Global Ship Lease, Inc.
Q4 2013 Earnings Call Transcript

Published: 12 Feb 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Global Ship Lease Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call maybe recorded. I will now introduce your host for today’s conference, Ian Webber, Chief Executive Officer of Global Ship Lease. You may begin.

[Ian Webber:]

Thank you very much. Good morning everybody and thanks for joining us today. I am sorry for the shorter than usual notice for the call. We will come back to the reason for that later on. Hopefully, you have had a chance to have a look at the earnings release that we issued earlier today. And as normal, you have been able to access the slides that accompany the call. Slides 1 and 2 are the normal reminders that today’s call may include forward-looking statements based on current expectations and assumptions and are by their very nature, inherently uncertain and outside the company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section on our Annual Report on the Form 20-F, which was filed with the SEC last April. You can obtain the 20-F on our website or on the SEC’s. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We don’t undertake any duty to update forward-looking statements. And for reconciliations of non-U.S. GAAP financial measures, to which we will refer during this call, to the most directly comparable measures calculated and presented in accordance with U.S. GAAP, please refer to the earnings release that we issued this morning, which is also available at our website, www.globalshiplease.com. I’d like to start today’s call by reviewing the fourth quarter and the full year 2013 highlights. Then provide an overview of our fleet. I will make some comments on the industry, including our charter, CMA CGM. And then before handing over to Susan for her commentary on our financials, I will touch on our ongoing refinancing work stream. After brief concluding remarks, we will take questions. Let’s look at financial performance. Slide 3 shows our highlights for the fourth quarter and the full year. Our fleet’s fully chartered as you know performed as expected and enabled the company to continue to generate robust cash flow. For both the quarter and the full year, we achieved fleet utilization in excess of 99% for our 17 vessels. There was only one day of cost of fleet during quarter four and as a result we earned revenue of just over $36 million and generated adjusted EBITDA of $22.9 million. For the full year, with the total of just 28 days off-hire primarily related to plant drydockings in the first half, we generated revenue of $143.2 million and adjusted EBITDA of $91.5 million. As we have done for the past three years or so, we have used our reliable cash flow to further de-lever our balance sheet repaying $17.9 million of debt in fourth quarter. For total repayments, there were little over $230 million since fourth quarter of 2009. This focus on de-levering our balance sheet has brought our ratio of net secured debt to 2003 adjusted EBITDA down to 3.7 times. During the fourth quarter, we were able to proactively expense our loan-to-value waiver through to May 1, 2015, which insulates us from near-term volatility and asset values and allows us to focus on taking the business forward. Turning to Slide 4, this summarizes our financial results since the company commenced operations back in the first quarter of 2008. As normal, we show the Time Charter Index on top of the slide and our results in the bottom. And the Time Charter Index is volatile indicating what’s happening in the short-term charter market and there is some illustration over strength and weakness of the industry. The stability of our financial results is a result of our strategy focusing on long-term fixed rate charters and in our success in implementing that strategy. Our results have shown a high degree of consistency generating strong and predictable cash flows with fleet utilization at only 100%, because we were insulated from the volatility of the spot market, the changes that you do see between quarters are largely attributable to off-hire as a consequence of scheduled regulatory drydockings. As mentioned last quarter, we have deferred the one drydocking that was scheduled to take place in the fourth quarter of 2013 by instead carrying out an underwater inspection, which showed that the coatings, the paints on the whole was in satisfactory condition. As a consequence, we have the regulatory flexibility always contingent on vessel performance and on the existing whole coatings to defer the drydocking of that vessel the latter until 2016. Accordingly, we are running our two vessels scheduled to be drydocked for regulatory purposes this year 2014 and 2015, so that’s two in two years. Moving on to Slide 5, this shows our fleet and charter portfolio. The weighted average age of our fleet is now a little under 10 years, 9.8 years out of the total economic life of 30 years. Our time charter coverage has a weighted average remaining term of 6.5 years, which if you eliminate the two spot vessels, Orion and Aquarius, increases to 7.3 years. Contracted revenue amounted just over $900 million spread over those 6 to 7 years. And as we keep saying the long-term nature of our contracts give us stable sources of revenue for years to come, hence, my visibility on future cash flow. Turning to Orion and Aquarius two 4,100 TEU vessels, which have been in the short-term market for a while. CMA CGM gave us notice at the end of January that it reserved its right to redeliver these vessels as early as the first half of April this year, that’s six weeks or so away. We are currently evaluating