Global Ship Lease, Inc. — FY 2011 Form 20-F
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; quarterly 2011 results are not clearly provided in the filing text. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
Global Ship Lease owns and charters containerships under long-term time charters. At year-end, it operated 17 vessels with aggregate capacity of 66,349 TEU; all were chartered to CMA CGM, which was the company’s sole charterer and source of operating revenue. The fleet’s weighted-average age was 7.8 years, and its weighted-average remaining charter term was 8.3 years.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Time-charter revenue | $156.3 million | $158.8 million |
| Operating income | $49.9 million | $51.8 million |
| Operating margin | 31.9% | 32.6% |
| Net income (loss) | $9.1 million | $(4.0) million |
| Basic/diluted Class A EPS | $0.19 | $(0.08) |
| Cash from operating activities | $74.9 million | $85.2 million |
| Cash used in investing activities | $27.3 million | $32.2 million |
| Cash used in financing activities | $50.2 million | $55.4 million |
| Cash and cash equivalents at year-end | $25.8 million | $28.4 million |
| Total assets | $939.5 million | $981.0 million |
| Long-term debt, current and non-current | $483.6 million | $532.8 million |
| Stockholders’ equity | $334.2 million | $324.6 million |
Operating expenses were $106.3 million, including a $13.6 million impairment charge related to vessel purchase options. Excluding that charge, operating expenses were 59% of revenue. Vessel operating expenses rose to $45.5 million from $42.1 million, with average daily cost increasing 8.2% to $7,336. The company reported a $45.3 million fair-value liability on interest-rate swaps at year-end; $19.4 million of realized derivative losses and $0.9 million of unrealized losses were recorded in 2011.
Current assets were $45.5 million and current liabilities were $70.3 million. Restricted cash was $3.0 million. The $48.0 million mandatorily redeemable preferred shares are classified as a liability; redemption installments begin in 2016.
Changes versus prior comparable period
- Revenue declined 1.6%, primarily due to 95 off-hire days from six vessel drydockings and 11 days of unplanned off-hire, versus no drydockings and three unplanned off-hire days in 2010.
- Operating income declined 3.6%. Net income improved from a $4.0 million loss to $9.1 million of income, reflecting lower interest expense and a much smaller unrealized derivative loss, partly offset by lower operating income and the 2011 impairment charge.
- Operating cash flow fell $10.3 million to $74.9 million. The company repaid $49.2 million of credit-facility debt, spent $7.7 million on drydockings and ended the year with $25.8 million of cash.
- Debt declined by $49.2 million, while vessel net book value declined to $890.2 million, principally reflecting depreciation and drydocking activity.
Outlook, risks and unusual items
- Counterparty concentration and collections: CMA CGM’s financial condition and ability to pay are critical. CMA CGM was discussing repayment rescheduling and covenant adjustments with its lenders amid the 2011 shipping downturn. Two charter installments totaling $13.3 million were overdue at December 31, 2011 and received in January 2012; two further installments totaling $13.3 million were outstanding as of April 12, 2012.
- Debt covenant and liquidity: A November 2011 waiver suspended the leverage-ratio test through November 30, 2012. The company expected the ratio could otherwise have been 75%–90%; a further waiver may be needed, with no assurance it will be obtained. The facility requires minimum cash, net worth and debt-service coverage and includes other restrictive covenants. Outstanding debt matures in August 2016, and there is no undrawn committed facility capacity.
- Dividends: Common dividends are prohibited under the waiver until at least November 30, 2012 and until the leverage ratio is no more than 75%, whichever is later. The company was not paying common dividends.
- Charter expirations and market conditions: Two vessels’ charters were due to expire around December 2012 (subject to a 90-day option). Management warned replacement rates could be substantially lower; the filing provides no specific earnings or dividend guidance.
- Acquisition options: The company wrote off $13.6 million in 2011 for options on two newbuildings after concluding it could not obtain acceptable financing; both options expired unexercised. The related 2010 impairment charge was $17.1 million.
- Industry and operating risks: Management described weak charter rates, excess vessel capacity, depressed vessel values and uncertain global trade conditions. Drydocking, operating-cost inflation, regulatory/environmental compliance, insurance, and vessel incidents may pressure cash flow. The company does not carry loss-of-hire insurance.
- Derivatives: Interest-rate swaps fixed a $580 million notional amount at a weighted average 3.59% base rate, but do not qualify for hedge accounting; fair-value movements can cause reported earnings volatility. The company expected to remain over-hedged as debt is repaid.
- Accounting and assurance: Vessel impairment testing found no impairment at year-end under management’s estimated undiscounted cash flows, despite vessel market values being depressed. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Investor verification points
- Confirm CMA CGM’s current financial condition, payment performance and status of any overdue charter hire.
- Track the November 30, 2012 leverage-ratio test, any further lender waiver, required repayments and covenant compliance.
- Assess rechartering prospects and expected rates for the two vessels with near-term expirations.
- Review liquidity after debt service, drydock spending and operating costs, and confirm the conditions for resuming common dividends.
- Verify derivative cash settlements, swap counterparty options and the effect of fair-value accounting on reported earnings.
- Evaluate vessel values and impairment assumptions, including charter-rate, off-hire, operating-cost and useful-life estimates.