Business Context and Reporting Period
Company: Danaos Corporation (Danaos)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Danaos is an international owner of containerships, chartering its fleet to major liner companies under multi-year, fixed-rate time charters. As of December 31, 2009, the company operated a fleet of 42 containerships (45 as of May 31, 2010). The company is a holding company incorporated in the Republic of The Marshall Islands, with operations managed by Danaos Shipping Co. Ltd.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Operating Revenues | $319.5 | $298.9 |
| Net Income (Continuing Ops) | $36.1 | $117.1 |
| Net Income (Total) | $36.1 | $115.2 |
| Net Income Per Share (Basic/Diluted) | $0.66 | $2.11 |
| Operating Cash Flow | $93.2 | $135.5 |
| Total Assets | $3,142.7 | $2,828.5 |
| Total Debt (Current + Long-term) | $2,331.7 | $2,096.9 |
| Stockholders' Equity | $405.6 | $219.0 |
Debt Classification: As of December 31, 2009, approximately $2.3 billion of indebtedness was reclassified as current liabilities due to non-compliance with financial covenants in loan agreements.
Working Capital: The company reported a working capital deficit of approximately $2.2 billion as of December 31, 2009, primarily due to the reclassification of long-term debt to current liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.9% to $319.5 million, driven by the addition of four new vessels to the fleet, partially offset by revenue losses from off-hire days and re-chartering at reduced rates.
- Profitability Decline: Net income from continuing operations decreased significantly to $36.1 million from $117.1 million in 2008. This decline was primarily due to a $63.6 million loss on the fair value of derivatives (interest rate swaps) compared to a $0.6 million loss in 2008, and the absence of a $16.9 million gain on the sale of vessels recorded in 2008.
- Derivative Losses: The company recorded substantial non-cash losses due to hedge accounting ineffectiveness and realized losses on interest rate swaps, attributed to changes in LIBOR and revised forecasts for debt drawdowns related to delayed newbuilding deliveries.
- Dividend Suspension: The Board of Directors suspended the payment of cash dividends in the first quarter of 2009 due to market conditions and covenant restrictions.
Guidance, Outlook, Risks, and Contingencies
Going Concern Uncertainty
The independent registered public accounting firm included an explanatory paragraph in its audit opinion expressing substantial doubt about the company's ability to continue as a going concern. This is due to breaches of financial covenants in credit facilities with HSH Nordbank and Deutsche Bank, and the potential for cross-defaults across other facilities.
Debt Restructuring and Financing
The company has reached agreements in principle with lenders to restructure existing indebtedness (excluding KEXIM and KEXIM-Fortis facilities) and secure new financing. Key conditions include:
- Raising net proceeds of $200 million from equity issuances (including an investment by the CEO).
- Execution of definitive documentation for the "Bank Agreement" and new credit facilities.
- Waivers of existing covenant breaches.
If definitive agreements are not reached or conditions are not met, lenders could accelerate indebtedness and foreclose on vessels.
Market Risks
- Charter Rates: The containership market remains depressed. Average daily charter rates for 4,400 TEU vessels dropped from $36,000 in May 2008 to a low of $6,400 in December 2009, recovering slightly to $20,000 by April 2010.
- Counterparty Risk: 94% of 2009 revenues were generated by six major liner companies, some of which have acknowledged financial difficulties and restructuring efforts.
- Newbuilding Obligations: The company has contracted for 20 newbuilding vessels with remaining capital expenditures of approximately $1.5 billion. Financing for 11 of these vessels is contingent on the successful debt restructuring.
Legal and Environmental
The company's manager entered a plea agreement in 2006 regarding a 2001 oil discharge incident, resulting in a $500,000 penalty and a probation period. The company is subject to various environmental regulations (IMO, OPA, CERCLA) which could impose significant costs.
Investor Verification Checklist
- Debt Restructuring Status: Verify if definitive agreements for the "Bank Agreement" and new credit facilities have been executed and if the $200 million equity raise condition has been satisfied.
- Covenant Compliance: Confirm whether waivers for covenant breaches with HSH Nordbank and Deutsche Bank have been obtained and if cross-default risks have been mitigated.
- Charterer Solvency: Assess the financial health of the top six charterers (China Shipping, CMA CGM, HMM Korea, Maersk, Yang Ming, ZIM) who account for the vast majority of revenue.
- Newbuilding Financing: Determine the status of financing for the 11 newbuildings dependent on the restructuring and the risk of losing deposits if contracts are cancelled.
- Derivative Exposure: Review the current fair value of interest rate swaps and the potential for further ineffectiveness charges impacting earnings.
- Equity Dilution: Evaluate the impact of the required equity raise and the issuance of warrants (15 million shares at $7.00) to lenders on existing shareholders.