our options for these vessels, including continuing to discuss the potential renewal of CMA CGM we will see where we get to. If we are unable to obtain the renewal of CMA CGM and that’s the real possibility depending on market conditions at the time of redelivery, we may decide to re-charter them to another charter, lay them up or sell them. We have made no decisions as of yet and as I have said we got six weeks to go before that we delivered at the earliest. Just – the current spot market rate environment is much the same as it was when we re-fix the vessels about a year ago last April. Today rates are between $6,000 to $8,000 a day, contingence on factors such as counterparty, detailed charter terms where the vessel is being positioned. Outside of these two vessels, which were accounted for approximately 4% of our revenue in 2013, we remain well insulated from volatility in the markets as we have no charter expirations, no other charter expirations until late 2016. While talking about our fleet, I just want to mention that one of our 2,200 TEU geared vessels, the Julie Delmas has suffered damage to one of her cranes in normal operations as far as we can tell. The vessel remains in service, which is good news. But as her operating performance has impaired, this is the largest of the three cranes onboard, we have agreed with CMA CGM to a pro rata reduction of charter hire to $10,000 a day until she is fully operational. The crane is currently being examined in detail. And we are assessing the repairs it requires, those could take as long as a few months depending upon the availability of spare parts. Clearly, we will share with you decisions we reach in respect of Orion and Aquarius on the first quarter earnings call and also provide an update on Julie Delmas crane. Moving to Slide 6, you can see our progress in using a steady cash flow to aggressively delever the balance sheet. Since we started paying down debt late 2009, we have repaid nearly 40% of the maximum outstanding. And with the extension of our existing loans of any waiver from December 2014 out to May 2015, on the same terms apart from the extended date, we continue to focus on repaying debt while seeking to enhance our capital structure. The next few slides, talk about the overall markets and current freight rate environments. Fundamentally the pictures little changed from previous calls. Slide 7, shows supply and demand since 2000 with a closer look on the right hand side at 2012 to 2015. This is normal all days. It doesn’t take account of slow steaming on the supply side, which has the effects of reducing effective capacity. Demand growth for 2013 is now estimated to have been around 5% with supply growth slightly ahead of this. Absent dollar factors such as the heavy focus of supply growth on larger vessels, on the current surplus of idle capacity which is around 4% of the fleet, a slightly more supply growth and demand growth would ordinarily be expected as the fleet has to grow for the stronger lead rate in container trade. However, the current surface capacity exacerbated by the seasonal downturn, always happens at this time of the year including effective Chinese New Year continues to exert downward pressure on short-term charter rates on asset values. That said, the forecast for 2014 and 2015 are encouraging and the demand growth is showing to exceed supply growth. Slide 8 reminds us in the pie chart on the left that the main trade lanes account for only 32% of global container trade. Main trade lanes being the big East-West arterial trades, Asia-Europe, Asia-North America, etcetera. So therefore 68% of container trades generated in the non-mainlane trades including most importantly interregional trades and primarily intra-Asia, which by itself is over a third of total container trade. Interestingly as the bar chart on the right hand side shows growth in the different trade groupings was much more balanced in 2013 at least according to the estimates for 2013 than in previous years.. However, you can see that the non- mainlane trades continue to grow a little more quickly than the mainlane trades. And as most containerized trade in the main – in the non-mainlane routes is counted on midsized ships and smaller, that’s the majority of Global Ship Lease’s fleet. Moving on to Slide 9, this shows the current order book to fleet ratio. It’s notched up ever so slightly since our last call it’s now 22% of standing capacity. Last, when we spoke it was 21%. However, contrast this ratio with the high 60% in 2007 that represented the legacy order book that we have to work through during the last five or six years of economic downturn. The slide also notes that some 4,400 TEU of capacity, all comprising vessels below 5,200 TEU so midsized and smaller were scrapped in 2013. That’s a record in terms of scrapping in a year. Just for this in context, 4,400 TEU equates to roughly 2.5% of today’s total fleets. More importantly, for us, with our focus on midsized ships and smaller, 5% of the fleet are 5,200 TEU and below. This record level of scrapping activity is driven in large measure by the financial distress of owners who have little option to perhaps disposal of the vessels by scrapping. Often in Germany, these owners and they simply don’t have the liquidity to continue to cover operating losses and crucially to cover the cost of any upcoming special surveys and drydockings. Slide 10, as we have done the four segments the fleet by vessel size. The chart on the left shows the continued focus of the order book on big ships, with the order book to fleet ratio for the very largest segments of 12,000 TEU and above vessels standing at 80% of today’s