Global Ship Lease(GSL) - 2018 Q4 - Annual Report

PART I Key Information This section presents key five-year financial data and outlines significant business, industry, and stock-related risks Selected Financial Data Summarizes five years of financial data, highlighting fluctuating revenues and the impact of the Poseidon Transaction Selected Financial and Operational Data (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Time charter revenue | $157.1M | $159.3M | $166.8M | | Impairment of vessels | ($71.8M) | ($87.6M) | ($92.4M) | | Operating (loss) income | ($10.3M) | ($15.4M) | ($20.7M) | | Net (loss) income | ($57.3M) | ($74.2M) | ($65.1M) | | Net (loss) available to common shareholders | ($60.4M) | ($77.3M) | ($68.2M) | | Net cash from Operating Activities | $47.7M | $66.9M | $71.6M | | Total assets (at period end) | $1,233.5M | $675.9M | $777.2M | | Total debt (at period end) | $877.2M | $398.5M | $419.9M | | Number of vessels (at period end) | 38 | 18 | 18 | - On November 15, 2018, the company completed a strategic combination with Poseidon Containers, acquiring 19 additional vessels (net of one vessel sold in December 2018), which significantly impacted the 2018 year-end financials[29] Risk Factors Details significant risks from the Poseidon integration, charterer dependence, debt, and industry volatility - Business Risks: - Poseidon Transaction: The company may not realize all anticipated benefits from the strategic combination with Poseidon Containers, and the integration places significant demands on management and systems[27][30] - Charterer Dependence: The business is highly dependent on charterers, particularly CMA CGM, for its operating cash flow, and a failure by charterers to fulfill obligations would materially harm financial results[31][33] - Substantial Indebtedness: As of December 31, 2018, the company had significant debt, including $340.0 million in 2022 notes and $506.3 million in secured debt from the Poseidon fleet, which could limit operational flexibility[49][50] - Vessel Value Fluctuations: Vessel values are volatile and can lead to losses on disposal or significant impairment charges, which have been recognized in 2018, 2017, and 2016[57][59][62] - Industry Risks: - Cyclicality: The container shipping industry is cyclical and volatile, influenced by global economic conditions, trade patterns, and the supply-demand balance for vessels[90][91] - Trade Protectionism: Increased trade barriers, particularly involving the US and China, could harm customers' businesses and reduce demand for shipping services[95][96] - Regulatory Compliance: New environmental regulations, such as the IMO 2020 sulfur cap and ballast water management rules, require significant capital expenditures and may increase operating costs[132][134] - Stock Risks: - Dividend Uncertainty: The company is not currently paying dividends on common shares, and future payments are not guaranteed, being subject to board discretion, debt covenants, and financial performance[138] - Share Price Volatility: The stock price may be volatile; the company received an NYSE notice for its share price falling below $1.00, leading to a one-for-eight reverse stock split in March 2019[145][146] - Concentrated Ownership: Affiliates of Kelso control a majority of the voting power (approximately 50.1%), which could lead to conflicts of interest and affect the trading price of the shares[45][537] Information on the Company Details the company's history, fleet expansion via the Poseidon Transaction, and operational framework History and Development of the Company Traces the company's formation in 2007 and its significant fleet expansion through the 2018 Poseidon Transaction - The company was formed in 2007 to purchase and charter back 17 containerships from CMA CGM[178] - A major strategic combination with Poseidon Containers was completed on November 15, 2018, adding 19 net vessels to the fleet[180] - As of December 31, 2018, the company owned 38 containerships with a TEU weighted average age of 11.0 years and a TEU weighted average remaining charter term of 2.5 years[181] Business Overview Provides a detailed overview of the company's fleet, chartering strategy, management structure, and regulatory environment Fleet Overview as of December 31, 2018 | Metric | Value | | :--- | :--- | | Number of Containerships | 38 | | Aggregate Capacity | 200,615 TEU | | TEU Weighted Average Age | 11.0 years | | Non-Weighted Average Age | 12.7 years | - The company's vessels are employed on time charters, where the owner provides the crew and covers vessel operating expenses, while the charterer pays for voyage costs like fuel[190][192] - Day-to-day technical ship management is outsourced to third parties, with the company anticipating a transfer of all technical management to Technomar during 2019[205] - The company is subject to significant environmental regulations, including the IMO's 2020 global sulfur cap and the Ballast Water Management Convention, which will require significant compliance costs[239][244] Organizational Structure Describes the company's holding structure, with each of its 38 vessels owned by a separate, wholly-owned subsidiary - Global Ship Lease, Inc is a Marshall Islands holding company, and each vessel is held in a separate wholly-owned subsidiary[287] - Vessel-owning subsidiaries are incorporated in the Marshall Islands (20), Cyprus (13), and Hong Kong (5)[287] Property, Plants and Equipment States that the company's only material properties are the vessels in its fleet, which serve as security for its debt - The company's only material properties are its vessels, which