The container shipping industry entered the GFC with a massive order book that in the subsequent period led to a decimation of time charter rates and second values of the ships. In December 2009, the TC rates started to pick up and have now risen about 300% from their lows and continue to climb. This is evident from the index of TC rates published by VHSS here and here.
Danaos (NYSE:DAC) has been through a grueling period since the GFC onset.
August 2010 refinancing
In August 2010, DAC issued 54 million shares, raised 200 MUSD and further obtained additional financing facilities for the remainder of its new building program and reduced the margins on its existing debt and loosened the covenants.
I must stress that I haven't seen the revised terms, so I can only assume that they are better than the previous terms. This in many ways took away the financial stress of DAC.
DAC has further issued 30 million warrants that have exercised prices of $6 per share.
This leads me to the next point: DAC is, in my opinion, not as open in its communication as Seaspan (NYSE:SSW), Costamare (NYSE:CMRE) and Global Ship Lease (NYSE:GSL). The other companies are more open about the terms of their new and existing deals on rates and options (to an extent) and have earnings calls. This makes valuing the company more tedious, and I think this is the reason why DAC doesn't enjoy much coverage. We therefore have to wait for the annual accounts to dig out some of the required information.
TC rates: I have looked in DAC's past annual accounts to find what TC rates it has published in the past for the older and still existing deals and used those where available. I have then estimated the remainder from similar deals from SSW, CMRE and GSL compared to their total reported revenues. I have then made adjustments in a goal-seeking manner. This fortunately didn't require big changes. For future rates, I used the current two-year TC rates from VHSS.
Margin on negotiated loans: I assume they have been reduced to 1.25%.
DAC has 11 ships where the charters expire in 2011. Ten of these somewhat surprisingly have lower TC rates than the current market rates. This goes to show how much the container ship market has recovered. It will be very exciting to see what DAC does with these ships. CMRE is pursuing a strategy of short extensions while it waits for higher rates. DAC may sell the ships to reduce its debt level. I hope it doesn't, as there seems to be a disconnect between second hand values and current TC rates with the former being too low relative to the latter.
Other input variables: The rest of the input variables like discount rate (10%), TC size modification rate for ships larger than 4250 TEU (60%), expense growth (3%), revenue growth (0%) are unchanged from what I normally use; I further assume no new deals and that ships are sold upon expiry of existing contracts. I have then used my normal maximum dividend model to value the company. The fair value price I reach is 6.5, which is 25% above yesterdays closing price.
I would like to stress that I don't expect this company to pay a dividend any time soon. My best guess is 2013 or late 2012, after the last ships have been delivered.
Other financial outputs
Net debt to ship market value in 2012 will be 75%.
Operational income before interest and depreciation will at least be 347 m. This largely depends on what they do with the ships where the charters expire in 2011-12.
Average age of ships when fleet is fully built will be 5.1 years as of today.
Average duration of outstanding charters: 9.0 years excluding optional extensions.
Average ship size when fleet is fully built will be 5580 TEU/ship.
DAC is heavily leveraged, and in economic downturns all the individual risk factors weigh on the company at the same time -- ranging from falling TC rates -- second-hand values, counter-party risks rise, banks reduce financing and the company experiences unrealized interest rate swap losses simultaneously.
George Economou, the chief executive officer of DryShips, Inc. (NASDAQ:DRYS), owns about 10.6% of the company. Mr. Economou is not well-perceived by some people from his transactions in DRYS with close counter-parties. I don't have any insights for this. The positive version of this is that he is good at looking out for himself, and must therefore see DAC as a good investment.
DAC is set to prosper long term as the container ship market recovers. Following its refinancing in August it is on relatively stable financial footing, and the cash flows are strong. The fleet is relatively young and the ships are of a varied size. DAC further has a relatively varied counter-party exposure, which helps reduce risk. DAC is the most leveraged of its peers, which results in it being the most sensitive to changes in the TC rates, interest rates and second-hand values. This of cause works both ways.
I doubt we will ever see 2007 pps of +30 again, as the share count has more than doubled and +30 was rich to begin with -- but less will also do.
I will try to publish another article where I compare SSW, CMRE, GSL and DAC separately.
Disclosure: I am long DAC, SSW, CMRE.