Global Ship Lease, Inc. — FY 2016 Form 20-F
Reporting period: Year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; the filing identifies a $63.1 million impairment charge in Q4 2016. Financial statements are prepared under U.S. GAAP.
Business context
Global Ship Lease owns and charters containerships. At year-end, its fleet comprised 18 vessels with capacity of 82,312 TEU, a weighted-average age of 12.0 years, and an average remaining charter term of about 4 years by capacity. Fifteen vessels were chartered to CMA CGM, which also owned approximately 44.4% of the company’s common shares.
Financial and operating results
| Metric | 2016 | 2015 |
|---|---|---|
| Time charter revenue | $166.5 million | $164.9 million |
| Operating expenses | $187.0 million | $145.7 million |
| Operating income (loss) | $(20.5) million | $19.3 million |
| Net income (loss) | $(65.1) million | $(28.9) million |
| Net income (loss) available to common shareholders | $(68.2) million | $(31.9) million |
| Operating cash flow | $71.2 million | $62.3 million |
| Cash and cash equivalents at year-end | $54.2 million | $53.6 million |
| Total assets | $776.3 million | $904.9 million |
| Stockholders’ equity | $328.9 million | $396.8 million |
Vessel operating expenses declined to $45.7 million from $50.1 million; excluding impairment, operating expenses were $94.6 million versus $101.0 million. Utilization was 98.4%, down from 99.6%, with 103 off-hire days, including 100 days for drydockings. The filing reports 2016 net cash used in investing activities of $6.9 million and net cash used in financing activities of $63.6 million.
Year-end debt principal totaled approximately $429.4 million: $365.8 million of 10% secured notes, $39.2 million drawn under the revolving facility, and $24.4 million under the secured term loan. The balance-sheet carrying value of debt, net of financing costs and other adjustments, was $419.9 million. Interest expense was $44.8 million, compared with $48.2 million in 2015.
Material changes versus 2015
- Revenue increased 1.0%, reflecting the full-year contribution of vessels acquired in 2015, partly offset by the sale of two vessels in late 2015 and increased drydock off-hire.
- Operating results moved from income of $19.3 million to a loss of $20.5 million. The main driver was non-cash vessel impairment of $92.4 million, compared with $44.7 million in 2015.
- The 2016 impairment comprised $29.4 million after amended charters for Marie Delmas and Kumasi and $63.1 million recorded in Q4 for four vessels. Vessel carrying value fell to $719.1 million from $846.9 million.
- Operating cash flow rose by $8.9 million. Financing cash outflow included $51.0 million spent repurchasing notes and $9.5 million of secured-term-loan repayments.
- The company repurchased $54.2 million principal amount of notes during 2016, including tender and open-market purchases; reported year-end note principal was $365.8 million.
Outlook, risks and notable items
- Liquidity: Management stated that cash generated and retained should be sufficient for operating needs over the next 12 months, including working capital, drydockings and debt repayments. The company was required to maintain at least $20 million in cash on specified covenant test dates; year-end cash was $54.2 million.
- Debt and refinancing: The 10% notes mature April 1, 2019; the revolving credit facility matures October 1, 2018. The secured term loan has scheduled amortization and may require early repayment if the notes are not refinanced by November 30, 2018. Annual excess-cash-flow offers may require up to $20 million of note repurchases at 102% of principal. A 2016 cash-flow tender offer of up to $20 million was announced in March 2017.
- Charter and counterparty exposure: CMA CGM generated $129.0 million of 2016 charter revenue and is the principal charterer. The filing warns that default or reduced replacement rates could materially harm cash flow and raise going-concern uncertainty. No charterhire was outstanding at year-end, and payments were reported timely during 2016.
- Rechartering and market conditions: Five vessels could be redelivered as early as September 2017 through September 2018. Management described weak charter rates, oversupply and uncertainty in container shipping. The filing warns that further impairment could be required if charter rates do not improve meaningfully; its sensitivity analysis estimated additional impairment of about $32.0 million under a 10% reduction in assumed post-charter rates.
- Dividends: No common-share dividend was paid in 2016; common dividends are not assured and are subject to cash availability, covenants, law and board discretion. Series B preferred dividends were paid, totaling $3.1 million for the year; the preferred shares carry an 8.75% annual rate when declared.
- Other risks and contingencies: Risks include high leverage and restrictive covenants, vessel values and operating costs, drydocking and regulatory spending (including ballast-water treatment), off-hire, related-party conflicts, and dependence on ship managers. The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
- Governance and audit: Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2016. The auditor issued an unqualified opinion and highlighted the company’s significant dependence on CMA CGM.
Important facts for investors to verify
- Charter coverage, redelivery options and renewal rates for vessels with near-term expiries, and CMA CGM’s capacity to meet its obligations.
- The assumptions behind the $92.4 million impairment and the potential for further write-downs, particularly charter-rate and vessel-value estimates.
- Debt covenant headroom, scheduled term-loan amortization, the 2018 facility maturity and the ability to refinance the 2019 notes.
- Whether operating cash flow can fund debt service, required note repurchases, drydockings and preferred dividends without constraining liquidity.
- Expected cost and timing of ballast-water and other environmental compliance work, and potential effects on off-hire and cash needs.