capacity. Conversely, the order book to fleet ratio for midsize and smaller vessels and here we categorize resources for that – sorry 7,600 TEU and below and no more than 8% outstanding capacity. So there is a massive distortion between smaller ships and larger ships. Why so? Line of companies who are driving the order book always driving new order book, particularly in the absence of capital for speculative investment both directly themselves by ordering vessels for their own balance sheets and through selected charter owners under long-term financing charters. The line of companies are seeking unit cost efficiencies in order to remain competitive resulting in the capital that is available to the industry right now being channeled towards this larger strategic tonnage. On the other hand, the order book for midsized ships and smaller more tactical tonnage, which is formally funded in large part by the German KG system, has been neglected. While the KG funding – and it’s worth remembering that roughly 30% of all containership capacity on the water today is KG owned has yet to be filled. The chart on the right of this slide makes the point that not only the midsized ships and smaller vessel segments seeing least investment, but there are also the segments containing the highest proportion of older tonnage, which I guess is those that you would expect with an industry that has constant and continuing upsizing the vessels of scale economies over the last several decades. This data suggests further scrapping, particularly when this economics distress among so many owners of this tonnage, but also perhaps paradoxically limited exposure to technological observations in these segments as the renewal rates of these vessels are so low. All of this is good news we believe for owners like GSL, with a focus on smaller and midsized tonnage. We contend as we have before the high scrapping levels with limited new ordering and deployments in aggregate largest trade lane groupings – largest trade lane groupings that are showing the most resilience during the economic downturn should drive an earlier than otherwise returned of supply demand tension and improved asset values and charter rates. In the meantime, GSL benefits from good mid to – near to mid-term charter coverage. As I said, 7.3 is on average, excluding the two spot vessels. On Slide 11, that’s line of company performance and spot freight rates, comparing these to an index for charter rates in the spot markets as we have done before. At the time of our last call, the line representing Asia and Europe freight rates was pretty much at an all-time mode. Now, three months later, general rates increases, which were implemented at the beginning of November through December driven up the freight rates in this trade lane, just my inspection it looks as if those rates may have more than doubled those that we saw in Q3. It remains to be seen how long this freight rate improvement can be maintained. And bear in mind, this is in the spot market for cargo not contracted rates, where a proportion of line of companies businesses will rest. Our CMA CGM specifically continues to outperform. Most of that is – vast majority of that is at the operating margin level, which in Q3 for them was 6.6%. And further following the improvements in liquidity, liquidity that we have mentioned before, $250 million of new equity earlier in the year, €400 million from the sale of their investments in terminal link, CMA CGM further improved liquidity by raising an additional €300 million of high yield bonds this last December. Our closer to home may continue to pay charter higher and full as of now, February 12, only one period of par is outstanding and that was due on the February 1. Before turning the call over to Susan, I just want to take a moment to provide you with an update on our efforts to increase the company’s financial flexibility. As I’m sure you are aware in December last year, we launched and then suspended $400 million high-yield offering the purpose of which was to refinance our existing credit facility to obtain more financial flexibility. We were well aware at the time that the funds table was tight and was a conscious decision to launch given that the markets were still receptive and the credit environment was good. We preferred to launch then rather than run the risk that market conditions would not be as favorable in the New Year. Unfortunately, we were simply timed out in December and unable to complete the process and they lead up to the holidays. That being said, we obtained extremely useful feedback from the market and remained convinced that the refinancing of this nature to terminate our existing credit facility and eliminate restricted maintenance covenants would give us the financial flexibility to use our operating cash flows to develop the business and consequently is currently the most appropriate way forward. To be prepared for opportunities to raise capital in the public markets when conditions are right, we pull forward our earnings call to ensure that we would have current financial information on file our Q3 2013 financial data (went stale) yesterday. So absent bringing forward the Q4 results, we wouldn’t be able to access public markets. As we seem to revitalize the company, we will, however, ensure that any capital markets action takes place on terms that are in the best interest of all of our shareholders. In the meanwhile, we continue to generate significant predictable cash flow and we will use that cash flow to aggressively delever our balance sheet and strengthen our financial position. I’d like to turn the call over to Susan now to comment on the financials.

