Danaos Corp. 2008 Annual Report (Form 20-F) Summary
Business Context and Reporting Period
Company: Danaos Corporation (Danaos)
Reporting Period: Fiscal year ended December 31, 2008
Business Model: International owner of containerships, deploying vessels under multi-year, fixed-rate time charters to major liner companies. The company operates exclusively in the containership sector following the sale of its drybulk fleet in 2007 (reported as discontinued operations).
Fleet Status: As of December 31, 2008, the fleet consisted of 38 containerships. The company had contracts for 28 additional newbuilding containerships expected to be delivered between 2009 and 2012.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Operating Revenues | $298.9 | $258.8 |
| Net Income (Continuing Ops) | $117.1 | $123.1 |
| Net Income (Total) | $115.2 | $215.3 |
| Diluted EPS (Total) | $2.11 | $3.95 |
| Operating Cash Flow | $135.5 | $158.3 |
| Total Assets | $2,828.5 | $2,071.8 |
| Total Debt (Long-term + Current) | $2,107.7 | $1,356.5 |
| Stockholders' Equity | $219.0 | $624.9 |
Note: The significant decline in Total Net Income from 2007 to 2008 is largely due to the absence of a one-time gain of $88.6 million from the sale of drybulk carriers in 2007, which is classified as discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 15.5% to $298.9 million, driven by the addition of six new vessels to the fleet and incremental revenue from vessels added in 2007.
- Expense Increases:
- Vessel Operating Expenses: Increased 35.8% to $89.2 million due to a larger fleet and higher crew wages/repair costs.
- Interest Expense: Increased 72.1% to $37.7 million, reflecting a significant increase in average debt levels ($1.7 billion in 2008 vs. $0.8 billion in 2007) to fund newbuilding programs.
- Asset Sales: The company sold five containerships in 2008, resulting in a net gain of $16.9 million. This contrasts with 2007, which included a significant gain from the sale of the entire drybulk fleet.
- Equity Decline: Stockholders' equity decreased by approximately $406 million (from $624.9M to $219.0M). This was primarily driven by a $408 million unrealized loss on interest rate swaps recorded in Accumulated Other Comprehensive Loss due to falling interest rates, as well as dividend payments.
Guidance, Outlook, Risks, and Unusual Items
Market Conditions & Outlook: The company faces a severe downturn in the global container shipping market. Charter rates for 4,400 TEU vessels dropped from $36,000/day in May 2008 to $6,900/day in May 2009. Management expects charter rates to remain weak for the remainder of 2009. While the company has 100% contracted charter coverage for 2009, there is significant counterparty risk regarding the ability of charterers to honor contracts at rates significantly above current market levels.
Covenant Breaches and Waivers: As of December 31, 2008, Danaos was in breach of collateral coverage, corporate leverage, and net worth covenants on approximately $1.8 billion of indebtedness. These breaches were caused by the decline in vessel market values and the negative fair value of interest rate swaps. In 2009, the company obtained waivers from lenders covering these breaches through January 31, 2010. These waivers include increased interest rate margins and restrictions on dividend payments.
Dividend Policy: The Board of Directors suspended the payment of cash dividends in late 2008 due to market conditions. Future dividends are subject to lender approval under the waiver agreements.
Financing Risks: The company has no financing arranged for 12 of its 28 contracted newbuilding vessels (expected delivery 2010-2012), representing approximately $1.4 billion in required funding. The ability to secure this financing is uncertain given the depressed vessel values and tight credit markets.
Unusual Items:
- Derivative Losses: A $408 million unrealized loss on interest rate swaps impacted equity but did not flow through the income statement as the swaps qualified for hedge accounting (ineffectiveness was minimal).
- Discontinued Operations: 2007 results included a $92.2 million gain from the sale of drybulk carriers, which is not comparable to 2008 continuing operations.
Key Facts for Investor Verification
- Covenant Compliance: Verify the status of loan covenants post-January 31, 2010, and whether additional waivers or equity injections are required to maintain compliance.
- Newbuilding Financing: Confirm whether financing has been secured for the 12 unfinanced newbuilding vessels to avoid default on shipyard contracts and loss of deposits ($1.1 billion as of June 30, 2009).
- Charterer Solvency: Assess the financial health of major charterers (e.g., China Shipping, CMA-CGM, Yang Ming) who account for 74% of 2008 revenues, given the risk of charter defaults or renegotiation.
- Dividend Resumption: Monitor lender consent requirements for any future dividend payments, as current waivers restrict distributions.
- Asset Impairment: Review future impairment assessments for the vessel fleet, as market values have declined significantly below book values.