GSL

Business Context and Reporting Period

Company: Global Ship Lease, Inc. (GSL)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Model: GSL owns a fleet of 17 containerships chartered exclusively to CMA CGM S.A. under long-term, fixed-rate time charters. The company operates as a holding company with vessels owned by subsidiaries. All revenue is derived from charter hire payments from CMA CGM.

Key Financial Metrics (Year Ended Dec 31, 2010)

Note: The 2010 net loss was primarily driven by a $32.0 million loss on interest rate derivatives and a $17.1 million impairment charge related to terminated vessel purchase obligations.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 7% to $158.8 million, driven by the addition of the 17th vessel (CMA CGM Berlioz) purchased in August 2009 and improved fleet utilization (100% in 2010 vs. 98.8% in 2009).
• Profitability Decline: Despite higher revenue, Net Income swung from a $42.4 million profit in 2009 to a $4.0 million loss in 2010. This was caused by:
  • Derivative Losses: A $32.0 million realized and unrealized loss on interest rate swaps due to downward movements in the LIBOR forward yield curve.
  • Impairment Charge: A $17.1 million charge resulting from the termination of purchase obligations for two newbuildings, converting them into purchase options.
• Debt Reduction: Total debt decreased by approximately $55.4 million due to mandatory prepayments under the Credit Facility Amendment.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects operating cash flow to remain stable and sufficient to fund working capital and debt service. The company has no undrawn committed financing and will require new capital sources to exercise purchase options for two additional vessels (Zim Alabama and Zim Texas) in late 2011/early 2012.

Dividend Policy

Dividends on common shares are currently suspended. The Credit Facility Amendment prohibits dividend payments unless the leverage ratio is 75% or lower. The leverage ratio was tested as of April 30, 2011, and was found to be less than 75% (but greater than 65%), technically permitting dividends, though no decision to resume payments has been made.

Key Risks and Contingencies

• Single Charterer Dependency: 100% of revenue comes from CMA CGM. While CMA CGM completed a financial restructuring in early 2011, any failure by CMA CGM to pay charter hire would materially adversely affect GSL.
• Credit Facility Covenants: The company is subject to a maximum leverage ratio of 75%. Exceeding this could trigger a default, requiring immediate prepayment of borrowings or additional security.
• Derivative Volatility: Interest rate swaps are marked-to-market and do not qualify for hedge accounting, causing significant volatility in reported net income despite stabilizing cash interest costs.
• Unusual Item: The $17.1 million impairment charge in Q4 2010 was a non-recurring event related to restructuring vessel purchase contracts into options.

Investor Verification Checklist

• CMA CGM Financial Health: Verify the stability of CMA CGM's recent bond issuances and restructuring to ensure continued ability to pay charter hire.
• Leverage Ratio Status: Confirm the most recent leverage ratio test results (next test date November 30, 2011) to assess dividend eligibility and covenant compliance.
• Derivative Exposure: Review the fair value of interest rate swaps and the impact of LIBOR fluctuations on future reported earnings vs. cash flow.
• Financing for Options: Assess the company's ability to secure external financing for the $122.5 million required to exercise purchase options for the two Zim-chartered vessels.
• Vessel Valuations: Monitor independent broker valuations of the fleet, as declining market values could increase the leverage ratio and trigger covenant breaches.