Global Ship Lease, Inc 20-F for FY2021
Global Ship Lease, Inc. (GSL)
About this 20-F
Global Ship Lease, Inc filed this 20-F on March 24, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $447.95M
- up 58.4% from $282.81M a year earlier
- Net income
- $171.5M
- up 312.6% from net income of $41.56M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
OR
For
the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission
file number:
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Republic
of The
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel
number:
ian.webber@globalshiplease.com
(Name, Telephone, Email and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A Common Shares, par value of $0.01 per share | ||||
| Depositary Shares, each of which represents a 1/100th interest in a share of 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares, par value $0.01 per share | GSL-B | New York Stock Exchange | ||
| 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares* | N/A* | N/A* | ||
| 8.00% Senior Unsecured Notes due 2024 | GSLD | New York Stock Exchange |
| * | Not for trading, but only in connection with the registration of the Depositary Shares representing 1/100th interest in such shares of 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
43,592 Series B Cumulative Redeemable Perpetual Preferred Shares, par value of $0.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer | ☐ | ☒ | ||||
| Non-accelerated Filer | ☐ | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of effectiveness of its
internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.S. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| International Financial Reporting Standards as Issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes ☐
GLOBAL SHIP LEASE, INC.
INDEX TO ANNUAL REPORT ON FORM 20-F
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements in this Annual Report include, but are not limited to, statements regarding our disclosure concerning our operations, cash flows, financial position, dividend policy, the anticipated benefits of strategic acquisitions, and the likelihood of success in acquiring additional vessels to expand our business.
Forward-looking statements appear in a number of places in this Annual Report including, without limitation, in the sections entitled “Business Overview,” “Management’s Discussion and Analysis of Financial Conditions and Operations,” and “Dividend Policy”.
Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in “Risk Factors” in this Annual Report. The risks described under “Risk Factors” are not exhaustive. Other sections of this Annual Report describe additional factors that could adversely affect our results of operations, financial condition, liquidity and the development of the industries in which we operate. New risks can emerge from time to time, and it is not possible for us to predict all such risks, nor can we assess the impact of all such risks on our business or the extent to which any risks, or combination of risks and other factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, or “SEC,” after the date of this Annual Report.
PART I
Unless the context otherwise requires, references to the “Company,” “we,” “us,” “our” or “Global Ship Lease” refer to Global Ship Lease, Inc., “CMA CGM” refers to CMA CGM S.A., currently a major charterer and shareholder, “Poseidon Containers” refers to Poseidon Containers Holdings LLC and K&T Marine LLC, collectively, with whom we completed a strategic combination on November 15, 2018, Technomar Shipping Inc (“Technomar”) refers to our principal ship technical manager and ConChart Commercial Inc (“Conchart”, and together with Technomar, our “Managers”) refers to our commercial ship manager. For the definition of certain terms used in this Annual Report, please see “Glossary of Shipping Terms” at the end of this Annual Report. Unless otherwise indicated, all references to “$” and “dollars” in this Annual Report are in U.S. dollars. We use the term “TEU”, meaning twenty-foot equivalent unit, the international standard measure of container size, in describing volumes in world container trade and other measures, including the capacity of our containerships, which we also refer to as vessels or ships. Unless otherwise indicated, we calculate the average age of our vessels on a weighted average basis, based on TEU capacity.
On November 15, 2018, we completed a transformative transaction, acquiring Poseidon Containers’ 20 containerships, one of which, the Argos, was contracted to be sold, which sale was completed in December 2018, which we refer to herein as the “Poseidon Transaction”. References herein to the “GSL Fleet” are to the 19 ships that were owned by us prior to the consummation of the Poseidon Transaction and references to the “Poseidon Fleet” are to the net 19 vessels that were acquired by us upon consummation of the Poseidon Transaction.
All share and per share amounts disclosed in this Annual Report give retroactive effect, for all periods presented, to the one-for-eight reverse stock split of our Class A common shares effected on March 25, 2019.
| Item 1. | Identity of Directors, Senior Management and Advisers |
Not applicable.
| Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
| 1 |
| Item 3. | Key Information |
A. Reserved
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
The risks and uncertainties discussed below could materially and adversely affect our business, financial condition and results of operations and the market price of our securities. Our business, financial condition and results of operations and the market price of our securities could also be materially adversely affected by other matters that are not known to us or that we currently do not consider to be material risks.
Risk Factor Summary
| · | We are dependent on our charterers and other counterparties fulfilling their obligations under agreements with us, and their inability or unwillingness to honor these obligations could significantly reduce our revenues and cash flow. |
| · | Our growth depends on continued growth in the demand for containerships, our ability to purchase additional vessels and obtain new charters. We will require additional financing to be able to grow and will face substantial competition to purchase vessels. |
| · | Should we expand our business or provide additional services to third parties, we may need to improve our operating and financial systems, expand our commercial and technical management staff, and recruit suitable employees and crew for our vessels. |
| · | Our third-party ship technical and commercial managers, including Technomar, and Conchart are privately-held companies and there is little or no publicly available information about them. |
| · | Due to our lack of diversification, adverse developments in the containership business could harm our business, results of operations and financial condition. |
| · | The volatile container shipping market and difficulty finding profitable charters for our vessels upon their expiry. |
| · | Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry. |
| · | Despite our indebtedness levels, we may be able to incur substantially more indebtedness. This could further exacerbate the risks associated with our substantial indebtedness. |
| · | Our ability to comply with various financial and collateral covenants in our credit facilities. |
| · | Vessel values may fluctuate, which may adversely affect our financial condition, result in the incurrence of a loss upon disposal of a vessel or increase the cost of acquiring additional vessels. |
| · | We must make substantial expenditures to maintain our fleet, meet new regulatory requirements, meet commercial requirements or to acquire vessels. |
| · | As our fleet ages, we may incur increased operating costs beyond normal inflation, which would adversely affect our results of operations. |
| · | We are exposed to volatility in, and related to the discontinuance of, LIBOR and to exchange rate fluctuations. |
| · | Our insurance may be insufficient to cover losses that may occur to our property or result from our operations. |
| · | We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law. |
| · | We rely on our information systems to conduct our business, and failure to protect these systems against security breaches, or the failure or unavailability of these systems, could adversely affect our business and results of operations. |
| · | Our growth and long-term profitability depend mainly upon growth in demand for containerships, the condition of the charter market and the availability of capital. The container shipping industry is cyclical and volatile. |
| 2 |
| · | Our financial and operating performance may be adversely affected by global public health threats, such as and including the outbreak of COVID-19. |
| · | A decrease in the export of goods or an increase in trade protectionism will harm our customers’ business and, in turn, harm our business, results of operations and financial condition. |
| · | The current state of the world financial markets, and economic and geopolitical conditions and conflicts could have a material adverse impact on our results of operations, financial condition and cash flows. |
| · | Increased competition in technology and innovation could reduce our charter hire income and our vessels’ values. |
| · | If our vessels call on ports located in countries or territories that are the subject of sanctions or embargoes imposed by the United States government, the European Union, the United Nations, or other governments, it could lead to monetary fines or penalties and have a material adverse effect on the market for our securities. |
| · | Governments could requisition our vessels during a period of war or emergency without adequate compensation, which under most of our time charter agreements would permit the customer to terminate the charter agreement for that vessel. |
| · | Compliance with safety and other vessel requirements imposed by classification societies may be costly and may adversely affect our business and operating results. |
| · | We are subject to regulation and liability under environmental laws that continue to develop and could require significant expenditures and affect our cash flows and net income. |
| · | Increased inspection procedures, tighter import and export controls and new security regulations could cause disruption of our containership business. |
| · | Our operating income could fail to qualify for an exemption from U.S. federal income taxation, which would reduce our cash flow. |
Risks Relating to Our Business
Operating Revenue Risk
We are dependent on our charterers and other counterparties fulfilling their obligations under agreements with us, and their inability or unwillingness to honor these obligations could significantly reduce our revenues and cash flow.
Payments to us by our charterers under time charters are, and will continue to be, our sole source of operating cash flow. We are consequently dependent on the performance by our charterers of their obligations under the charters. The container shipping industry is cyclical and, whilst financial performance improved from time to time, suffered an extended cyclical downturn lasting from the Global Financial Crisis in 2008/2009 through 2016, with freight rates, charter rates, asset values, and liner operator earnings under pressure due to oversupply of container ship capacity. Industry conditions improved from 2017 through 2019, albeit with some weakness in short term market charter rates in the second half of 2018. The compound annual growth rate of containerized trade volumes from 2010 through 2019 was 3.8%. In the first half of 2020 global containerized trade volumes contracted sharply due to the COVID-19 pandemic. However, volumes improved in the second half of the year, resulting in estimated negative growth of approximately 1.9% for the full year. Demand growth accelerated in 2021 and is estimated to have reached 7.1%. This rapid growth in demand, combined with bottlenecks and congestion in the global supply chain, further tightened capacity - driving earnings in the sector to historic highs. These dynamics have continued in early 2022, with the global containership fleet close to full employment. However, significant uncertainty remains concerning the longer-term impact of COVID-19 upon container shipping and the macro-economic environment in general. Similar uncertainty exists regarding the broader impact of the conflict in Ukraine and other geopolitical tensions, such as those surrounding Taiwan. Furthermore, the recent hostilities between Russia and Ukraine, in addition to sanctions announced on February 22, 2022 by President Biden and several European leaders against Russia and any forthcoming sanctions, may also adversely impact our business, and the escalation of conflicts between Russia and Ukraine may lead to further regional and international conflicts or armed action. It is possible that such conflict could disrupt supply chains and cause instability in the global economy. Equally unpredictable is the impact these uncertainties may have upon our charterers’ operations and cash flows, and their payment of charterhire to us. If we lose a time charter because the charterer is unable to pay us or for any other reason, we may be unable to re-deploy the related vessel on similar terms or at all. Also, we will not receive any revenues from such a vessel while it is un-chartered, but we will be required to pay expenses necessary to maintain and insure the vessel and service any indebtedness on it.
Whilst there were no delays in receiving charterhire payments in 2020 or 2021, we have previously experienced, from time to time, delays in receiving charterhire payments from some of our charterers, which under the charter contracts are due to be paid two weeks in advance. As of December 31, 2021, no charterhire payments were outstanding.
| 3 |
If any of our charterers ceases doing business or fails to perform their respective obligations under their charters with us, our business, financial position and results of operations could be materially adversely affected if we face difficulties finding immediate replacement charters, or if such replacement charters were at lower daily rates and for shorter durations. If such events occur, these events may give rise to uncertainty about our ability to continue as a going concern. Please also see “—We may be unable to recharter our vessels at profitable rates, if at all, upon their time charter expiry” below.
Operational Growth Risk
Significant demands may be placed on us as a result of possible future acquisitions of additional vessels.
As a result of possible future acquisitions of vessels, significant demands may be placed on our managerial, operational and financial personnel and systems. We cannot assure you that our systems, procedures and controls will be adequate to support the expansion of our operations. Our future operating results will be affected by the ability of our officers and key employees to manage changing business conditions and to implement and expand our operational and financial controls and reporting systems as a result of future acquisitions.
Our growth depends on continued growth in the demand for containerships, our ability to purchase additional vessels and obtain new charters. We will require additional financing to be able to grow and will face substantial competition to purchase vessels.
One of our objectives is to grow by acquiring additional vessels and chartering them out to container shipping companies. The opportunity to acquire additional containerships will in part depend on the state of and prospects for container shipping. The container shipping industry is both cyclical and volatile in terms of supply demand balance, freight rates, charter rates, vessel values and overall profitability. Although supply-side fundamentals have generally been improving since 2017, and the global containership fleet was effectively fully employed by the end of 2021, the industry remains vulnerable to an excess of supply of containership capacity and mediocre demand growth. As at December 31, 2021, the global containership orderbook to fleet ratio was 23.8% - weighted heavily towards containerships larger than 10,000 TEU - with deliveries running from 2022 through to 2025. The factors affecting the supply and demand for containerships, and the nature, timing and degree of changes in industry conditions are unpredictable.
Acquisition of vessels will be challenging as, among other things, we may need to obtain additional financing in order to complete vessel purchases. In recent years, financing for investment in containerships, whether newbuildings or existing vessels, has been severely limited. Further, the cost of available financing may increase significantly in the future. In addition, the number of lenders for shipping companies has decreased and lenders have generally lowered their loan-to-value advance ratios, shortened loan terms and accelerated repayment schedules. The actual or perceived credit quality of our charterers and proposed charterers, and any defaults by them, may materially affect our ability to obtain the additional capital resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining such capital. These factors may hinder our ability to access financing and we may be unable to obtain adequate funding for growth.
The process of obtaining further vessels and new charters is highly competitive and depends on a variety of factors relating to the vessel owner, including:
| • | competitiveness of overall price; |
| • | availability of committed financing; |
| • | containership leasing experience and quality of ship operations (including cost effectiveness); |
| • | shipping industry relationships and reputation for reliability, customer service and safety; |
| • | quality and experience of seafaring crew; |
| • | ability to finance containerships at competitive rates and financial stability generally; |
| • | relationships with shipyards and the ability to get suitable berths for newbuildings; and |
| • | construction management experience, including the ability to obtain on-time delivery of new vessels according to customer specifications. |
We will face substantial competition in expanding our business from a number of experienced companies. Many of these competitors may have greater financial resources and a lower cost of capital than us, may operate larger fleets, may have been established for longer and may be able to offer better charter rates. During an industry downturn there are an increased number of vessels available for charter, including many from owners with strong reputations and experience. Excess supply of vessels in the container shipping market results in greater price competition for charters. During strong industry conditions, the value of vessels rises and there is substantially greater competition for purchase opportunities. As a result of these factors, we may be unable to purchase additional containerships, expand our relationships with our existing charterers or obtain new charters on a profitable basis, if at all, which would have a material adverse effect on our business, results of operations and financial condition.
| 4 |
We may be unable to make or realize expected benefits from acquisitions of vessels or container shipping-related assets and implementing our growth strategy through acquisitions may harm our business, financial condition and operating results.
Our growth strategy includes, among other things, selectively acquiring secondhand and, potentially, newbuilding vessels and possibly seeking to diversify our asset base by acquiring containers and other container shipping-related assets if an attractive investment opportunity presents itself. Growing any business through acquisition presents numerous risks, such as undisclosed liabilities and obligations, the possibility that indemnification agreements will be unenforceable or insufficient to cover potential losses and obtaining the necessary resources to manage an enlarged business. We cannot give any assurance that we will be successful in executing our growth plans, that we will be able to employ any acquired vessels under charters, that we will be able to purchase secondhand vessels or newbuildings at satisfactory prices or obtain ship management agreements with similar or better terms than those we have obtained from our current ship managers, that we will be able to purchase container shipping-related assets and subsequently lease them out at satisfactory prices or that we will not incur significant expenses and losses in connection with our future growth.
Factors that may limit our ability to acquire additional vessels and container shipping-related assets include competition from other owners and lessors, availability of financing, shipyard capacity for newbuildings and the limited number of modern vessels with appropriate characteristics not already subject to existing long-term or other charters. Competition from other purchasers could reduce our acquisition opportunities or cause us to pay higher prices.
Any acquisition of a vessel or container shipping-related assets may not be profitable to us and may not generate cash flow sufficient to justify our investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including risks that we may:
| • | fail to obtain financing, ship management agreements and charters on acceptable terms; |
| • | be unable, including through our ship managers, to hire, train or retain qualified shore and seafaring personnel to manage and operate our enlarged business and fleet; |
| • | fail to realize anticipated benefits of cost savings or cash flow enhancements; |
| • | decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions or by additional repayments of debt; |
| • | significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions; or |
| • | incur or assume unanticipated liabilities, losses or costs associated with the vessels acquired. |
Should we expand our business or provide additional services to third parties, we may need to improve our operating and financial systems, expand our commercial and technical management staff, and recruit suitable employees and crew for our vessels.
Our current operating and financial systems may not be adequate if we further expand the size of our fleet or begin to provide additional services and attempts to improve those systems may be ineffective. In addition, we may need to recruit suitable additional administrative and management personnel to manage any growth. We may not be able to continue to hire suitable employees in such circumstances. If a shortage of experienced labor exists or if we encounter business or financial difficulties, we may not be able to adequately staff our vessels. If we further expand our fleet, or begin to provide additional services, and we are unable to grow our financial and operating systems or to recruit suitable employees, our business, results of operations and financial condition may be harmed.
We are exposed to risks associated with the purchase and operation of secondhand vessels.
Secondhand vessels typically do not carry warranties as to their condition at the time of acquisition. While we would generally inspect secondhand containerships prior to purchase, such an inspection would normally not provide us with as much knowledge of the vessel’s condition as if it had been built for and operated by us during its life. Future repairs and maintenance costs for secondhand vessels are difficult to predict and may be substantially higher than those for equivalent vessels of which we have had direct experience. These additional costs could decrease our cash flow and reduce our liquidity. There can be no assurance that market conditions will justify such expenditures or enable us to operate our vessels profitably during the remainder of the economic lives of such vessels.
| 5 |
We may not perform underwater inspections of vessels prior to purchase.
Although we would perform physical inspections of any vessel prior to its purchase, it may not be possible for us to undertake any underwater inspections. As a result, we will not be aware of any damage to a vessel that may have existed at the time of purchase and which could only be discovered through an underwater inspection. However, if any damage is subsequently found, we could incur substantial costs to repair the damage which would not be recoverable from the sellers.
Third Parties’ Performance Risk
We are dependent on third parties, some of which are related parties, to manage our ships and substantial fees will be payable to our ship managers regardless of our profitability.
The majority of our ship technical management agreements are with Technomar, a company of which our Executive Chairman is the Founder, Managing Director, and majority beneficial owner, for an annual management fee. The manager provides all day-to-day ship technical management, including crewing, purchasing stores, lubricating oils and spare parts, paying wages, pensions and insurance for the crew, and organizing other vessel operating necessities, including the arrangement and management of drydocking. As of the date of this report, Technomar provided technical ship management services for all but six vessels, which were purchased by us in July 2021.
Additionally, as of the date of this report, all of our vessels are commercially managed by Conchart, a company of which our Executive Chairman is the sole beneficial owner. The services provided by Conchart, as our commercial manager, include chartering, sale and purchase and post-fixture administration.
The fees and expenses payable pursuant to our technical and commercial ship management agreements will be payable without regard to our business, results of operation and financial condition and we have limited rights to terminate our management agreements. The payment of fees to our managers could adversely affect our results of operations and ability to pay dividends.
Our third-party ship technical and commercial managers are privately-held companies and there is little or no publicly available information about them.
The ability of our third party ship managers, including Technomar and Conchart, to render technical and commercial ship management services will depend in part on their own financial strength. Circumstances beyond our control could impair our third-party ship managers’ financial strength, and because each is a privately held company, information about the financial strength of our third-party ship managers is not available. As a result, we and our shareholders might have little or no advance warning of financial or other problems affecting our third-party ship managers even though their financial or other problems could have a material adverse effect on us.
Related Parties’ Risks
Technomar, Conchart and CMA CGM may have conflicts of interest with us which may make them favor their own interests to our detriment.
Our Executive Chairman is the Founder, Managing Director, and majority beneficial owner of Technomar and the sole beneficial owner of Conchart, our third-party ship technical and commercial manager, respectively. As of the date of this report, CMA CGM, one of our major charterers, holds approximately 8.3% of our voting power and had nominated two members of our Board of Directors. Accordingly, CMA CGM and affiliates of Technomar and Conchart have the power to exert considerable influence over our actions. These relationships could create conflicts of interest between us and our Managers and CMA CGM. Under our amended and restated bylaws, in order for the approval of contracts or transactions involving a related party not to be voidable (1) any interested director’s relationship or interest as to the contract or transaction must be disclosed to our Board of Directors, and such contract or transaction must be authorized by a majority of the disinterested directors (or, in certain cases, all of the disinterested directors) or (2) the contract or transaction must be specifically approved in good faith by vote of the shareholders. Furthermore, our corporate governance guidelines require a director with a personal interest in a matter being approved by our Board of Directors to disclose the interest, to recuse himself or herself from participation in the discussion and to not vote on the matter.
Such conflicts of interest may arise in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus vessels managed or owned by other companies affiliated with our Managers or CMA CGM. As a result of these conflicts, our Managers or CMA CGM may favor their own or their affiliates’ interests over our interests. These conflicts may have unfavorable consequences for us. Although Technomar and Conchart have entered into a non-competition agreement with us, conflicts of interest may arise between us and our Managers and CMA CGM, and such conflicts may not be resolved in our favor and could have an adverse effect on our results of operations.
| 6 |
Our financial reporting is partly dependent on accounting and financial information provided to us by Technomar with respect to our vessels.
Technomar is obliged to provide us with requisite financial and accounting information on a timely basis so that we can meet our own reporting obligations under U.S. securities laws. Technomar is a privately held company with financial reporting arrangements different from ours. If it is delayed in providing us with key financial information, or it otherwise fails to meet its contractual obligations to us, we could fail to meet our financial reporting deadlines, which could lead to regulatory sanctions being imposed on us and cause us to default on reporting covenants under our financing agreements. Any such results may have a material adverse effect on our results of operation, financial condition and reputation.
Certain terms in our agreements with CMA CGM may be the result of negotiations that were not conducted at arms-length and may not reflect market standard terms. Accordingly, they may include terms that may not be obtained from future negotiations with unaffiliated third parties.
Four of our current charter agreements with CMA CGM and certain other contractual agreements were entered into when we were a wholly-owned subsidiary of CMA CGM in the context of a proposed public offering of our Class A common shares in 2007, and subsequently the 2008 merger of Marathon Acquisition Corp. (“Marathon”) and Global Ship Lease, with and into GSL Holdings, Inc., Marathon’s newly-formed wholly-owned Marshall Islands subsidiary, with GSL Holdings, Inc. (now renamed Global Ship Lease, Inc.) continuing as the surviving company incorporated in the Republic of the Marshall Islands (collectively, the “Marathon Merger”), and other related transactions. We have subsequently agreed to amendments of and extensions to a number of the charters we have with CMA CGM. Our agreements with CMA CGM may include terms that could not have been obtained and may not be attainable in the future from arms-length negotiations with unaffiliated third parties for similar services and assets.
Shareholders’ Power Risk
Certain shareholders may have the power to exert significant influence over us, and their interests could conflict with the interests of our other shareholders.
CMA CGM owns approximately 8.3% of our Class A common shares and our Executive Chairman, including via Shipping Participations Inc, a company which he controls owns approximately 6.1% of our Class A common shares. Conflicts of interest may also arise between us and these significant shareholders or their affiliates, which may result in transactions on terms not determined by market forces. Any such conflicts of interest could adversely affect our business, financial condition and results of operations, and the trading price of our common shares. Moreover, the concentration of ownership may delay, deter or prevent acts that may be favored by or favorable to our other shareholders or deprive shareholders of an opportunity to receive a premium for their shares as part of a sale of our business. Similarly, this concentration of share ownership may adversely affect the trading price of our shares because investors may perceive disadvantages in owning shares in a company with concentrated ownership.
Market Related Risks
Due to our lack of diversification, adverse developments in our containership transportation business could harm our business, results of operations and financial condition.
Nearly all of our cash flow is generated from our chartering of containerships. Due to our lack of diversification, an adverse development in the containership industry may harm our business, results of operations and financial condition more significantly than if we maintained more diverse assets or lines of business.
We may be unable to recharter our vessels at profitable rates, if at all, upon their time charter expiry.
According to Maritime Strategies International Ltd. (“MSI”), as of December 31, 2021 the overall orderbook-to-fleet ratio represented approximately 23.4% of the total worldwide containership fleet capacity as of that date. Notwithstanding scrapping, the size of the orderbook will likely result in an increase in the size of the world containership fleet over the next few years, particularly in the larger vessel sizes (over 10,000 TEU) for which the orderbook to fleet ratio at year-end 2021 was 45.3%. At that same time, idle capacity stood at about 165,000 TEUs, or 0.7% of the total cellular fleet. An over-supply of containership capacity, combined with a lack of growth in the demand for containerships, may result in downward pressure on charter rates. As at December 31, 2021, but adjusted to include all charters agreed through March 2, 2022, the charter for one of our 65 containerships either has expired or could expire before the end of the first half of 2022 and a further nine vessels have charters which may expire during the second half of 2022. We cannot be assured that we will be able to obtain new time charters for our vessels on expiry of existing charters or that if we do, the new rates will be favorable. If we are unable to obtain new time charters for our containerships at favorable rates or are unable to secure new charters promptly, or at all, the vessels would be idle. We would continue to incur certain operating costs but earn no revenue, which would have a material adverse effect on our business, financings, results of operations and financial condition. Please also see “—We are dependent on our charterers and other counterparties fulfilling their obligations under agreements with us, and their inability or unwillingness to honor these obligations could significantly reduce our revenues and cash flow” above.
| 7 |
Financing/Debt Risks
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
We are highly leveraged. As of December 31, 2021, we had $1,085.6 million of outstanding indebtedness, including $117.5 million of indebtedness outstanding under our 8.00% Senior Unsecured Notes due 2024 (the “2024 Notes”), $178.4 million of finance leases and $789.7 million of secured credit facilities.
Our high degree of leverage could have important consequences, including:
| • | increasing our vulnerability to adverse economic, industry or competitive developments; |
| • | requiring a substantial portion of our cash flows from operations to be dedicated to the payment of interest on our indebtedness, amortization payments for our credit facilities, therefore reducing our ability to use our cash flows to fund operations, capital expenditure and future business opportunities; |
| • | making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing the 2024 Notes and the agreements governing such other indebtedness; |
| • | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
| • | limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and |
| • | limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage may prevent us from exploiting. |
Despite our indebtedness levels, we may be able to incur substantially more indebtedness. This could further exacerbate the risks associated with our substantial indebtedness.
We may be able to incur substantial additional indebtedness in the future. Although certain of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. In addition, our debt agreements will not prevent us from incurring obligations that do not constitute indebtedness thereunder. If we incur substantially more indebtedness, the risks associated with our indebtedness as described above could be exacerbated.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our debt agreements contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability and the ability of our restricted subsidiaries to, among other things:
| • | incur additional indebtedness or issue certain preferred stock; |
| • | make any substantial change to the nature of our business; |
| • | pay dividends on or repay or distribute any dividend or share premium reserve; |
| • | redeem or repurchase capital stock or make other restricted payments and investments; |
| • | create or impair certain securities interests, including liens; |
| • | transfer or sell certain assets; |
| • | enter into certain transactions with affiliates; |
| • | acquire a company, shares or securities or a business or undertaking; |
| • | enter into any amalgamation, demerger, merger, consolidation or corporate reconstruction, or sell all or substantially all of our properties and assets; |
| • | create or designate unrestricted subsidiaries; and |
| • | change the flag, class or technical or commercial management of the vessel mortgaged under such facility or terminate or materially amend the management agreement relating to such vessel. |
| 8 |
In addition, certain of our debt agreements require our subsidiaries to satisfy certain financial covenants on their facilities, including on minimum liquidity, minimum net worth, and value adjusted leverage ratio. Our ability to meet those financial covenants and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control.
Due to restrictions in our debt agreements, we may need to seek consent from our lenders in order to engage in some corporate and commercial actions that we believe would be in the best interest of our business, and a denial of consent may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. For example, our debt agreements restrict our entry into certain transactions or the termination or amendment of our third-party ship management agreements and require that George Giouroukos remain our Executive Chairman. Our lenders’ interests may be different from ours, and we cannot guarantee that we will be able to obtain their permission when needed. This may prevent us from taking actions that are in our or our shareholders’ best interest. Any future agreements governing our indebtedness may include similar or more restrictive restrictions.
A breach of any of the covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and may permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our credit facilities, the lenders could elect to declare all amounts outstanding under the loan to be immediately due and payable. Such actions by the lenders could cause cross defaults under our other credit facilities.
Substantially all of the assets currently owned by us serve as security under our secured debt agreements. If our operating performance declines, we may be required to obtain waivers from the lenders under our credit facilities to avoid default thereunder. If we are not able to obtain a waiver from the lenders under our credit facilities, the lenders could exercise their rights upon default and we could be forced into bankruptcy or liquidation.
The vessels’ mortgagor or other maritime claimants could arrest our vessels, which could interrupt the charterers’ or our cash flow.
If we default under any of our credit facilities, lenders under our other credit facilities who hold mortgages on our vessels could arrest some or all of our vessels and cause them to be sold. We would not receive any proceeds of such sale unless and until all amounts outstanding under such indebtedness had been repaid in full. Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels, for valid or invalid reasons, could interrupt the charterers’ or our cash flow and require the charterer or us or our insurance to pay a significant amount to have the arrest lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in our fleet for claims relating to another vessel in our fleet. In any event, any lien imposed may adversely affect our results of operations by delaying the revenue gained from ships.
Assets’ Fair Value Risks
Vessel values may fluctuate, which may adversely affect our financial condition, result in the incurrence of a loss upon disposal of a vessel or increase the cost of acquiring additional vessels.
