Michael Demaray

Global Ship Lease: A Fairly Valued Stock

"At unchanged residual values there wont be much if any free cash to pay as dividends unless the value of ship to loan covenant is waived/cancelled. But mind you this just subtracts from the final run off value."

The nature of the industry is such that as vessel values rise, credit terms will loosen thereby enabling a refinancing, which in turn will allow cash flows to be diverted to the equity holders. The impact on residual values is not the important part. So why is this important? Because if GSL is able to refinance under less restrictive terms than the current credit amendment -- its cash flow to equity (which is currently ~50% of the equity market value of the firm) can be diverted to shareholders via dividends/share buybacks etc. As you point out, paying out cash today subtracts from residual equity realized in the future. But this can't be so quickly dismissed. Time value of money is the crux of value for GSL as a dollar next year is worth substantially more than a dollar 15 years from now. In an extreme example, even if GSL holders have to pony up $580MM 15 years from now to pay off the outstanding loan balance when the ships are disposed of, they would make a fine return by receiving $50MM operating cash flows annually in the interim. This extremely crude example yields an NPV of a $232MM market cap at a 12.5% discount rate. This is meant to be illustrative, not accurate -- the timing of cash flows matters.

Assigning no probability to a refinancing scenario where shareholders can participate in the cash flow to equity materially sooner than disposal of the asset, in my mind ignores what is to my mind a more likely outcome than a continuation of the current situation.

I appreciate your analysis.