are used as collateral for its debt agreements[289] Operating and Financial Review and Prospects Provides management's analysis of financial results, liquidity, capital resources, and industry trends Operating Results Analyzes financial results, highlighting revenue drivers, significant vessel impairment charges, and critical accounting policies Results of Operations Comparison (2017 vs. 2018) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Time charter revenue | $157.1M | $159.3M | | Vessel operating expenses | $49.3M | $42.7M | | Impairment of vessels | ($71.8M) | ($87.6M) | | Operating Loss | ($10.3M) | ($15.4M) | | Interest and other finance expense | ($48.7M) | ($59.4M) | | Net Loss | ($57.3M) | ($74.2M) | | Net Loss available to Common Shareholders | ($60.4M) | ($77.3M) | - The decrease in 2018 operating revenue was mainly due to charter renewals on legacy GSL vessels at lower rates, partially offset by $15.9 million in revenue from the newly acquired Poseidon Fleet[332] - A non-cash impairment charge of $71.8 million was recorded in Q4 2018 for three vessels, following charges of $87.6 million in 2017 and $92.4 million in 2016[314][318] - Vessel impairment testing is a critical accounting estimate, with key assumptions including future charter rates, operating costs, and vessel residual values[298][309][310] Liquidity and Capital Resources Details the company's liquidity, cash flows, and significant increase in debt due to the Poseidon Transaction Consolidated Cash Flows Summary (2016-2018) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $47.7M | $66.9M | $71.6M | | Net cash provided by/(used in) investing activities | $24.3M | ($4.9M) | ($6.9M) | | Net cash used in financing activities | ($55.2M) | ($42.9M) | ($64.1M) | | Net increase in cash | $16.8M | $19.1M | $0.6M | | Cash at end of year | $90.1M | $73.3M | $54.2M | Indebtedness as of December 31, 2018 | Lender/Instrument | Amount Outstanding | | :--- | :--- | | 2022 notes (9.875%) | $340.0M | | GSL Citi Term Loan (LIBOR + 3.25%) | $34.8M | | GSL Hayfin Loan (LIBOR + 5.50%) | $8.1M | | Poseidon - DVB Bank (LIBOR + 2.85%) | $51.1M | | Poseidon - Credit Agricole (various) | $133.1M | | Poseidon - Blue Ocean (various) | $62.3M | | Poseidon - ABN AMRO Bank (LIBOR + 3.42%) | $62.2M | | Poseidon - ATB (LIBOR + 3.90%) | $17.1M | | Poseidon - Deutsche, CIT (Senior & Junior) | $180.5M | | Total | $889.2M | - The company has significant liquidity requirements, with minimum debt amortization of $64.1 million and interest payments of $67.8 million due in 2019[441] - The 2022 notes and the new secured term loan require the company to maintain minimum liquidity of $20.0 million at each quarter end[368] Trend Information Outlines key container shipping industry trends, including trade growth, supply discipline, and firming charter rates - Containerized trade growth is historically correlated to global GDP growth and was estimated at approximately 3.9% in 2018[447] - The vessel supply side has become more disciplined, with the orderbook-to-fleet ratio down to 12.3% overall and 3.8% for mid-size and smaller vessels[448] - Charter rates for 8,500 TEU vessels increased from lows of around $12,000 per day in Fall 2018 to around $21,000 per day in early March 2019[450] - The upcoming IMO 2020 emission control regulations are expected to reduce the effective supply of containerships due to scrubber retro-fitting and slower operating speeds[450] Tabular Disclosure of Contractual Obligations Summarizes the company's estimated future payments under fixed contractual obligations, totaling $1.132 billion Contractual Obligations as of December 31, 2018 (in millions) | Obligation | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $64.1 | $378.2 | $446.9 | $0 | $889.2 | | Interest on long-term debt | $67.8 | $104.8 | $33.4 | $0 | $206.0 | | Ship management agreements | $11.7 | $24.2 | $1.1 | $0 | $37.0 | | Total | $143.6 | $507.2 | $481.4 | $0 | $1,132.2 | Directors, Senior Management and Employees Outlines the company's leadership, compensation policies, board structure, and employee count Directors and Senior Management Lists the company's directors and executive officers and details their extensive industry experience Key Management Personnel | Name | Position | | :--- | :--- | | George Giouroukos | Executive Chairman | | Ian J. Webber | Chief Executive Officer | | Thomas A. Lister | Chief Commercial Officer | | Anastasios Psaropoulos | Chief Financial Officer | Compensation Details executive and director compensation, including employment agreements, fees, and equity incentive plans - Aggregate compensation paid to key executive officers during 2018 was $2.3 million, including base salary, bonuses, and amounts related to the Poseidon Transaction[493] - Non-executive directors receive an annual fee of $105,000, with additional fees for committee service[494] - In February 2019, the board adopted the 2019 Equity Incentive Plan, reserving 1,812,500 Class A common shares for issuance[495][502] - The Poseidon Transaction triggered a "Change of Control" clause, causing all outstanding restricted share awards to vest in November 2018[516] Board Practices Describes the board's classified structure, its three primary committees, and director independence standards - The board of directors is classified into three classes, with each class serving a staggered three-year term[517] - The board has three main committees: Audit, Compensation, and Nominating and Corporate Governance[521] - The Audit Committee is composed of three independent directors, with one qualifying as the "audit committee financial