Vessel values may fluctuate due to a number of different factors, including:
| • | general economic and market conditions affecting the shipping industry; |
| • | the types, sizes and demand for available vessels; |
| • | the availability of other modes of transportation; |
| • | increases in the supply of vessel capacity; |
| • | the cost of newbuildings; |
| • | governmental or other regulations; and |
| • | the need to upgrade second hand and previously owned vessels as a result of changes in regulations, charterer requirements, technological advances in vessel design or equipment, or otherwise. |
| 9 |
In addition, as vessels grow older, they generally decline in value. If a charter terminates, we may be unable to re-deploy the vessel at attractive rates, or at all and, rather than continue to incur costs to maintain and finance the vessel, may seek to dispose of it. Our inability to dispose of the containership at a reasonable price, or at all, could result in a loss on its sale and harm our business, results of operations and financial condition. Additionally, under four of our time charter agreements with CMA CGM, the charterer, has a right of first refusal should we decide to sell the vessel during or at the end of the charter period. If they do not exercise this right, we are entitled to sell the vessel, subject to their prior approval, which cannot be unreasonably withheld. We may be forced to sell our vessels for a lesser amount because of these constraints. Moreover, if the book value of a vessel is impaired due to unfavorable market conditions, we may incur a loss that could adversely affect our operating results.
Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels, the cost of acquisition may increase and this could adversely affect our business, results of operations, cash flow and financial condition.
In addition, if we determine at any time that a vessel’s value has been impaired, we may need to recognize impairment charge, which could be significant, that would reduce our earnings and net assets. We review our containership assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, which occurs when the assets’ carrying value is greater than the undiscounted future cash flows the asset is expected to generate over its remaining useful life. In our experience, certain assumptions relating to our estimates of future cash flows are more predictable by their nature, including, estimated revenue under existing contract terms and remaining vessel life. Certain assumptions relating to our estimates of future cash flows require more judgement and are inherently less predictable, such as future charter rates beyond the firm period of existing contracts, the amount of time a vessel is off-charter, ongoing operating costs and vessel residual values, due to factors such as the volatility in vessel charter rates and vessel values. We believe that the assumptions used to estimate future cash flows of our vessels are reasonable at the time they are made. We can provide no assurances, however, as to whether our estimates of future cash flows, particularly future vessel charter revenues or vessel values, will be accurate. Vessels that currently are not considered impaired may become impaired over time if the future estimated undiscounted cash flows decline at a rate that is faster than the depreciation of our vessels. Future fluctuations in charter rates and vessel values may trigger a possible impairment of our vessels as described in “Item 5. Operating and Financial Review and Prospects— A. Results of Operations—Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Estimates”.
Declining containership values could affect our ability to raise cash by limiting our ability to refinance vessels or use unencumbered vessels as collateral for new loans or result in prepayments under certain of our credit facilities. This could harm our business, results of operations, financial condition or ability to raise capital.
If impairment testing is required, we may need to recognize impairment charges. The determination of the fair value of vessels will depend on various market factors, including charter and discount rates, ship operating costs and vessel trading values, and our reasonable assumptions at that time. The amount, if any, and timing of any impairment charges we may need to recognize in the future will depend upon the then current and expected future charter rates, vessel utilization, operating and dry-docking expenditures, vessel residual values, inflation and the remaining expected useful lives of our vessels, which may differ materially from those used in our assessments as of December 31, 2021.
Loss of Income Risks
Our vessels may be subject to extended periods of off-hire, which could materially adversely affect our business, financial condition and results of operations.
Under the time charters for our vessels, when the vessel is not available for service, it will likely be “off-hire,” in which case the charterer is generally not required to pay hire, and we will be responsible for all costs unless the charterer is responsible for the circumstances giving rise to the lack of availability. Additionally, in many cases the charterer has the option to extend the latest redelivery date by the offhire days. A vessel generally will be deemed to be off-hire if there is an occurrence that affects the full working condition of the vessel, such as:
| • | any drydocking for repairs, maintenance or classification society inspection; |
| • | any time out of service necessary for owner to upgrade vessels to meet new regulatory requirements, such as ballast water treatment or emission control or to improve the specification and commercial characteristics of our vessels; |
| • | any damage, defect, breakdown or deficiency of the ship’s hull, machinery or equipment or repairs or maintenance thereto; |
| • | any deficiency of the ship’s master, officers and/or crew, including the failure, refusal or inability of the ship’s master, officers and/or crew to perform the service immediately required, whether or not within its control; |
| • | its deviation, other than to save life or property, which results in charterer’s lost time; |
| • | crewing labor boycotts or certain vessel arrests; |
| • | our failure to maintain the vessel in compliance with the charter’s requirements, such as maintaining operational certificates; |
| • | the vessel’s declared performance speed is reduced or fuel consumption is increased by more than 5% over a specified period of time; or |
| 10 |
| • | the vessel is requisitioned by any government or governmental authority. |
Additionally, the charterer may have the right to terminate the charter agreement under a number of circumstances, such as if:
| • | the vessel is off-hire for a specified number of days; |
| • | the charterer informs us of a default under the charter, and the default is not rectified; |
| • | there is a total (actual or constructive) loss of the vessel; |
| • | the vessel is requisitioned by any government or governmental authority; or |
| • | a vessel’s declared performance speed is reduced or fuel consumption increased in excess of a pre-agreed percentage over a continuous period of an agreed number of days, (for example, consumption in excess of 10% of that declared for a given speed over a continuous period of 30 days) and the reason is within our or the vessel’s control. |
Our business, financial condition and results of operations may be materially adversely affected if our vessels are subject to extended periods of off-hire.
Vessels’ Operational Risks
We must make substantial expenditures to maintain our fleet, meet new regulatory requirements, meet commercial requirements or to acquire vessels.
We must make substantial expenditures to maintain our fleet and we generally expect to finance these expenditures from operating cash flow. In addition, we will need to make substantial capital expenditures to acquire vessels in accordance with our growth strategy. Further, we may be obliged to make substantial expenditures to become compliant with changes in the regulatory environment, particularly concerning decarbonization, emission control and ballast water treatment. We may also incur substantial expenditure to improve the specification and commercial characteristics of some of our vessels. Maintenance expenditures could increase as a result of, among other things, the cost of labor and materials, customer requirements and governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment. If we are unable to generate sufficient operating cash flow, we will need to fund these significant expenditures, including those required to maintain our fleet, with additional borrowings or otherwise find alternative sources of financing. Such financing arrangements may not be available on satisfactory economic terms or at all, which could have a material adverse effect on our business and results of operations.
As our fleet ages, we may incur increased operating costs beyond normal inflation, which would adversely affect our results of operations.
In general, the day-to-day cost of operating and maintaining a vessel increases with age. In addition, older vessels are typically less fuel efficient and may attract lower charter rates compared to modern, more fuel-efficient vessels. Governmental regulations and safety or other equipment standards may also require expenditures for modifications or the addition of new equipment and may restrict the type of activities in which our vessels may engage. We cannot assure you that, as our vessels age, market conditions will justify any such expenditures or expenditures to otherwise improve their operating characteristics, such as fuel efficiency to enable us to operate our vessels profitably during the remainder of their useful lives, which could adversely affect our results of operations. Our fleet of 65 vessels as of December 31, 2021 had an average age weighted by TEU capacity of 14.9 years.
Unless we set aside reserves or are able to borrow funds for vessel replacement, at the end of the useful lives of our vessels our revenue will decline, which would adversely affect our business, results of operations and financial condition.
Our fleet of 65 vessels as of December 31, 2021 had an average age weighted by TEU capacity of 14.9 years. Unless we maintain reserves or are able to borrow or raise funds for vessel replacement, we will be unable to replace the older vessels in our fleet. Our cash flows and income are dependent on the revenues earned by the chartering of our containerships. The inability to replace the vessels in our fleet upon the expiration of their useful lives could have a material adverse effect on our business, results of operations and financial condition. Any reserves set aside by any of our subsidiaries for vessel replacement will not be available for servicing our indebtedness.
| 11 |
Our business depends upon certain individuals who may not necessarily continue to be affiliated with us in the future.
Our current performance and future success depend to a significant extent upon our Executive Chairman, George Giouroukos, our Chief Executive Officer, Ian J. Webber, our Chief Commercial Officer, Thomas A. Lister, and our Chief Financial Officer, Anastasios Psaropoulos, who collectively have almost 100 years of cumulative experience in the shipping industry and have worked with several of the world’s largest shipping, ship leasing and ship management companies. They and members of the Board of Directors are crucial to the execution of our business strategies and to the growth and development of our business. Mr. Giouroukos has committed to spend approximately 50% on his time on matters related to our affairs. If these individuals were no longer to be affiliated with us, or if we were to otherwise cease to receive advisory services from them, we may be unable to recruit other employees with equivalent talent and experience, and our business and financial condition may suffer as a result.
Rising crew and other vessel operating costs may adversely affect our profits.
Acquiring and renewing charters with leading liner companies depends on a number of factors, including our ability to man our containerships with suitably experienced, high quality masters, officers and crews. The limited supply of and increased demand for well-qualified crew, due to the increase in the size of the global shipping fleet, has from time to time created upward pressure on crewing costs, which we generally bear under our time charters. Increases in crew costs and other vessel operating costs such as insurance, repairs and maintenance, and lubricants may adversely affect our profitability. In addition, if we cannot retain a sufficient number of high quality onboard seafaring personnel, our fleet utilization will decrease, which could have a material adverse effect on our business, results of operations and financial condition.
Increased fuel prices may have a material adverse effect on our profits.
The cost of fuel is a significant factor in negotiating charter rates and can affect us both directly and indirectly. The cost of fuel is borne by us when our vessels are offhire, being positioned for and undergoing drydockings, between charters and when employed on voyage charters or contracts of affreightment. We currently have no voyage charters or contracts of affreightment, but we may enter into such arrangements in the future, and to the extent we do so, an increase in the price of fuel beyond our expectations may adversely affect our profitability. Even where the cost of fuel is ordinarily borne by the charterer, which is the case with all of our existing time charters, that cost will affect the level of charter rates that charterers are prepared to pay, depending in part on the fuel efficiency of a particular vessel.
The price of fuel is unpredictable and fluctuates based on events outside our control, including but not limited to conflicts, geopolitical developments, supply and demand for oil, actions by members of the Organization of the Petroleum Exporting Countries (“OPEC”) and other oil and gas producers, economic or other sanctions levied against oil and gas producing countries, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations.
In addition, since the implementation of the International Maritime Organization’s regulations limiting sulfur emissions (“IMO 2020 Sulfur Regulation”) effective January 1, 2020, our vessels have been and continue to be operated using compliant low sulfur fuels, the price of which has increased as a result of increased demand. Fuel may continue to be more expensive, which may reduce our profitability and the competitiveness of our business compared to other forms of transportation. Further, as fuel costs are generally paid by our charterers, high fuel prices may impact their profitability if they are unable to pass these costs through to their customers. High fuel prices could have a material adverse effect on our business, results of operations and financial condition.
Interest Rate Risk
Volatility in the London Interbank Offered Rate (“LIBOR”), the cessation of LIBOR and replacement of our interest rate in our debt agreements could affect our profitability, earnings and cash flow.
Our indebtedness accrues interest based on LIBOR, which has been historically volatile. The publication of the U.S. Dollar LIBOR for the one-week and two-month U.S. Dollar LIBOR tenors ceased on December 31, 2021, and the ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority, announced the publication of all other U.S. Dollar LIBOR tenors will cease on June 30, 2023. The United States Federal Reserve concurrently issued a statement advising banks to cease issuing U.S. Dollar LIBOR instruments after 2021. As such, any new loan agreements we enter into will not use LIBOR as an interest rate, and we will need to transition our existing loan agreements from U.S. Dollar LIBOR to an alternative reference rate prior to June 2023.
| 12 |
In response to the anticipated discontinuation of LIBOR, working groups are converging on alternative reference rates. The Alternative Reference Rate Committee, a committee convened by the Federal Reserve that includes major market participants, has proposed an alternative rate to replace U.S. Dollar LIBOR: the Secured Overnight Financing Rate, or “SOFR”. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates. The impact of such a transition from LIBOR to SOFR or another alternative reference rate could be significant for us.
In order to manage our exposure to interest rate fluctuations under LIBOR, SOFR or any other alternative rate, we have and may from time to time use interest rate derivatives to effectively fix some of our floating rate debt obligations. No assurance can however be given that the use of these derivative instruments, if any, may effectively protect us from adverse interest rate movements. The use of interest rate derivatives may affect our results through mark to market valuation of these derivatives. Also, adverse movements in interest rate derivatives may require us to post cash as collateral, which may impact our free cash position. Interest rate derivatives may also be impacted by the transition from LIBOR to SOFR or other alternative rates.
Subsidiaries’ Performance Risk
We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial and other obligations.
We are a holding company and have no significant assets other than the equity interests in our subsidiaries. Our subsidiaries own all of the vessels and payments under charters are made to them. As a result, our ability to pay dividends and meet any debt service obligations and other liabilities depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to pay dividends or make other distributions or payments to us will be subject to the availability of profits or funds for such purpose which, in turn, will depend on the future performance of the subsidiary concerned which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond its control. Additionally, the ability of our subsidiaries to make these distributions could be affected by the provisions of our financing arrangements or a claim or other action by a third party, including a creditor, or by English law, Marshall Islands law or the laws of any jurisdiction which applies to us and regulates the payment of dividends by companies. Applicable tax laws may also subject such payments to further taxation. Applicable law may also limit the amounts that some of our subsidiaries will be permitted to pay as dividends or distributions on their equity interests, or even prevent such payments. Limitations on our ability to transfer cash among and within our group may mean that even though we, in aggregate, may have sufficient resources to meet our obligations, we may not be permitted to make the necessary transfers from one entity in our group to another entity in our group in order to make payments on our obligations. Therefore, if we are unable to obtain funds from our subsidiaries, we may not be able to pay dividends, including on our Series B Preferred Shares, or meet our debt service obligations or our other liabilities.
Exchange Rates’ Fluctuation Risk
Because we generate all of our revenues in U.S. dollars but incur a portion of our expenses in other currencies, exchange rate fluctuations could hurt our results of operations.
We generate all of our revenues in U.S. dollars and some of our expenses are denominated in currencies other than U.S. dollars. This currency mismatch could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to other currencies. Expenses incurred in foreign currencies against which the U.S. dollar falls in value could increase, thereby decreasing our net income. We have not hedged any of this exposure and our U.S. dollar denominated results of operations and financial condition and ability to pay dividends could suffer from adverse currency exchange rate movements. Future declines in the U.S. dollar versus other currencies could have a material adverse effect on our operating expenses and net income.
Insurance Related Risks
Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.
The shipping industry has inherent operational risks. Although we carry hull and machinery insurance, war risks insurance and protection and indemnity insurance (which includes coverage for environmental damage and pollution) and other insurances commonly held by vessel owners, we may not be adequately insured against all risks or our insurers may not pay every claim. Even if our insurance coverage is adequate to cover our losses, we may not be able to obtain a replacement vessel in the event of a total or constructive total loss in a timely manner. Further, under our financings, we are subject to restrictions on the use of any proceeds we may receive under claims in the event of a total or constructive total loss. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our fleet. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. In addition, insurers typically charge additional premiums if vessels transit certain “excluded areas,” which may be subject to higher risk of piracy, war or terrorism. We cannot be certain that our insurers will continue to provide such cover, or that we will be able to recover these increased costs from our charterers. Our insurance policies also contain deductibles, limitations and exclusions which, although we believe are standard in the shipping industry, may nevertheless increase our costs.
| 13 |
In addition, we do not presently carry loss-of-hire insurance, which covers the loss of revenue during extended vessel off-hire periods, such as those that might occur during an unscheduled drydocking due to damage to the vessel from a major accident. Accordingly, any vessel that is off hire for an extended period of time, due to an accident or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
Place of Incorporation Risk
We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law.
Our corporate affairs are governed by our articles of incorporation and bylaws and by the Business Corporations Act of the Republic of the Marshall Islands, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been very few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.
Cyber Security Risk
A cyber-attack could materially disrupt our business.
We rely on information technology systems and networks in our operations and administration of our business. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. Our business operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information in our systems. Any such attack or other breach of our information technology systems could have a material adverse effect on our business and results of operations. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.
Risks Relating to Our Industry
Our growth and long-term profitability depend mainly upon growth in demand for containerships, the condition of the charter market and the availability of capital. The container shipping industry is cyclical and volatile.
Container shipping industry is both seasonal and cyclical but has shown positive demand growth in every year of its history except 2009 (the Global Financial Crisis) and 2020 (the COVID-19 pandemic). According to MSI, between 2000 and 2008, which included a period of super-cyclical growth partly fueled by a significant increase in trade with China, containerized trade grew at an annual compound rate of 9.9%. The Global Financial Crisis, from late 2008, prompted a contraction of demand, with 2009 volumes falling by around 8.0%. In 2010, demand rebounded, with volume growth of 15.3%. Between 2010 and 2019 the average compound annual growth of containerized trade was 3.8%. In 2020, as a result of the COVID-19 crisis, containerized volumes contracted by 1.9% compared to 2019, despite a significant rebound in the second half of the year. The recovery in accelerated in 2021, with demand growth estimated at 7.1%. On the supply side, cellular containership capacity grew by a compound annual rate of 5.7% from 2009 through 2020, and is estimated to have expanded by approximately 4.5% in 2021. As of December 31, 2021, the containership fleet stood at just under 5,500 ships, with an aggregate capacity estimated at 24.8 million TEU.
Weak conditions in the containership sector may affect our ability to generate cash flows and maintain liquidity, as well as adversely affect our ability to obtain financing.
The factors affecting the supply and demand for containerships and container shipping services are outside our control, and the nature, timing and degree of changes in industry conditions are unpredictable.
The factors that influence demand for containership capacity include:
| • | supply and demand for products suitable for shipping in containers; |
| • | changes in the pattern of global production of products transported by containerships; |
| • | the globalization of manufacturing; |
| • | global and regional economic and political conditions; |
| • | developments in international trade; |
| 14 |
| • | changes in seaborne and other transportation patterns, including changes in the distances over which container cargoes are transported, the size of containerships, the extent of trans-shipments and the competitiveness of other forms of marine transportation including dry bulk and refrigerated vessels; |
| • | environmental and other legal and regulatory developments; |
| • | the price of oil and economics of slow steaming; |
| • | the availability of trade finance and currency exchange rates; and |
| • | port and canal congestion. |
The factors that influence the supply of containership capacity include:
| • | the containership newbuilding orderbook; |
| • | the availability of financing; |
| • | the scrapping rate of containerships; |
| • | the number of containerships off-hire or otherwise idle including laid-up; |
| • | the price of steel and other raw materials; |
| • | changes in environmental and other laws and regulations that may limit the useful life of containerships; |
| • | the availability of shipyard capacity; |
| • | port and canal congestion; and |
| • | the extent of slow steaming. |
Our ability to recharter our containerships upon the expiration of their current charters. Of our fleet of 65 containerships, one has a charter which may expire before June 30, 2022 and a further nine have charters which may expire during the second half of 2022. Charter rates receivable under any renewal or replacement charters will depend upon, among other things, the prevailing state of the containership charter market. If the charter market is depressed when our charters expire, we may be forced to recharter our containerships at reduced or even unprofitable rates, or we may not be able to recharter them at all, which may reduce or eliminate our results of operations or make our results of operations volatile. The same issues will exist in respect of any additional vessels we may acquire either when obtaining the initial charters or on rechartering at their expiry.
Public Health Threats Risk
Our financial and operating performance may be adversely affected by global public health threats, such as and including COVID-19.
Public health threats, such as the coronavirus (COVID-19), influenza and other highly communicable diseases or viruses, outbreaks of which from time to time occur in various parts of the world in which we operate, including China, could adversely impact our operations and the operations of our customers. The recent pandemic of the novel coronavirus (COVID-19) has, among other things, caused delayed or extended drydockings, disrupted our operations from non-availability of staff and materials and significantly affect global markets, including the demand for container shipping services, and therefore charter rates and asset values. If the effect of the COVID-19 is ongoing, or another such pandemic occurs, we may be unable to recharter our ships at appropriate rates or durations.
Additionally, any prolonged restrictive measures implemented in order to control or contain COVID-19 or other global public health threats may have a material and adverse effect on our business operations and demand for our vessels generally.
| 15 |
Seasonal Fluctuations Risk
Seasonal fluctuations could affect our operating results and available cash from quarter to quarter.
We operate our vessels in markets that have historically exhibited seasonal, as well as cyclical, variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results, which could affect the amount of our cash flow.
Global Financial Market Risks
A decrease in the export of goods or an increase in trade protectionism will harm our customers’ business and, in turn, harm our business, results of operations and financial condition.
Much of our customers’ containership business revenue is derived from the shipment of goods from the Asia Pacific region, primarily China, to various overseas export markets, including the United States and Europe. Any reduction in or hindrance to the output of China-based exporters could negatively affect the growth rate of China’s exports and our customers’ business. For instance, the government of China has implemented economic policies aimed at increasing domestic consumption of Chinese-made goods. This may reduce the supply of goods available for export and may, in turn, result in a decrease in shipping demand. Additionally, though in China there is an increasing level of autonomy and a gradual shift in emphasis to a “market economy” and enterprise reform, many of the reforms, particularly some limited price reforms that result in the prices for certain commodities being principally determined by market forces, are unprecedented or experimental and may be subject to revision, change or abolition. The level of imports to and exports from China could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government. Changes in laws and regulations in China, including with regards to tax matters, and their implementation by local authorities could affect our charterers’ business and have a material adverse impact on our business, results of operations and financial condition.
Our international operations expose us to the risk that increased trade protectionism will harm our business. In times of global economic challenge, governments may turn to trade barriers to protect their domestic industries against foreign imports, thereby depressing shipping demand. Protectionist developments, or the perception that they may occur, could have a material adverse effect on global economic conditions, and may significantly reduce global trade. Moreover, increasing trade protectionism may cause an increase in (i) the cost of goods exported from regions globally, (ii) the length of time required to transport goods and (iii) the risks associated with exporting goods. Such increases may significantly affect the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs, which could have an adverse impact on our charterers’ business, operating results and financial condition and could thereby affect their ability to make timely charter hire payments to us and to renew and increase the number of their time charters with us. This could have a material adverse effect on our business, results of operations, financial condition and our ability to pay any cash distributions to our stockholders.
Adverse economic conditions, especially in the Asia Pacific region, the European Union or the United States, could harm our business, results of operations and financial condition.
We anticipate a significant number of the port calls made by our vessels will involve the loading or discharging of containerships in ports in the Asia Pacific region. Consequently, economic turmoil in that region may exacerbate the effect of any economic slowdown on us. China has been one of the world’s fastest growing economies in terms of gross domestic product, or GDP, which has increased the demand for shipping. However, China’s rate of real GDP growth has fallen from its historical highs. The United States has also implemented more protectionist trade measures in an effort to protect and enhance its domestic economy. Additionally, the European Union, or the EU, and certain of its member states are facing significant economic and political challenges, including a risk of increased protectionist policies and the withdrawal of the United Kingdom from the European Union. Our business, results of operations and financial condition will likely be harmed by any significant economic downturn in the Asia Pacific region, including China, or in the EU or the United States.
In recent years, China and the United States have implemented certain increasingly protective trade measures with continuing trade tensions, including significant tariff increases, between these countries. Although the United States and China successfully reached an interim trade deal in January 2020 that deescalated the trade tensions with both sides rolling back tariffs, the extent to which the trade deal will be successfully implemented is unpredictable. Notwithstanding the interim trade deal, the US policy on China may not change dramatically under President Joe Biden and there is no assurance that the Chinese economy will not experience a significant slowdown in the future. A decrease in the level of imports to and exports from China could adversely affect our business, operating results and financial condition.
The global economy experienced disruption and volatility following adverse changes in global capital markets commencing in 2007 and 2008. The deterioration in the global economy caused, and any renewed deterioration may cause, a decrease in worldwide demand for certain goods and shipping. Economic instability could harm our business, results of operations and financial condition.
| 16 |
The current state of the world financial market and current economic conditions could have a material adverse impact on our results of operations, financial condition and cash flows.
Global financial markets and economic conditions have been, and continue to be, volatile. Inter alia, this volatility is due to continuing uncertainty around COVID-19 and, more recently, heightened geopolitical tension surrounding the recent hostilities between Russia and Ukraine, and growing concerns regarding inflation and prices for commodities such as oil and steel. These issues, along with the re-pricing of credit risk and the difficulties currently experienced by financial institutions have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets, many lenders have increased margins, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts), or refused to refinance existing debt at all or on terms similar to our current debt. Furthermore, certain banks that have historically been significant lenders to the shipping industry have announced an intention to reduce or cease lending activities in the shipping industry. New banking regulations, including larger capital requirements and the resulting policies adopted by lenders, could reduce lending activities. We may experience difficulties obtaining financing commitments in the future if current or future lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. The current state of global financial markets and current economic conditions might adversely impact our ability to issue additional equity at prices that will not be dilutive to our existing shareholders or preclude us from issuing equity at all.
We cannot be certain that financing or refinancing will be available on acceptable terms or at all. If financing or refinancing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our future obligations as they come due. Our failure to obtain such funds could have a material adverse effect on our business, results of operations and financial condition, as well as our cash flows, including cash available for dividends to our shareholders. In the absence of available financing, we also may be unable to take advantage of business opportunities or respond to competitive pressures.
The U.K.’s withdrawal from the European Union (“EU”) may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the U.K. elected to withdraw from the EU in a national referendum, a process that the government of the U.K. formally initiated in March 2017 (“Brexit”). The U.K. and the EU negotiated the terms of a withdrawal agreement, which was approved in October 2019 and ratified in January 2020. The U.K. formally exited the EU on January 31, 2020, although a transition period was in place until December 2020, during which the U.K. remained subject to the rules and regulations of the EU while continuing to negotiate the parties’ relationship going forward, including trade deals. The EU-UK Trade and Cooperation Agreement (“Cooperation Agreement”) was agreed on December 24, 2020, ratified by the UK Parliament on December 30, 2020 and has been provisionally applied by the EU from December 31, 2020. There is still uncertainty as to the practical consequences of the Cooperation Agreement and its impact on the future relationship between the U.K. and the EU over the short-, medium, and long term. Brexit has also given rise to calls for the governments of other EU member states to consider withdrawal. These developments and uncertainties, or the perception that any of them may occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business and on our consolidated financial position, results of operations and our ability to pay distributions. Additionally, Brexit or similar events in other jurisdictions, could impact global markets, including foreign exchange and securities markets; any resulting changes in currency exchange rates, tariffs, treaties and other regulatory matters could in turn adversely impact our business and operations.
Brexit contributes to considerable uncertainty concerning the current and future economic environment. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets.
We may have more difficulty entering into long-term charters if a more active and cheaper short-term or spot container shipping market develops.
At the expiration of our charters or if a charter terminates early for any reason or if we acquire vessels charter-free, we will need to charter or recharter our vessels. If an excess of vessels is available on the spot or short-term market at the time we are seeking to fix new longer-term charters, we may have difficulty entering into such charters at all or at profitable rates and for any term other than short term and, as a result, our cash flow may be subject to instability in the mid to long-term. In addition, it would be more difficult to fix relatively older vessels should there be an oversupply of younger vessels on the market. A depressed spot market may require us to enter into short-term spot charters based on prevailing market rates, which could result in a decrease in our cash flow.
| 17 |
An over-supply of containership capacity may lead to reductions in charter hire rates and profitability.
While the size of the containership orderbook has declined substantially since its peak in 2008/2009, the containership newbuilding orderbook as of December 31, 2021 represented approximately 23.4% of the total on the water fleet capacity. Further containerships are likely to be ordered. Notwithstanding scrapping, delivery of newly built containerships will likely result in an increase in the size of the world containership fleet over the next few years. An over-supply of containership capacity, combined with any decline in the rate of growth in demand for containerships, would be likely to result in a reduction of charter hire rates. If such a reduction occurs when we seek to charter newbuilding vessels, our growth opportunities may be diminished. If such a reduction occurs upon the expiration or termination of our containerships’ current time charters, we may only be able to recharter our containerships for reduced rates or unprofitable rates or we may not be able to recharter our containerships at all, which would have a material adverse effect on our business, financial condition and results of operation.
Increased competition in technology and innovation could reduce our charter hire income and the value of our vessels.
The charter rates and the value and operational life of a vessel are determined by a number of factors, including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed and fuel economy. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits together with other vessel specifications such as the capacity to carry temperature controlled containers (reefers). Physical life is related to the original design and construction, maintenance and the impact of the stress of operations. If new ship designs currently promoted by shipyards as being more fuel efficient perform, or if new containerships built in future that are more efficient or flexible or have longer physical lives than our vessels, competition from these more technologically advanced containerships could adversely affect our ability to re-charter, the amount of charter-hire payments that we receive for our containerships once their current time charters expire and the resale value of our containerships. This could adversely affect our ability to service our debt or pay dividends to our shareholders.
Piracy Related Risk
Acts of piracy on ocean-going vessels have increased in frequency, which could adversely affect our business.
Piracy is an inherent risk in the operation of ocean-going vessels and particularly affects vessels operating in specific regions of the world such as the South China Sea, the Gulf of Aden, the Arabian Sea, off the coast of West Africa and off the coast of Somalia. Generally, we do not control the routing of our vessels, which is determined by the charterer. Pirate attacks on any of our vessels could result in loss of life, the kidnapping of crew or the theft, damage or destruction of vessels or of containers or cargo being transported thereon. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on our business, results of operations and financial condition. In addition, insurance premiums and costs such as onboard security guards, should we decide to employ them, could increase in such circumstances. Further, acts of piracy may materially adversely affect our charterer’s business, impairing its ability to make payments to us under our charters.
Terrorist attacks and international hostilities could affect our results of operations and financial condition.
