Friday, November 20, 2009

No Dividends for Global Ship Lease stockholders

I just shake my head when I read what Global Ship Lease is doing. I don't know who manages this company, but perhaps whoever it is should read a newspaper once in a while.

It's bad enough they continue to buy ships which they then charter to CMA CGM (who is the largest shareholder), but they still plan to buy ships to charter to Zim.

Why would anyone want to do this? Why would Zim want to do this, assuming they are honoring the original contract agreement. There are so many containerships sitting idle they could charter some in at a cheap rate. Furthermore, what does Zim need more ships for? At this time, if you are a container carrier, the more ships you operate, the more money you will lose.

From The Journal of Commerce

Global Ship Lease, a containership charter owner listed on the New York Stock Exchange, posted a net loss of $3.9 million in the third quarter ended Sept. 30, which was more than triple its loss of $1.2 million in the same quarter a year earlier.

The company’s revenue increased by 57 percent to $37.6 million from $23.9 million a year ago, due to the purchase of four additional vessels in December 2008 and one additional vessel in August 2009.

The company said it earned a normalized net profit of $6.2 million in the quarter, excluding an $8.1 million non-cash interest rate derivative mark-to-market charge and $2 million deferred financing costs written off on an accelerated basis. Normalized net earnings are not defined by accounting principles generally accepted in the United States.

And here's the part about the ships...

The company said it was able to borrow sufficient funds under the credit facility to allow the purchase for $82 million in August of the CMA CGM Berlioz, a 2001-built container vessel with 6,627 20-foot equivalent unit capacity chartered to CMA CGM for 12 years.

With that purchase, Global Ship Lease owns 17 container ships that are all on fixed long-term charters with CMA CGM, with an average remaining term of 9.3 years.

The company, which is domiciled in the Marshall Islands, started as a time charter operator in December 2007 when it purchased 10 container vessels from CMA CGM that it leased back to the French liner company.

Global Ship Lease said its has contracts in place to purchase two new 4,250-TEU ships from German interests for approximately $77 million each that are scheduled to be delivered in the fourth quarter of 2010. It said it has agreements to charter out these new ships to Zim Integrated Shipping Services for periods of seven to eight years.


Anonymous said...

Linda...your post further distributes a mistaken press report as to Global Ship Lease earnings in the current quarter.

GSL did not have a LOSS in the recent quarter. GSL generated actual cash after expenses of $15.4 million in the quarter. As a semantic matter of GAAP accounting, GSL also booked a non-cash loss on interest rate swaps which was larger than the cash generated.

A non-cash loss is just that - no cash involved - merely meaning that if GSL had not fixed its floating rate borrowings to a predictable interest rate via interest rate swaps, then in this particular 90 days GSL would have earned EVEN MORE money as rates fell.

So by GAAP accounting rules GSL is required to report as a LOSS the preposterous notion that they COULD HAVE EARNED EVEN MORE by gambling on floating interest rates. It's equivalent to saying that a person who finances their home on a 90-day adjustable rate mortgage, even if he could get a permanently fixed loan at a slightly higher rate, is a genius.

I sleep better owning GSL shares with the understanding that: a) the company made $15+ million in the quarter, and b) they did NOT jeopardize those earnings by gambling on floating interest rates...even though rates fell.


As for the two ships on order, GSL is under contract to take those for a total of $154 million...and Zim is under contract to lease them at very generous long term rates beneficial to GSL. Realistically, neither party probably expects the deal will go through, though they cannot say so publicly because of the agreements in place. There is much speculation, including the possibility that GSL will simply walk away from its $15 million deposit on those two ships and allow Zim to pay that amount as a penalty rather than suffering under the leases...which would save both companies a lot of potential trouble and much money, as you've outlined.

What I really LOVE about GSL's orderbook is, these are the ONLY ships it has on order. So as soon as CMA CGM gets its house in order, which is happening this very moment, GSL will be able to go out and acquire ships in this very depressed market and begin competing against the other long term charterers on a radically lower cost basis than any of them can afford - due to the very orderbook problem you seem to be attributing to GSL.

Anonymous said...

Lynda, GSL's "loss" was related to market pricing of their interest rate swaps. The point of an interest rate swap is so that the company, which is charged interest based on a FLOATING rate (LIBOR) can match its interest expense to its income (its charters) which are earned at a FIXED rate. These swaps actually make the company less risky, but result in accounting metrics that make a company look like they are making or losing more money than is actually the case. These are non-cash charges. In reality, GSL has reduced its risk by paying a predictable fixed rate of interest. If interest rates rise, it will appear that GSL is actually making more money than it really is. Since interest rates have been falling, it appears GSL is losing money. Neither, in reality is the case.

This is why investors must distinguish between GAAP earnings (which can be manipulated...e.g., Enron) vs. cash flow (which is less easy to manipulate). GSL will earn over $100M in pre-interest cash flow this year, and should earn $40-50M in cash flow to shareholders.

Anonymous said...

I shake my head reading your blog today.

Of the three publicly traded long term charter companies that offer containerships - Seaspan, Danaos and Global Ship Lease - GSL is the only one with essentially zero financial exposure to future ship orders.

GSL's total orderbook consists of the two ships you mentioned, both ordered to fulfill an existing long term charter with Zim. If GSL chooses to do so, it is free to refuse delivery of those ships and simply forfeit a relatively small deposit ($15 million) as the only consequence. In all likelihood Zim will ask GSL to to exactly that - gladly reimbursing GSL for the forfeiture rather than honoring the charter expense and losing even more money.

By contrast, Seaspan and Danaos each have several dozen massive ships in the order pipeline at astronomical prices negotiated at the very top of the market! Both companies have undertaken dilutive capital raises and other extreme steps hoping against hope not to be caught under the weight of these obligations.

To my view, GSL's lack of orderbook risk going forward opens the possibility that GSL may partner with one or more shipowner banks in to take on and stretch out delivery of ships ordered by CMA, Zim and possibly others. Indeed, this very crisis may result in GSL's becoming the dominant player in long term containership charter.

Anonymous said...

Linda, with your keen eye and dead on reporting i hope and assume you will join me and so many others shorting GSL to the max. we rely heavily on you to tell-it-like-it- -is and put those arrogant posters in their place.

monday at 9:30, let's pound that bid back to low 1's. no prisoners!