expert"[523][524] Employees States the number of company employees, which increased to 11 as of year-end 2018 - As of December 31, 2018, the company had 11 employees, compared to 9 employees at the end of both 2017 and 2016[527] Major Shareholders and Related Party Transactions Discloses major shareholder ownership, highlighting Kelso's control, and details related party agreements Major Shareholders Details beneficial ownership, highlighting that affiliates of Kelso & Company control approximately 50.1% of the vote Beneficial Ownership of Common Shares | Beneficial Owner | Approximate Percentage of Outstanding Common Shares | | :--- | :--- | | George Giouroukos (Executive Chairman) | 19.80% | | Michael S. Gross (Director) | 13.52% | | All directors and executive officers as a group | 35.73% | | CMA CGM S.A. | 30.69% | | MAAS Capital | 10.42% | - Affiliates of Kelso & Company control approximately 50.1% of the voting power through ownership of Series C Preferred Shares and a voting agreement[537] Related Party Transactions Details agreements with related parties, including registration rights, board nominations, and management contracts - An Amended and Restated Registration Rights Agreement provides registration rights for major shareholders including affiliates of Kelso, CMA CGM, and George Giouroukos[542] - A Non-Compete Agreement with Executive Chairman George Giouroukos grants the company a right of first refusal to acquire any containerships that he or his controlled entities agree to purchase[547][551] - The company has technical and commercial management agreements with entities affiliated with the Executive Chairman (Technomar, Conchart) and shareholder CMA CGM (CMA Ships)[557][558][560] Management Fees Paid to Related Parties (2018) | Related Party | Service | 2018 Fees Paid | | :--- | :--- | :--- | | Technomar | Technical Management | $723,000 | | CMA Ships | Technical Management | $967,000 | | Conchart | Commercial Management | $222,000 | Financial Information Covers legal proceedings, dividend policy, and references the full consolidated financial statements Consolidated Statements and Other Financial Information Reports no significant legal proceedings and outlines the dividend policy for various share classes - The company has not been involved in any legal proceedings that have had or may have a significant effect on its business or financial position[567] - The declaration and payment of any dividend on common shares is at the discretion of the board of directors and is subject to restrictions under debt agreements and Marshall Islands law[572] - Holders of Series B Preferred Shares are entitled to cumulative dividends at a rate of 8.75% per annum, payable quarterly when declared[573] Additional Information Details the company's corporate framework, share rights, and material U.S. and Marshall Islands tax implications Memorandum and Articles of Association Outlines the rights and preferences of the company's share classes, particularly the Series B and Series C Preferred Shares - Series B Preferred Shares: Have a liquidation preference of $2,500 per share, carry a cumulative dividend of 8.75% per annum, and are redeemable at the company's option on or after August 20, 2019[583][584] - Series C Preferred Shares: Are convertible into an aggregate of 12,955,187 Class A common shares and carry significant voting power, with each share having 38.75 votes[585] Taxation Summarizes material U.S. and Marshall Islands tax consequences, focusing on the Section 883 exemption and PFIC risk - The company expects to qualify for the Section 883 exemption, which exempts its U.S. source shipping income from U.S. federal income tax[598] - A significant risk to the Section 883 exemption is the "5% Override Rule," which could be triggered if 5% shareholders own 50% or more of a class of stock[605][606] - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would subject U.S. shareholders to a disadvantageous tax regime[619][622] - The company and its subsidiaries are not subject to income, capital gains, or other taxation under current Marshall Islands law[636] Quantitative and Qualitative Disclosures About Market Risk Analyzes the company's exposure to market risks, primarily interest rate fluctuations on its floating-rate debt - The company's primary market risk is interest rate risk from its floating-rate borrowings, with $510.7 million in floating rate debt as of December 31, 2018[642][644] - Sensitivity Analysis: A hypothetical 1% increase in LIBOR would reduce the company's annual net income by approximately $5.1 million[644] - Foreign currency exchange risk and inflation are not expected to have a significant impact on the company's financial results[645][646] PART II Controls and Procedures Confirms management's conclusion on the effectiveness of disclosure and internal controls over financial reporting - Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of December 31, 2018[654][655] - Management's annual report on internal control over financial reporting concluded that these controls were effective as of December 31, 2018, based on the COSO framework[656][658] PART III Financial Statements Contains the complete audited consolidated financial statements and accompanying notes for the past three fiscal years - This section includes the full audited consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, along with the auditors' reports[682] - The financial statements include: Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Cash Flows, Consolidated Statements of Shareholders' Equity, and Notes to the Consolidated Financial Statements[682][721]