Terrorist attacks and the continuing response of the United States and other countries to these attacks, as well as the threat of future terrorist attacks, continue to cause uncertainty in the world financial markets and may affect our business, results of operations and financial condition from increased security costs and more rigorous inspection procedures at borders and ports. From time to time, acts of terrorism, regional conflict and other armed conflict around the world may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all.
Terrorist attacks targeted at oceangoing vessels may also negatively affect our future operations and financial condition from, for example, increased insurance costs, and directly impact our containerships or our charterer. Future terrorist attacks could result in increased market volatility or even a recession in the United States or elsewhere or negatively affect global financial markets and could further increase inspection and security requirements and regulation that could slow our operations and negatively affect our profitability. Any of these occurrences could have a material adverse impact on our operating results, revenue and costs.
| 18 |
Vessels’ Trading Risks
If our vessels call on ports located in countries or territories that are the subject of sanctions or embargoes imposed by the United States government, the European Union, the United Nations, or other governmental authorities, it could lead to monetary fines or other penalties and have a material adverse effect on the market for our securities.
While none of our vessels called on ports located in countries or territories that are the subject of country-wide or territory-wide sanctions and/or embargoes imposed by the U.S. government or other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism (“Sanctioned Jurisdictions”), and we endeavor to take precautions reasonably designed to mitigate such activities, it is possible that, on charterers’ instructions and without our consent, our vessels may call on ports located in Sanctioned Jurisdictions on charterers’ instructions and/or without our consent. If such activities result in a sanctions violation, we could be subject to monetary fines, penalties, or other sanctions, and our reputation and the market for our common shares could be adversely affected.
The applicable sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities and may be amended or strengthened over time. Current or future counterparties of ours may be affiliated with persons or entities that are or may be in the future the subject of sanctions imposed by the U.S., the EU, and/or other international bodies. If we determine that such sanctions require us to terminate existing or future contracts to which we or our subsidiaries are party or if we are found to be in violation of such applicable sanctions, our results of operations may be adversely affected or we may suffer reputational harm.
Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with Sanctioned Jurisdictions and certain financial institutions may have policies against lending or extending credit to companies that have contracts with Sanctioned Jurisdictions. The determination by these investors not to invest in, or to divest from, our common shares or the determination by these financial institutions not to offer financing may adversely affect the price at which our common shares trade. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries or territories subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries or territories, or engaging in operations associated with those countries or territories pursuant to contracts with third parties that are unrelated to those countries or territories or entities controlled by their governments. Investor perception of the value of our common shares may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
The smuggling of drugs, weapons or other contraband and stowaways on our vessels may lead to governmental claims against us.
We expect that our vessels will call in areas where smugglers attempt to hide drugs, weapons and other contraband on vessels or stowaways attempt to board, with or without the knowledge of crew members. To the extent our vessels are found with contraband or stowaways, whether with or without the knowledge of any of our crew or charterers, we may face governmental or other regulatory claims, which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
We are exposed to significant risks in relation to compliance with anti-corruption laws and regulations.
Our business entails numerous interactions with government authorities, including port authorities, health, safety, and environment authorities, labor and tax authorities and customs and immigration authorities. Furthermore, at our charterer’s direction, our vessels call at ports throughout the world, including in some countries where corruption is endemic. Although we have strict and adequate procedures prohibiting our employees or persons associated with us from making unlawful payments to government officials, we cannot guarantee that such payments may not be made despite our procedures and without our approval. In such case, such payments may be deemed to have violated anti-corruption laws potentially applicable to us, including the UK Bribery Act 2010 (the “Bribery Act”) and the U.S. Foreign Corrupt Practices Act (the “FCPA”). Both civil and criminal penalties may be imposed on us as a result of violations of anti-corruption laws, and such penalties could have a material adverse impact on our reputation, business and financial condition.
| 19 |
Risks inherent in the operation of containerships could impair the ability of the charterer to make payments to us, increase our costs or reduce the value of our assets.
Our containerships and their cargoes are at risk of being damaged or lost because of events such as marine accidents, bad weather, mechanical failures, human error, war, terrorism, piracy, environmental accidents and other circumstances or events. Any of these events connected to our vessels or other vessels under the charterer’s control, or any other factor which negatively affects the charterer’s business such as economic downturn and significant cyclical depression in the container shipping industry, could impair the ability of the charterer to make payments to us pursuant to our charters. Although the charterer is obligated to pay us charterhire regardless of the amount of cargo being carried on board, it is possible that generally low cargo volumes and low freight rates or events noted above may render the charterer financially unable to pay us its hire. Furthermore, there is a risk that a vessel may become damaged, lost or destroyed during normal operations and any such occurrence may cause us additional expenses to repair or substitute the vessel or may render us unable to provide the vessel for chartering, which will cause us to lose charter revenue.
These occurrences could also result in death or injury to persons, loss of property or environmental damage, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates, and damage to our reputation and customer relationships generally. Any of these circumstances or events could increase our costs or lower our revenues, which could result in reduction in the market price of our common shares.
Governments could requisition our vessels during a period of war or emergency without adequate compensation, which under most of our time charter agreements would permit the customer to terminate the charter agreement for that vessel.
A government of a vessel’s registry could requisition one or more of our vessels. Requisition for title occurs when a government takes control of a vessel and becomes its owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would likely be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Additionally, under most of our time charter agreements, if a vessel is requisitioned, our customer has the option to terminate the charter agreement within 14 days of receipt of notice of the requisition. Government requisition of one or more of our vessels may negatively impact our revenues and cash flow.
If labor or other interruptions are not resolved in a timely manner, they could have an adverse effect on our business, results of operations, cash flows, financial condition and available cash.
In addition to providing services to us our technical managers are responsible for recruiting the senior officers and other crew members for our vessels. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest or any other labor interruption, could prevent or hinder our operations from being carried out as we expect and could have an adverse effect on our business, financial condition, operating results, distribution of dividends or the trading price of our common shares.
Reliability of suppliers may limit our ability to obtain supplies and services when needed.
We rely, and will continue to rely, on a significant supply of consumables, spare parts and equipment to operate, maintain, repair and upgrade our fleet of ships. Delays in delivery or unavailability of supplies could result in off-hire days due to consequent delays in the repair and maintenance of our fleet which would negatively impact our revenues and cash flows. Cost increases could also negatively impact our future operations.
Environmental and Safety Compliance Risks
Compliance with safety and other vessel requirements imposed by classification societies may be costly and may adversely affect our business and operating results.
The hull and machinery of every commercial vessel must conform to the rules and standards of a classification society approved by the vessel’s country of registry. Such societies set the rules and standards for the design, construction, classification, and surveys of vessels and conduct surveys to determine whether vessels are in compliance with such rules and standards. A certification by a society is an attestation that the vessel is in compliance with the society’s rules and standards. A vessel involved in international trade must also conform to national and international regulations on safety, environment and security, including (but not limited to) the Safety of Life at Sea Convention, or SOLAS, and the International Convention for the Prevention of Pollution from Ships. A vessel conforms to such regulations by obtaining certificates from its country of registry and/or a classification society authorized by the country of registry.
| 20 |
A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special or class renewal survey, a vessel’s machinery may be reviewed on a continuous survey cycle, under which the machinery would be surveyed over a five-year period. See “Item 4. Information on the Company—B. Business Overview—Inspection by Classification Societies” for more information regarding annual surveys, intermediate surveys and special surveys. Bureau Veritas, Lloyd’s Register, DNV-GL & RINA and American Bureau of Shipping, the classification societies for the vessels in our fleet, may approve and carry out in-water inspections of the underwater parts of our vessels once every three to five years, in lieu of drydocking inspections. In-water inspections are typically less expensive than drydocking inspections and we intend to conduct in-water inspections when that option is available to us.
If a vessel does not maintain its “in class” certification or fails any annual survey, intermediate survey or special survey, port authorities may detain the vessel, refuse her entry into port or refuse to allow her to trade resulting in the vessel being unable to trade and therefore rendering her unemployable. In the event that a vessel becomes unemployable, we could also be in violation of provisions in our charters, insurance coverage, covenants in our loan agreements and ship registration requirements and our revenues and future profitability would be negatively affected.
We are subject to regulation and liability under environmental laws that could require significant expenditures and affect our cash flows and net income.
Our business and the operation of our containerships are materially affected by environmental regulation in the form of international conventions, national, state and local laws and regulations in force in the jurisdictions in which our containerships operate, as well as in the countries of their registration, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, water discharges, ballast water management and vessel recycling. Because such conventions, laws and regulations are often revised, we cannot predict the ultimate cost or effect of complying with such requirements or the effect of such compliance on the current market value, resale price or useful life of our containerships. Additional conventions, laws and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business, which may negatively impact our business, results of operations and financial condition. In addition, any future decarbonization technologies may increase our costs, or we may be limited in our ability to apply them to commercial scale.
Environmental requirements may also require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in substantial penalties, fines or other sanctions, including the denial of access to certain jurisdictional waters or ports or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and natural resource damages, if there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of hazardous materials associated with our operations, even if not carried as cargo.
In addition, in complying with existing environmental laws and regulations and those that may be adopted, we may incur significant costs in meeting new maintenance and inspection requirements and new restrictions on air emissions from our containerships, in managing ballast water, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety, security and environmental requirements, can be expected to become stricter in the future and require us to incur significant capital expenditures on our vessels to keep them in compliance, or even to scrap or sell certain vessels altogether. Substantial violations of applicable requirements or a catastrophic release of bunker fuel from one or more of our containerships could harm our business, results of operations and financial condition. For additional information about the environmental regulations to which we are subject, please read “Item 4. Information on the Company—B. Business Overview—Environmental and Other Regulations”.
Increasing scrutiny and changing expectations from investors, lenders and other market participants with respect to our Environmental, Social and Governance (“ESG”) policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants are increasingly focused on ESG practices, especially as they relate to the environment health and safety, diversity, labor conditions and human rights in recent years, and have placed increasing importance on the implications and social cost of their investments. The increased focus and activism related to ESG and similar matters may hinder access to capital, as investors and lenders may decide to reallocate capital or to not commit capital as a result of their assessment of a company’s ESG practices. Failure to adapt to or comply with evolving investor, lender or other industry shareholder expectations and standards or the perception of not responding appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may damage such a company’s reputation or stock price, resulting in direct or indirect material and adverse effects on the company’s business and financial condition.
| 21 |
Moreover, from time to time, in alignment with our sustainability priorities, we may incur additional costs, establish and publicly announce goals and commitments in respect of certain ESG items. While we may create and publish voluntary disclosures regarding ESG matters from time to time, many of the statements in those voluntary disclosures are based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. If we fail to achieve or improperly report on our progress toward achieving our environmental goals and commitments, the resulting negative publicity could adversely affect our reputation and/or our access to capital.
Increased inspection procedures, tighter import and export controls and new security regulations could increase costs and cause disruption of our containership business.
International container shipping is subject to security and customs inspection and related procedures in countries of origin, destination, and certain trans-shipment points. These inspection procedures can result in cargo seizure, delays in the loading, offloading, trans-shipment, or delivery of containers, and the levying of customs duties, fines and other penalties against us.
Since the events of September 11, 2001, U.S. authorities have substantially increased container inspections. Government investment in non-intrusive container scanning technology has grown and there is interest in electronic monitoring technology, including so-called “e-seals” and “smart” containers, which would enable remote, centralized monitoring of containers during shipment to identify tampering with or opening of the containers, along with potentially measuring other characteristics such as temperature, air pressure, motion, chemicals, biological agents and radiation. Also, as a response to the events of September 11, 2001, additional vessel security requirements have been imposed, including the installation of security alert and automatic identification systems on board vessels.
It is unclear what additional changes, if any, to the existing inspection and security procedures may ultimately be proposed or implemented in the future, or how any such changes will affect the industry. It is possible that such changes could impose additional financial and legal obligations on us. Furthermore, changes to inspection and security procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of goods in containers uneconomical or impractical. Any such changes or developments could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our shareholders.
The operation of our vessels is also affected by the requirements set forth in the International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS Code requires vessels to develop and maintain a ship security plan that provides security measures to address potential threats to the security of ships or port facilities. Although each of our containerships is ISPS Code certified, any failure to comply with the ISPS Code or maintain such certifications may subject us to increased liability and may result in denial of access to, or detention in, certain ports. Furthermore, compliance with the ISPS Code requires us to incur certain costs. Although such costs have not been material to date, if new or more stringent regulations relating to the ISPS Code are adopted by the International Maritime Organisation, the United Nations agency for maritime safety and the prevention of pollution by vessels (the “IMO”) and the flag states, these requirements could require significant additional capital expenditures or otherwise increase the costs of our operations.
Sulfur regulations to reduce air pollution from ships are likely to require retrofitting of vessels and may cause us to incur significant costs.
From January 1, 2020, vessels must comply with the IMO mandated sulfur emission limit of 0.5% m/m. This may be achieved by (i) using low sulfur fuel which may be at a higher cost that standard heavy fuel oil, (ii) installing scrubbers for cleaning of exhaust gas; or (iii) by retrofitting vessels to be powered by, for example, liquefied natural gas. The higher cost of low sulfur fuel is, in the first instance, borne by the vessel operator, our charterer, whereas the installation of scrubbers or retrofitting for an alternative fuel source, would in the first instance be borne by us as the vessel owner. Contrary to initial concerns, the availability of low sulfur fuel has not been an issue for the industry and, to date, the pricing spread between high- and low-sulfur fuels has been much tighter than originally anticipated. Nevertheless, costs of compliance going forward may be significant and may have a material adverse effect on our future performance, results of operations, cash flows and financial position.
Climate change risks and greenhouse gas restrictions may adversely impact our operations.
Due to concerns over the risks associated with climate change, a number of countries and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from ships. These regulatory measures may include the adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. More specifically, on October 27, 2016, the IMO’s Marine Environment Protection Committee (the “MEPC”), announced its decision concerning the implementation of regulations mandating a reduction in sulfur emissions from 3.5% currently to 0.5% as of the beginning of January 1, 2020. Since January 1, 2020, ships must either remove sulfur from emissions or buy fuel with low sulfur content, which may lead to increased costs and supplementary investments for ship owners. The interpretation of "fuel oil used on board" includes use in main engine, auxiliary engines and boilers. Shipowners may comply with this regulation by (i) using 0.5% sulfur fuels on board, which are available around the world but at a higher cost; (ii) installing scrubbers for cleaning of the exhaust gas; or (iii) by retrofitting vessels to be powered by liquefied natural gas, which may not be a viable option due to the lack of supply network and high costs involved in this process. Costs of compliance with these regulatory changes may be significant and may have a material adverse effect on our future performance, results of operations, cash flows and financial position.
| 22 |
Maritime shipping will also be included in the Emission Trading Scheme (ETS) as of 2023 with a phase-in period. It is expected that shipowners will need to purchase and surrender a number of emission allowances that represent their MRV-recorded carbon emission exposure for a specific reporting period. The person or organization responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or any other organization or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner. Compliance with the Maritime EU ETS will result in additional compliance and administration costs to properly incorporate the provisions of the Directive into our business routines. Additional EU regulations which are part of the EU’s Fit-for-55, could also affect our financial position in terms of compliance and administration costs when they take effect.
Territorial taxonomy regulations in geographies where we are operating and are regulatorily liable, such as EU Taxonomy, might jeopardize the level of access to capital. For example, EU has already introduced a set of criteria for economic activities which should be framed as ‘green’, called EU Taxonomy. As long as we are an EU-based company meeting the NFRD prerequisites, we will be eligible for reporting our Taxonomy eligibility and alignment. Based on the current version of the Regulation, companies that own assets shipping fossil fuels are considered as not aligned with EU Taxonomy. The outcome of such provision might be either an increase in the cost of capital and/or gradually reduced access to financing as a result of financial institutions’ compliance with EU Taxonomy.
Emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or any amendments or successor agreements. The Paris Agreement adopted under the United Nations Framework Convention on Climate Change in December 2015, which contemplates commitments from each nation party thereto to take action to reduce greenhouse gas emissions and limit increases in global temperatures, did not include any restrictions or other measures specific to shipping emissions. However, restrictions on shipping emissions are likely to continue to be considered and a new treaty may be adopted in the future that includes additional restrictions on shipping emissions to those already adopted under MARPOL.
Any climate control legislation, or other regulatory initiatives that aim to reduce greenhouse gases emissions, may affect our business. Compliance with future changes in laws and regulations relating to climate change could increase the costs of operating and maintaining our ships. Among other things, these risks may include increases in the pricing of greenhouse gas emissions, new reporting regulations, changes in legislation impacting existing products and services, costs of transitioning to lower-emission fuels and technologies, potential substitution or replacement of existing products and services, and stakeholder concerns and/or shifts in customer preferences which may have financial implications for our business and could lead us to retire existing assets prior to the end of the their currently-anticipated economic lives.
In addition to being exposed to the risk of legislative and regulatory change, our business is vulnerable to the underlying risks of climate change itself and may be directly or indirectly affected by climate-related changes such as rising sea levels, rising temperatures, changes in precipitation patterns, volatile and extreme weather, demographic change, and heightened risk of conflict—all of which could lead, among other things, to reduced demand for our services, increased operating and/or capital costs, and increased insurance premiums.
Regulations relating to ballast water discharge that have been in effect since September 2019 may adversely affect our revenues and profitability.
The IMO has imposed updated guidelines for ballast water management systems specifying the maximum amount of viable organisms allowed to be discharged from a vessel’s ballast water. Existing vessels constructed before September 8, 2017, must comply with updated standards on or after September 8, 2019, with the exact date depending on the date of the next International Oil Pollution Prevention (“IOPP”) renewal survey. In some cases, such as where vessels are due to trade to U.S. ports, the implementation date may be before the IMO deadline. For most vessels, compliance with the standard will involve installing on-board systems to treat ballast water to eliminate unwanted organisms. Ships constructed on or after September 8, 2017 have been obligated to comply with the standards on or after September 8, 2017. We currently have 43 vessels which have a ballast water management system fitted and 22 vessels that do not. The costs of compliance may be substantial and adversely affect our revenues and profitability.
Furthermore, United States regulations are currently changing. Although the 2013 Vessel General Permit (“VGP”) program and U.S. National Invasive Species Act (“NISA”) are currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on December 4, 2018, requires that by December 2020, the U.S. Environmental Protection Agency (“EPA”) is required to develop national standards of performance for approximately 30 discharges. On October 26, 2020, the EPA published a Notice of Proposed Rulemaking for Vessel Incident Discharge National Standards of Performance under VIDA. By approximately 2022, the U.S. Coast Guard is required to develop corresponding implementation, compliance, and enforcement regulations regarding ballast water. These may include requirements governing the design, construction, testing, approval, installation, and use of devices to achieve the EPA national standards of performance.
The new regulations could require the installation of new equipment, which may cause us to incur substantial costs.
| 23 |
Risks Relating to our Common Stock and Depositary Shares Representing Series B Preferred Shares
We cannot guarantee that our Board of Directors will declare dividends or otherwise return cash to shareholders.
Our Board of Directors may, in its sole discretion, from time to time, declare and pay cash dividends in accordance with our dividend policy or determine to return cash to shareholders in other ways, such as share repurchases. Our Board of Directors makes determinations regarding the payment of dividends in its sole discretion, and there is no guarantee that we will continue to declare and pay dividends in the future. The timing and amount of any dividends declared will depend on, among other things (a) our results of operations, financial condition, cash flow and cash requirements, (b) our liquidity, including our ability to obtain debt and equity financing on acceptable terms as contemplated by our vessel acquisition strategy, (c) restrictive covenants in our existing and future debt instruments and (d) provisions of Marshall Islands law. The declaration and payment of dividends is also subject at all times to the discretion of our Board of Directors.
The international containership and containership leasing industry is highly volatile, and we cannot predict with certainty the amount of cash, if any, that will be available for distribution as dividends in any period. Also, there may be a high degree of variability from period to period in the amount of cash, if any, that is available for the payment of dividends. The amount of cash we generate from operations and the actual amount of cash we will have available for dividends in each quarter will vary based upon, among other things:
| • | the charter-hire payments we obtain from our charters as well as the rates obtained upon the expiration of our existing charters; |
| • | acquisition of additional vessels; |
| • | the timing of scheduled drydockings; |
| • | the timing of interest payments, scheduled debt amortization payments and other payments that might be due under our debt facilities; |
| • | delays in the delivery of newbuilding vessels, if any, and the beginning of payments under charters relating to those vessels; |
| • | the level of our operating costs, such as the costs of crews, lubricants and insurance; |
| • | the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled dry-docking of our containerships; |
| • | any idle time after one charter expires until a new charter is agreed or the vessel is disposed of, should a new charter not be agreed; |
| • | unexpected repairs to, or required expenditures on, vessels or dry-docking costs in excess of those anticipated; |
| • | the loss of a vessel; |
| • | prevailing global and regional economic and geopolitical conditions; |
| • | changes in interest rates; |
| • | the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business; |
| • | changes in the basis of taxation of our activities in various jurisdictions; |
| • | modification or revocation of our dividend policy by our Board of Directors; and |
| • | the amount of any cash reserves established by our Board of Directors. |
The amount of cash we generate from our operations may differ materially from our net income or loss for the period, which will be affected by non-cash items. We may incur other expenses or liabilities that could reduce or eliminate the cash available for distribution as dividends or to be returned to shareholders in other ways.
| 24 |
In addition, Marshall Islands law generally prohibits the payment of dividends other than from surplus (retained earnings and the excess of consideration received from the sale of shares above the par value of the shares) or if there is no surplus, from the net profits for the current and prior fiscal years, or while a company is insolvent or if it would be rendered insolvent by the payment of such a dividend. We may not have sufficient surplus or net profits in the future to pay dividends, and our subsidiaries may not have sufficient funds, surplus or net profits to make distributions to us. As a result of these and other factors, we may not be able to pay dividends during periods when we record losses and may not pay dividends during periods when we record net income. We can give no assurance that dividends will be paid in the future or that cash will be returned to shareholders in other ways.
The price of our securities may be volatile.
The price of our common shares and Depositary Shares representing Series B Preferred Shares may be volatile and may fluctuate due to factors such as:
| • | actual or anticipated fluctuations in our quarterly revenues and results of operations and those of publicly held containership owners or operators; |
| • | market conditions in the industry; |
| • | perceived counterparty risk; |
| • | shortfalls in our operating results from levels forecasted by securities analysts; |
| • | announcements concerning us or other containership owners or operators; |
| • | mergers and strategic alliances in the shipping industry; |
| • | changes in government regulation including taxation; and |
| • | the general state of the securities markets. |
The international containership industry has been highly unpredictable and volatile. The market for common shares and Depositary Shares representing Series B Preferred Shares in companies operating in this industry may be equally volatile.
We have anti-takeover provisions in our organizational documents that may discourage a change of control.
Certain provisions of our articles of incorporation and bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders.
Certain of these provisions provide for:
| • | a classified Board of Directors with staggered three-year terms; |
| • | restrictions on business combinations with certain interested shareholders; |
| • | directors only to be removed for cause and only with the affirmative vote of holders of at least a majority of the common shares entitled to vote in the election of directors; |
| • | advance notice for nominations of directors by shareholders and for shareholders to include matters to be considered at annual meetings; and |
| • | a limited ability for shareholders to call special shareholder meetings. |
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
Our management is required to devote substantial time to complying with public company regulations.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) as well as rules subsequently adopted by the SEC and the New York Stock Exchange (“NYSE”), including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, have imposed various requirements on public companies, including changes in corporate governance practices. Our directors, management and other personnel devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations relating to public companies increase our legal and financial compliance costs and make some activities more time-consuming and costly.
| 25 |
Sarbanes-Oxley requires, among other things, that we maintain and periodically evaluate our internal control over financial reporting and disclosure controls and procedures. In particular, under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each of our annual reports on Form 20-F a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and, if we are an accelerated filer or a large accelerated filer, a related attestation of our independent registered public accounting firm. While we did not identify any material weaknesses or significant deficiencies in our internal controls under the current assessment, we cannot be certain at this time that our internal controls will be considered effective in future assessments and that our independent registered public accounting firm would reach a similar conclusion. Therefore, we can give no assurances that our internal control over financial reporting will satisfy regulatory requirements in the future.
We are a “foreign private issuer” under the NYSE rules, and as such we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE.
Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
Future sales of our common stock could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, may depress the market price for our common stock. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future.
Subject to the rules of the NYSE, in the future, we may issue additional shares of common stock, and other equity securities of equal or senior rank, without shareholder approval, in a number of circumstances. The issuance by us of additional shares of common stock or other equity securities of equal or senior rank would have the following effects:
| • | our existing shareholders’ proportionate ownership interest in us may decrease; |
| • | the dividend amount payable per share on our common stock may be lower; |
| • | the relative voting strength of each previously outstanding share may be diminished; and |
| • | the market price of our common stock may decline. |
Our shareholders also may elect to sell large numbers of shares held by them from time to time. The number of shares of common stock available for sale in the public market will be limited by restrictions applicable under securities laws, and agreements that we and our executive officers, directors and existing shareholders may enter into with the underwriters at the time of an offering. Subject to certain exceptions, these agreements generally restrict us and our executive officers, directors and existing shareholders from directly or indirectly offering, selling, pledging, hedging or otherwise disposing of our equity securities or any security that is convertible into or exercisable or exchangeable for our equity securities and from engaging in certain other transactions relating to such securities for a period of up to 180 days after the date of an offering prospectus without the prior written consent of the underwriter(s).
We may not have sufficient cash from our operations to enable us to pay dividends on or to redeem our Series B Preferred Shares, and accordingly the Depositary Shares, as the case may be.
We pay quarterly dividends on the Series B Preferred Shares, and accordingly the Depositary Shares, only from funds legally available for such purpose when, as and if declared by our Board of Directors. We may not have sufficient cash available each quarter to pay dividends. In addition, if our Board of Directors does not authorize and declare a dividend for any dividend period prior to the relevant dividend payment date, holders of the Series B Preferred Shares and accordingly the Depositary Shares would not be entitled to receive a dividend for that dividend period. However, any unpaid dividends will accumulate. In addition, we have the option to redeem the Series B Preferred Shares, and accordingly the Depositary Shares, although we may have insufficient cash available to do so or may otherwise elect not to do so.
The amount of cash we can use to pay dividends or redeem our Series B Preferred Shares and the Depositary Shares depends upon the amount of cash we generate from our operations, which may fluctuate significantly, and other factors, including the following:
| • | changes in our operating cash flow, capital expenditure requirements, working capital requirements and other cash needs; |
| • | the amount of any cash reserves established by our Board of Directors; |
| • | restrictions under Marshall Islands law as described below; |
| • | restrictions under our credit facilities and other instruments and agreements governing our existing and future debt as described below; and |
| • | our overall financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and to the risks associated with the shipping industry and the other factors (see “—Risks Related to our Business” above), many of which are beyond our control. |
| 26 |
The amount of cash we generate from our operations may differ materially from our net income or loss for the period, which will be affected by noncash items, and our Board of Directors in its discretion may elect not to declare any dividends. We may incur other expenses or liabilities that could reduce or eliminate the cash available for distribution as dividends. As a result of these and the other factors mentioned above, we may pay dividends during periods when we record losses and may not pay dividends during periods when we record net income.
Our ability to pay dividends on and to redeem our Series B Preferred Shares is limited by the requirements of Marshall Islands law and by our contractual obligations.
Marshall Islands law provides that we may pay dividends on and redeem the Series B Preferred Shares only to the extent that assets are legally available for such purposes. Legally available assets generally are limited to our surplus, which essentially represents our retained earnings and the excess of consideration received by us for the sale of shares above the par value of the shares. In addition, under Marshall Islands law we may not pay dividends on or redeem Series B Preferred Shares if we are insolvent or would be rendered insolvent by the payment of such a dividend or the making of such redemption.
Further, the terms of our credit facilities may prohibit us from declaring or paying any dividends or distributions on preferred stock, including the Series B Preferred Shares, or redeeming, purchasing, acquiring or making a liquidation payment on preferred stock in certain circumstances.
Risks Related to Tax Matters
Our operating income could fail to qualify for an exemption from U.S. federal income taxation, which would reduce our cash flow.
We do not expect to be engaged in a U.S. trade or business. In the case of a foreign corporation that is not so engaged, the Internal Revenue Code of 1986, as amended (the “Code”), imposes a 4% U.S. federal income tax (without allowance of any deductions) on 50% of the corporation’s gross transportation income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States, unless the corporation qualifies for the exemption provided in Section 883 of the Code or an applicable income tax treaty. The imposition of this tax could have a negative effect on our business, financial condition and results of operations. Under the charter agreements, the charterer has agreed to provide reimbursement for any such taxes as the charterer determines where each vessel trades.
We will qualify for the exemption under Section 883 if, among other things, our stock is treated as primarily and regularly traded on an established securities market in the United States. However, under the relevant Treasury regulations, a class of stock will not be treated as primarily and regularly traded on an established securities market if, during more than half the number of days during the taxable year, one or more shareholders who actually or constructively own at least 5% of the vote and value of the outstanding shares of such class of stock (“5% Shareholders”), own, in the aggregate, 50% or more of the vote and value of the outstanding shares of such class of stock, unless a sufficient amount of stock is owned by 5% Shareholders that are considered to be “qualified shareholders” to preclude non-qualifying 5% Shareholders from owning 50% or more of the total value of the stock held by the 5% Shareholders group.
