Image Credit: NafsGreen
Thesis: 3 Steps to Recovery & Dividends
We have been following Global Ship Lease (GSL) for years and after maintaining an avoid/bearish posture for years, the company finally became an interesting investment target in late-2018. Following the reverse split in early-2019, the price washed out, and it was time to buy. I believe GSL is an excellent investment over the next 9-12 months based on a three step thesis which culminates in a restoration of significant dividends.
We have already seen one of these steps (refinancing of 2020 debt) completed on 19 September and their recently concluded equity raise paves the way for the advanced refinancing of their high interest secured bonds. They have legacy bonds with a hefty 9.875% interest rate, which are eligible to be called after 15 November 2019. GSL has also secured credit facility amendments which allow them to restore dividends starting in 2020. I expect they will refinance their high interest bonds and then restore dividends by mid-2020.
- GSL Refinances their December 2020 Maturities (Complete)
- GSL Refinances their $340M 2022 Notes (In Progress)
- GSL Restores Dividends
- We Profit as GSL Moves Toward Comp Values
Company & Stock Overview
Global Ship Lease is a container leasing firm focused primarily on midsize tonnage with medium and long-term charters. Peers in their sector include Seaspan Corp (SSW), Costamare (CMRE), Capital Product Partners (CPLP), Danos Corp (DAC), and Navios Containerships (NMCI). I’ve covered GSL closely for years with private commentary on Value Investor’s Edge and I’ve met with management several times including at Marine Money in June. I was previously very bearish on the stock, dating back to Fall 2015 in the mid-$40s.
Source: Seeking Alpha, J Mintzmyer GSL Report, 22 September 2015
The stock ended up cutting the dividend as predicted. As the containership market worsened, the company fell further into dire straits. GSL survived and began to turn the corner in early-2018. We finally saw a clear breakout transaction in November 2018 as GSL merged with the private Poseidon Containers fleet. Stock prices were weak and GSL was forced to complete a 1-for-8 reverse split. Reverse splits are notoriously terrible for share prices, but it was an absolute gift for those looking to buy for cheap.
Source: Google Finance, GSL 5y Price Chart, annotations added
Because of the market disconnect, we were able to buy shares at less than one-third of adjusted net asset value (“NAV”) while the company was in the best financial shape of the past 5 years, perhaps even in the best shape in company history. GSL has been delivering nonstop good news during 2019, but the market has been mostly snoozing.
Source: Global Ship Lease, 2019 Press Releases, markings added
While CEO Ian Webber and the rest of the team at GSL certainly deserve credit for turning this ship around, the midsize containership markets are at five-year highs, so they have been able to lock in major deals for their fleet. Meanwhile, the current supply situation for midsize containerships is the best we’ve seen in decades. My associate James Catlin has recently reviewed the bullish backdrop we’re seeing now in an exclusive report posted on 7 September.
Source: Harper Peterson, Harpex Index, 5y Chart
GSL’s balance sheet was still in tight shape, so they needed a bit more equity to ensure a full refinancing in the next few months. They recently raised $48M at $7.25 as part of a placement with heavy private investment and insider buying. Following this offering, I estimate that GSL will have approximately 30.5M shares outstanding, for an estimated market capitalization of just over $230M. They also have $35M in par value of preferred equity (GSL-B). GSL don’t currently offer a dividend, but I expect this will change by mid-2020.
Isn’t the US-China ‘Trade War’ killing shipping?
Not really. Shipping companies are making the best profits we’ve seen in years even if the stocks have been slower to respond (read more about the huge disconnect here). Thus far, 2019 has been a very profitable year for nearly all shipping companies.
I’ve written more about the dichotomy between actual shipping performance and poor market sentiment several times over the past year. I recommend a review of several of these reports along with sector-specific macro commentary by James Catlin to discover how these companies are performing and what the overall demand/supply prospects look like. All of these following reports are relevant to the broad shipping sector as well as to company-specific prospects for GSL and its containership peers:
Why GSL? Three Steps to Big Profits
Our primary investment thesis for investing in GSL is a three-step series of catalysts. This was originally a private idea on Value Investor’s Edge, but I’ve recently discussed the prospects, starting with the Q2-19 conference call.
Source: Seeking Alpha, GSL Q2-19 Transcript, highlights added
Step 1: Refinance the 2020 Debt, Complete (19 Sep)!
GSL announced their new financing transaction on 19 September, just as they guided, and actually beating my expectations by several months.