[Susan Cook:]

Thank you, Ian. Please turn to Slide 13 for summary of our financial results for the three months ended December 31, 2013. We generated revenue of $36.1 million during the fourth quarter from a fully-charted fleet of vessels, down $0.1 million from revenue of $36.2 million in the comparative period in 2012. The decline in revenue is due mainly to reduced revenue for two vessels following charter renewals at lower rates since the expiry of the initial charters in September 2012 and offset by lower off-hire with only one unplanned off-hire day in the 2013 quarter. This 99.9% utilization in Q4 2013 compares to 99% in the same period in 2012. Following satisfactory completion of on float inspection on one vessel, there was no drydocking in the fourth quarter of 2013, with only two vessels scheduled to undergo drydocking in 2014 and none in 2015. Our vessel operating expenses were $11.7 million for the three-month period with an average cost per ownership a day of $7,511, up $148 per day or 2% over $7,363 for the comparative period of 2012. The increase is mostly related to repairs and maintenance partially offset by lower crew and lubricating oil costs. Interest expense excluding the effect of interest rate derivatives which do not qualify the hedge accounting for the three months ended December 31, 2013 was $4.5 million on average borrowings under our credit facility of $384.3 million and on the $45 million of preferred shares throughout the period. In the prior year period, interest expense was $5.1 million based on higher average credit facility borrowings of $436.8 million and preferred shares of $45 million. Our derivative hedging instruments gained the realize loss of $2.9 million in the three months ended December 31, 2013, with settlement of swaps in the period as current LIBOR rates are lower than the average fixed rates. This is lower than the $4.7 million realized loss in the three months ended December 2012, following the expiration of $253 million of swaps in March 2013 and further $50 million of swaps at the end of November 2013. Further, there was a $2.5 million unrealized gain in the fourth quarter 2013 for evaluation of the balance sheet position, given current LIBOR movements in forward curve for interest rates. This compared to a $4.7 million unrealized gain in the comparative period. Net income for the fourth quarter was $7.9 million including the $2.5 million non-cash interest rate derivative mark to market gain. For the prior year quarter, net income was $8.1 million after the $4.7 million non-cash interest rate derivative mark to market gain. Normalized net income adjusted for non-cash items was $5.4 million for the fourth quarter 2013 and $3.5 million for the comparable period last year. Slide 14 shows the balance sheet, key items as of December 31, includes cash at $24.5 million, total assets of $858.2 million, of which $817.9 million is vessel. The total debt was $411.3 million including the preferred and shareholders’ equity of $399.5 million. The total mark to market unrealized loss recognized as a liability on the balance sheet as of the end of the year was $21.3 million. Slide 16 shows our cash flows. The main items to mention are net cash provided by operating activity of $18.5 million in the fourth quarter and as mentioned earlier we have repaid the total of $17.9 million of credit facility that during the quarter leaving us with an outstanding balance of $366.4 million. I would now like to turn the call back to Ian for closing remarks.