Generally, a 5% Shareholder is a qualified 5% Shareholder if the 5% Shareholder is an individual who is a resident of a qualified foreign country, the government of a qualified foreign country, a foreign corporation organized in a qualified foreign country that meets the “publicly-traded” test discussed herein, a non-profit organization organized in a qualified foreign country or an individual beneficiary (resident in a qualified foreign country) of a pension plan administered in or by a qualified foreign country. Generally, a foreign country is a qualified foreign country if it grants an equivalent exemption from tax to corporations organized in the United States.
| 27 |
Based on information that we have as to our shareholders and other matters, we believe that we qualified for the Section 883 exemption for 2009 through 2018 under the “publicly-traded” test. We do not believe that we were able to satisfy the “publicly-traded” test for 2019 and, consequently, we were not exempt from U.S. federal income taxation on our U.S. source gross transportation income for 2019. Based on information that we have as to our shareholders and other matters, we believe that we qualified for the Section 883 exemption for 2020 and 2021, under the “publicly-traded” test. Whether we may satisfy the “publicly-traded” test depends on factors that are outside of our control, and we cannot provide any assurances that we will or will not satisfy the “publicly-traded” test to claim exemption from U.S. taxation for 2022 or future taxable years. See Item “10. Additional Information—E. Taxation—Taxation of Global Ship Lease—The Section 883 exemption” for a more comprehensive discussion of the U.S. federal income tax rules related to Section 883.
Under our charter agreements, our charterers have agreed to reimburse any such taxes. However, if our charterers do not provide such reimbursement, this could have a negative impact on our financial condition and results of operations.
Certain adverse U.S. federal income tax consequences could arise for U.S. holders.
Shareholders of a “passive foreign investment company,” or PFIC, that are U.S. persons within the meaning of the Code (“U.S. shareholders”) are subject to a disadvantageous U.S. federal income tax regime with respect to the distributions they receive from a PFIC and the gain, if any, they derive from the sale or other disposition of their shares in a PFIC (as discussed below). In addition, dividends paid by a PFIC do not constitute qualified dividend income and, hence, are ineligible for the preferential rate of tax that applies to qualified dividend income.
A foreign corporation is treated as a PFIC if either (1) 75% or more of its gross income for any taxable year consists of certain types of “passive income” or (2) 50% or more of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business; income derived from the performance of services does not, however, constitute “passive income.”
Based on the projected composition of our income and valuation of our assets, we do not expect that we will constitute a PFIC with respect to the current or any future taxable year, although there can be no assurance in this regard. Our expectation is based principally on the position that, for purposes of determining whether we are a PFIC, the majority, if not all, of the gross income we derive from our chartering activities should constitute services income rather than rental income.
In this regard, we have been advised by our tax advisor that the income from our chartering activities is, more likely than not, services income. There is, however, no direct legal authority under the PFIC rules addressing our current and projected future operations or supporting our position. Accordingly, no assurance can be given that the IRS will not assert that we are a PFIC with respect to any taxable year, nor that a court would not uphold any such assertion and we have not obtained advice from our tax advisor on whether we are a PFIC.
Further, in a case not concerning PFICs, Tidewater Inc. v. U.S., 2009-1 USTC ¶ 50,337, the Fifth Circuit held that a vessel time charter at issue generated rental, rather than services, income. However, the court’s ruling was contrary to the position of the IRS that the time charter income should be treated as services income. Subsequently, the IRS has stated that it disagrees with and will not acquiesce to the rental versus services distinction in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Further, the facts in Tidewater are not directly analogous to our facts. No assurance can be given that the IRS or a court of law would accept our position, and there is a risk that the IRS or a court of law could determine that the company is a PFIC.
If the IRS were to determine that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. tax consequences. Distributions paid by us with respect to our shares will not constitute qualified dividend income if we were a PFIC in the year we pay a dividend or in the prior taxable year and, hence, will not be eligible for the preferential rate of tax that applies to qualified dividend income. In addition, our U.S. shareholders (other than shareholders who have made a “qualified electing fund” or “mark-to-market” election) will be subject to special rules relating to the taxation of “excess distributions”—with excess distributions being defined to include certain distributions we may make on our Class A common shares as well as gain recognized by a U.S. holder on a disposition of our Class A common shares. In general, the amount of any “excess distribution” will be allocated ratably to each day of the U.S. holder’s holding period for our Class A common shares. The amount allocated to the current year and any taxable year prior to the first taxable year for which we were a PFIC will be included in the U.S. holder’s gross income for the current year as ordinary income. With respect to amounts allocated to prior years for which we were a PFIC, the tax imposed for the current year will be increased by the “deferred tax amount,” which is an amount calculated with respect to each prior year by multiplying the amount allocated to such year by the highest rate of tax in effect for such year, together with an interest charge as though the amounts of tax were overdue. See Item 10.E. “Additional Information—Taxation —Tax Consequences of Holding Class A common shares—Consequences of possible passive foreign investment company classification” for a more comprehensive discussion of the U.S. federal income tax consequences to U.S. shareholders if we were treated as a PFIC (including those applicable to U.S. shareholders who make a qualified electing fund or mark-to-market election).
| 28 |
We may be subject to taxation on all or part of our income in the United Kingdom, which could have a material adverse effect on our results of operations.
If we or our vessel owning subsidiaries were considered to be a resident of the United Kingdom (or “UK”) or to have a permanent establishment in the United Kingdom, all or a part of our profits could be subject to UK corporate tax, which had a maximum rate of 21%, 20% and 20% for the years ended March 31, 2014, 2015 and 2016, respectively, and 19% thereafter. We and our vessel owning subsidiaries are strategically managed and controlled from outside the United Kingdom and have restricted activities within the United Kingdom. Certain intra-group services are provided from within the United Kingdom and UK corporate tax will be payable on the arms-length price for those services. The appropriate arms-length price in these circumstances is likely to be a matter of negotiation with the UK taxing authorities.
We do not believe that we or our vessel owning subsidiaries are residents of the United Kingdom, or that we or our vessel owning subsidiaries have permanent establishments in the United Kingdom. However, because some administrative and executive services are provided to us or our vessel owning subsidiaries by a subsidiary company located in the United Kingdom and certain of our directors reside in the United Kingdom, and because UK statutory and case law fail to definitively identify the activities that constitute a trade being carried on in the United Kingdom through a permanent establishment, the UK taxing authorities may contend that we or our vessel owning subsidiaries are subject to UK corporate tax on all of our income, or on a greater portion of our income than we currently expect to be taxed. If the UK taxing authorities made such a contention, we could incur substantial legal costs defending our position, and, if we were unsuccessful in our defense, our results of operations would be materially adversely affected.
We may be subject to taxes which will reduce our cash flow.
We and our vessel owning subsidiaries may be subject to tax in certain jurisdictions in which we are organized, own assets or have operations, which would reduce the amount of our cash available for distribution. In computing our tax obligations in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions, the applicable authorities will agree with our positions. A successful challenge by a tax authority, or a change in law in a jurisdiction in which we operate (including Cyprus and Hong Kong, where a number of our vessel owning subsidiaries are entered in the local tonnage tax regime), could result in additional tax imposed on us, further reducing the cash available for distribution.
Tax laws, including tax rates, in the jurisdictions in which we operate may change as a result of macroeconomic or other factors outside of our control. For example, various governments and organizations such as the European Union and Organization for Economic Co-operation and Development (the “OECD”) are increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue. In January 2019, the OECD announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. In the third quarter of 2021, more than 130 countries tentatively signed on to a framework that imposes a minimum tax rate of 15%, among other provisions. Qualifying international shipping income is exempt from many aspects of this framework. The framework calls for law enactment by OECD and G20 members in 2022 to take effect in 2023 and 2024. On December 20, 2021, the OECD published model rules to implement the Pillar Two rules, which are generally consistent with agreement reached by the framework in October 2021. These changes, when enacted by various countries in which we do business, may increase our taxes in these countries. As this framework is subject to further negotiation, final approval by the G20, and implementation by each member country, the timing and ultimate impact of any such changes on our tax obligations are uncertain.
| Item 4. | Information on the Company |
A. History and Development of the Company
Our legal and commercial name is Global Ship Lease, Inc. We are a Republic of the Marshall Islands corporation that owns a fleet of mid-sized and smaller containerships which we charter out under fixed-rate charters to reputable container shipping companies.
| 29 |
The mailing address of our principal executive office is c/o Global Ship Lease Services Limited, 25 Wilton Road, London SW1V 1LW, United Kingdom, and our telephone number at that address is +44 (0) 20 3998 0063. Our agent in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s Internet site is www.sec.gov. Our website address is www.globalshiplease.com. None of the information contained on these websites is incorporated herein by reference or forms a part of this Annual Report. From time to time, we may use our website and social media outlets as channels of distribution of material company information.
We were formed in 2007 to purchase and charter back 17 containerships then owned or to be purchased by CMA CGM, at that time the third largest containership operator in the world by number of vessels. On August 14, 2008, we merged indirectly with Marathon Acquisition Corp. (“Marathon”), a company then listed on the American Stock Exchange. Under the merger agreement, Marathon, a U.S. corporation, first merged with its wholly-owned Marshall Islands subsidiary, GSL Holdings, Inc. (“Holdings”), with Holdings continuing as the surviving company. Global Ship Lease, Inc., at that time a subsidiary of CMA CGM, then merged with Holdings, with Holdings again being the surviving company. Holdings was renamed Global Ship Lease, Inc. and became listed on the NYSE on August 15, 2008.
On November 15, 2018, we completed the Poseidon Transaction, a transformative transaction by which we acquired 20 containerships, one of which was contracted to be sold. On the closing of the Poseidon Transaction, we issued as consideration 3,005,603 Class A common shares and 250,000 Series C Preferred Shares, which were converted to an aggregate of 12,955,188 Class A common shares in January 2021, and assumed the debt of Poseidon Containers, which amounted to $509.7 million.
On January 2, 2019, as a consequence of the completion of the Poseidon Transaction, all of our issued and outstanding Class B common shares converted one-for-one into Class A common shares. On March 25, 2019, we effected a one-for-eight reverse stock split of our Class A common shares, which our shareholders authorized at our special meeting of shareholders held on March 20, 2019. There was no change to the trading symbol, number of authorized shares, or par value of our Class A common shares in connection with the reverse stock split. All share and per share amounts disclosed in this Annual Report give effect to the reverse stock split retroactively, for all periods presented.
During 2021, we completed a series of vessel purchases, resulting in our acquisition of 23 additional vessels, and as of March 10, 2022, we owned 65 mid-sized and smaller containerships, ranging from 1,118 to 11,040 TEU, with an aggregate capacity of 342,348 TEU. 32 ships are wide-beam Post-Panamax. See “Item 4. Information on the Company-B. Business Overview”.
Class A Common Shares
On October 1, 2019, we closed our fully underwritten public offering of 7,613,788 Class A common shares, at a public offering price of $7.25 per share, for gross proceeds of approximately $55.2 million, (the “October 2019 Equity Offering”). This includes the exercise in full by the underwriter of its option to purchase additional shares. The net proceeds, after underwriting discounts and commissions and expenses, were approximately $50.7 million. Certain members of our executive management purchased an aggregate of 168,968 Class A common shares in the October 2019 Equity Offering at the public offering price, for which the underwriter did not receive any discount or commissions.
During the year ended December 31, 2020, 184,270 Class A common shares were issued under our 2019 Omnibus Incentive Plan (the “2019 Plan”) resulting in a total of 17,741,008 Class A common shares outstanding as of December 31, 2020.
On January 20, 2021, we repaid all of our outstanding 9.875% First Priority Secured Notes due 2022 (the “2022 Notes”) from the proceeds of a new $236.2 million senior secured loan facility (the “New Hayfin Facility”) with Hayfin Capital Management, LLP (“Hayfin”) and cash on hand. As a result, on the same day, the 250,000 Series C Preferred Shares, representing all such shares outstanding, converted to an aggregate of 12,955,188 Class A common shares.
On January 26, 2021, we closed our fully underwritten public offering of 5,400,000 Class A common shares, at a public offering price of $13.00 per share, for gross proceeds of approximately $70.2 million, and on February 17, 2021, we issued an additional 141,959 Class A common shares in connection with the underwriters’ partial exercise of their option to purchase additional shares (together, the “January 2021 Equity Offering”). The net proceeds we received in the January 2021 Equity Offering, after underwriting discounts and commissions and expenses, were approximately $67.5 million. Following the closing of the January 2021 Equity Offering, we had 36,283,468 Class A common shares outstanding.
On September 1, 2021, we announced the purchase and retirement of 521,650 Class A common shares for $10.0 million, reducing our issued and outstanding Class A common shares to 36,216,803 as of that date.
During the year ended December 31, 2021, 747,604 Class A common shares were issued under the 2019 Plan, and in January 2022, a further 347,283 Class A common shares were issued under the 2019 Plan.
| 30 |
2024 Notes
On November 19, 2019, we issued $27.5 million aggregate principal amount of our 8.00% Senior Unsecured Notes due 2024 (the “2024 Notes”) in an underwritten public offering, and on November 27, 2019, we issued an additional $4.125 million aggregate principal amount of 2024 Notes pursuant to the underwriters’ exercise of their option to purchase additional 2024 Notes, resulting in aggregate net proceeds to us of approximately $29.6 million, after the payment of underwriting discounts and commissions and offering expenses, (the “November 2019 Notes Offering”). Certain members of our executive management purchased $300,000 aggregate principal amount of 2024 Notes in the November 2019 Notes Offering, for which the underwriters did not receive any discount or commissions.
On November 27, 2019, we launched an “at the market” offering program (the “2024 Notes ATM Program”), for the sale, from time to time, of up to an additional $68.0 million of 2024 Notes. As of March 10, 2022, we have issued and sold approximately $50.9 million aggregate principal amount of the 2024 Notes ATM Program, resulting in net proceeds to us of $50.3 million..
On August 13, 2021, as part of the consideration for the purchase of 12 containerships from Borealis Finance LLC (the “Borealis Fleet”), for an aggregate purchase price of $233.9 million we issued $35.0 million of 2024 Notes to the sellers of the ships. As at December 31, 2021 total outstanding balance of the 2024 Notes was $117.5 million.
Depositary Shares ATM Program
On December 10, 2019, we launched an “at the market” offering program (the “Depositary Shares ATM Program”), pursuant to which we may sell, from time to time, up to $75.0 million of our depositary shares (the “Depositary Shares”), each of which represents 1/100th of one share of our 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares, par value $0.01 per share, with a liquidation preference of $2,500.00 per share (equivalent to $25.00 per Depositary Share). As of March 10, 2022, we have issued and sold approximately 3.0 million of our Depositary Shares under the Depositary Shares ATM Program, resulting in net proceeds to us of $71.4 million.
Other Recent Developments
On March 4, 2022, we provided a notice of redemption to holders of our 2024 Notes for our redemption of $28.5 million aggregate principal amount of the 2024 Notes at a redemption price equal to 102.0% of the principal amount thereof plus accrued and unpaid interest to, but not including, the redemption date of April 5, 2022.
On March 2, 2022, we announced that our Board of Directors authorized share repurchases in the amount of up to $40.0 million, to be utilized on an opportunistic basis.
On February 10, 2022, we announced a dividend of $0.25 per Class A common share for the fourth quarter of 2021 to be paid on March 4, 2022 to common shareholders of record as of February 22, 2022. This follows dividends of $0.25 per Class A common share paid for the first, second and third quarters 2021.
In January 2022, agreed an amendment to the existing $268.0 million Syndicated Senior Secured Credit Facility (CACIB, ABN, CIT, Siemens, CTBC, Bank Sinopac, Palatine) with outstanding balance of $213.2 million, to extend the maturity date from September 2024 to December 2026, favorably amend certain covenants, and release three vessels from the facility’s collateral basket, at an unchanged rate of LIBOR + 3.00%. These three vessels were subsequently used as collateral for a new $60.0 million syndicated senior secured debt facility, maturing July 2026 and priced at LIBOR + 2.75%, which was used to fully repay the 10.00% Blue Ocean junior debt facility and for general corporate purposes.
In December 2021, we hedged our exposure to a potential rising interest rate environment by putting in place a USD one-month LIBOR interest rate cap of 0.75% through fourth quarter 2026, on $484.1 million of our floating rate debt, which reduces over time and represents approximately half of the then outstanding floating rate debt. In February 2022, we entered into a further USD one-month LIBOR interest rate cap of 0.75% through fourth quarter 2026 on $507.9 million of floating rate debt, which also reduces over time and represented approximately half of the outstanding floating rate.
On November 22, 2021, we announced that our Board of Directors approved the increase in the dividend on our Class A common shares by 50% to $0.375 per share per quarter effective from first quarter 2022.
| 31 |
B. Business Overview
Our Fleet
The table below provides certain information about our fleet of 65 containerships as of December 31, 2021, including charters agreed up to March 10, 2022:
|
Vessel Name |
Capacity in TEUs | Lightweight (tons) | Year Built | Charterer | Earliest Charter Expiry Date | Latest Charter Expiry Date (2) | Daily Charter Rate $ |
| CMA CGM Thalassa | 11,040 | 38,577 | 2008 | CMA CGM | 4Q25 | 2Q26 | 47,200 |
| UASC Al Khor (1) | 9,115 | 31,764 | 2015 | Hapag-Lloyd (3) | 1Q27 (3) | 3Q27 (3) | 34,000 (3) |
| Anthea Y (1) | 9,115 | 31,890 | 2015 | COSCO | 3Q23 | 4Q23 | 38,000 |
| Maira XL(1) | 9,115 | 31,820 | 2015 | ONE (3) | 2Q27 (3) | 4Q27 (3) | 31,650 (3) |
| MSC Tianjin | 8,603 | 34,325 | 2005 | MSC | 2Q24 | 3Q24 | 19,000 |
| MSC Qingdao (4) | 8,603 | 34,609 | 2004 | MSC | 2Q24 | 1Q25 | 23,000 |
| GSL Ningbo | 8,603 | 34,340 | 2004 | MSC | 1Q23 | 3Q23 | 22,500 |
| GSL Eleni | 7,847 | 29,261 | 2004 | Maersk | 3Q24 | 4Q24 (5) | 16,500 (5) |
| GSL Kalliopi | 7,847 | 29,105 | 2004 | Maersk | 4Q22 | 1Q25 (5) | 14,500 (5) |
| GSL Grania | 7,847 | 29,190 | 2004 | Maersk | 4Q22 | 4Q24 (5) | 14,500 (5) |
| Mary (1) | 6,927 | 23,424 | 2013 | CMA CGM | 3Q23 | 4Q23 | 25,910 |
| Kristina (1) | 6,927 | 23,421 | 2013 | CMA CGM | 2Q24 | 3Q24 | 25,910 |
| Katherine (1) | 6,927 | 23,403 | 2013 | CMA CGM | 1Q24 | 2Q24 | 25,910 |
| Alexandra (1) | 6,927 | 23,348 | 2013 | CMA CGM | 1Q24 | 3Q24 | 25,910 |
| Alexis (1) | 6,882 | 23,919 | 2015 | CMA CGM | 1Q24 | 3Q24 | 25,910 |
| Olivia I (1) | 6,882 | 23,864 | 2015 | CMA CGM | 1Q24 | 2Q24 | 25,910 |
| GSL Christen | 6,840 | 27,954 | 2002 | Maersk | 3Q23 | 4Q23 | 35,000 |
| GSL Nicoletta | 6,840 | 28,070 | 2002 | Maersk | 3Q24 | 4Q24 | 35,750 |
| CMA CGM Berlioz | 6,621 | 26,776 | 2001 | CMA CGM | 4Q25 | 2Q26 | 37,750 (6) |
| Agios Dimitrios (4) | 6,572 | 24,931 | 2011 | MSC | 4Q23 | 3Q24 | 20,000 |
| GSL Vinia | 6,080 | 23,737 | 2004 | Maersk | 3Q24 | 2Q25 | 13,250 |
| GSL Christel Elisabeth | 6,080 | 23,745 | 2004 | Maersk | 2Q24 | 2Q25 | 13,250 |
| GSL Dorothea | 5,992 | 24,243 | 2001 | Maersk | 3Q24 | 3Q26 | 18,600 (7) |
| GSL Arcadia | 6,008 | 24,858 | 2000 | Maersk | 2Q24 | 1Q26 | 18,600 (7) |
| GSL Violetta | 6,008 | 24,873 | 2000 | Maersk | 4Q24 | 4Q25 | 18,600 (7) |
| GSL Maria | 6,008 | 24,414 | 2001 | Maersk | 4Q24 | 1Q27 | 18,600 (7) |
| GSL MYNY | 6,008 | 24,873 | 2000 | Maersk | 3Q24 | 1Q26 | 18,600 (7) |
| GSL Melita | 6,008 | 24,848 | 2001 | Maersk | 3Q24 | 3Q26 | 18,600 (7) |
| GSL Tegea | 5,992 | 24,308 | 2001 | Maersk | 3Q24 | 3Q26 | 18,600 (7) |
| Tasman | 5,936 | 25,010 | 2000 | Maersk | 1Q22 | 1Q24 | 12,500 (8) |
| ZIM Europe | 5,936 | 25,010 | 2000 | ZIM | 1Q24 | 3Q24 | 14,500 (9) |
| Ian H | 5,936 | 25,128 | 2000 | ZIM | 2Q24 | 4Q24 | 32,500 (9) |
| GSL Tripoli | 5,470 | 22,259 | 2009 | Maersk | 3Q24 | 4Q27 | 36,500 (10) |
| GSL Kithira | 5,470 | 22,108 | 2009 | Maersk | 4Q24 | 1Q28 | 36,500 (10) |
| GSL Tinos | 5,470 | 22,067 | 2010 | Maersk | 3Q24 | 4Q27 | 36,500 (10) |
| GSL Syros | 5,470 | 22,098 | 2010 | Maersk | 3Q24 | 4Q27 | 36,500 (10) |
| Dolphin II | 5,095 | 20,596 | 2007 | OOCL | 1Q25 | 2Q25 | 24,500 (11) |
| Orca I | 5,095 | 20,633 | 2006 | Maersk | 2Q24 | 4Q25 | 21,000 (12) |
| CMA CGM Alcazar | 5,089 | 20,087 | 2007 | CMA CGM | 3Q26 | 4Q26 | 35,500 |
| GSL Château d’If | 5,089 | 19,994 | 2007 | CMA CGM | 4Q26 | 1Q27 | 35,500 |
| GSL Susan | 4,363 | 17,309 | 2008 | CMA CGM | 3Q22 | 4Q22 | 22,000 |
| CMA CGM Jamaica | 4,298 | 17,272 | 2006 | CMA CGM | 3Q22 | 3Q23 | 25,350 |
| CMA CGM Sambhar | 4,045 | 17,429 | 2006 | CMA CGM | 3Q22 | 3Q23 | 25,350 |
| CMA CGM America | 4,045 | 17,428 | 2006 | CMA CGM | 3Q22 | 2Q23 | 25,350 |
| GSL Rossi | 3,421 | 16,420 | 2012 | Gold Star/ZIM | 1Q26 | 3Q26 | 20,000 (13) |
| GSL Alice | 3,421 | 16,543 | 2014 | CMA CGM | 1Q23 | 2Q23 | 21,500 |
| GSL Eleftheria | 3,404 | 16,642 | 2013 | Maersk | 3Q25 | 4Q25 | 37,975 |
| GSL Melina | 3,404 | 16,703 | 2013 | Maersk | 2Q23 | 3Q23 | 24,500 |
| GSL Valerie | 2,824 | 11,971 | 2005 | ZIM | 1Q25 | 3Q25 | 13,250 (14) |
| Matson Molokai | 2,824 | 11,949 | 2007 | Matson | 2Q25 | 3Q25 | 20,250 (15) |
| GSL Lalo | 2,824 | 11,950 | 2006 | ONE | 4Q22 | 1Q23 | 18,500 |
| GSL Mercer | 2,824 | 11,970 | 2007 | ONE | 4Q24 | 1Q25 | 35,750 |
| Athena | 2,762 | 13,538 | 2003 | Hapag-Lloyd | 2Q24 | 2Q24 | 21,500 |
| 32 |
|
Vessel Name |
Capacity in TEUs | Lightweight (tons) | Year Built | Charterer | Earliest Charter Expiry Date | Latest Charter Expiry Date (2) | Daily Charter Rate $ |
| GSL Elizabeth | 2,741 | 11,507 | 2006 | ONE | 3Q22 | 1Q23 | 18,500 |
| GSL Chloe | 2,546 | 12,212 | 2012 | ONE | 4Q24 | 1Q25 | 33,000 |
| GSL Maren | 2,546 | 12,243 | 2014 | Westwood | 4Q22 | 1Q23 | 19,250 |
| Maira | 2,506 | 11,453 | 2000 | Hapag-Lloyd | 1Q23 | 2Q23 | 14,450 |
| Nikolas | 2,506 | 11,370 | 2000 | CMA CGM | 1Q23 | 1Q23 | 16,000 |
| Newyorker | 2,506 | 11,463 | 2001 | CMA CGM | 1Q24 | 3Q24 | 20,700 |
| Manet | 2,272 | 11,727 | 2001 | OOCL | 4Q24 | 1Q25 | 32,000 (16) |
| Keta | 2,207 | 11,731 | 2003 | CMA CGM | 1Q25 | 1Q25 | 25,000 |
| Julie | 2,207 | 11,731 | 2002 | Sea Consortium | 1Q23 | 2Q23 | 20,000 |
| Kumasi | 2,207 | 11,791 | 2002 | Wan Hai | 1Q25 | 2Q25 | 38,000 (17) |
| Akiteta (18) | 2,207 | 11,731 | 2002 | OOCL | 4Q24 | 1Q25 | 32,000 |
| GSL Amstel | 1,118 | 5,167 | 2008 | CMA CGM | 3Q23 | 3Q23 | 11,900 |
| (1) | Modern design, high reefer capacity, fuel-efficient vessel. |
| (2) | In many instances charterers have the option to further extend a charter beyond the nominal latest expiry date by the amount of time that the vessel was off hire during the course of that charter. This additional charter time (“Offhire Extension”) is computed at the end of the initially contracted charter period. The Latest Charter Expiry Dates shown in this table have been adjusted to reflect offhire accrued up to the date of issuance of this release plus estimated offhire scheduled to occur during the remaining lifetimes of the respective charters. However, as actual offhire can only be calculated at the end of each charter, in some cases actual Offhire Extensions – if invoked by charterers - may exceed the Latest Charter Expiry Dates indicated. |
| (3) | UASC Al Khor & Maira XL. On November 22, 2021 we announced the forward fixture of these two ships, upon the expiry of their existing charters in the second or third quarters of 2022, to a leading liner operator for approximately five years each at a charter rate of $65,000 per day. |
| (4) | MSC Qingdao & Agios Dimitrios are fitted with Exhaust Gas Cleaning Systems (“scrubbers”). |
| (5) | GSL Eleni delivered 2Q2019 and is chartered for five years; GSL Kalliopi (delivered 4Q2019) and GSL Grania (delivered 3Q2019) are chartered for three years plus two successive periods of one year at the option of the charterer. During the option periods the charter rates for GSL Kalliopi and GSL Grania are $18,900 per day and $17,750 per day respectively. |
| (6) | CMA CGM Berlioz. Chartered at $34,000 per day through end-December 2021, at which time the rate increased to $37,750 per day. |
| (7) | On February 9, 2021 we announced that we had contracted to purchase seven ships of approximately 6,000 TEU each, which have now been delivered. Contract cover for each ship is for a firm period of at least three years from the date each vessel is delivered, with charterers holding a one-year extension option on each charter (at a rate of $12,900 per day), followed by a second option (at a rate of $12,700 per day) with the period determined by - and terminating prior to - each vessel’s 25th year drydocking & special survey. |
| (8) | Tasman. 12-month extension at charterer’s option is callable in 2Q2022, at an increased rate of $20,000 per day. |
| (9) | A package agreement with ZIM, for direct charter extensions on two 5,900 TEU ships: Ian H, at a rate of $32,500 per day from May 2021, and ZIM Europe (formerly Dimitris Y), at a rate of $24,250 per day, from May 2022. |
| (10) | On June 16, 2021 we announced that we had contracted to purchase four ultra-high reefer ships of 5,470 TEU each. These ships delivered in September and October of 2021. Contract cover on each ship is for a firm period of three years at a rate of $36,500 per day, with a period of an additional three years (at $17,250 per day) at charterers’ option. |
| (11) | Dolphin II. Chartered to OOCL at $24,500 per day through April 2022, at which time the rate will increase to $53,500 per day. |
| (12) | Orca I. Chartered at $21,000 per day through to the median expiry of the charter in 2Q2024; thereafter the charterer has the option to charter the vessel for a further 12-14 months at the same rate. |
| (13) | GSL Rossi. Chartered to Gold Star / ZIM to March 2022 at a rate of $20,000 per day; thereafter the rate increases to an average of $38,875 per day. |
| (14) | GSL Valerie: chartered to ZIM at $13,250 per day to January 2022; thereafter the rate increases to an average of $35,600 per day-$40,000 for the first 12 months, $36,000 for the next 12 months and $32,000 for the remaining period. |
| (15) | Matson Molokai. Chartered to Matson at $20,250 per day to May 2022 after which the rate increases to $36,500 per day. |
| (16) | Manet. Chartered to OOCL at a rate of $32,000 per day upon completion of dry-docking. |
| (17) | Kumasi. Chartered to Wan Hai at a rate of $38,000 per day upon completion of dry-docking. |
| (18) | Akiteta, formerly Marie Delmas. Chartered to OOCL at a rate of $32,000 per day upon completion of dry-docking. Note that this charter was formerly attributed to Kumasi, but was switched to Akiteta due to vessel positioning and availability. |
| 33 |
Fleet Development
As of December 31, 2021, our fleet consisted of 65 containerships with an aggregate capacity of 342,348 TEU and a TEU-weighted average age of approximately 14.9 years.
