Business Context and Reporting Period
Danaos Corporation filed its annual Form 20-F for the fiscal year ended December 31, 2020, prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A. This is an annual filing, not a standalone fourth-quarter filing. Danaos owns and charters containerships to global liner companies. As of December 31, 2020, it operated 60 vessels with 371,262 TEU of capacity; Gemini, accounted for under the equity method, owned five additional vessels.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $461.6 million | $447.2 million | +3.2% |
| Income from operations | $199.5 million | $201.1 million | -0.8% |
| Net income | $153.6 million | $131.3 million | +17.0% |
| Basic EPS | $6.51 | $8.29 | Lower due to share-count effects |
| EBITDA | $317.1 million | $306.3 million | +3.5% |
| Adjusted EBITDA | $318.3 million | $310.6 million | +2.5% |
| Operating cash flow | $265.7 million | $219.9 million | +20.8% |
| Capital expenditures and vessel additions | $170.7 million cash investing outflow | $21.4 million outflow | Higher due to acquisitions and scrubbers |
Calculated margins were approximately 43.2% operating margin, 33.3% net margin, 68.7% EBITDA margin and 69.0% adjusted EBITDA margin. Vessel operating expenses increased to $110.9 million from $102.5 million, while depreciation increased to $101.5 million from $96.5 million. Interest expense declined to $53.5 million from $72.1 million, supported by lower average debt and lower debt-service costs.
Cash, cash equivalents and restricted cash totaled $65.7 million at year-end, down from $139.2 million. Total current assets were $118.4 million against current liabilities of $239.7 million. Long-term debt, net of current portion, was $1.187 billion, and leaseback obligations totaled $120.1 million. Gross bank debt was $1.368 billion, and total debt including leaseback obligations was approximately $1.5 billion. The weighted-average borrowing rate, including leaseback obligations, was 4.6%.
Total assets were $2.714 billion and stockholders’ equity was $1.036 billion at December 31, 2020. The company had no remaining borrowing availability under its existing credit facilities. Scheduled 2021 principal payments were $155.9 million, excluding leaseback payments; scheduled leaseback installments were $30.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from contractual charter-rate increases and the acquisition of five vessels, partly offset by lower non-cash revenue recognition, lower rechartering rates for certain vessels and COVID-19-related off-hire.
- Fleet utilization declined to 96.3% from 98.3%. Management reported adjusted utilization of 97.2% excluding 188 incremental off-hire days caused by shipyard delays related to COVID-19.
- Five vessels were acquired during 2020 for total acquisition costs of $141.9 million. Nine scrubbers were installed for total costs of $39.9 million.
- Operating cash flow increased by $45.8 million, but investing cash use increased by $149.3 million because of vessel purchases and scrubber installations.
- Financing cash outflows increased to $168.5 million from $136.6 million, including $31.1 million spent to repurchase 4.34 million common shares.
- Equity income from the 49%-owned Gemini investment increased to $6.3 million from $1.6 million.
- No vessel impairment loss was recorded in 2020 or 2019. However, management identified 22 vessels with estimated market values below carrying value; the aggregate carrying-value excess was approximately $519.7 million. Management concluded that projected undiscounted cash flows supported the carrying values.
- Accumulated other comprehensive loss improved to $86.7 million from $116.9 million, principally due to a $26.6 million unrealized gain on available-for-sale securities.
Guidance, Outlook, Commentary and Risks
Management reported a sharp improvement in containership market conditions during the second half of 2020 and early 2021. Global idle containership capacity was approximately 1.2% at December 31, 2020, and management expected container trade to grow by mid- to high-single digits in 2021. Management expected to recharter vessels whose charters expire in 2021 at rates equivalent to or above existing rates if prevailing market conditions continued, but provided no firm earnings guidance.
Contracted charter revenue as of December 31, 2020 totaled approximately $1.099 billion, including $478.7 million for 2021 and approximately $620.1 million thereafter. Twenty-eight vessels had charters expiring in 2021, creating meaningful rechartering exposure. Approximately 88% of 2020 operating revenue came from six customers; CMA CGM represented 36% and HMM approximately 24%.
The major financial contingency was the contemplated 2021 Debt Refinancing. Danaos issued $300 million of 8.500% senior unsecured notes due 2028 on February 11, 2021, with proceeds placed in escrow. The intended refinancing also included an $815 million senior secured credit facility and a $135 million sale-leaseback arrangement. The filing stated that the refinancing remained subject to definitive documentation and customary closing conditions; if not completed by August 9, 2021, the escrowed proceeds and cash on hand would be used to redeem the notes at par plus accrued interest.
- COVID-19 caused lower container demand and charter rates in the first half of 2020, crew-change disruptions and shipyard delays. A renewed slowdown could reduce charter rates, vessel values, utilization and charterer credit quality.
- Failure to satisfy debt covenants could permit lenders to accelerate debt and foreclose on mortgaged vessels. Key existing covenant requirements included minimum liquidity of $30 million, minimum interest coverage of 2.50x and collateral-value tests.
- Debt maturities and amortization remain substantial, including approximately $776.9 million of scheduled principal payments in 2023 and approximately $1.010 billion of final payments through 2025 under the disclosed pre-refinancing schedule.
- Vessel values, charter rates, LIBOR exposure, foreign-currency expenses and environmental compliance costs remain material risks. The company had no outstanding interest-rate swaps and did not hedge its foreign-currency exposure.
- Danaos has not paid dividends since 2008. Dividend payments remain subject to board discretion, available cash, legal requirements and financing covenants.
- Danaos held a $597.9 million unsecured claim against bankrupt former charterer Hanjin Shipping, which was not recognized on the balance sheet. The company received a $3.9 million partial payment in January 2021.
Important Facts for Investors to Verify
- Completion and final terms of the 2021 Debt Refinancing, including the new senior secured facility and sale-leaseback arrangement.
- Actual 2021 rechartering rates and renewal outcomes for the 28 vessels with charters expiring during 2021.
- Compliance with minimum liquidity, interest-coverage, leverage and collateral-value covenants after refinancing.
- Cash available after debt amortization, leaseback payments, maintenance capital expenditures and vessel acquisitions.
- Valuation sensitivity for the 22 vessels whose estimated market values were below carrying value, including the potential $519.7 million aggregate shortfall.
- Concentration and credit exposure to CMA CGM, HMM and other major charterers representing most of revenue.
- Fair value and collectability of the ZIM and HMM notes, and the market value and transfer restrictions applicable to Danaos’s ZIM equity stake.
- The effect of COVID-19, crew availability, shipyard delays, environmental rules and the phaseout of LIBOR on future cash flows.