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.

Global Ship Lease: A Fairly Valued Stock

Are you using a Free Cash Flow to Firm model with a WACC and backing out residual debt, or are you using a Free Cash Flow to Equity model and using an equity discount rate? If using a FCFE model, are you assuming GSL's intrinsic value is based solely on the current credit facility amendment recently agreed upon, or do you have an upside scenario factored in where the company refinances in the interim (one year, two years, three years from now) and the FCFE shifts?

Sounds like your version is a run-off model and in such a scenario I would not disagree with your conclusions, but if financing markets re-open there is a scenario where GSL starts diverting cash to shareholders much quicker which would significantly change the value of GSL. The run-off scenario which you describe is the second-worst outcome, in my opinion, next to a CMA CGM bankruptcy. A static run-off, however, is not a high-probability scenario as financing markets will certainly re-open, shipping volumes will recover and vessel values will rise. The clincher of course is the timing. I think your conclusions demonstrate that GSL is fairly valued today if it simply lets its current book of business wind-down over time.

Global Ship Lease: Heads I Win, Tails I Don't Lose Much

CMA CGM had over $1B in cash at the end of Q1. Financials are posted on Bloomberg.


On Aug 12 06:19 AM Dalrymple wrote:

> CMA stopped working with the rating agencies at the beginning of
> summer after its credit got downgraded. They decided not to "supply
> information" to them anymore. I am sure that makes the bankers nervous
> about the GSL's stability of contracts. CMA allegedly has a very
> low level of cash reserves.
> internationalshippingn...

Global Ship Lease: Cash Flow More Important Than Dividends

Fair enough. If the dividends are canceled, I do expect to see some selling by those who purchased the stock for income. My point is, that the intrinsic value could remain the same.

Another scenario which I didn't spend time writing up but did do a little modeling on is...what happens if the credit line is restricted entirely, what is the company worth at that point based simply on the cash flows already in place? I did not include litigation expenses and other costs related to Zim and cancellation of newbuildings (I doubt CMA CGM would sue for not being able to close the purchase of the Berlioz...in fact they might finance it themselves via preferreds), my analysis concluded the intrinsic value was somewhere between $6 - 9 in such a scenario. So, let's just say it's $6. You're getting a double even if the covenant negotiation is unfavorable. Personally, I think you're being fairly compensated for the risk of entering pre-amendment, but I realize many don't feel comfortable until they see the "GSL amends credit agreement" headline.

Global Ship Lease: Undervalued and Undiscovered

Sargaso,

Great question about the class action. Looking at the facts, it's a difficult one to answer. The charge was under-accruing in order to inflate earnings. Of course outright accounting manipulation is always serious concern for shareholders. Was it malicious or an oversight?

Here's what we do know:

- Suit was settled for $1.25MM
- Suit was brought by Millberg Weiss (for the uninitiated, you can find out more about Milberg Weiss here: en.wikipedia.org/wiki/... )
- Company's shares immediately dropped on announcement of accrual error to $12.85 on August 9, 2004. Yet, one year later in October 2005, CP Ships was sold for $21.50.

Again, I think accounting manipulation is a bad thing, but it's difficult to tell if it was an error or malicious intent. The company broke the story itself. Clearly enterprise value was not permanently impaired.

Global Ship Lease: Undervalued and Undiscovered

I have been corrected on two points and I wanted to provide the update:

1. CMA CGM does not re-lease at year long rates, they sell the cargo space aboard the ship on a per container basis and thus are exposed to the spot market

2. The 100K for required capital improvements to the ship come, not in the form of cash reimbursement to GSL, but rather higher lease rates to cover the financing cost of the improvement

Global Ship Lease: Undervalued and Undiscovered

Thanks for the comment. I guess my response is:

1. Clearly container ship rates, just like dry bulk rates, are down precipitously at present. The advantage of GSL is that they are on fixed rates, not spot rates. The spot rate they need to be concerned about is the one in 2012 when their first ship comes up for renewal.

2. You're correct that loan-to-value ratios are a concern. To this I would only ask, what happens if they have a technical default on an LTV basis? What do you believe the odds are that the bank consortium is going to call the loan? Personally, I believe they are low. Stephen Moyer's "Distressed Debt Analysis" puts it better than I can in this footnote: "Technical default gives the lender significant leverage over the borrower, including, in certain circumstances, the right to demand immediate repayment. However, since acceleration of the debt would likely only lead to a payment default...which would then cause the loan to be characterized as nonperforming, the lender will usually work with the borrower to amend the agreement (for a fee of course) and "cure" the default.

In an environment where lenders are stretching the definition of non-performing to loans that are 120 days delinquent instead of 90 so they don't have to report bad non-performing numbers, I think what is more likely is that we'll see an amendment surface prior to any technical default in which GSL either gets LTV based on the cash flow stream of the ships and/or pays a higher rate, thus curing the default.

3. Lastly with respect to the "super-sized" ship comment, I can only assume you read the front-page Marketplace section article in today's Wall Street Journal titled "The Mega Containers Invade". Look closely at the picture. You'll see the name CMA CGM stamped on the side of that megaship. You'll also notice that CMA CGM is featured prominently as one of the companies embracing the megaships. CMA CGM is part of the arms race, but so long as they own a chunk of GSL, I doubt you'll see them abandon their leases.

On Jan 26 03:39 PM NotAsSmartAsTheWriterB... wrote:

> Well written by someone obviously keen on GSL and stock valuation
> methods.
>
> However analysis misses several important points.
>
> Firstly can GSL comply with loan covenants, particularly LVR (Loan
> to Valuation) when ship valuations are declining. GSL must provide
> regular valuations to its bankers.
>
> Secondly GSL has mainly panamax size vessels and the Baltic Exchange
> Panamax index shows no sign of recovery (Unlike the capsize index)
> www.investmenttools.co...

>
>
> Thirdly, the number 1 and 2 container shipping companies in the world
> have orders with shipbuilders for a new breed of super sized container
> ship, that will keep downward pressure on container hire rates once
> the financial crisis over.
>
> Food for thought!