Vessel Acquisitions
On February 9, 2021, we contracted to purchase from and charter back to Maersk Line, seven 6,000 TEU Post-Panamax containerships (the “Seven Vessels”) with an average age of approximately 20 years for an aggregate purchase price of $116.0 million funded by cash, a new $64.2 million secured credit facility and a new $14.7 million sale and leaseback agreement. The vessels were delivered between April 26, 2021 and July 28, 2021.
On June 8, 2021, we contracted to purchase 12 containerships from Borealis Finance LLC, with an average size of approximately 3,000 TEU, a weighted average age of 11 years, and all with charters to leading liner operators, for an aggregate purchase price of $233.9 million funded by cash, an issuance of $35.0 million of existing 2024 Notes to the sellers of the ships and a new $140.0 million syndicated secured credit facility. All of these vessels were delivered in July 2021.
On June 16, 2021, we contracted to purchase four 5,470 TEU ultra-high reefer capacity Panamax containerships with an average age of approximately 11 years, and with charters to Maersk Line, for an aggregate purchase price of $148.0 million funded by cash and four new $30.0 million sale and leaseback agreements. Three of these vessels were delivered to us in September 2021 and the remaining vessel was delivered on October 13, 2021.
Vessel disposals
We sold La Tour, a 2001-built, 2,272 TEU containership, on June 30, 2021, for net proceeds of $16.5 million. The vessel was released as collateral under our $236.2 million senior secured loan facility with Hayfin Capital Management, LLP (the “New Hayfin Credit Facility”). The net gain from the sale of vessel was $7.8 million.
Time Charters
A time charter is a contract for the use of a vessel for a fixed period of time at a specified daily rate. Under a time charter, the vessel owner provides crew, lubricating oil, all maintenance and other services related to the vessel’s operation, the cost of which is included in the daily rate. The vessel owner is also responsible for insuring its interests in the vessel and liabilities as owner arising from its use. The charterer is responsible for substantially all of the vessel’s voyage costs, such as fuel (bunker) costs, canal fees, port expenses, extra war risk insurance costs if the vessel is deployed outside normal insurance limits and for entering areas which are specified by the insurance underwriters as being subject to additional premiums and cargo handling charges.
The initial term for a time charter commences on the vessel’s delivery to the charterer. Time charter agreements may include options, in favor of the owner or the charterer, to extend the charter on pre-agreed terms. At the end of a charter, the vessel may be re-delivered by the charterer within a pre-agreed time window, to allow for operational flexibility. Charters may be extended on mutually agreed terms, or the vessel is re-delivered, in which case we would seek alternate employment with another charterer.
Our charters expire on different dates and over a period of time. We believe the staggered expirations of our charters reduces our exposure to rechartering risk and may mitigate the impact of the cyclical nature of the container shipping industry.
| 34 |
Daily Charter Rate
Daily charter rate refers to the gross amount per day payable by the charterer to the owner for the use of the vessel. It may be reduced by chartering commission payable to a broker or other party. Under our time charters, hire is payable to us typically every 15 days in advance and in U.S. dollars. The daily charter rate is a fixed daily amount that will remain the same for the duration of the charter, although the charter rate can be reduced in certain circumstances where there are added costs to the charterer due to vessel performance deficiencies in speed or fuel consumption. Hire can also be reduced, pro-rata for any cost savings that we may realize, if the vessel is laid up or idled at the charterers’ request.
Operations and Expenses
As owners, we are required to maintain each vessel in class and in an efficient state of hull and machinery and are responsible for vessel costs such as crewing, lubricating oil, maintenance, insurance and drydocking. The charterer is responsible for the voyage costs, which includes bunker fuel, stevedoring, port charges and towage. As described below, we have entered into ship management agreements to sub-contract the day-to-day technical management of our vessels.
Right of First Refusal
Pursuant to the terms of the initial time charters with CMA CGM, of which four were in place at December 31, 2021, CMA CGM has a right of first refusal to purchase the vessel at matching terms to any offer of any third party if we decide to sell it during, or at the end of, the charter period. Should CMA CGM decline to exercise its right of first refusal in case of a sale during the charter period, we will be entitled to sell the vessel, subject to CMA CGM’s prior approval, which shall not be unreasonably withheld. CMA CGM has the right to reject a sale of a vessel to owners whose business or shareholding is determined to be detrimental or contrary to its interest.
Off-hire
Under a time charter, when the vessel is not available for service, and is “off-hire,” the charterer generally is not required to pay charter hire (unless the charterer is responsible for the circumstances giving rise to the ship’s unavailability), and we are responsible for costs during any off-hire period, and possible additional costs of fuel to regain lost time. Additionally, in many cases the charterer has the option to extend the latest redelivery date by the offhire days. A vessel generally will be deemed to be off-hire if there is an occurrence that affects the full working condition of the vessel, including:
| • | any drydocking for repairs, maintenance or classification society inspection; |
| • | any damage, defect, breakdown or deficiency of the ship’s hull, machinery or equipment or repairs or maintenance thereto; |
| • | any deficiency of the ship’s master, officers and/or crew, including the failure, refusal or inability of the ship’s master, officers and/or crew to perform the service immediately required, whether or not within its control; |
| • | its deviation, other than to save life or property, which results in the charterer’s lost time; |
| • | crewing labor boycotts or certain vessel arrests; or |
| • | our failure to maintain the vessel in compliance with the charter’s requirements, such as maintaining operational certificates. |
Ship Management and Maintenance
Under each of our time charters, we are responsible for the operation and technical management of each vessel, which includes crewing, provision of lubricating oils, maintaining the vessel, periodic drydocking and performing work required by regulations. The day-to-day crewing and technical management of our vessels are provided by our ship managers pursuant to the terms of ship management agreements.
Termination and Withdrawal
Generally, if a vessel is off-hire for a significant number of consecutive days, then the charterer may cancel the charter without any further consequential claims provided the vessel is free of cargo. The number of these days varies from 20 to 90 days and depends on the relevant charter agreement. Some of our charters provide that we can in some circumstances provide a substitute vessel during an anticipated extended period of off-hire.
| 35 |
For a number of vessels chartered to CMA CGM, if a vessel’s fuel consumption exceeds a level specified in the charter over a continuous period of 30 days, and the reason is within our or the vessel’s control, CMA CGM may request that we cure the deficiency. If the deficiency is not cured within 30 days after we receive notice, then CMA CGM may terminate the charter.
Generally, if either party informs the other party of a default under the charter, and the default is not rectified within 60 days of such notice, then the party giving the notice has the right to terminate the time charter with respect to that vessel.
The charter will terminate in the event of a total (actual or constructive) loss of the vessel or if the vessel is requisitioned.
We may suspend the performance of our obligations under the charter if the charterer defaults on its payment obligations under the charter.
Management of Our Fleet
Our management team supervises the day-to-day technical ship management of our vessels which is provided mainly by Technomar, a company of which our Executive Chairman is the Founder, Managing Director, and majority beneficial owner. The technical management of six vessels is provided by a separate third party ship manager. Additionally, as of December 31, 2021, all of our vessels were commercially managed by Conchart, a company of which our Executive Chairman is the sole beneficial owner.
Technical Management
Technomar provides all day-to-day technical ship management services for all but six of our vessels, where technical management services are provided by a separate third-party ship manager (the “Third-Party Managed Vessels”).
Under the ship management agreements, our ship managers are responsible for all day-to-day ship management, including crewing, purchasing stores, lubricating oils and spare parts, paying wages, pensions and insurance for the crew, and organizing other vessel operating necessities, including the arrangement and management of drydocking. We reimburse the ship managers for the costs they incur on our behalf. Each ship management agreement provides that we have the right to audit the accounts of our ship manager to verify the costs incurred. The ship managers have agreed to maintain our vessels so that they remain in class with valid certification. In addition, they are responsible for our current fleet’s compliance with all applicable government and other regulations, and compliance with class certifications.
We pay Technomar a daily management fee of Euro 700 (Euro 715 from January 1, 2022), per vessel, payable in U.S. dollars at an agreed exchange rate of 1.164 USD to 1.0 Euro, which, in addition to the technical ship management services noted above, includes administrative support services provided to the GSL group including accounting and financial reporting, treasury management services and legal services.
The ship managers are required to use their best endeavors to provide the services specified in the ship management agreements. Pursuant to the terms of the ship management agreements, we provide customary indemnification to the manager and its employees, agents and sub-contractors.
The ship management agreements for the vessels provided as security under our credit facilities have a minimum duration equal to the duration of their respective credit facilities.
The management agreements with Technomar may be terminated by either party by giving six months’ written notice with termination to be effective no sooner than the expiry of the minimum term. In this case, a termination payment of 50% of the annual fee is payable if the management agreement is terminated by the managers and a termination fee of two times the annual fee is payable if the management agreement is terminated by the owners.
A third-party ship manager provides technical and crew services for the Third-Party Managed Vessels. We pay $200,000 per annum per vessel for technical management services and $4,000 per month per vessel for crew services for these vessels. The minimum contract period is two years from each vessel’s delivery date, with the second year being subject to certain performance parameters of the manager. The management agreements with the third-party managers may be terminated by either party by giving two months’ written notice with termination to be effective no sooner than the expiry of the minimum term. A termination payment of a one month fee is payable if the management agreement is terminated by either party.
Either party may terminate a ship management agreement in the event of default, which has not been cured, an order being made or a resolution being passed for the winding up, dissolution or bankruptcy of either party, or if a receiver is appointed, or if it suspends payment, ceases to carry on business or makes a special arrangement with its creditors. The ship management agreement will also terminate if the vessel becomes a total loss, is declared as a constructive or compromised or arranged total loss, is requisitioned or sold. The agreements with Technomar can also be terminated by either party upon a change of control of the other party.
| 36 |
In addition, each of our vessel-owning subsidiaries for the Third-Party Managed Vessels has entered into a Supervision Agreement with Technomar, pursuant to which Technomar supervises the third-party manager in order to ensure the services are fulfilled as required under the third party management agreements. In addition, Technomar undertakes the provision of Technical, Drydock, Insurance, Freight and Claims Handling Services as well as accounting, administrative & support services. The terms of the Supervision Agreements are similar, mutatis mutandis, to the terms of our existing Technical Management Agreements with Technomar. Pursuant to the Supervision Agreements, we pay a supervision fee of $150 per day per vessel, which, subject to the vessel-owning subsidiary’s approval, may be increased every January 1 by not more than 2.5%. The minimum duration is from the delivery date of each vessel to us until the earlier of either (i) the termination of the third party management agreement or (ii) the lapse of 24 calendar months from the delivery date in which case the Supervision Agreement automatically converts to a Technomar technical management agreement under agreed terms as per our existing Technomar management agreements, with a minimum duration until September 30, 2026 and with the first budget to be agreed on the date of conversion.
Commercial Management
Commercial management of vessels includes evaluating possible daily rate and duration of future employment, marketing a vessel for such employment, agreeing the detailed terms of a new charter or extension of an existing charter, administering the conduct of the charter including collection of charter-hire where necessary. Commercial management also includes negotiating sale and purchase transactions.
The commercial management of all of our vessels is provided by Conchart, under agreements which provide for Conchart to receive a commission of 1.25% on all monies earned under each charter fixture, and 1.00% commission on any sale and purchase transaction. No commission is payable on any charter of a vessel in the GSL Fleet to CMA CGM in place as of November 15, 2018, if applicable. However, commission is payable to the managers for any extension of such charters after March 31, 2021.
The commercial management agreements for the vessels provided as security under our credit facilities have a minimum term equal to the duration of their respective credit facilities and can thereafter be terminated on six months’ notice in which case a termination payment is due of six times the average monthly commission paid in the previous six months if the agreement is terminated by Conchart and 12 times the average monthly commission paid in the previous six months if the agreement is terminated by the vessel owner. The agreement can also be terminated by one party on change of control in the other party. Either party can terminated the agreement in the event of default, which has not been cured, an order being made or a resolution being passed for the winding up, dissolution or bankruptcy of either party, or if a receiver was appointed, or if it suspends payment, ceases to carry on business or makes a special arrangement with its creditors.
Until January 20, 2021, Global Ship Lease Services Limited (“GSLS”), a wholly owned subsidiary of the company, was the commercial manager for the 16 vessels provided as security under the 2022 Notes and an associated credit facility until the 2022 Notes were fully repaid on January 20, 2021, the associated credit facility having been fully repaid on October 31, 2020. It had entered into a Commercial Advisory Services and Exclusive Brokerage Services Agreement (“EBSA”) with Conchart, whereby Conchart was appointed to provide commercial advisory and exclusive brokerage services on terms substantially similar to those of the described above.
By mutual consent, the EBSA was terminated without penalty on the repayment of the 2022 Notes and the 16 vessels became subject to commercial management agreements directly with Conchart.
Pursuant to the Brokerage Services Agreement dated February 21, 2020 among GSL Inc , each GSl vessel owning company and GSL Enterprises Ltd (“GSL Enterprises”), GSL Enterprises is engaged by GSL Inc and the GSL SPVs to provide various brokerage, administrative and other services. GSL Enterprises is getting a base fee of $1,000 per month per vessel plus any supplemental fees to cover all operating needs of GSL Enterprises. The Brokerage Services Agreement can be terminated by mutual agreement at any time or by either party in case of the other party’s breach of the terms of the agreement.
| 37 |
Insurance
We arrange for insurance coverage for each of our vessels, including hull and machinery insurance, protection and indemnity insurance and war risk insurance. We are responsible for the payment of all premiums. See “—Risk of Loss and Liability Insurance.”
Inspection by Classification Societies
The hull and machinery of every commercial vessel must be classed by a classification society authorized by the vessel’s country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the International Convention for the Safety of Life at Sea of 1974, or SOLAS Convention. Most insurance underwriters make it a condition for insurance coverage that a vessel be certified “in class” by a classification society which is a member of the International Association of Classification Societies, the IACS. All of our vessels are certified as being “in class” by all the applicable Classification Societies.
For maintenance of the class, regular and extraordinary surveys of hull and machinery, including the electrical plant and any special equipment classed, are required to be performed as follows:
Annual Surveys
For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable, on special equipment classed at intervals of 12 months from the date of commencement of the class period indicated in the certificate.
Intermediate Surveys
Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.
Class Renewal Surveys
Class renewal surveys, also known as special surveys, are carried out on the ship’s hull and machinery, including the electrical plant, and on any special equipment classed at the intervals indicated by the character of classification for the hull. During the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. Substantial amounts of funds may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey, which is generally every five years, a shipowner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At a ship-owner’s application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal. All areas subject to surveys as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are otherwise prescribed. The period between two consecutive surveys of each area must not exceed five years.
All vessels are also dry-docked at least once every five years for inspection of their underwater parts and for repairs related to such inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the ship-owner within prescribed time limits.
If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable which could cause us to be in violation of certain covenants in our loan agreements. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition and results of operations.
| 38 |
The following table shows the classification societies for our vessels and lists the month by which they need to have completed their next drydocking:
|
Vessel Name |
Classification Society | Drydocking Month(1) |
| CMA CGM Thalassa | Bureau Veritas | Jun-22 |
| UASC Al Khor | DNV-GL & RINA | Dec-22 |
| Anthea Y | DNV-GL & RINA | Feb-23 |
| Maira XL | DNV-GL & RINA | Aug-25 |
| MSC Tianjin | RINA | Mar-25 |
| MSC Qingdao | Bureau Veritas | Apr-24 |
| GSL Ningbo | Bureau Veritas | May-24 |
| GSL Eleni | DNV-GL | Jul-24 |
| GSL Kalliopi | DNV-GL | Oct-24 |
| GSL Grania | DNV-GL | Sep-24 |
| Mary | RINA | Jan-23 |
| Kristina | DNV-GL | Mar-23 |
| Katherine | RINA | Apr-23 |
| Alexandra | RINA | Jan-23 |
| Alexis | DNV-GL & RINA | Jul-24 |
| Olivia I | DNV-GL & RINA | Jul-24 |
| GSL Christen | RINA | Aug-22 |
| GSL Nicoletta | RINA | Sep-22 |
| CMA CGM Berlioz | Bureau Veritas | In progress |
| Agios Dimitrios | Bureau Veritas | Sep-25 |
| GSL Vinia | Bureau Veritas | Oct-24 |
| GSL Christel Elisabeth | Bureau Veritas | Sep-24 |
| GSL Dorothea | RINA | May-26 |
| GSL Arcadia | DNV-GL | Dec-25 |
| GSL Violetta | DNV-GL | Aug-25 |
| GSL Maria | RINA | Dec-26 |
| GSL MYNY | DNV-GL | Oct-25 |
| GSL Melita | RINA | May-26 |
| GSL Tegea | RINA | Jun-26 |
| Tasman | Bureau Veritas | Jan-25 |
| ZIM Europe | Bureau Veritas | May-25 |
| Ian H | Bureau Veritas | Jul-25 |
| GSL Tripoli | DNV-GL | Sep-22 |
| GSL Kithira | DNV-GL | Jul-22 |
| GSL Tinos | DNV-GL | Jun-22 |
| GSL Syros | DNV-GL | Jul-22 |
| Dolphin II | Bureau Veritas | Apr-22 |
| Orca I | Bureau Veritas | Nov-26 |
| CMA CGM Alcazar | Bureau Veritas | Nov-22 |
| GSL Château d’If | Bureau Veritas | Aug-22 |
| GSL Susan | RINA | Jul-22 |
| CMA CGM Jamaica | DNV-GL | In progress |
| CMA CGM Sambhar | RINA | Jul-26 |
| CMA CGM America | RINA | In progress |
| GSL Rossi | RINA | Dec-27 |
| GSL Alice | RINA | Mar-29 |
| GSL Eleftheria | RINA | Jun-28 |
| GSL Melina | RINA | Dec-28 |
| GSL Valerie | DNV-GL | Jun-25 |
| 39 |
|
Vessel Name |
Classification Society | Drydocking Month(1) |
| Matson Molokai | RINA | Feb-25 |
| GSL Lalo | RINA | Jun-26 |
| GSL Mercer | RINA | May-22 |
| Athena | RINA | Feb-23 |
| GSL Elizabeth | RINA | Mar-26 |
| tbr GSL Chloe | RINA | Jan-25 |
| GSL Maren | RINA | Mar-24 |
| Maira | RINA | Aug-25 |
| Nikolas | RINA | Aug-25 |
| Newyorker | RINA | Jan-26 |
| Manet | Bureau Veritas | Oct-26 |
| Keta | Bureau Veritas | Nov-26 |
| Julie | Bureau Veritas | Aug-22 |
| Kumasi | Bureau Veritas | Feb-27 |
| Akiteta | Bureau Veritas | Jan-27 |
| GSL Amstel | RINA | Oct-23 |
| (1) | Expected month of drydocking assumes that the vessel qualifies for in-water inspections at the intermediate survey. |
The table does not take account of discretionary drydockings to effect vessel upgrades, or in response to proposed or actual regulatory changes such as for ballast water treatment.
Competition
We operate in markets that are highly competitive. We expect to compete for vessel purchases and charters based upon price, customer relationships, operating expertise, professional reputation and size, age and condition of the vessel. We also expect to compete with many other companies, both other owners and operators to, among other things, purchase newbuildings and secondhand vessels to grow our fleet.
We expect substantial competition in obtaining new containership charters from a number of experienced and substantial companies. Many of these competitors may have greater financial resources than us, may operate larger fleets, may have been established for longer and may be able to offer better charter rates. Due to the recent industry downturn, there have been an increased number of vessels available for charter, including many from owners with strong reputations and experience. Excess supply of vessels in the container shipping market results in a more active short-term charter market and greater price competition for charters. As a result of these factors, we may be unable to purchase additional containerships, expand our relationships with existing customers or obtain new charterers on a profitable basis, if at all, which would have a material adverse effect on our business, results of operations and financial condition.
Permits and Authorizations
We are required by various governmental and other agencies to obtain certain permits, licenses and certificates with respect to our vessels. The kinds of permits, licenses and certificates required depend upon several factors, including the commodities transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the age of a vessel. Not all of the permits, licenses and certificates currently required to operate the vessels globally have been obtained by us or our ship managers. For example, Keta, Julie, Kumasi and Akiteta have not been certified to comply with all U.S., Canadian and Panama Canal regulations, as our charterers do not intend to operate them in these waters. However, permits can be obtained in case charterers wish to trade the vessels in USA Canada and/or transit Panama Canal.
Environmental and Other Regulations
Government regulation significantly affects our business and the operation of our vessels. We are subject to international conventions and codes, and national, state, and local laws and regulations in the jurisdictions in which our vessels operate or are registered, including, among others, those governing the generation, management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions and water discharges. Because such laws and regulations frequently change, we cannot predict the ultimate cost of complying with these requirements or the impact of these requirements on the resale or current market value or useful lives of our vessels.
| 40 |
A variety of government, quasi-government and private entities require us to obtain permits, licenses or certificates for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels in one or more ports.
Increasing environmental concerns have created a demand for vessels that conform to the strictest environmental standards. We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with United States and international regulations and with flag state administrations.
The following is an overview of certain material governmental regulations that affect our business and the operation of our vessels.
International Maritime Organization
The IMO is the United Nations’ agency for maritime safety. The IMO has adopted international conventions that impose liability for pollution in international waters and a signatory’s territorial waters. For example, the IMO’s International Convention for the Prevention of Pollution from Ships, or MARPOL, imposes environmental standards on the shipping industry relating to, among other things, pollution prevention and procedures, technical standards, oil spills management, transportation of marine pollutants and air emissions. Annex VI of MARPOL, which regulates air pollution from vessels, sets limits on sulfur oxide, nitrogen oxide and particulate matter emissions from vessel exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. We believe all of our vessels currently are Annex VI compliant. Annex VI also includes a global cap on the sulfur content of fuel oil with a lower cap (currently 0.1%) on the sulfur content applicable inside Emission Control Areas, or ECAs. Existing ECAs include the Baltic Sea, the North Sea, including the English Channel, the North American area and the U.S. Caribbean Sea area. Other areas in China are subject to local regulations that impose stricter emission controls. Additional geographical areas may be designated as ECAs in the future.
Annex VI calls for incremental reductions in sulfur in fuel between 2012 and 2020 (or 2015 in the case of ECAs), and the use of advanced technology engines designed to reduce emissions of nitrogen oxide, with a “Tier II” emission limit applicable to engines installed on or after January 1, 2011, and a more stringent “Tier III” emission limit applicable to engines installed on or after 2016 operating in the North American and U.S. Caribbean Sea nitrogen oxide ECAs and for engines installed on or after 2021 for vessels operating in the Baltic and North Sea. For future nitrogen oxide ECA designations, Tier III standards will apply to engines installed on ships constructed on or after the date of ECA designation, or a later date as determined by the country applying for the ECA designation. Additional ECAs could be established in the future. The IMO has undertaken a study for a new 0.1% m/m low sulfur ECA in the Mediterranean.
From January 1, 2020, the IMO mandated global sulfur cap of 0.5% m/m was implemented. Vessels comply either by being fitted with exhaust gas cleaning systems (“scrubbers”), allowing the vessel to continue to use less expensive, higher sulfur content fuel or by burning more expensive, low sulfur fuel. From March 1, 2020, vessels not fitted with exhaust gas scrubbers cannot have high sulfur content fuel on board.
Our existing time charters call for our customers to supply fuel that complies with Annex VI. It may be that charterers of certain of our vessels will seek to comply with Annex VI by agreeing with us to have exhaust gas cleaning systems installed.
These amendments or other changes could require modifications to our vessels to achieve compliance, and the cost of compliance may be significant to our operations.
The IMO has also adopted technical and operational measures aimed at reducing greenhouse gas emissions from vessels. These include the “Energy Efficiency Design Index,” which is mandatory for newbuilding vessels, and the “Ship Energy Efficiency Management Plan,” which is mandatory for all vessels. The IMO now requires ships of 5,000 gross tonnage, or grt, or more to record and report their fuel consumption to their flag state at the end of each calendar year. The IMO plans to use this data to adopt an initial greenhouse gas emissions reduction strategy.
The IMO’s International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, imposes, subject to limited exceptions, strict liability on vessel owners for pollution damage in jurisdictional waters of ratifying states, which does not include the United States, caused by discharges of “bunker oil.” The Bunker Convention also requires owners of registered vessels over a certain size to maintain insurance for pollution damage in an amount generally equal to the limits of liability under the applicable national or international limitation regime. With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in a ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur on a fault or strict-liability basis. We believe our vessels comply with the Bunker Convention.
| 41 |
The IMO’s International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, requires the installation of ballast water treatment systems on certain newbuilding vessels for which the keel is laid after September 8, 2017 and for existing vessels at the renewal of their International Oil Pollution Prevention Certificate after September 8, 2019. The MEPC adopted updated guidelines for approval of ballast water management systems (G8) at MEPC 70. At MEPC 71, the schedule regarding the BWM Convention’s implementation dates was also discussed and amendments were introduced to extend the date existing vessels are subject to certain ballast water standards. Those changes were adopted at MEPC 72. Ships over 400 gross tons generally must comply with a “D-1 standard,” requiring the exchange of ballast water only in open seas and away from coastal waters. The “D-2 standard” specifies the maximum amount of viable organisms allowed to be discharged, and compliance dates vary depending on the IOPP renewal dates. Depending on the date of the IOPP renewal survey, existing vessels must comply with the D-2 standard on or after September 8, 2019. For most ships, compliance with the D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Ballast water management systems, which include systems that make use of chemical, biocides, organisms or biological mechanisms, or which alter the chemical or physical characteristics of the ballast water, must be approved in accordance with IMO Guidelines (Regulation D-3). As of October 13, 2019, MEPC 72’s amendments to the BWM Convention took effect, making the Code for Approval of Ballast Water Management Systems, which governs assessment of ballast water management systems, mandatory rather than permissive, and formalized an implementation schedule for the D-2 standard. Under these amendments, all ships must meet the D-2 standard by September 8, 2024. Costs of compliance with these regulations may be substantial. The BWM Convention also requires ships to carry an approved ballast water management plan, record books and statement of compliance. The BWM Convention also requires ships to carry an approved ballast water management plan, record books and statement of compliance. Additionally, in November 2020, MEPC 75 adopted amendments to the BWM Convention which would require a commissioning test of the ballast water management system for the initial survey or when performing an additional survey for retrofits. This analysis will not apply to ships that already have an installed BWM system certified under the BWM Convention. These amendments are expected to enter into force on June 1, 2022. We will be required to incur significant costs to install these ballast water treatment systems on all our vessels before the applicable due dates.
The IMO’s International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the Anti-fouling Convention,” prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels and requires vessels over 400 grt engaged in international voyages to undergo an initial survey before the vessel is put into service or before an International Anti fouling System Certificate is issued for the first time, or subsequent surveys when the anti-fouling systems are altered or replaced. In November 2020, MEPC 75 approved draft amendments to the Anti-fouling Convention to prohibit anti-fouling systems containing cybutryne, which would apply to ships from January 1, 2023, or, for ships already bearing such an anti-fouling system, at the next scheduled renewal of the system after that date, but no later than 60 months following the last application to the ship of such a system. These amendments may be formally adopted at MEPC 76 in 2021. We have obtained Anti-fouling System Certificates for all of our vessels that are subject to the Anti-fouling Convention. MEPC 77 adopted a non-binding resolution which urges Member States and ship operators to voluntarily use distillate or other cleaner alternative fuels or methods of propulsion that are safe for ships and could contribute to the reduction of Black Carbon emissions from ships when operating in or near the Arctic.
Amendments to MARPOL Annex V (regulation for the prevention of pollution by garbage from ships) adopted at MEPC 70 entered into force on March 1, 2018. The changes include criteria for determining whether cargo residues are harmful to the marine environment, and a new Garbage Record Book format with a new garbage category for e-waste. As all our existing containerships are compliant with MARPOL Annex V requirements, the amendments could cause us to incur additional operational costs for the handling of garbage produced on our fleet.
The IMO also regulates vessel safety. The International Safety Management Code, or the ISM Code, provides an international standard for the safe management and operation of ships and for pollution prevention. The ISM Code requires our vessels to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy and implementation procedures. A Safety Management Certificate is issued under the provisions of the SOLAS Convention to each vessel with a Safety Management System verified to be in compliance with the ISM Code. Failure to comply with the ISM Code may subject a party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports. All of the vessels in our fleet are ISM Code-certified. Furthermore, all seafarers are required to meet the standards of the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers, or STCW, and be in possession of a valid STCW certificate. Flag states that have ratified the SOLAS Convention and STCW generally employ the classification societies to undertake surveys to confirm compliance.
| 42 |
Furthermore, recent action by the IMO’s Maritime Safety Committee and United States agencies indicate that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. For example, under the IMO’s Resolution MSC.428(98), cyber risks must be appropriately addressed in existing safety management systems no later than the first annual verification of a company’s Document of Compliance after January 1, 2021. This might cause companies to create additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures.