[Ian Webber:]

Thanks Susan. Let’s now look at Slide 16 where we briefly summarized the company’s core strengths and reiterated our strategy for creating value for all of our shareholders. First, aside from the two vessels that may redeliver to us in April of this year and which gain account for any 4% of our total revenues. Our fleet is fully contracted through to late 2016, representing committed revenue of approximately $900 million. We have on average remaining term on these charters between 6.5 years to 7.5 years depending on whether you include or exclude the two short-term vessels. Therefore a high degree of visibility on our future cash flows all the while being insulated from near-term charter market volatility. Second, we have $303 million of interest rate swaps rolled off during 2013, which represents approximately $9 million of savings on an annual basis and substantially less drydocking in ‘13 I am looking forward into ‘14 and ‘15 than previously and consequently we should see continued strong cash flow. Thirdly, we took the opportunity to extend our loan-to-value waiver cover through until May 1, 2015. Fourth, we are continuing to apply our robust and steady cash flow through aggressively delver our balance sheet. And we got no exposure to financing or refinancing risk until 2016. So our refinancing is purely opportunistic. Finally, the Board and management remain committed to increasing our financial flexibility in a manner, which would be accretive to our shareholders and would allow us to add a great component to the business also being able to pay the dividend to our common shareholders. We intend to be ready to go to market when the conditions arise. We will owe to reassure you will only pursue such an action if its terms were in the best interest of shareholders. Finding such terms remains our priority. I would like to hand the call back to the operator now, who will explain the Q&A process.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Omar Nokta of Global Hunter Securities. Your line is open.

[Omar Nokta:]

Thank you, good afternoon. I just had a few questions, obviously nice to see the six-month extension on the LTV waiver. Just wanted to get a sense, I know you said on the call and in the press release that there was no apparently no cost, and I just want to confirm is that just – it was a simple extension at absolutely no change in cash sweep level or borrowing cost?

[Ian Webber:]

Yes, that’s it. Just December 1, 2014 and May 1, 2015.

[Omar Nokta:]

Okay, that’s not too bad. I guess I wanted to think about why do you think that means or how do you feel about being able to extend that further I know it’s obviously little early, but does that range the convictional that you might be able to extend that further into as we proceed another few months to extend that into 2016?

[Ian Webber:]

Well, I think we will think about (indiscernible) we are pleased that we have got over 12 months of protection from today. We need to see what happens to the market, asset values about potential refinancing and all of the rest of it to see what action we need to take down the track.

[Omar Nokta:]

Right. It sounded based on your comments that potential refinancing could be again on the near-term horizon, I know you didn’t specifically say that but bringing your earnings forward it seems to indicate maybe that’s the track you are on. This – getting the six-month extension does that at all change your thinking or how you are going to approach doing another deal especially when you compare it to what you launched in December. Has this extra six months, how has that changed your thinking on approaching the market with another deal?

[Ian Webber:]

Not at all frankly. I wouldn’t read too much into the extension of loan-to-value. We saw an opportunity given the refinancing to push the waiver date out and we took that opportunity and we are grateful to the support in our existing lenders. They could say an advantage to us if we work to returns to the high yield market with a reluanch or reactivation of the previous process of having a longer term waiver in our back pocket. So fundamentally it doesn’t change our approach to our balance sheet management there off.

[Omar Nokta:]

Okay. That makes sense. Basically you are still fully intent on sort of doing a recapitalization to some extent that you have in your back pocket this way, but that gives you the flexibility?

[Ian Webber:]

Yes, that’s right

[Omar Nokta:]

Okay, thank you. Just one thing I wanted to ask you about the vessel that underwent or is going through repairs you said that day rate is going to $10,000 for a few months, and it’s going to basically continuing operation the entire time, is that the expectation currently?

[Ian Webber:]

Yes, absolutely. Just currently it was a hedge rates I should speak is first on the $18,500 a day. The one crane that’s out of action is the largest crane it has the biggest bridge, it services 10 out of the 22 base on the vessel, which is approximately 45% if you do the simple math. So we have agreed a 46% charter hire reduction with it rounding for the period when the vessel is not completely performing as the spec. We set off to several months we are still assessing the repairs that are required if we need to have it manufactured, it doesn’t play very often and outstanding stocks of it then that will take a little while, but it’s always possible that the repairs could take less time. We are just being cautious.

[Omar Nokta:]

Okay. And then just one final one on the two vessels that may return to you in April, as you asses the market you did say that charter rates are generally in line, currently with what it’s currently receiving. Do you see if you will be – if needed to sell the vessels would you be able to sell them for a theoretical market value that’s different than scrap or in another words would you have the ability to sell them for a much better price than just simply scrap if you are forced to do so?