Source: Seeking Alpha, GSL Q2-19 Transcript, highlights added
This deal rolls 6 previous facilities into two new ones, shifting 4x 2020, 1x 2021, and 1x 2023 maturities into two maturities in September 2024. The entire amount of the debt facility has been rolled and amortization remains smooth without the need for additional cash sweeps.
The slide below shows this transition (see blue tinted lines).
Source: Global Ship Lease, Sep 2019 Presentation, Slide 27, marks added
GSL was able to borrow a total of $268.5M against 9 vessels with a current estimated charter-free market value of just $293.5M (91.5% D/A!). This is because GSL also has significant value in their secured charters which have continued to improve despite the fact that the ships themselves remain at weaker valuations due to poor market sentiment.
Furthermore, GSL capitalized on the improving markets to reduce encumbered vessels from 12 ships to 9 ships, allowing for the “Tasman,” “Dimitris Y,” and “Ian H” to now be fully debt-free. All three of these ships are fixed on profitable charters to a minimum of mid-2021. They carry a current market value of roughly $27M.
Source: VesselsValue, Global Ship Lease Fleet Valuations, 23 September
Step 2: Refinance Sky-High “Senior Secured Notes”
The next logical step for GSL is to refinance their 9.875% fixed senior secured notes. I’ve been pressing management on this for the past year and they have confirmed the bonds are eligible to be called in November (reference page 58-59 of the latest annual report filing) and this would be their priority focus after resolving the 2020 debt.
The current $365M financing package is secured by 18 of GSL’s legacy vessels with a combined current charter-free market value of about $217M.
Source: Global Ship Lease, September 2019 Presentation, Slide 27
These market values are extremely depressed and don’t reflect credit for GSL’s charters including the 11k TEU “CMA CGM Thalassa” which is fixed until Q4-2025 at $47,200/day, or the pair of 8.6k TEU vessels which are earning roughly $25M EBITDA apiece over the next five years.
I previously expected that GSL will need to add additional collateral to a new financing package (i.e. such as those 3 recently unencumbered vessels worth $27M) and also pay down about $60-$80M in cash. I believe the recent equity raise was geared towards exactly this purpose and massively improves the odds of a near-term refinancing.
GSL secured LIBOR + 3.00% on their recent refinancing. I suspect this new facility will land between LIBOR + 3.00% to +3.50% given the tighter collateral packaging. With the 3M LIBOR currently at 2.11%, this would be a mid-range cost of 5.36% (2.11% + 3.25%) on about $270M versus 9.875% on $340M, or savings of over $19M/yr (over $0.60/sh).
Step 3: Resume Dividend Payments, Mid-2020?
GSL has already achieved covenant amendments (read page 5-6) which allow them to resume dividends in 2020 as long as they have audited trailing profits. This initial filing was posted in December 2018, which we picked up on immediately, but of course there was no point to buy ahead of the reverse.
On the latest conference call, and in related discussions with management, I confirmed they can begin payments in 2020; however, it does require audited financials, so it would be late-Q1 at the earliest. They can pay up to 50% of net profits. As of Q2-19, they have earned $18.85M. Even with just $35M of total profits for 2019, they could still pay nearly $0.60/sh in dividends. The more GSL refinances, the higher their profits will go (due to lower interest costs)- their mid-2020 annualized run-rate profits could be over $60M (nearly $2/sh). We don’t yet know their payout level for 2020, but I expect we’ll see continual q/q improvements starting in Q3-19.
Strong Backdrop: Improving Charter Backlog
GSL has added some significant charter coverage into improving rates over the past year. They now have $835M of revenue backlog with an average size-adj duration of 2.9 years. The bulk of their near-term maturities are in the smaller feeder classes where current rates are roughly mid-$9k to mid-$10k/day (similar to slight improvement from current rates).
They have 1x 8.6k ship expiring mid-2020 at $18k/day (current rates about $30k/day) and 2x 9k TEU ships expiring mid-2020 at $39.2k/day (current rate mid-$30s, sistership fixed Q1-19 for 3-years at $34k/day).
Source: Global Ship Lease, September 2019 Presentation, Slide 7
Altogether I expect GSL’s revenues to remain stable or slightly increase on balance through 2021-2022 while interest expenses are poised to decline significantly, leading to a surge in net profits.
Markets are significantly improving and GSL has capitalized, adding $129M in backlog EBITDA just in the past 9 months.
Source: Global Ship Lease, September 2019 Presentation, Slide 9
More Vessel Deals Coming?
GSL has been able to take advantage of peers’ distressed situations by adding some additional containership tonnage for cheap. In late-May, GSL added 3 vessels for significantly less than three-year guaranteed EBITDA plus residual scrap value, which virtually insures a fat profit while giving GSL all the potential tail profits.
