the post-transaction outstanding stock.
  • Liquidity Requirements: New covenants require a minimum liquidity of $30 million throughout the term. A minimum consolidated cash balance of $60 million is required as of September 30, 2018, with a backstop commitment from Danaos Investment Limited (DIL).
  • Financial Covenants:
    • Maximum consolidated net leverage ratio: Declining from 7.50x (Dec 31, 2018) to 5.50x (Dec 31, 2023).
    • Minimum interest coverage ratio: 2.50x.
    • Minimum consolidated market value adjusted net worth: Increasing from negative $510 million (Dec 31, 2018) to $60 million (Dec 31, 2023).

Material Changes and Transaction Terms

The filing details a significant restructuring of the Company's capital structure compared to the prior period:

  • Maturity Extension: Debt maturities are extended by approximately five years, from December 31, 2018, to December 31, 2023.
  • Amortization: New facilities require quarterly fixed and variable amortization payments representing approximately 85% of actual free cash flows from relevant vessels.
  • Asset Sales: The Company plans to sell two 13,100 TEU vessels (Hyundai Honour and Hyundai Respect) post-refinancing, with proceeds applied to repay new credit facilities.
  • Dividend Restrictions: Dividends are prohibited until the Company receives over $50 million in net cash proceeds from equity offerings and pays the first installment of amortization.
  • Governance Changes: A new Stockholders Agreement will require a majority of the Board of Directors to be "independent" under NYSE rules. Amendments to the Articles of Incorporation will require a 66-2/3% supermajority vote for significant corporate actions (e.g., mergers, delisting) for five years or until specific equity raise conditions are met.

Outlook, Management Commentary, and Risks

Management Commitments and Follow-on Equity:

  • DIL (the largest stockholder) has committed to contribute $10 million on the Closing Date and backstop any shortfall in the $60 million minimum cash balance as of September 30, 2018.
  • The Company must use commercially reasonable efforts to consummate a "Follow-on Equity Raise" of at least $50 million within 18 months of the Closing Date. DIL has agreed to backstop this offering by purchasing up to $10 million of stock if the target is not met.
  • DIL has committed to reinvest 50% of cash dividends received into Company stock or escrow until the new credit facilities are repaid or refinanced.
Risks and Contingencies:
  • Closing Conditions: The transaction is subject to definitive documentation and closing conditions, with a required consummation date of July 31, 2018.
  • Change of Control: Defined broadly to include the departure of Dr. Coustas as CEO/Director or loss of family control, triggering mandatory prepayment of all new credit facilities.
  • Market Risks: Forward-looking statements highlight risks related to charter hire rates, vessel values, bunker prices, and global economic conditions.

Investor Verification Checklist

  • Verify the execution of definitive documentation and satisfaction of closing conditions by July 31, 2018.
  • Confirm the issuance of 99,342,271 new shares and the resulting dilution to existing shareholders.
  • Monitor the Company's ability to meet the $60 million minimum cash balance requirement by September 30, 2018.
  • Track progress on the planned sale of the Hyundai Honour and Hyundai Respect vessels.
  • Assess the timeline and success of the required $50 million Follow-on Equity Raise within 18 months.
  • Review the amended Articles of Incorporation for the 66-2/3% supermajority voting requirements.