[Ian Webber:]

May be, not another significant margin little it will potentially this Panamax type vessels I know as you know in surplus right now we contend as we said on the call and we said previously that the supply demand tension should improve, quite lower over a couple of years as the supply growth is constrained, demand growth for these vessels improves because of our exposure to the midsized and smaller type freight lines. So the sort of things that we will think about in coming to a decision what to do on these vessels is what’s happening in the small charter market. At that time we need to make a decision what proceeds could we (indiscernible) we would sell them, what can we do with those proceeds. But coming back to your question it’s possible to sell and it’s sort of an ongoing concern for a little margin over time.

[Omar Nokta:]

Okay. Alright, well, that’s all for me. Thank you very much Ian.

[Ian Webber:]

Thank you

[Operator:]

Our next question comes from Chris Snyder of Sidoti. Your line is open.

[Chris Snyder:]

Hey, good afternoon guys

[Ian Webber:]

Hi Chris.

[Chris Snyder:]

My first question was just a follow-up on the ships those are at a service. I didn’t catch the name of the ship, could you just provide me with that?

[Ian Webber:]

She is the Julie Delmas.

[Chris Snyder:]

Okay. And you said it would be at service for two to three months, could you just kind of give that time which two to three months is the timeframe there?

[Ian Webber:]

Well, it could be up to several months, I have just said turning up the level of repairs that are required, but it’s obviously has no financial impact on Q4 total, but there will be reduced revenue in Q1 for sure. And possibly in Q2 depending on how long the crane is out of service that where we felt it is internally right to let you guys know that rather than bring this later on.

[Chris Snyder:]

Okay. And then…

[Ian Webber:]

The reduced level of hire started on February the 9th, so very recent, part of it is correct.

[Chris Snyder:]

Okay. My – I guess next question is kind of on the refinancing. Service is something you guys have given a lot of thought too, but maybe you could just provide some insight on to the rationale of why sell $400 million notes and as you guys proposed. What’s the argument against selling maybe $100 million or $150 million just enough to come into compliance while at the same time benefiting from the low interest rate on the credit facility?

[Ian Webber:]

Because fundamentally Chris, we want to eliminate maintenance covenants however which we have no control by and large. We want to remove the risk of loan-to-value from the business going forward otherwise we’ll always have that shattered behind us. As I’m sure you’re aware our high yield is governed by incurrence covenants. So to a large measure we can control our own destiny and we have thought long and hard about part repayments credit facility and exchange but improve terms and becoming compliant etcetera. That would require raising unsecured new money which of itself can be challenging.

[Chris Snyder:]

Okay, makes sense. And final question just kind of overall about this Panamax, Panamax containership market. I guess the market hasn’t seen its rates pickup I mean that we have seen in other shipping sectors. Just kind of wanting what your thoughts and the reason for that is and is this part of it cascading and if it is, do you think that that’s kind of run its course already?

[Ian Webber:]

Well fundamentally right I mean it picks up because there are too many of these ships on the water at the moment chasing employment. It’s a function of two things. It’s a function of the time of the year, Q4 and Q1 are seasonally weak. This business is not only cyclical, it’s seasonal as I’m sure you know Q4 and Q1 are seasonally weak and idle capacity when there is an excessive tonnage tends to peak in Q1. So there are Panamax vessels and other glasses as well obviously but if your question was on Panamax there are Panamax vessels that are seeking employment that keeps charter rates down. The other reason is the cascade, yes. There have been huge deliveries of big ships and at the top of the pyramid which is displaced tonnage etcetera and it takes time for the cascade to work through. And because there was some acceleration of deliveries of big vessels there hasn’t been enough time in the strong part of the year for the cascade to work through completely. Now we go back to what I said a number of times is that although in the near term that likely continued downward pressure on charter rates and charter rates and asset values and the midterm because of really low levels of supply growth for those – that tonnage and their deployment characteristics we think there should be an improvement. There has been an acceleration of stopping of the vessels in 2013 and in 2014 so far, 14 vessels we understand are Panamax type size have gone to break this in 2014.