Although I expect GSL to use the bulk of their recent raise for a lucrative refinancing, we might see some vessel acquisition deals as well. Stay tuned!
Adj. Net Asset Valuations
I currently value GSL at an adjusted net asset value (“NAV”) in the low-$13s. This includes direct charter-free vessel valuations of $876M (provided by VesselsValue), plus charter premiums of approximately $300M, offset by nearly $740M in net debt and $35M in preferred equity.
Following their recent equity offering, GSL has approximately 30.5M common shares outstanding.
In their Q1-19 earnings presentation, shared 7 May 2019, GSL estimated their charter adjusted NAV at $21.70/sh. This was prior to the recent equity raise and also was based on a more aggressive charter premium estimate and a more generous broker ship valuation. Prior to their equity offering, I estimated GSL’s NAV in the mid-$15s, now the low-$13s.
Source: Global Ship Lease, May 2019 Presentation, Slide 7
Risks to the Thesis
The primary risk to the GSL thesis is a longer duration prior to dividends. Investors are naturally going to be upset if it takes them longer than mid-2020 to refinance the 9.875% bonds and re-initiate dividends. Therefore if GSL is unable to close the bond refinance in a timely fashion or if they decide to remain more conservative with their dividend policy, we could see a retraction in share price valuations.
Another major related risk would be worsening sentiment from banks. GSL clearly has a strong credit favorability as evidenced by their successful refinancing of their 2020 maturities just 2 weeks ago. However, if the US-China rift deepens or if the global economy turns weaker, banks might be reticent to underwrite new loans. GSL could technically (per their covenants) resume dividends without refinancing the 9.875% bonds, but it would be ill-advised, and I strongly expect them to fix the bonds first.
CMA CGM is one of GSL’s largest counterparties and also one of their largest shareholders (roughly 10% post raise). CMA CGM has a fairly strong credit profile, so I’m not particularly concerned about their charters at this point. However, a handful of these, particularly 5 of their Panamax vessels (3x 4k TEU, 2x 5k TEU), are fixed wildly above market levels and if CMA CGM were to encounter serious financial difficulties, these charters could be at risk.
Finally, if market rates for containerships collapsed due to shifting fleet dynamics or a weakening global environment, GSL’s future fixtures would undoubtedly be at lower rates, calling into question the sustainability of future dividend payouts. Of primary note are the 9k TEU “Anthea Y” and “Maira XL” vessels, which are fixed at $39.2k/day and expire in mid-2020. In the current market environment, these rates should be continued at similar levels. If rates reverted back to multi-year lows, future contracts could dip into the teens.
In summary, the primary risks include:
- Timing: For both the refinancing and dividend restoration
- Global economic strength: For both container rates & refinancing ability
- Containership markets: Rate risk for future contracts
- CMA CGM exposure: Potential credit risk in a very bad market
Conclusion: Turnaround Complete, $12.00 ‘Fair Value’
I’ve followed GSL for over six years and have been on both sides of the stock depending on market sentiment and underlying prospects. They hit a (fully predictable) rough patch from mid-2015 through mid-2018, but management has turned the ship around and they are clearly set to continue improving their results and prospects into 2020 and beyond.
My current ‘fair value estimate’ is $12/sh, which is a further discount of 20% to my conservative estimate of adjusted NAV in the $13s. I’ve incorporated this discount to account for potential delays in refinancing and dividend payouts. If GSL is able to complete a significant refinancing and launches strong dividends by mid-2020, then I believe share prices could perform significantly better.
Dividend paying shipping companies have typically traded at premiums to NAV. Peer Seaspan Corp (SSW) currently trades at nearly 2x of my estimate for example while Costamare (CMRE) trades slightly above NAV. This is likely because these firms have steady dividends and a highly regarded management team. Meanwhile GSL still trades at less than 60% adj. NAV, which is about one-third of SSW’s valuation.
As reviewed above, our investment thesis for Global Ship Lease is based on a four-step process:
- GSL Refinances their December 2020 Maturities
- GSL Refinances their $340M 2022 Notes
- GSL Restores Dividends
- We Profit as GSL Moves Toward Comp Values
Step 1 is complete and signs are pointing to Step 2 right around the corner, with first eligibility after 15 November 2019. I expect both Step #2 and Step #3 to be completed during the first half of 2020. I welcome a spirited discussion below and encourage as much engagement as possible.
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Disclosure: I am/we are long GSL, CPLP, NMCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I collaborate with James Catlin on a Marketplace service.