Increasingly, various regions are adopting additional, unilateral requirements on the operation of vessels in their territorial waters. These regulations, such as those described below, apply to our vessels when they operate in the relevant regions’ waters and can add to operational and maintenance costs, as well as increase the potential liability that applies to violations of the applicable requirements.
United States
The United States Oil Pollution Act of 1990 and CERCLA
The United States Oil Pollution Act of 1990, (“OPA”), establishes an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. The Comprehensive Environmental Response, Compensation and Liability Act, (“CERCLA”), governs spills or releases of hazardous substances other than petroleum or petroleum products. Under OPA and CERCLA, vessel owners, operators and bareboat charterers whose vessels trade or operate within the U.S., its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S.’s territorial sea and its 200 nautical mile exclusive economic zone around the U.S., are jointly and, subject to limited exceptions, strictly liable for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil or hazardous substances, as applicable, from their vessels. OPA and CERCLA define these damages broadly to include certain direct and indirect damages and losses, including but not limited to assessment of damages, remediation, damages to natural resources such as fish and wildlife habitat, and agency oversight costs. Although our vessels do not carry oil as cargo, they do carry oil as bunkers, or fuel.
Under OPA and CERCLA, the liability of responsible parties is limited to a specified amount, which is periodically updated. Under both OPA and CERCLA, liability is unlimited if the incident is caused by gross negligence, willful misconduct or a violation of certain regulations. Similarly, liability limits do not apply (i) under OPA if the responsible party fails or refuses to report the incident where the responsible party knows or has reason to know of the incident or reasonably cooperate and assist as requested in connection with oil removal activities, or (ii) under CERCLA if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.
We maintain pollution liability coverage insurance in the amount of $1 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage it could harm our business, financial condition and results of operation. Vessel owners and operators must establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet their potential aggregate liabilities under OPA and CERCLA. Evidence of financial responsibility may be demonstrated by showing proof of insurance, surety bonds, self-insurance or guarantees. We have obtained the necessary U.S. Coast Guard financial assurance certificates, or COFRs, for each of our vessels currently in service and trading to the United States. Owners or operators of certain vessels operating in U.S. waters also must prepare and submit to the U.S. Coast Guard a response plan for each vessel, which plan, among other things, must address a “worst case” scenario environmental discharge and describe crew training and drills to address any discharge. Each of our vessels has the necessary response plans in place.
OPA and CERCLA do not prohibit individual states from imposing their own liability regimes with regard to oil pollution or hazardous substance incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for spills. In some cases, states that have enacted such legislation have not yet issued implementing regulations defining vessel owners’ responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call. Nevertheless, future changes to OPA, CERCLA and other United States environmental regulations could adversely affect our operations.
| 43 |
Clean Water Act
The Clean Water Act, or CWA, establishes the basic structure for regulating discharges of pollutants into the “waters of the United States” and regulating quality standards for surface waters. The CWA authorizes civil and criminal penalties for discharging pollutants without a permit, failure to meet any requirement of a permit, and also allows for citizen suits against violators. The CWA imposes strict liability in the form of penalties for any unauthorized discharges, and substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA. In 2015, the EPA expanded the definition of waters of the United States (“WOTUS”), thereby expanding federal authority under the CWA, but following litigation, the EPA and Department of the Army proposed a limited definition of “waters of the United States” in December 2018. The proposed rule was published in the Federal Register on February 14, 2019 and was subject to public comment. On October 22, 2019, the agencies published a final rule repealing the 2015 Rule defining WOTUS. In 2019 and 2020, the agencies repealed the prior WOTUS Rule and promulgated the Navigable Waters Protection Rule (“NWPR”) which significantly reduced the scope and oversight of EPA and the Department of the Army in traditionally non-navigable waterways. On August 30, 2021, a federal district court in Arizona vacated the NWPR and directed the agencies to replace the rule. On December 7, 2021, the EPA and the Department of the Army proposed a rule that would reinstate the pre-2015 definition, which is subject to public comment until February 7, 2022.The EPA and the USCG have also enacted rules relating to ballast water discharge, compliance with which requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial costs, and/or otherwise restrict our vessels from entering U.S. Waters. The EPA will regulate these ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters pursuant to the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on December 4, 2018 and replaces the 2013 VGP program (which authorizes discharges incidental to operations of commercial vessels and contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters, stringent requirements for exhaust gas scrubbers, and requirements for the use of environmentally acceptable lubricants) and current Coast Guard ballast water management regulations adopted under the U.S. National Invasive Species Act, or NISA, such as mid-ocean ballast exchange programs and installation of approved USCG technology for all vessels equipped with ballast water tanks bound for U.S. ports or entering U.S. waters. Under NISA, newbuilding vessels constructed after December 1, 2013 are required to have a U.S. Coast Guard-approved ballast water treatment system installed, and existing vessels, are required to have a ballast water treatment system installed on the first scheduled dry-dock after January 1, 2016.
VIDA establishes a new framework for the regulation of vessel incidental discharges under the CWA, requires the EPA to develop performance standards for those discharges within two years of enactment, and requires the U.S. Coast Guard to develop implementation, compliance, and enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP and USCG regulations regarding ballast water treatment remain in force and effect until the EPA and U.S. Coast Guard regulations are finalized. Non-military, non-recreational vessels greater than 79 feet in length must continue to comply with the requirements of the VGP, including submission of a Notice of Intent, or NOI, or retention of a Permit Authorization and Record of Inspection form and submission of annual reports. We have submitted NOIs for our vessels where required. Compliance with the EPA, U.S. Coast Guard and state regulations could require the installation of ballast water treatment equipment on our vessels or the implementation of other port facility disposal procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.
In addition, the Act to Prevent Pollution from Ships, or APPS, implements various provisions of MARPOL and applies to larger foreign-flag ships when operating in U.S. waters. The regulatory mechanisms established in APPS to implement MARPOL are separate and distinct from the CWA and other federal environmental laws. Civil and criminal penalties may be assessed under APPS for non-compliance.
Additional Ballast Water Regulations
The U.S. Coast Guard regulations also require vessels to maintain a vessel-specific ballast water management plan that addresses training and safety procedures, fouling maintenance and sediment removal procedures. Individual U.S. states have also enacted laws to address invasive species through ballast water and hull cleaning management and permitting requirements.
Clean Air Act
The Clean Air Act, or the CAA, and its implementing regulations subject our vessels to vapor control and recovery requirements when cleaning fuel tanks and conducting other operations in regulated port areas and to air emissions standards for our engines while operating in U.S. waters. The EPA has adopted standards that apply to certain engines installed on U.S. vessels and to marine diesel fuels produced and distributed in the United States. These standards are consistent with Annex VI of MARPOL and establish significant reductions for vessel emissions of particulate matter, sulfur oxides and nitrogen oxides.
The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in primarily major metropolitan and industrial areas. Several SIPs regulate emissions from degassing operations by requiring the installation of vapor control equipment on vessels. California has enacted regulations which apply to ocean-going vessels’ engines when operating within 24 miles of the California coast and require operators to use low sulfur fuels. California also approved regulations to reduce emissions from diesel auxiliary engines on certain ocean-going vessels while in California ports, including container ship fleets that make 25 or more annual visits to California ports. These federal and state requirements may increase our capital expenditures and operating costs while in applicable ports. As with other U.S. environmental laws, failure to comply with the Clean Air Act may subject us to enforcement action, including payment of civil or criminal penalties and citizen suits.
| 44 |
European Union Requirements
In waters of the EU, our vessels are subject to regulation by EU-level legislation, including directives implemented by the various member states through laws and regulations of these requirements. These laws and regulations prescribe measures, among others, to prevent pollution, protect the environment and support maritime safety. For instance, the EU has adopted directives that require member states to refuse access to their ports to certain sub-standard vessels, according to various factors, such as the vessel’s condition, flag, and number of previous detentions (Directive 2009/16/EC on Port State Control as amended and supplemented from time to time). Member states must, among other things, inspect minimum percentages of vessels using their ports annually (based on an inspection “share” of the relevant member state of the total number of inspections to be carried out within the EU and the Paris Memorandum of Understanding on Port State Control region), inspect all vessels which are due for a mandatory inspection (based, among other things, on their type, age, risk profile and the time of their last inspection) and carry out more frequent inspections of vessels with a high risk profile. If deficiencies are found that are clearly hazardous to safety, health or the environment, the state is required to detain the vessel or stop loading or unloading until the deficiencies are addressed. Member states are also required to implement their own separate systems of proportionate penalties for breaches of these standards.
Our vessels are also subject to inspection by appropriate classification societies. Classification societies typically establish and maintain standards for the construction and classification of vessels, supervise that construction in accordance with such standards, and carry out regular surveys of ships in service to ensure compliance with such standards. The EU has adopted legislation (Regulation (EC) No 391/2009 and Directive 2009/15/EC, as amended and supplemented from time to time) that provides member states with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of classification societies that are negligent in their duties. The EU requires member states to monitor these organizations’ compliance with EU inspection requirements and to suspend any organization whose safety and pollution prevention performance becomes unsatisfactory.
The EU’s directive on the sulfur content of fuels (Directive (EU) 2016/802, which consolidates Directive 1999/32/EC and its various amendments) restricts the maximum sulfur content of marine fuels used in vessels operating in EU member states’ territorial seas, exclusive economic zones and pollution control zones. The directive provides for more stringent rules on maximum sulfur content of marine fuels applicable in specific Sulfur Emission Control Areas, or SECAs, such as the Baltic Sea and the North Sea, including the English Channel. Further sea areas may be designated as SECAs in the future by the IMO in accordance with Annex VI of MARPOL. Under this directive, we may be required to make expenditures to comply with the sulfur fuel content limits in the marine fuel our vessels use in order to avoid delays or other obstructions to their operations, as well as any enforcement measures which may be imposed by the relevant member states for non-compliance with the provisions of the directive. We also may need to make other expenditures (such as expenditures related to washing or filtering exhaust gases) to comply with relevant sulfur oxide emissions levels. The directive has been amended to bring the above requirements in line with Annex VI of MARPOL. It also makes certain of these requirements more stringent. These and other related requirements may require additional capital expenditures and increase our operating costs.
Through Directive 2005/35/EC (as amended by Directive 2009/123/EC and as further amended and supplemented from time to time), the EU requires member states to cooperate to detect pollution discharges and impose criminal sanctions for certain pollution discharges committed intentionally, recklessly or by serious negligence and to initiate proceedings against ships at their next port of call following the discharge. Penalties may include fines and civil and criminal penalties. Directive 2000/59/EC (as amended and supplemented from time to time) requires all ships (except for warships, naval auxiliary or other state-owned or state-operated ships on non-commercial service), irrespective of flag, calling at, or operating within, ports of member states to deliver all ship-generated waste and cargo residues to port reception facilities. Under the directive, a fee is payable by the ships for the use of the port reception facilities, including the treatment and disposal of the waste. The ships may be subject to an inspection for verification of their compliance with the requirements of the directive and penalties may be imposed for their breach.
The EU also authorizes member states to adopt the IMO’s Bunker Convention, discussed above, that imposes strict liability on shipowners for pollution damage caused by spills of oil carried as fuel in vessels’ bunkers and requires vessels of a certain size to maintain financial security to cover any liability for such damage. Most EU member states have ratified the Bunker Convention.
The EU has adopted a regulation (EU Ship Recycling Regulation (1257/2013)) which sets forth rules relating to vessel recycling and management of hazardous materials on vessels. The regulation contains requirements for the recycling of vessels at approved recycling facilities that must meet certain requirements, so as to minimize the adverse effects of recycling on human health and the environment. The regulation also contains rules for the control and proper management of hazardous materials on vessels and prohibits or restricts the installation or use of certain hazardous materials on vessels. The regulation seeks to facilitate the ratification of the IMO’s Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships, 2009. The regulation applies to vessels flying the flag of a member state and certain of its provisions apply to vessels flying the flag of a third country calling at a port or anchorage of a member state. For example, when calling at a port or anchorage of a member state, a vessel flying the flag of a third country will be required, among other things, to have on board an inventory of hazardous materials which complies with the requirements of the new regulation and the vessel must be able to submit to the relevant authorities of that member state a copy of a statement of compliance issued by the relevant authorities of the country of the vessel’s flag verifying the inventory. The regulation entered into force on December 30, 2013, although certain of its provisions are to apply at different stages, with certain of them applicable from December 31, 2020. Pursuant to this regulation, the EU Commission adopted the first version of a European List of approved ship recycling facilities meeting the requirements of the regulation, as well as four further implementing decisions dealing with certification and other administrative requirements set out in the regulation.
| 45 |
The EU is considering other proposals to further regulate vessel operations. The EU has adopted an Integrated Maritime Policy for the purposes of achieving a more coherent approach to maritime issues through coordination between different maritime sectors and integration of maritime policies. The Integrated Maritime Policy has sought to promote the sustainable development of the European maritime economy and to protect the marine environment through cross-sector and cross-border cooperation of maritime participants. The EU Commission’s proposals included, among other items, the development of environmentally sound end-of-life ship dismantling requirements (as described above in respect of the EU Ship Recycling Regulation (1257/2013)), promotion of the use of shore-side electricity by ships at berth in EU ports to reduce air emissions, and consideration of options for EU legislation to reduce greenhouse gas emissions from maritime transport. The European Maritime Safety Agency has been established to provide technical support to the EU Commission and member states in respect of EU legislation pertaining to maritime safety, pollution and security. The EU, any individual country or other competent authority may adopt additional legislation or regulations applicable to us and our operations.
Other Greenhouse Gas Legislation
Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions with targets extended through 2020. International negotiations are continuing with respect to a successor to the Kyoto Protocol, and restrictions on shipping emissions may be included in any new treaty. In December 2009, more than 27 nations, including the U.S. and China, signed the Copenhagen Accord, which includes a non-binding commitment to reduce greenhouse gas emissions. The 2015 United Nations Climate Change Conference in Paris resulted in the Paris Agreement, which entered into force on November 4, 2016 and does not directly limit greenhouse gas emissions from ships. The U.S. initially entered into the agreement, but on June 1, 2017, former U.S. President Trump announced that the United States intends to withdraw from the Paris Agreement, and the withdrawal became effective on November 4, 2020. On January 20, 2021, U.S. President Biden signed an executive order to rejoin the Paris Agreement, which the U.S. officially rejoined on February 19, 2021.
The IMO, EU, the United States and other individual countries, states and provinces are evaluating various measures to reduce greenhouse gas emissions from international shipping, which may include some combination of market-based instruments, a carbon tax or other mandatory reduction measures. The EU adopted Regulation (EU) 2015/757 concerning the monitoring, reporting and verification of carbon dioxide emissions from vessels, or the MRV Regulation, which entered into force in July 2015 (as amended by Regulation (EU) 2016/2071). The MRV Regulation applies to all vessels over 5,000 gross tonnage (except for a few types, including, but not limited to, warships and fish-catching or fish-processing vessels), irrespective of flag, in respect of carbon dioxide emissions released during voyages within the EU as well as EU incoming and outgoing voyages. The first reporting period commenced on January 1, 2018. The monitoring, reporting and verification system adopted by the MRV Regulation may be the precursor to a market-based mechanism to be adopted in the future. The EU is currently developing a proposal for the inclusion of shipping in the EU Emissions Trading System.
At MEPC 70 and MEPC 71, a draft outline of the structure of the initial strategy for developing a comprehensive IMO strategy on reduction of greenhouse gas emissions from ships was approved. In accordance with this roadmap, in April 2018, nations at the MEPC 72 adopted an initial strategy to reduce greenhouse gas emissions from ships. The initial strategy identifies “levels of ambition” to reducing greenhouse gas emissions, including (1) decreasing the carbon intensity from ships through implementation of further phases of the EEDI for new ships; (2) reducing carbon dioxide emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 emission levels; and (3) reducing the total annual greenhouse emissions by at least 50% by 2050 compared to 2008 while pursuing efforts towards phasing them out entirely. The initial strategy notes that technological innovation, alternative fuels and/or energy sources for international shipping will be integral to achieve the overall ambition. These regulations could cause us to incur additional substantial expenses.
The EU made a unilateral commitment to reduce overall greenhouse gas emissions from its member states from 20% of 1990 levels by 2020. The EU also committed to reduce its emissions by 20% under the Kyoto Protocol’s second period from 2013 to 2020. Starting in January 2018, large ships over 5,000 gross tonnage calling at EU ports are required to collect and publish data on carbon dioxide emissions and other information. As previously discussed, regulations relating to the inclusion of greenhouse gas emissions from the maritime sector in the European Union’s carbon market are also forthcoming.
| 46 |
In the United States, the EPA issued a finding that greenhouse gases endanger the public health and safety, adopted regulations to limit greenhouse gas emissions from certain mobile sources, and proposed regulations to limit greenhouse gas emissions from large stationary sources. However, in March 2017, former U.S. President Trump signed an executive order to review and possibly eliminate the EPA’s plan to cut greenhouse gas emissions, and in August 2019, the Administration announced plans to weaken regulations for methane emissions. On August 13, 2020, the EPA released rules rolling back standards to control methane and volatile organic compound emissions from new oil and gas facilities. However, U.S. President Biden recently directed the EPA to publish a proposed rule suspending, revising, or rescinding certain of these rules. The EPA or individual U.S. states could enact environmental regulations that would affect our operations. On November 2, 2021, the EPA issued a proposed rule under the CAA designed to reduce methane emissions from oil and gas sources. The proposed rule would reduce 41 million tons of methane emissions between 2023 and 2035 and cut methane emissions in the oil and gas sector by approximately 74 percent compared to emissions from this sector in 2005. EPA also anticipates issuing a supplemental proposed rule in 2022 to include additional methane reduction measures following public input and anticipates issuing a final rule by the end of 2022. If these new regulations are finalized, they could affect our operations.
Any passage of climate control legislation or other regulatory initiatives by the IMO, the EU, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol or Paris Agreement, that restricts emissions of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change may result in sea level changes or certain weather events.
Other Regions
We may be subject to environmental and other regulations that have been or may become adopted in other regions of the world that may impose obligations on our vessels and may increase our costs to own and operate them. Compliance with these requirements may require significant expenditures on our part and may materially increase our operating costs.
Of particular importance, due to the trade intensity in these areas, are four ECAs created in Hong Kong and in China (Pearl River Delta, the Yangtze River Delta and Bohai Sea), aiming to reduce the levels of ship-generated air pollution and focus on the sulfur content of fuels. As of January 1, 2017, vessels at berth in a core port within an emission control area are required to use fuel with a maximum sulfur content of 0.5% m/m—except one hour after arrival and one hour before departure. Since January 1, 2018, all ports within Chinese emission control areas have implemented this standard. As of January 1, 2019, vessels must switch to fuel with a sulfur content not exceeding 0.5% m/m prior to entering China’s territorial sea, in defined areas. From January 1, 2020, vessels entering Inland ECAs (Yangtze River and Xi Jiang River) must use fuel with a sulfur content not exceeding 0.10% while operating within the Inland ECA. Looking further ahead, a sulfur cap of 0.1% will apply to seagoing vessels entering Hainan Waters within the coastal ECA from January 1, 2022. Vessels capable of receiving shore power must use shore power if they berth for more than three hours in ports in the coastal ECA that have shore power capabilities (or more than two hours in ports with such capabilities in the Inland ECAs). Furthermore, ships of 400 gross tonnage or over, or ships powered by main propulsion machinery greater than 750 kW of propulsion power, calling at a port in China should report energy consumption data of their last voyage to China MSA before leaving port (China Regulation on Data Collection for Energy Consumption of Ships). Hong Kong’s current Fuel at Berth Regulation requiring ships to burn fuel with a sulfur content not exceeding 0.5% m/m while at berth are expected to be replaced by a regulation extending the standard to ships operating in Hong Kong waters. Ships not fitted with scrubbers will be required to burn fuel with a sulfur content not exceeding 0.5% m/m within Hong Kong waters, irrespective of whether they are sailing or at berth. In Taiwan, ships not fitted with exhaust gas scrubbers must burn fuel with a sulfur content not exceeding 0.5% m/m when entering its international commercial port areas. In December 2021, the member states of the Convention for the Protection of the Mediterranean Sea Against Pollution (“Barcelona Convention”) agreed to support the designation of a new ECA in the Mediterranean. The group plans to submit a formal proposal to the IMO by the end of 2022 with the goal of having the ECA implemented by 2025.
In connection with the introduction of the ban of high sulfur fuel for vessels not fitted with exhaust gas scrubbers, a number of countries are introducing rules as to the type of exhaust gas scrubber that may be acceptable to be operated on vessels, in effect prohibiting the operation in their waters of hybrid or open loop type exhaust gas scrubbers and forcing vessels to use more expensive closed loop systems or to burn low sulfur fuel when sailing in their waters.
International Labor Organization
The International Labor Organization is a specialized agency of the UN that has adopted the Maritime Labor Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships that are 500 gross tonnage or over and are either engaged in international trade or flying the flag of a Member and operating from a port, or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
| 47 |
Vessel Security Regulations
Since September 2001, there have been a variety of initiatives intended to enhance vessel security. In November 2002, the U.S Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To implement certain portions of the MTSA, the U.S. Coast Guard has issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States and at certain ports and facilities, some of which are regulated by the EPA. Similarly, amendments to the SOLAS Convention created a new chapter of the convention dealing specifically with maritime security, which came into effect in July 2004. To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel’s flag state. Ships operating without a valid certificate may be detained, expelled from, or refused entry at port until they obtain an ISSC. The new chapter imposes various detailed security obligations on vessels and port authorities, most of which are contained in the International Ship and Port Facilities Security Code, or ISPS Code. Among the various requirements are:
| • | on-board installation of automatic information systems, to enhance vessel-to-vessel and vessel-to-shore communications; |
| • | on-board installation of ship security alert systems; |
| • | the development of vessel security plans; and |
| • | compliance with flag state security certification requirements. |
The United States Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures if such vessels have on board a valid International Ship Security Certificate, that attests to the vessel’s compliance with the SOLAS Convention security requirements and the ISPS Code. Our existing vessels have implemented the various security measures addressed by the MTSA, the SOLAS Convention and the ISPS Code.
Inspection by Classification Societies
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and SOLAS. Most insurance underwriters make it a condition for insurance coverage and lending that a vessel be certified “in class” by a classification society which is a member of the International Association of Classification Societies, the IACS. The IACS has adopted harmonized Common Structural Rules, or “the Rules,” which apply to oil tankers and bulk carriers contracted for construction on or after July 1, 2015. The Rules attempt to create a level of consistency between IACS Societies. All of our vessels are certified as being “in class” by all the applicable Classification Societies.
A vessel must undergo annual surveys, intermediate surveys, drydockings and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked every 30 to 36 months for inspection of the underwater parts of the vessel. If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable which could cause us to be in violation of certain covenants in our loan agreements. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition and results of operations.
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, piracy incidents, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon shipowners, operators and bareboat charterers of any vessel trading in the exclusive economic zone of the United States for certain oil pollution accidents in the United States, has made liability insurance more expensive for shipowners and operators trading in the United States market. We carry insurance coverage as customary in the shipping industry. However, not all risks can be insured, specific claims may be rejected, and we might not be always able to obtain adequate insurance coverage at reasonable rates.
Hull & Machinery, Loss of Hire and War Risks Insurance
We maintain marine hull and machinery, increased value and war risks insurances, which cover the risk of actual or constructive total loss, for all of our vessels. Our vessels are each covered up to at least fair market value, which we expect to assess at least annually, with certain deductibles per vessel per incident. We also maintain freight value coverage for each of our vessels under which in the event of total loss or constructive total loss of a vessel, we will be entitled to recover the lost anticipated long term income. As required by the terms of our credit facilities, we have assigned certain of our insurance policies to our lenders and will be subject to restrictions on our use of any proceeds therefrom.
We do not have loss-of-hire insurance covering the loss of revenue during extended off-hire periods. We evaluate obtaining such coverage on an ongoing basis, taking into account insurance market conditions and the employment of our vessels.
| 48 |
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I associations, (“Clubs”) which insure our third-party and crew liabilities in connection with our shipping activities. Coverage includes third-party liability, crew liability and other related expenses resulting from the abandonment, injury or death of crew, and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by P&I associations. Subject to the limit for pollution discussed below, our coverage is virtually unlimited, but subject to the rules of the particular protection and indemnity insurer.
Our current protection and indemnity insurance coverage for pollution is up to $1.0 billion per vessel per incident. The 13 Clubs that comprise the International Group insure approximately 90% of the world’s commercial blue-water tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. The International Group of P&I Clubs maintain a Pool arrangement, which provides a mechanism for sharing all claims in excess of $10.0 million up to, currently, $100.0 million. The Clubs are collectively reinsured in the International Group Excess Loss Programme for $3.0 billion, with an excess of $100.0 million. The overall limit of coverage per vessel, per incident, is approximately $7.0 billion. As members of Clubs which are members of the International Group, we are subject to calls payable to the associations based on our claim records as well as the claim records of all other members of the individual associations and members of the shipping pool of Clubs comprising the International Group.
C. Organizational Structure
Our holding company, Global Ship Lease, Inc., is a Marshall Islands corporation. Each of our vessels is owned by a separate wholly-owned subsidiary. 23 vessels are owned by companies incorporated in Marshall Islands; one of them is under sale and leaseback transaction and while the disponent owner is a Marshall Island company, its registered owner is a Hong Kong non GSL company. 42 vessels are owned by companies incorporated in Liberia; five of them are under sale and leaseback transactions and while the disponent owners are Liberian companies, their registered owners are Hong Kong non GSL companies. In addition, GSLS, a company incorporated in England and Wales and which is directly wholly owned by the holding company, and GSL Enterprises Ltd., a Marshall Islands corporation which has established a branch office in Greece pursuant to the provisions of art. 25 of Law 27/1975 (formerly law 89/1967), provide certain administrative services to the group.
A list of our subsidiaries and their respective countries of incorporation is provided as Exhibit 8.1 to this Annual Report on Form 20-F.
D. Property, Plants and Equipment
Our only material properties are the vessels in our fleet, which are described in “Item 4. Information on the Company—B. Business Overview.” The vessels are affected by environmental and other regulations. See “Item 4. Information on the Company—B. Business Overview—Environmental and Other Regulations.” Certain of our vessels serve as security under our debt agreements. See “Item 5. Operating and Financial Review—B. Liquidity and Financial Resources—Indebtedness.” We do not own any real property.
| Item 4A. | Unresolved Staff Comments |
Not applicable.
| Item 5. | Operating and Financial Review and Prospects |
A. Operating Results
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and the financial and other information included elsewhere in this Annual Report. The term consolidated financial statements refers to the consolidated financial statements of Global Ship Lease, Inc. and its subsidiaries. This discussion contains forward-looking statements based on assumptions about our future business. Our actual results will likely differ materially from those contained in the forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Annual Report.
| 49 |
Overview
We are a containership owner, incorporated in the Marshall Islands. We commenced operations in December 2007 with a business of owning and chartering out containerships under fixed rate charters to container liner companies.
As of December 31, 2021, we owned 65 vessels, with a total capacity of 342,348 TEU with an average age, weighted by TEU capacity, of 14.9 years.
We have entered into ship management agreements with third-party ship managers for the day-to-day technical and commercial management of our current fleet of vessels. See “Item 4. Information on the Company—B. Business Overview—Management of Our Fleet” for a more detailed description of our ship management agreements.
Our financial results are largely driven by the following factors:
| • | the continued performance of the charter agreements; |
| • | the number of vessels in our fleet and their charter rates; |
| • | the terms under which we recharter our vessels once the existing time charters have expired; |
| • | the number of days that our vessels are utilized and not subject to drydocking, special surveys or otherwise are off-hire; |
| • | our ability to control our costs, including ship operating costs, ship management fees, insurance costs, drydock costs, general, administrative and other expenses and interest and financing costs. Ship operating costs may vary from month to month depending on a number of factors, including the timing of purchases of spares and stores and of crew changes; |
| • | impairment of our vessels and other non-current assets; and |
| • | access to, and the pricing and other terms of, our financing arrangements. |
As at December 31, 2021 and as adjusted to include new charters agreed through March 10, 2022, the average remaining term of our charters at December 31, 2021, to the mid-point of redelivery, including options under our control, was 2.6 years on a TEU-weighted basis. The time charters for one of our 65 containerships either have expired or could expire before the end of the first half of 2022, and a further nine vessels have charters that could expire during the second half of 2022. The charter rate that we will be able to achieve on renewal will be affected by market conditions at that time. As discussed further below, operational matters such as off-hire days for planned maintenance or for unexpected accidents and incidents also affect the actual amount of revenues we receive.