[Chris Snyder:]

Yes.

[Ian Webber:]

That’s a lot.

[Chris Snyder:]

Yes. I agree that fundamental certainly point to improving rates over the next few years. That’s it all from me guys. Thanks for the time.

[Ian Webber:]

Yes that’s 5% of the Panamax fleet just to put into context 14 vessels in two months.

[Chris Snyder:]

Wow, okay.

[Operator:]

Thank you. Our next question comes from Mark Suarez of Euro Pacific Capital. Your line is open.

[Mark Suarez:]

Good morning, Ian.

[Ian Webber:]

Hi, Mark.

[Mark Suarez:]

Just to go back on I know you talked about the senior secured notes issued last December and you mentioned you were timed out. I’m wondering if you can give us more details as to what you mean by timed out, is that – you mean that literally or you have any other facts just maybe came into play that didn’t allow you to close that transaction last year?

[Ian Webber:]

Mark, I meant exactly what it says, we are out of time so to get the deal done. We were – we had just over a week actually which is ambitious, we recognized that, but we made a conscious decision to go ahead for the reasons I explained mainly that we didn’t want to take the risk that January would have been dialed. And for the first issue of senior secured notes which is unusual not unknown but is unusual. We just didn’t have enough time to go read on the cycle and it is a slightly as just with predecessors having this type of paper, but our portfolio managers just faired off for a one end break over the holidays. In January, look January opens as you know really robustly. If we hind-sighted one – if we had launched in January maybe we’ll got that deal done before the markets fell apart what two weeks ago, alternatively we could have been looking to try and price in all of the turmoil and over the last week of January and early February. So you can never really time it perfectly until you’ve done it.

[Mark Suarez:]

Got it. Now given that – given the state of the credit market today as you mentioned. Do you feel that maybe you can go into the market this quarter or would you rather wait maybe I should say time to market in the second quarter. What’s your sense as to the timeline as to maybe would you see an issue from new guys?

[Ian Webber:]

Well Mark as I’m sure you’ll understand I can’t speculate on that, that the high yield market as to most capital markets opens and closes pretty quickly, sometimes the window is short, sometimes they are longer. What we’ve focused on being here is getting as ready as we can to be able to access the market when we judge the conditions are right hence bringing forward this call by two or three weeks as I said to make sure that we’ve got current financial information out there.

[Mark Suarez:]

Got it. And okay, so just turning into that macro picture for a second. You talked about the KG market and its limited credit availability, we’ve seen that over the past for quite sometime actually. Have you seen an increased selling activity given that of second-hand vessels from these owners given that a lot of them are in financial distress since the last quarter that we – since the last earnings call if you will?

[Ian Webber:]

Yes, yes, we reckon that the source of most scrapped tonnage in 2013 and so far in 2014 has been from Germany. Bear in mind they own part of the charter fleet by capacity which is what more actually and yes they enhanced the charter fleet by capacity and so 30% with the group of the total fleet as well. So now they’re in distress, they’re financed by private individuals on the equity side, thanks that are on distress, they can’t raise extra capital and running out of liquidity, they’re being obliged to sell and we reckon that 35% to 40% of scrapping last year was out of Germany.

[Mark Suarez:]

Okay. So you feel that a lot of the sources or deals may potentially come from that market or what other sources you think that maybe now begin to start thinking about selling their second-hand tonnage?

[Ian Webber:]

Yes, I mean Germany certainly would be a source of transactions it has been seen to-date. We’ve also seen small scale (indiscernible) in these spectrums actually is between owners and liner operations to improve liquidity but retain access to tonnage so that through potential types of deal in the market.

[Mark Suarez:]

Got it. And just to go back to comment on Panamax vessels I think some – the last question regarding Panamax tonnage here. In terms of the demand if you’re looking out the demand type for second-hand tonnage and what particular vessel segments have you seen, have you seen any sort of activity pickups since last year in terms of particular vessel segments that maybe some of the owners are going after?

[Ian Webber:]

Not in terms of size but yes, I pervasively given one of the geared vessels is subject to tonnage to where it’s gearing or gear. It’s the geared sector that seems to have attracted quite a lot of interest for transactions within the mid-sized ships were smaller, asset class that we’ve explained and it seems to offer potential up term.

[Mark Suarez:]

Sure.

[Ian Webber:]

Upside rather over the next two, three years, geared vessels are even more constrained in the order book etcetera, etcetera.

[Mark Suarez:]

Okay.

[Ian Webber:]

Well, while we are talking about vessels, given a piece of paper just to clarify, when Chris Snyder asked the question about the scrapping activity of Panamax vessels, I said, today 12.5 – sorry 5% 14 vessels, that was wrong I am sorry, that’s been about 33 vessels scrapped in 2013 and year-to-date 14, that represents about 5% of the fleet. So it’s still significant of the Panamax fleet.

[Mark Suarez:]

Okay, great. That’s all I have for now. Thanks for your time as always, Ian.

[Ian Webber:]

Okay.

[Operator:]

Thank you. Our next question comes from Zach Pancratz of DRZ. Your line is open.

[Zach Pancratz:]

Good afternoon, Ian.

[Ian Webber:]

Hi, Zach.

[Zach Pancratz:]

We appreciate you guys moving up the earnings release and being proactive in trying to get this refinancing done. Just a couple of quick questions from me, I am curious if you have the numbers on what your earnings would have been or your net income would have been, had you not had interest rate swaps in close?

[Ian Webber:]

Yes. We just back out the two items in the income and expenditure for those line items. So we had the reported $32.5 million if we are doing it very quickly here, if we take off that game that they will be about flat about 32.

[Zach Pancratz:]

Okay.

[Ian Webber:]

Because the realized loss in the year was 14 million and the unrealized gain was 14.3 million as it happened. So it’s a loss.

[Zach Pancratz:]

Okay. And moving to the next question in the event, you guys are successful in refinancing, what are the impacts on those swaps? Will you guys have to take a loss on them or how does that all flow through?

[Ian Webber:]

We would more than likely have to take out the balance sheet liability, i.e., pay them down, they are secured on the same assets as the underlying bank debt and it’s effectively a further loan that have to pay off about $20 million, $21.5 million at December 31.

[Zach Pancratz:]

Okay. So, in the event, I mean I know you guys are pursuing this, but you would have been nothing, the cash flow benefit that you will get from the interest rate swaps rolling off would be no longer if you wouldn’t fall through with the new financing?

[Ian Webber:]

Yes.

[Zach Pancratz:]

Okay. That’s all I have. Thank you and best of luck.

[Ian Webber:]

Thank you very much.

[Operator:]

Thank you. (Operator Instructions) Thank you. Our next question comes from Charles Ronson of Northeast Securities. Your line is open.

[Charles Ronson:]

Hi, we haven’t spoken before. I have a question for you perhaps I would like some clarification of comments on chart 6, you have I think 8 ship vessels which CMA CGM has reserved right to redeliver, that means that they can reject the lease?

[Ian Webber:]

No, you are looking at some – the bar chart showing our 17 vessels.

[Charles Ronson:]

Yes, it’s Page 5 actually.

[Ian Webber:]

Yes. It’s only the top two vessels that under the contract say CMA CGM can…

[Charles Ronson:]

Okay.

[Ian Webber:]

As early as the first half of the April, the 8 vessels that you are talking about, the 8 vessels have firm contracts, four of them through to August-September 2016 and four through August-September 2017 at the earliest.

[Charles Ronson:]

Okay.

[Ian Webber:]

There is no option for the CMA to cancel these contracts early or for us to cancel the contracts early.

[Charles Ronson:]

No, of course not.

[Ian Webber:]

So it’s only the top two vessels that have been, they are first finding their chances expired in September 2012 we renewed for eight months to May 2013 and renewed for further year or so to early April 2014 and we will see what we can do with them as we discussed.

[Charles Ronson:]

Okay, thank you very much. It was my misreading of the chart then.

[Ian Webber:]

No problem, happy to clarify.

[Charles Ronson:]

Okay.

[Operator:]

Thank you. I am not showing any further questions in queue. This does conclude the call for today. Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

[Ian Webber:]

Thanks everybody.