The container shipping industry suffered a cyclical downturn as a result of the Global Financial Crisis in 2008—2009 and many container shipping companies reported substantial losses. Financial performance of container shipping companies subsequently improved however, the industry remained under pressure due to oversupply of container ship capacity. 2020 saw a substantial downturn, triggered by the global COVID-19 pandemic. However, the industry has recovered markedly, commencing late 2020 with volumes, freight rates, charter rates and vessel values all increasing substantially. Charter payments have been received on a timely basis and, as of December 31, 2021, charterhire was up-to-date. If our charterers are unable to make charter payments to us, our results of operations and financial condition will be materially adversely affected. If our existing charters with our charterers were terminated and we were required to recharter at lower rates or if we were unable to find new charters due to market conditions, our results of operations and financial condition would be materially adversely affected.
| 50 |
Selected Financial Information and Other Data
The following table sets forth our selected consolidated financial and other data as of and for the years ended December 31, 2021, 2020, 2019, 2018 and 2017. Consolidated financial data is derived from our audited consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Our audited consolidated statements of income and statements of cash flows for the years ended December 31, 2021, 2020 and 2019 and our audited consolidated balance sheets as of December 31, 2021 and 2020, together with the notes thereto, are included in this Annual Report. Our audited consolidated statements of income and cash flows for the years ended December 31, 2018 and 2017 and our audited consolidated balance sheets as of December 31, 2019, 2018, and 2017, and the notes thereto, are not included herein.
| 2021 | 2020 | 2019 | 2018 (1) | 2017 | |||||
|
(Expressed in millions of U.S. dollars, except for per share data) | |||||||||
| Statement of Income | |||||||||
| Operating revenues: | |||||||||
| Time charter revenue | $ 448.0 | $ 282.8 | $ 261.1 | $ 157.1 | $ 159.3 | ||||
| Operating expenses: | |||||||||
| Vessel operating expenses | (130.3) | (102.8) | (87.8) | (49.3) | (42.7) | ||||
| Time charter and voyage expenses | (13.1) | (11.2) | (9.0) | (1.6) | (1.0) | ||||
| Depreciation and amortization | (61.6) | (47.0) | (43.9) | (35.5) | (38.0) | ||||
| General and administrative expenses | (13.2) | (8.4) | (8.8) | (9.2) | (5.4) | ||||
| Impairment of vessels | — | (8.5) | — | (71.8) | (87.6) | ||||
| Gain/(Loss) on sale of vessels | 7.8 | (0.2) | — | — | — | ||||
| Total operating expenses | (210.4) | (178.1) | (149.5) | (167.4) | (174. ) | ||||
| Operating Income / (Loss) | 237.6 | 104.7 | 111.6 | (10.3) | (15. ) | ||||
| Non-operating income/(expenses) | |||||||||
| Interest income | 0.4 | 1.0 | 1.8 | 1.4 | 0.5 | ||||
| Interest and other finance expenses | (69.2) | (65.4) | (75.0) | (48.7) | (59.4) | ||||
| Other income, net | 2.8 | 1.3 | 1.5 | 0.3 | 0.1 | ||||
| Income / (Loss) before income taxes | 171.6 | 41.6 | 39.9 | (57.3) | (74.2) | ||||
| Income taxes | (0.1) | (0.0) | (0.0) | 0.0 | (0.0) | ||||
| Net Income / (Loss) | 171.5 | 41.6 | 39.9 | (57.3) | (74.2) | ||||
| Earnings allocated to Series B Preferred Shares | (8.3) | (4.0) | (3.1) | (3.1) | (3.1) | ||||
| Net
Income / (Loss) available to common shareholders (2) |
163.2 | 37.6 | 36.8 | (60.4) | (77.3) | ||||
| Net Earnings / (Loss) per Class A common share in $ | |||||||||
| Basic | 4.65 | 1.23 | 1.48 | (7.42) | (12.89) | ||||
| Diluted | 4.60 | 1.22 | 1.48 | (7.42) | (12.89) | ||||
| Weighted average number of Class A common shares outstanding | |||||||||
| Basic in millions | 35.1 | 17.7 | 11.9 | 6.5 | 6.0 | ||||
| Diluted in millions | 35.5 | 17.8 | 11.9 | 6.5 | 6.0 | ||||
| Net income per Class B common share in $ | |||||||||
| Basic and diluted | Nil | Nil | Nil | Nil | Nil | ||||
| Weighted average number of Class B common shares outstanding | |||||||||
| Basic and diluted in millions | Nil | Nil | Nil | 0.9 | 0.9 | ||||
| Dividend per Class A common share in $ | 27.9 | — | — | — | — | ||||
| Statement of cash flow | |||||||||
| Net cash provided by Operating Activities | 263.9 | 104.4 | 93.3 | 47.7 | 66.9 | ||||
| Net cash (used in)/provided by Investing Activities | (482.2) | (39.6) | (99.9) | 24.3 | (4.9) | ||||
| Net cash provided by/(used in) Financing Activities | 321.6 | (120.1) | 64.1 | (55.2) | (42.9) | ||||
| 51 |
| 2021 | 2020 | 2019 | 2018 (1) | 2017 | |||||
|
(Expressed in millions of U.S. dollars, except for per share data) | |||||||||
| Balance sheet data (at year end) | |||||||||
| Total current assets | 143.4 | 98.6 | 161.9 | 99.0 | 77.4 | ||||
| Vessels in operation | 1,682.8 | 1,140.6 | 1,155.6 | 1,112.8 | 586.5 | ||||
| Total assets | 1,994.1 | 1,274.2 | 1,351.8 | 1,233.5 | 675.9 | ||||
| Debt (current and non-current portion), net | 1,070.5 | 769.5 | 896.9 | 877.2 | 398.5 | ||||
| Class B and C Preferred Shares | — | — | — | — | — | ||||
| Class A and B common shares | 0.4 | 0.2 | 0.2 | 0.1 | 0.1 | ||||
| Shareholders’ equity | 712.6 | 464.7 | 406.4 | 316.4 | 251.6 | ||||
| Other data | |||||||||
| Number of vessels in operation at year end | 65 | 43 | 43 | 38 | 18 | ||||
| Ownership days | 19,427 | 16,044 | 14,326 | 7,675 | 6,570 | ||||
| Utilization | 94.3% | 93.0 % | 94.4 % | 98.7 % | 98.4 % | ||||
| (1) | On November 15, 2018, we completed the Poseidon Transaction. The consideration given was 3,005,603 Class A common shares and 250,000 Series C perpetual convertible preferred shares of par value $0.01 (the “Series C Preferred Shares”). On January 20, 2021, all 250,000 Series C Preferred Shares were converted into an aggregate of 12,955,188 Class A common shares. |
| (2) | On January 2, 2019, as a consequence of the completion of the Poseidon Transaction, all of our issued and outstanding Class B common shares converted one-for-one into Class A common shares. On March 25, 2019, we effected a one-for-eight reverse stock split of our Class A common shares, which our shareholders authorized at our special meeting of shareholders held on March 20, 2019. There was no change to the par value of our Class A common shares in connection with the reverse stock split. All share and per share amounts disclosed in this Annual Report give effect to the reverse stock split retroactively, for all periods presented. |
Results of Operations
Year ended December 31, 2021 compared to Year ended December 31, 2020
|
Year ended December 31, | |||
|
2021 |
2020 | ||
| Operating Revenues | (in millions of U.S. dollars) | ||
| Time charter revenue | $ 448.0 | $ 282.8 | |
| Operating Expenses | |||
| Vessel operating expenses | (130.3) | (102.8) | |
| Time charter and voyage expenses | (13.1) | (11.2) | |
| Depreciation and amortization | (61.6) | (47.0) | |
| Impairment of vessels | - | (8.5) | |
| General and administrative expenses | (13.2) | (8.4) | |
| Gain/(loss) on sale of vessels | 7.8 | (0.2) | |
| Total operating expenses | (210.4) | (178.1) | |
| Operating Income | 237.6 | 104.7 | |
| Non-Operating Income / (Expenses) | |||
| Interest income | 0.4 | 1.0 | |
| Interest and other finance expenses | (69.2) | (65.4) | |
| Other income, net | 2.8 | 1.3 | |
| Income taxes | (0.1) | (0.0) | |
| Net Income | 171.5 | 41.6 | |
| Earnings allocated to Series B Preferred Shares | (8.3) | (4.0) | |
| Net Income available to Common Shareholders | $ 163.2 | $ 37.6 | |
Operating Revenues
Operating revenues reflect income under fixed rate time charters and were $448.0 million in the year ended December 31, 2021, an increase of $165.2 million, or 58.4%, from operating revenues of $282.8 million for 2020. The increase is principally due to (i) a 21.1% increase in ownership days, due to the net acquisition of 22 vessels in 2021, resulting in 19,427 ownership days in 2021, compared to 16,044 in 2020, (ii) increased revenue on charter renewals at higher rates on 15 vessels since the beginning of 2021 and the full year effect of four charter renewals at higher rates effective in 2020, (iii) $45.4 million credit from amortization of intangible liabilities arising on below-market charters attached to vessels, and (iv) $16.3 million due to the modification of time charter contracts with a direct continuation at a different rate with the same charterer, offset by an increase in unplanned offhire days from 95 in 2020 to 260 days in 2021 and an increase in planned offhire days from 687 in 2020 to 752 in 2021.
There were 1,100 days offhire through the year, including 752 days for 11 planned vessel upgrades, 11 completed regulatory drydockings and four in progress as at December 31, 2021. Utilization for 2021 was 94.3%. In 2020, utilization was 93.0%.
| 52 |
Total Operating Expenses
Total Operating Expenses totaled $210.4 million (or 47.0% of operating revenues). Operating expenses totaled $178.1 million for the year ended December 31, 2020 (or 63.0% of operating revenues).
Total Operating expenses can be analyzed as follows:
| • | Vessel operating expenses: Vessel operating expenses, which relate to the operation of the vessels themselves, were $130.3 million for the year ended December 31, 2021 (or 29.0% of operating revenues) compared to $102.8 million for the year ended December 31, 2020 (or 36.4% of operating revenues). Ownership days in 2021 were 19,427, up 21.1% on 16,044 of 2020. The increase is mainly due to the net increase of 22 vessels since January 1, 2021. The average cost per ownership day was $6,707, up $297, (or 4.6%), from $6,410 for 2020. |
| • | Time Charter and voyage expenses: Time charter and voyage expenses, which comprise mainly commission paid to ship brokers, the cost of bunker fuel for owner’s account when a ship is offhire or idle and miscellaneous costs associated with a ship’s voyage for the owner’s account, were $13.1 million for the year ended December 31, 2021 (or 2.9% of operating revenues) compared to $11.1 million for the year ended December 31, 2020 (or 3.9% of operating revenues). The increase was mainly due to the net increase of 22 vessels since January 1, 2021. The average cost per ownership day was $674, down $21, (or 3.0%), from $695 for 2020 |
| • | Depreciation and Amortization: Depreciation and Amortization was $61.6 million (or 13.7% of operating revenues) for the year ended December 31, 2021, up from $47.0 million (or 16.6% of operating revenues) in 2020. The increase was mainly due to the net increase of 22 vessels since January 1, 2021. |
| • | Impairment of Vessels-Gain/(loss) on sale of vessels: The 2001-built, 2,272 TEU containership, La Tour, was sold on June 30, 2021 for net proceeds of $16.5 million resulting in a gain of $7.8 million. As at December 31, 2021, there were no events or changes in circumstances which indicated that the carrying amounts of any of our vessels may not be recoverable and therefore no impairment was charged. As of March 31, 2020, we had an expectation that the 1999-built, 2,200 TEU feeder ships, GSL Matisse and Utrillo, would be sold before the end of their previously estimated useful life, and as a result performed an impairment test of these two asset groups and an impairment charge of $7.6 million was recognized. An additional impairment charge of $0.9 million was recognized on these two vessels in the three months ended June 30, 2020 for a total of $8.5 million in the year ended December 31, 2020. The two vessels were sold in July 2020. |
| • | General and administrative: General and administrative expenses were $13.2 million (or 2.9% of operating revenues) in the year ended December 31, 2021, and were $8.4 million (or 3.0% of operating revenues) for 2020. The increase was mainly due to social tax costs related to vesting of certain senior management stock awards, the effect in share based compensation expense from a new stock award plan agreed in July 2021 and increased cost of D&O insurance. The average cost per ownership day was $682 for the year ended December 31, 2021, up $162, compared to $520 per day for the year ended December 31, 2020. |
Operating Income
As a consequence of all preceding items, operating income was $237.6 million for the year ended December 31, 2021 compared to an operating income of $104.7 million for the year ended December 31, 2020.
Interest Income
Interest income earned on cash balances for the year ended December 31, 2021 was $0.4 million compared to $1.0 million for the year ended December 31, 2020 with the decrease being mainly due to lower deposit rates.
Interest and other finance expenses
Interest and other finance expenses for the year ended December 31, 2021 were $69.2 million, an increase of $3.8 million, or 5.8%, on the interest and other finance expenses for the comparative period, of $65.4 million, although total debt increased by a net amount of $303.7 million year on year or 38.8%. The increase was mainly due to $5.8 million premium paid on the redemption in full of our 2022 Notes in January 2021 compared to $2.8 million premium paid on the redemption of $74.0 million of the 2022 Notes in 2020, the associated non-cash write off of deferred financing charges of $3.7 million and of original issue discount of $1.1 million, a prepayment fee of $1.6 million paid on the partial repayment of our Blue Ocean Junior Credit Facility, the prepayment fee of $1.4 million paid on the repayment and completion of the refinancing of our Odyssia Credit Facilities and interest on new loans with Hamburg Commercial Bank AG (“HCOB”) and new sale and leaseback agreements with Neptune and CMBFL, all for vessel additions, offset by a decrease in our blended cost of debt from approximately 6.3% for 2020 to 4.5% for 2021, as a result of our refinancing activities.
| 53 |
Other income, net
Other operating income, net represents miscellaneous revenue mainly from sundry recharges to charterers under our time charters. In the year ended December 31, 2021, other operating income, net was $2.8 million, up from $1.3 million in 2020.
Income Taxes
Income taxes for the years ended December 31, 2021 and 2020 were not material as our vessel owning subsidiaries were subject to taxation based on tonnage rather than profits.
Net Income
For the year ended December 31, 2021, net income was $171.5 million, compared to a net income of $41.6 million for the year ended December 31, 2020.
Earnings Allocated to Series B Preferred Shares
The dividends payable on the $109.0 million of Series B Preferred Shares outstanding as at December 31, 2021, are presented as a reduction of net income, as and when declared by the Board of Directors. These dividends totaled $8.3 million and $4.0 million for each of the years ended December 31, 2021 and 2020, respectively.
Net Income Available to Common Shareholders
Net income available to common shareholders for the year ended December 31, 2021 was $163.2 million, compared to a net income available to common shareholders of $37.6 million for the year ended December 31, 2020.
Year ended December 31, 2020 compared to Year ended December 31, 2019
For a discussion of our results for the year ended December 31, 2020 compared to the year ended December 31, 2019, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations—Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019” contained in our Annual Report on Form 20-F for the year ended December 31, 2020, filed with the SEC on March 19, 2021.
B. Liquidity and Capital Resources
Liquidity, working capital and dividends
Overview
Our net cash flow from operating activities derives from revenue received under our charter contracts, which varies directly with the number of vessels under charter, days on-hire and charter rates, less operating expenses including crew costs, lubricating oil costs, costs of repairs and maintenance, insurance premiums, general and administrative expenses, interest and other financing costs. In addition, each of our vessels is subject to a drydock approximately every five years. 11 drydockings were completed in 2021 for regulatory reasons and 11 vessel upgrades were completed, the total cost of which, excluding the effect of the associated 752 days of offhire, was $28.3 million. Nine drydockings were completed in 2020 for regulatory reasons and 11 for vessel upgrades, the total cost of which, excluding the effect of the associated 687 days of offhire, was $26.6 million. The average cost of the 20 drydockings completed on vessels in the current fleet between January 2020 and December 2021 was $1.6 million with an average loss of revenue of $0.8 million while the relevant vessel was offhire. The average cost for vessel upgrades due to commercial reasons was $0.4 million.
We have included a schedule of the next anticipated drydocking date for each of our vessels in “Item 4. Information on the Company—B. Business—Inspection by Classification Societies.” In future years there will be incremental costs for compliance with ballast water management regulations and with emission control regulations should we decide, in conjunction with our relevant charter, to retrofit scrubbers on our vessels. See “Item 4. Information on the Company—B. Business—Environmental and Other Regulations.”
| 54 |
The main factor affecting cash flow in a period is the timing of the receipt of charterhire, which is due to be paid two weeks or one month in advance, proceeds from any asset sales, costs of any asset purchases, the payments for costs of drydockings and vessel upgrades, the timing of the payment of interest, which is mainly quarterly, amortization of our debt including the 2024 Notes,, financings and refinancings, purchases of our Class A common shares, for which the Board of Directors authorized $40.0 million in March 2022, and dividends paid on our Class A common shares and Series B Preferred Shares.
At December 31, 2021, we had $1,085.6 million of debt outstanding, consisting of $117.5 million under our 2024 Notes which carry interest at the fixed rate of 8.00%, $789.7 million under our other credit facilities and $178.4 million under sale and leaseback financing transactions which have floating interest rates at LIBOR plus a weighted average margin of approximately 4.05%. Assuming LIBOR of 0.75%, quarterly interest on total gross debt at December 31, 2021, without taking into account amortization or any interest rate hedges, would amount to approximately $14.3 million.
Our credit facilities require that we maintain $20.0 million minimum liquidity at each quarter end on group basis.
We intend to declare and make quarterly dividend payments amounting to approximately $2.4 million per quarter on our Series B Preferred Shares on a perpetual basis and in accordance with the Certificate of Designation governing the terms of our Series B Preferred Shares, based on the amount outstanding as of December 31, 2021. Finally, we may, in the discretion of our Board of Directors, declare and pay dividends on our common shares, subject to, among other things, any applicable restrictions contained in our current and future agreements governing our indebtedness, including our credit facilities, and available cash flow. We paid dividends of $0.25 per Class A common share for the first, second, third and fourth quarter of 2021 and we have announced that from first quarter of 2022 the dividend will increase by 50% to $0.375 per Class A common share per quarter.
Other than costs for drydockings and compliance with environmental regulations, there are no other current material commitments for capital expenditures or other known and reasonably likely material cash requirements other than in respect of our growth strategy.
All our revenues are denominated in U.S. dollars and a portion of our expenses are denominated in currencies other than U.S. dollars. As of December 31, 2021, we had $203.5 million in cash and cash equivalents, including restricted cash and time deposits. Our cash and cash equivalents are mainly held in U.S. dollars, with relatively small amounts of UK pounds sterling and Euros. We regularly review the amount of cash and cash equivalents held in different jurisdictions to determine the amounts necessary to fund our operations and their growth initiatives and amounts needed to service our indebtedness and related obligations. If these amounts are moved out of their original jurisdictions, we may be subject to taxation.
Due to our charter coverage and nature of our operating and financial costs, our cashflows are predictable and visible, at least in the near to medium term. We have policies in place to control treasury activities within the group. For example, all new funding must be approved by our Board of Directors, and cash deposits can only be made with institutions meeting certain credit metrics and up to predetermined limits by institution.
Our floating rate debt is represented by drawings under a number of secured credit facilities. In December 2021, we entered into a USD one-month LIBOR interest rate cap of 0.75% through fourth quarter of 2026 on $484.1 million of floating rate debt and in February 2022 we entered into a USD one-month LIBOR interest rate cap of 0.75% though fourth quarter of 2026 on $507.9 million of floating rate debt to hedge our cash flows. We would not enter into derivatives for trading or speculative purposes.
| 55 |
The table below shows our consolidated cash flows for each of the years ended December 31, 2021, 2020 and 2019:
|
Year ended December 31, | |||||
|
2021 |
2020 |
2019 | |||
| (in millions of U.S. dollars) | |||||
| Cash flows from operating activities | |||||
| Net income | $ 171.5 | $ 41.6 | $ 39.8 | ||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||
| Depreciation and amortization | 61.6 | 47.0 | 43.9 | ||
| Impairment of vessels | — | 8.5 | — | ||
| (Gain)/loss on sale of vessels | (7.8) | 0.2 | — | ||
| Amortization of deferred financing costs | 8.3 | 4.1 | 3.1 | ||
| Amortization of original issue discount/premium on repurchase of notes | 8.6 | 3.3 | 1.1 | ||
| Amortization of intangible assets/liabilities-charter agreements | (45.4) | (0.5) | 1.9 | ||
| Share based compensation | 3.5 | 2.0 | 1.7 | ||
| Movement in working capital | 63.6 | (1.8) | 1.8 | ||
| Net cash provided by operating activities | 263.9 | 104.4 | 93.3 | ||
| Cash flows from investing activities | |||||
| Acquisition of vessels | (463.7) | (23.1) | (73.0) | ||
| Net proceeds from sale of vessels | 16.5 | 6.9 | — | ||
| Cash paid for vessel expenditures | (4.6) | (4.1) | (9.5) | ||
| Advances for vessel acquisitions and other additions | (3.3) | (4.5) | (9.2) | ||
| Cash paid for drydockings | (19.2) | (14.8) | (7.4) | ||
| Time deposits acquired | (7.9) | — | — | ||
| Cash acquired from Poseidon Transaction, net of capitalized expenses | — | — | (0.8) | ||
| Net cash used in investing activities | (482.2) | (39.6) | (99.9) | ||
| Cash flows from financing activities | |||||
| Proceeds from issuance of 2024 Notes | 22.7 | 20.1 | 39.8 | ||
| Deferred financing costs paid | (13.8) | (1.2) | (7.9) | ||
| Repayment of refinanced debt | (149.6) | (44.4) | (262.8) | ||
| Repurchase of 2022 Notes, including premium | (239.2) | (92.0) | (17.6) | ||
| Proceeds from drawdown of credit facilities and sale and leaseback | 744.5 | 47.0 | 327.5 | ||
| Repayment of credit facilities and sale and leaseback | (115.5) | (64.3) | (63.5) | ||
| Net proceeds from offering of Class A common shares, net of offering costs | 67.5 | — | 50.7 | ||
| Retirement of Class A common shares | (10.0) | — | — | ||
| Proceeds from offering of Series B preferred shares, net of offering costs | 51.2 | 18.7 | 1.0 | ||
| Class A common shares-dividend paid | (27.9) | — | — | ||
| Series B preferred shares – dividends paid | (8.3) | (4.0) | (3.1) | ||
| Net cash provided by/(used in) financing activities | 321.6 | (120.1) | 64.1 | ||
| Net increase/(decrease) in cash and cash equivalents and restricted cash | 103.3 | (55.3) | 57.5 | ||
| Cash and cash equivalents and restricted cash at beginning of the year | 92.3 | 147.6 | 90.1 | ||
| Cash and cash equivalents and restricted cash at end of the year | $ 195.6 | $ 92.3 | $ 147.6 | ||
Year ended December 31, 2021 compared to Year ended December 31, 2020
Net cash provided by operating activities was $263.9 million for the year ended December 31, 2021 reflecting mainly net income of $171.5 million, adjusted for depreciation and amortization of $61.6 million, gain on sale of vessels of $7.8 million, amortization of deferred financing costs and original issue discount of $16.9 million, amortization of intangible liabilities of $45.4 million, share-based compensation of $3.5 million, plus movements in working capital, including deferred revenue, of $63.6 million.
Net cash provided by operating activities for the year ended December 31, 2021 at $263.9 million was $159.5 million higher than in 2020 mainly due to net income up by $129.9 million, $14.6 million increase in depreciation and amortization expense as a consequence of the net acquisition of 22 vessels in 2021, movement in working capital $65.4 million higher in 2021 mainly due to increase in deferred revenue, offset by $45.9 million increase in amortization of intangible liabilities arising on below-market charters attached to vessel additions and $7.8 million gain on sale of vessels.
| 56 |
Net cash used in investing activities for the year ended December 31, 2021 was $482.2 million, including $463.7 million for the purchase of 23 ships, 7.9 million vessel additions and other advances, $19.2 million paid for drydockings, $7.9 million cash in time deposits acquired and $16.5 million proceeds from sale of one vessel.
Net cash used in investing activities for the year ended December 31, 2020 was $39.6 million, including $23.1 million for the purchase of two ships, $8.6 million vessel additions and other advances, $14.8 million paid for drydockings and $6.9 million proceeds from sale of two vessels.
Net cash provided by financing activities for the year ended December 31, 2021 was $321.6 million, including $22.7 million net proceeds from issuing our 2024 Notes under our ATM program, $744.5 million drawdown of new credit facilities, $51.2 million net proceeds from issuing Series B Preferred Shares under our ATM program, $67.5 million net proceeds from issuance of Class A common shares, $10.0 million purchase and retirement of 521,650 Class A common shares, offset by $239.2 million used for the full optional redemption of our outstanding expensive 2022 Notes, $115.5 million repayment of credit facilities, $149.6 million repayment of refinanced debt, $13.8 million deferred financing costs paid, $8.3 million dividends paid on our Series B Preferred Shares and $27.9 million dividends paid on our Class A common shares.
Net cash used in financing activities for the year ended December 31, 2020 was $120.1 million, including $20.1 million net proceeds from issuing our 2024 Notes under our ATM program, $47.0 million drawdown of new credit facilities, $18.7 million net proceeds from issuing Series B Preferred Shares under our ATM program offset by $92.0 million purchase of our 2022 Notes under the mandatory annual offer plus the optional redemption in February 2020, $64.3 million amortization of credit facilities, $44.4 million repayment of refinanced debt, $1.2 million deferred financing costs paid and $4.0 million dividends paid on our Series B Preferred Shares.
Overall, there was a net increase in cash and cash equivalents and restricted cash of $103.3 million in the year ended December 31, 2021, resulting in closing cash and cash equivalents and restricted cash of $195.6 million compared to closing cash and cash equivalents and restricted cash of $92.3 million at December 31, 2020.
Year ended December 31, 2020 compared to Year ended December 31, 2019
For a discussion of our liquidity and capital resources for the year ended December 31, 2020 compared to the year ended December 31, 2019, please see “Item 5. Operating and Financial Review and Prospects-B. Liquidity and Capital Resources-Liquidity, working capital and dividends-Year Ended December 31, 2020 Compared to Year Ended December 31, 2019” contained in our Annual Report on Form 20-F for the year ended December 31, 2020, filed with the SEC on March 19, 2021.
Our indebtedness as of December 31, 2021 comprised:
|
Facility |
$ million |
Collateral vessels |
Interest Rate |
Final maturity date |
| Chailease Credit Facility | 5.6 | Maira, Nikolas, Newyorker | LIBOR plus 4.2% | March 2025 |
| Sinopac Credit Facility | 11.6 | GSL Valerie | LIBOR plus 3.25% | September 2026 |
| Deutsche Credit Facility | 49.3 | UASC Al Khor | LIBOR plus 3.25% | April 2026 |
| CACIB, CTBC, Sinopac Credit Facility | 49.2 | Maira XL | LIBOR plus 2.75% | April 2026 |
| Hellenic Credit Facility | 8.5 | GSL Eleni |
LIBOR plus 3.90%
|
May 2024 |
| 8.4 | GSL Grania | September 2024 | ||
| 8.8 | GSL Kalliopi | October 2024 | ||
| 16.0 | GSL Vinia, GSL Christel Elisabeth | December 2024 | ||
| Syndicated Senior Secured Credit Facility (CACIB, ABN, First-Citizens & Trust Company, Siemens, CTBC, Sinopac, Palatine)(1) | 213.2 | Orca I, Katherine, Dolphin II, Athena, Kristina, Agios Dimitrios, Alexandra, Alexis, Olivia I, Mary | LIBOR plus 3.00% | September 2024 |
| Blue Ocean Junior Credit Facility(2) | 26.2 | Orca I, Katherine, Dolphin II, Athena, Kristina, Agios Dimitrios, Alexandra, Alexis, Olivia I | 10.00% | September 2024 |
| HCOB Credit Facility | 28.1 | GSL Arcadia, GSL Maria, GSL Dorothea | LIBOR plus 3.5% | April 2025 |
| 18.7 | GSL Melita, GSL Tegea | May 2025 | ||
| 10.0 | GSL MYNY | July 2025 |
| 57 |
|
Facility |
$ million |
Collateral vessels |
Interest Rate |
Final maturity date |
| HCOB, CACIB, ESUN, CTBC, Taishin Credit Facility | 132.0 | GSL Susan, GSL Mercer, Matson Molokai, GSL Lalo, GSL Amstel, tbr GSL Chloe, GSL Alice, GSL Melina, GSL Eleftheria, GSL Elizabeth, GSL Maren, GSL Rossi | LIBOR plus 3.25% | July 2026 |
| CMBFL Finance Lease | 50.0 | Anthea Y | LIBOR plus 3.25% | May 2028 |
| CMBFL Finance Lease | 85.2 | GSL Tripoli, GSL Tinos, GSL Syros | LIBOR plus 3.25% | September 2027 |
| CMBFL Finance Lease | 30.0 | GSL Kithira | LIBOR plus 3.25% | October 2027 |
| Neptune Finance Lease | 13.2 | GSL Violetta | LIBOR plus 4.64% | February 2026 |
| New Hayfin Credit Facility | 204.1 | GSL Fleet (20 vessels) | LIBOR plus 7.00% | January 2026 |
| 2024 Notes | 117.5 | (Unsecured) | 8.00% | December 2024 |
| TOTAL | 1,085.6 |
|
|
|
| (1) | Refinanced in January 2022. |
| (2) | Repaid in January 2022. |
Notes
8.00% Senior Unsecured Notes due 2024
On November 19, 2019, we issued $27.5 million aggregate principal amount of 8.00% Senior Unsecured Notes due 2024 (the “2024 Notes”) in an underwritten public offering. On November 27, 2019, we issued an additional $4.1 million aggregate principal amount of 2024 Notes pursuant the underwriters’ exercise of their option to purchase such additional 2024 Notes.
On November 27, 2019, we entered into an “At Market Issuance Sales Agreement” with B. Riley FBR, Inc. (the “Agent”) pursuant to which we may sell, from time to time, up to an additional $68.0 million of 2024 Notes (the “2024 Notes ATM Program”). As of December 31, 2021, we had issued and sold approximately $50.9 million aggregate principal amount of 2024 Notes under the 2024 Notes ATM Program.
In July 2021, we agreed to purchase the Borealis Fleet for an aggregate purchase price of $233.9 million, part of which was financed by the issuance of $35.0 million of 2024 Notes to the sellers.
Interest on the 2024 Notes is payable on the last day of February, May, August and November of each year commencing on February 29, 2020 and the 2024 Notes have a maturity date of December 31, 2024.
We have the option to redeem the 2024 Notes for cash, in whole or in part, at any time (i) on or after December 31, 2021 and prior to December 31, 2022, at a price equal to 102% of the principal amount, (ii) on or after December 31, 2022 and prior to December 31, 2023, at a price equal to 101% of the principal amount and (iii) on or after December 31, 2023 and prior to maturity, at a price equal to 100% of the principal amount.
As of December 31, 2021, the total outstanding aggregate principal amount of the 2024 Notes was $117.5 million.
9.875% First Priority Secured Notes due 2022
On October 31, 2017, we issued and sold $360.0 million in aggregate principal amount of our 2022 Notes which were scheduled to mature on November 15, 2022. Proceeds after the deduction of the original issue discount, but before expenses, amounted to $356.4 million. The 2022 Notes were fully redeemed in January 2021, as discussed below.
Interest on the 2022 Notes was payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2018. As at December 31, 2020 and December 31, 2019 the 2022 Notes were secured by first priority vessel mortgages on the 16 and 18 vessels, respectively, in the GSL Fleet and by assignments of earnings and insurances, pledges over certain bank accounts, as well as share pledges over each subsidiary owning a vessel securing the 2022 Notes. In addition, the 2022 Notes were fully and unconditionally guaranteed, jointly and severally, by 16 and 18 of our vessel owning subsidiaries as of December 31, 2020 and 2019, respectively, and Global Ship Lease Services Limited.
We were required to have a minimum cash balance of $20.0 million on each test date, being March 31, June 30, September 30 and December 31 in each year. The original issue discount was being amortized on an effective interest rate basis over the life of the 2022 Notes. We were required to repay $40.0 million each year for the first three years and $35.0 million thereafter, across both the 2022 Notes and the Citi Credit Facility. The Citi Credit Facility had minimum fixed amortization whereas as long as amounts were outstanding thereunder, amortization of the 2022 Notes is at the option of the noteholders, who could accept or reject an annual tender offer we were obliged to make.
| 58 |
In December 2018, the tender offer was accepted in full and we repurchased $20.0 million of the 2022 Notes at a purchase price of 102%. In December 2019, the tender offer of $20.0 million was partially accepted by the noteholders and we repurchased $17.3 million principal amount of the 2022 Notes at a purchase price of 102%. The balance of the offer of $2.7 million was applied to repay the Citi Credit Facility at par. The Citi Credit Facility was fully repaid on October 31, 2020, consequently on December 3, 2020, we mandatorily redeemed $28.0 million aggregate principal amount of the 2022 Notes at a redemption price of $28.6 million (representing 102.0% of the aggregate principal amount redeemed) plus accrued and unpaid interest.
On February 10, 2020, we completed an optional redemption of $46.0 million aggregate principal amount of our 2022 Notes at a redemption price of $48.3 million (representing 104.938% of the aggregate principal amount redeemed) plus accrued and unpaid interest. During the year ended December 31, 2020, we also repurchased $15.3 million of aggregate principal amount of 2022 Notes in the open market at a weighted average price of 98.98% of the aggregate principal amount.
The aggregate principal amount outstanding at December 31, 2020 was $233.4 million. On January 20, 2021, we optionally redeemed, in full, $233.4 million aggregate principal amount of 2022 Notes, representing all such 2022 Notes outstanding, using the proceeds we received from the New Hayfin Facility and cash on hand, at a redemption price of $239.2 million (representing 102.469% of the aggregate principal amount of notes redeemed) plus accrued and unpaid interest.
Credit Facilities
$65.0 million Hayfin Credit Facility
On September 7, 2018, we entered into a facility agreement with Hayfin Services LLP (the “Lenders”) which provided for a secured term loan facility of up to $65.0 million. The Hayfin Credit Facility was to be borrowed in tranches and was to be used in connection with the acquisition of vessels as specified in the Hayfin Credit Facility or as otherwise agreed with the Lenders. An initial tranche of $8.1 million was drawn on September 10, 2018 in connection with the acquisition of GSL Valerie. The Hayfin Credit Facility, which is non-amortizing, was available for drawing until May 10, 2019 and had a final maturity date of July 16, 2022. A commitment fee of 2.0% per annum was due on the undrawn commitments until May 10, 2019 when the availability period was terminated.
Outstanding amounts under the Hayfin Credit Facility were secured by first priority vessel mortgage on the acquired vessel and by assignments of earnings and insurances, pledges over certain bank accounts, as well as share pledges over the subsidiary owning the vessel. In addition, the Hayfin Credit Facility was fully and unconditionally guaranteed, jointly and severally, by the Company, GSL Holdings, Inc. and the Facility Mortgaged vessel owning subsidiaries.
On August 27, 2021, the Hayfin Credit Facility was cancelled, having been fully repaid with proceeds from a new secured credit facility amounting to $12.0 million with Bank SINOPAC CO. LTD (“Bank Sinopac”).
$180.5 million Deutsche, First-Citizens & Trust Company, HCOB, Entrust, Blue Ocean Credit Facility
In connection with the Poseidon Transaction, we assumed debt outstanding of $180.5 million relating to the vessels UASC Al Khor, Maira XL and Anthea Y provided by Deutsche Bank AG. The agreement was dated November 9, 2018, with initial drawdown amount of $180.5 million and final maturity of June 30, 2022.
On December 31, 2018, we entered into a deed of amendment and restatement with the bank. Based on this restatement there was a re-tranche of the facility such that it was split into a senior facility in an amount of $141.9 million (“Senior Facility”) and a junior facility in an amount of $38.6 million (“Entrust, Blue Ocean Junior Facility”). The lenders of the Senior Facility were Deutsche Bank AG, HCOB and First-Citizens & Trust Company and the lenders of the Blue Ocean Junior Facility were Blue Ocean GP LLC, Blue Ocean Income Fund LP, Blue Ocean Onshore Fund LP, Entrustpermal ICAV, Blue Ocean Investments SPC one and Blue Ocean Investments SPC for three. The final maturity of both Facilities (Senior and Blue Ocean Junior) was June 30, 2022. In addition to the repayment schedule, a cash sweep mechanism based on a DSCR ratio of 1.10:1 (DSCR ratio is the ratio of Cash Flow to the Cash Flow Debt Service) would apply pro rata against the Senior Facility and the Blue Ocean Junior Facility.
Senior Facility
The Senior Facility was comprised of three tranches. Tranche A related to UASC Al Khor and was scheduled to be repaid in 14 instalments of $0.9 million with the first such instalment due three months from the utilization date, and a final instalment of $35.1 million. Tranche B related to Anthea Y and was scheduled to be repaid in 14 instalments of $0.9 million, the first such instalment due three months from the utilization date, and a final instalment of $35.2 million. Tranche C related to Maira XL and was scheduled to be repaid in 14 instalments of $0.9 million, the first such instalment due three months from the utilization date, and a final instalment of $35.3 million.
| 59 |
The Senior Facility bore interest at LIBOR plus 3.00% payable quarterly in arrears.
The Senior facility was cancelled, having been fully repaid with proceeds from i) a new secured credit facility amounting to $51.7 million with Crédit Agricole Corporate and Investment Bank (“CACIB”), CTBC Bank CO., LTD (“CTBC”) and Sinopac, ii) a new secured credit facility amounting $51.7 million with Deutsche Bank and iii) a new $54.0 million Sale and Leaseback agreement with CMB Financial Leasing Co. Ltd. (“CMBFL”).
Junior Facility
The Junior Facility was comprised of in three Tranches. Tranche A related to UASC Al Khor and was scheduled to be repaid in 14 instalments of $0.2 million, the first such instalment due three months from the utilization date, and a final instalment of $9.6 million. Tranche B related to Anthea Y and was scheduled to be repaid in 14 instalments of $0.2 million, the first such instalment due three months from the utilization date, and a final instalment of $9.6 million. Tranche C related to Maira XL and was scheduled to be repaid in 14 instalments of $0.2 million, the first such instalment due three months from the utilization date, and a final instalment of $9.6 million.
The Blue Ocean Junior Facility bore interest at LIBOR plus 10.00% payable quarterly in arrears.
The Blue Ocean Junior facility was cancelled, having been fully repaid with proceeds from i) a new secured credit facility amounting to $51.7 million with CACIB, CTBC and Sinopac, ii) a new secured credit facility amounting $51.7 million with Deutsche Bank and iii) a new $54.0 million Sale and Leaseback agreement with CMBFL.
$59.0 million Hellenic Bank Credit Facility
On May 23, 2019, we entered into a facility agreement with Hellenic Bank Public Company Limited for an amount up to $37.0 million, which we refer to as the Hellenic Credit Facility. Borrowings under the Hellenic Credit Facility were available in tranches and were used in connection with the acquisition of the GSL Eleni, GSL Kalliopi and GSL Grania. We drew down on an initial tranche of $13.0 million on May 24, 2019, in connection with the acquisition of the GSL Eleni. The first tranche is repayable in 20 equal quarterly instalments of $0.5 million each with a final balloon payment of $4.0 million payable together with the final instalment. We drew down a second tranche of $12.0 million on September 4, 2019, in connection with the acquisition of the GSL Grania. The second tranche is repayable in 20 equal quarterly instalments of $0.4 million each with a final balloon payment of $4.0 million, payable together with the final instalment. The third tranche of $12.0 million was drawn on October 3, 2019, in connection with the acquisition of GSL Kalliopi. The third tranche is repayable in 20 equal quarterly instalments of $0.4 million each with a final balloon payment of $4.0 million payable together with the final instalment.
On December 10, 2019, we entered into an amended and restated loan agreement with Hellenic Bank for an additional facility of amount $22.0 million that was to be borrowed in two tranches and was to be used in connection with the acquisition of the vessels GSL Vinia and GSL Christel Elisabeth. Both additional tranches were drawn on December 10, 2019. Each tranche is repayable in 20 equal quarterly instalments of $0.4 million each with a final balloon payment of $3.5 million payable together with the final instalment.
The Hellenic Credit Facility bears interest at LIBOR plus a margin of 3.90% per annum.
As of December 31, 2021, the outstanding balance of the Hellenic Credit Facility was $41.7 million.
$268.0 Million Syndicated Senior Secured Credit Facility (CACIB, ABN, CIT, Siemens, CTBC, Sinopac, Palatine)
On September 19, 2019, we entered into a new syndicated $268.0 million senior secured credit facility comprised of two tranches (the “Senior Syndicated Facility”) with CACIB, ABN Amro Bank N.V. (“ABN”), CIT Bank N.A (“CIT”), Siemens Financial Services, Inc (“Siemens”), Sinopac, CTBC and Banque Palatine (“Palatine”). The first tranche of the Senior Syndicated Facility of $230.0 million was drawn down, in full, and the proceeds were used to refinance five of our senior credit facilities existing at the time with maturities in December 2020 and April 2021 (the “First Tranche Refinancing”). As a result of the First Tranche Refinancing, three 2000-built 6,000 TEU ships, Tasman, ZIM Europe and Ian H, became unencumbered. The final maturity date of the Senior Syndicated Facility is September 2024, five years after drawdown. Borrowings under the Senior Syndicated Facility bear interest at LIBOR plus a margin of 3.00% and the scheduled amortization of the first tranche is $5.2 million per quarter plus a balloon payment of $126.0 million.
On February 10, 2020 we drew down in full Tranche B in the amount of $38.0 million, which is scheduled to be repaid in 20 consecutive quarterly instalments of $1.0 million and a balloon payment of $18.0 million payable in the termination date on the fifth anniversary from the utilization date of Tranche A, which falls in September 24, 2024. Tranche B was fully utilized to refinance the DVB Credit Facility.
| 60 |
The existing indebtedness that was fully refinanced with the Syndicated Senior Facility comprised of the following credit facilities:
| • | $55.7 Million Credit Agricole Credit Facility: This facility bore interest at LIBOR plus a margin of 2.75% per annum. As of September 23, 2019, the outstanding balance on this facility amounted to $51.0 million and was fully refinanced. |
| • | $24.5 Million Blue Ocean Credit Facility: A facility with Blue Ocean Income Fund LP, Blue Ocean Onshore Fund LP, Blue Ocean Investments SPC One and Blue Ocean Investments SPC Three (together, “Blue Ocean”). This facility bore interest on $18.8 million of principal at LIBOR plus a margin of 4.00% per annum. As of September 24, 2019, the outstanding balance on this facility amounted to $23.7 million and was fully refinanced. |
| • | $65.3 Million ABN AMRO Credit Facility Blue Ocean Credit Facility: This facility bore interest at LIBOR plus a margin of 3.42% per annum up to March 31, 2019 and afterwards 3.50% per annum. As of September 24, 2019, the outstanding balance on this facility amounted to $61.6 million and was fully refinanced. |
| • | $17.1 Million Amsterdam Trade Bank (“ATB”) Credit Facility: This facility bore interest at LIBOR plus a margin of 3.90% per annum. As of September 27, 2019, the outstanding balance on this facility amounted to $12.6 million and was fully refinanced. |
| • | $80.0 Million Credit Agricole Credit Facility: This facility bore interest at LIBOR plus a margin of 3.00% per annum for the first 6 months, 3.25% for the following 12 months and 3.50% thereafter payable quarterly in arrears. As of September 24, 2019, the outstanding balance on this facility amounted to $75.5 million and was fully refinanced. |
As of December 31, 2021, the outstanding balance of the Senior Syndicated Facility was $213.2 million.
$38.5 million Blue Ocean Junior Credit Facility
On September 19, 2019, we entered into a refinancing agreement with Blue Ocean Income Fund LP, Blue Ocean Onshore Fund LP and Blue Ocean Investments SPC Blue, holders of the outstanding debt of $38.5 million relevant to the previous Blue Ocean Credit Facility in order to refinance that existing facility with the only substantive change being to extend maturity at the same date with the Syndicated Senior Secured Credit Facility. We drew down the facility on September 23, 2019 and it is scheduled to be repaid in a single instalment on the termination date which falls on September 24, 2024.
This facility bore interest at 10.00% per annum.
As of December 31, 2021, the outstanding balance of the Blue Ocean Junior Credit Facility was $26.2 million, and on January 10, 2022, we repaid this facility in full.
$9.0 million Chailease Credit Facility
On February 26, 2020, we entered into a secured term facility agreement with Chailease International Financial Services Pte., for an amount of $9.0 million. The Chailease credit facility was used to refinance of DVB Credit Facility. The Facility is to be repaid in 36 consecutive monthly instalments of $0.2 million and 24 monthly instalments of $0.1 million with a final balloon of $1.3 million payable together with the final instalment.
This facility bears interest at LIBOR plus a margin of 4.20% per annum.
As of December 31, 2021, the outstanding balance of the Chailease Credit Facility was $5.6 million.
New Credit Facilities and sale and leaseback agreements (finance leases) in 2021
New Hayfin Facility
On January 7, 2021, we entered into a new $236.2 million senior secured loan facility with Hayfin Capital Management, LLP, or Hayfin, as lender, agent and security agent, which we refer to as the New Hayfin Facility. The New Hayfin Facility is guaranteed by us and certain of our subsidiaries. We used the proceeds from the New Hayfin Facility, along with cash on hand, to optionally redeem in full our outstanding 2022 Notes.
The New Hayfin Facility matures in January 2026 and bears interest at a rate of LIBOR plus a margin of 7.00% per annum. It is repayable in twenty quarterly installments of $6.56 million, along with a balloon payment at maturity. The New Hayfin Facility is secured by, among other things, first priority ship mortgages over 21 of our vessels, assignments of earnings and insurances of the mortgaged vessels, pledges over certain bank accounts, as well as share pledges over the equity interests of each mortgaged vessel-owning subsidiary.
| 61 |
As of December 31, 2021, the outstanding balance of the New Hayfin Credit Facility was $204.1 million.
$51.7 million CACIB, CTBC, Sinopac Credit Facility
On April 13, 2021, the Company via its subsidiary Penelope Marine LLC entered into a secured facility for an amount of $51,7 million in order to refinance one of the three tranches of the $180.5 million Deutsche, CIT, HCOB, Entrust, Blue Ocean Credit Facility, that had a maturity date on June 30, 2022, of an amount $48.6 million. The new secured credit facility has a maturity in April 2026.
The Lenders are CACIB, Sinopac and CTBC.
The facility is repayable in 20 equal consecutive quarterly instalments of $1.3 million with a final balloon of $26.2 million payable together with the final instalment.
The facility bears interest at LIBOR plus a margin of 2.75% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this facility was $49.2 million.
$64.2 million Hamburg Commercial Bank AG Credit Facility
On April 15, 2021, we entered into a Senior Secured term loan facility with HCOB “the HCOB Facility” for an amount of up to $64.2 million in order to finance the acquisition of six out of the Seven Vessels.
Tranche A, E and F amounting to $32.1 million were drawn down in April 2021 and have a maturity date in April 2025, Tranche B and D amounting to $21.4 million were drawn down in May 2021 and have a maturity date in May 2025, and Tranche C amounting to $10.7 million was drawn down in July 2021 and has a maturity date in July 2025.
Each Tranche of the facility is repayable in 16 equal consecutive quarterly instalments of $0.7 million.
The facility bears interest at LIBOR plus a margin of 3.50% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this facility was $56.8 million.
$51.7 million Deutsche Bank AG Credit Facility
On May 6, 2021, the Company via its subsidiary Laertis Marine LLC entered into a secured facility for an amount of $51.7 million with Deutsche Bank AG in order to refinance one of the three previous tranches of the $180.5 million Deutsche, CIT, HCOB, Entrust, Blue Ocean Credit Facility, that had a maturity date on June 30, 2022, of an amount $48.5 million.
The new facility is repayable in 20 equal consecutive quarterly instalments of $1.2 million with a final balloon of $28.4 million payable together with the final instalment.
The facility bears interest at LIBOR plus a margin of 3.25% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this facility was $49.3 million.
$140.0 million HCOB, CACIB, ESUN, CTBC, Taishin Credit Facility
On July 6, 2021, we entered into a facility with CACIB, HCOB, E.Sun Commercial Bank, Ltd (“ESUN”), CTBC and Taishin International Bank (“Taishin”) for a total of $140.0 million to finance the acquisition of the Borealis Fleet. The full amount was drawdown in July 2021 and the credit facility has a maturity in July 2026.
The facility is repayable in 6 equal consecutive quarterly instalments of $8.0 million, 8 equal consecutive quarterly instalments of $5.4 million and 6 equal consecutive quarterly instalments of $2.2 million with a final balloon of $35.6 million payable together with the final instalment.
The facility bears interest at LIBOR plus a margin of 3.25% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this facility was $132.0 million.
| 62 |
$12.0 million Sinopac Credit Facility
On August 27, 2021, the Company via its subsidiary Global Ship Lease 42 LLC entered into a secured credit facility for an amount of $12.0 million with Sinopac Capital International (HK) Limited (“Sinopac Credit Facility”), partially used to fully refinance the Hayfin Credit Facility. The full amount was drawn down in September 2021 and the credit facility has a maturity in September 2026.
The new facility is repayable in 20 equal consecutive quarterly instalments of $0.4 million with a final balloon of $3.6 million payable together with the final instalment.
The facility bears interest at LIBOR plus a margin of 3.25% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this facility was $11.6 million.
$14.7 million Sale and Leaseback agreement-Neptune Maritime Leasing
On May 12, 2021, the Company via its subsidiary GSL Violetta LLC entered into a $14.7 million sale and leaseback agreement with Neptune Maritime Leasing (“Neptune”) to finance the acquisition of GSL Violetta delivered in April 2021. We have a purchase obligation to acquire the vessel at the end of the lease term and under ASC 842-40, the transaction has been accounted for as a failed sale. In accordance with ASC 842-40, we did not derecognize the respective vessel from our balance sheet and accounted for the amount received under the sale and leaseback agreement as a financial liability. In May 2021, we drew $14.7 million under this agreement.
The sale and leaseback agreement is repayable in 15 equal consecutive quarterly instalments of $0.8 million each and four equal consecutive quarterly instalments of $0.5 million with a repurchase obligation of $1.0 million on the last repayment date.
The sale and leaseback agreement matures in February 2026 and bears interest at LIBOR plus a margin of 4.64% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of this sale and leaseback agreement was $13.2 million.
$54.0 million Sale and Leaseback agreement-CMBFL
On May 20, 2021, the Company via its subsidiary Telemachus Marine LLC entered into a $54.0 million sale and leaseback agreement with CMB Financial Leasing Co. Ltd. (“CMBFL”) to refinance one of the three previous tranches of the $180.5 million Deutsche, CIT, HCOB, Entrust, Blue Ocean Credit Facility, that had a maturity date on June 30, 2022, of an amount $46.6 million. We have a purchase obligation to acquire the vessel at the end of the lease term and under ASC 842-40, the transaction has been accounted for as a failed sale. In accordance with ASC 842-40, we did not derecognize the respective vessel from our balance sheet and accounted for the amount received under the sale and leaseback agreement as a financial liability.
The sale and leaseback agreement is repayable in eight equal consecutive quarterly instalments of $2.0 million each and 20 equal consecutive quarterly instalments of $0.9 million with a repurchase obligation of $19.9 million on the final repayment date.
The sale and leaseback agreement matures in May 2028 and bears interest at LIBOR plus a margin of 3.25% per annum payable quarterly in arrears.
In May 2021, on delivery of the vessel, the Company drew $54.0 million, which represented vessel purchase price $75.0 million less advanced hire of $21.0 million, which advanced hire neither bore any interest nor was refundable and was set off against payment of the purchase price payable to the Company by the unrelated third party under this agreement.
As of December 31, 2021, the outstanding balance of this sale and leaseback agreement was $50.0 million.
| 63 |
$120.0 million Sale and Leaseback agreement-CMBFL Four vessels
On August 26, 2021, the Company via its subsidiaries Global Ship Lease 68 LLC, Global Ship Lease 69 LLC, Global Ship Lease 70 LLC and Global Ship Lease 71 LLC, entered into four $30.0 million sale and leaseback agreements with CMBFL to finance the acquisition of the Four Vessels. As at September 30, 2021, we had drawdown a total of $90.0 million. The drawdown for the fourth vessel, amounting to $30.0 million, took place on October 13, 2021 together with the delivery of this vessel. We have a purchase obligation to acquire the Four Vessels at the end of their lease terms and under ASC 842-40, the transaction has been accounted for as a failed sale. In accordance with ASC 842-40, we did not derecognize the respective vessels from our balance sheet and accounted for the amounts received under the sale and leaseback agreement as financial liabilities.
Each sale and leaseback agreement is repayable in 12 equal consecutive quarterly instalments of $1.6 million and 12 equal consecutive quarterly instalments of $0.3 million with a repurchase obligation of $7.0 million on the final repayment date.
The sale and leaseback agreement for the three vessels matures in September 2027 and for the fourth vessel in October 2027 and bear interest at LIBOR plus a margin of 3.25% per annum payable quarterly in arrears.
As of December 31, 2021, the outstanding balance of these sale and lease back agreements was $115.2 million.
Covenants
Certain of our credit facilities have financial covenants, which require us to maintain, on borrowers or subholding level, among other things:
| • | minimum liquidity on borrowers level; |
| • | minimum market value of collateral for each credit facility, such that the aggregate market value of the vessels collateralizing the particular credit facility is between 120% and 135%, depending on the particular facility, of the aggregate principal amount outstanding under such credit facility, or, if we do not meet such threshold, to provide additional security to eliminate the shortfall; and |
On group level, the Company has a minimum consolidated liquidity of not less than $20.0 million.
The agreements governing our indebtedness also contain undertakings limiting or restricting us from, among other things:
| • | incurring additional indebtedness or issuing certain preferred stock; |
| • | making any substantial change to the general nature of our business; |
| • | paying dividends on or repaying or distributing any dividend or share premium reserve; |
| • | redeeming or repurchasing capital stock; |
| • | creating or impairing certain securities interests, including liens; |
| • | transferring or selling certain assets; |
| • | entering into certain transactions other than arm’s length transactions; |
| • | acquiring a company, shares or securities or a business or undertaking; |
| • | entering into any amalgamation, demerger, merger, consolidation or corporate reconstruction, or selling all or substantially all of our properties or assets; |
| • | experiencing any change in the position of Executive Chairman; and |
| • | changing the flag, class or technical or commercial management of the vessel mortgaged under such facility or terminating or materially amending the management agreement relating to such vessel. |
Our secured credit facilities are generally secured by, among other things:
| • | a first priority mortgage over the relevant collateralized vessels; |
| • | first priority assignment of earnings and insurances from the mortgaged vessels; |
| 64 |
| • | pledge of the earnings account of the mortgaged vessel; |
| • | pledge of the equity interest of each of the vessel-owning subsidiaries; and |
| • | corporate guarantees. |
Debt repaid in 2020
$54.8 million Citi Credit Facility
On October 26, 2017, and in connection with our 2022 Notes, we entered into a $54.8 loan facility with Citibank N.A., which we refer to as the Citi Credit Facility. The proceeds of this facility were used, together with the proceeds of our 2022 Notes and cash on hand, to refinance our 10.00% first priority secured notes due 2019 and other debt then outstanding. The term loan matured on October 31, 2020. The term loan was cross-collateralized on a first priority basis with the collateral under our 2022 Notes, including 16 vessels in the GSL Fleet. The loan was payable semi-annually in instalments of $10.0 million resulting in minimum repayment of $20.0 million in each of the first and second years with the balance of the Citi Credit Facility to be repaid in the third year.
The term loan carried interest at LIBOR plus a margin of 3.25%.
The term loan was fully repaid on October 31, 2020.
$52.6 million DVB Credit Facility
In connection with the Poseidon Transaction, we assumed debt outstanding of $51.1 million related to the vessels Maira, Nikolas, Newyorker and Mary, provided by DVB Bank SE (“DVB”). The facility agreement, which we refer to as the DVB Credit Facility, was dated July 18, 2017, with an initial drawdown amount of $52.6 million and final maturity of December 31, 2020.
As of February 12, 2020, the outstanding balance on this facility amounted to $44.4 million was fully refinanced by the Tranche B Syndicated Senior Secured Credit Facility and the Chailease Credit Facility.
The facility had a repayment schedule along with a cash sweep clause, whereby the excess cash flows will be used against the outstanding balance of the facility and would be specifically applied to the prepayment of the balloon instalment up to a specific amount. The facility carried interest at LIBOR plus a margin of 2.85% per annum.
Leverage
As of December 31, 2021, we had $1,085.6 million of debt outstanding of which $26.2 million was provided by Blue Ocean at a fixed rate of interest of 10.0%, $117.5 million was for our 2024 Notes which carry interest at the fixed rate of 8.00% and $941.9 million was floating rate debt across a number of facilities and sale and leaseback arrangements and bearing interest at LIBOR plus an average margin of approximately 4.05%. In December 2021 we entered into a USD one-month LIBOR interest rate cap of 0.75% through fourth quarter of 2026, on $484.1 million of our floating rate debt, which reduces over time and represented approximately half of our outstanding floating rate debt as of that date. In February 2022 we entered into a USD one-month LIBOR interest rate cap of 0.75% through fourth quarter of 2026, on $507.9 million of our floating rate debt, which reduces over time and represented approximately half of our outstanding floating rate debt as of that date.
We believe that funds generated by the business and retained will be sufficient to meet our operating needs for the next twelve months following the issuance of this Form 20-F, including working capital requirements, drydocking costs, interest and debt repayment obligations.
As market conditions warrant, we may from time to time, depending upon market conditions and the provisions on our facilities/notes, seek to repay loans or repurchase debt securities, in privately-negotiated or open market transactions.
| 65 |
Working capital and dividends
Our net cash flows from operating activities depend on the number of vessels under charter, days on-hire, vessel charter rates, operating expenses, drydock and vessel upgrade costs, interest and other financing costs including amortization and general and administrative expenses. Pursuant to our ship management agreements, we have agreed to pay our ship managers an annual management fee per vessel and to reimburse them for operating costs they incur on our behalf. Charterhire is payable by our charterers 15 days or monthly in advance and estimated ship management costs are payable monthly in advance. Although we can provide no assurances (see “Item 3. Key Information—D. Risk Factors—Risks Related to our Business—We are highly dependent on charter payments”), we expect that our cash flow from our chartering arrangements will be sufficient to cover our ship management costs and fees, interest payments under our borrowings, amortization, insurance premiums, vessel taxes, general and administrative expenses, dividends on our Series B Preferred Shares and other costs and any other working capital requirements for the short and medium term and planned drydocking expenses.
We estimate that the average cost of each of the 20 drydockings completed on vessels in the fleet between January 2020 and December 2021 was $1.6 million, with an average loss of revenue of $0.8 million from offhire. We have included a schedule of the next anticipated drydocking date for each of our vessels in the section of this Annual Report entitled “Item 4. Information on the Company—B. Business Overview—Inspection by Classification Societies.”
Our other liquidity requirements include a requirement to pay a minimum of $190.3 million of amortization in 2022 on our secured term loans and minimum amortization of $153.6 million in 2023. Interest requirements are $48.8 million and $41.8 million, respectively. The dividend on the $109.0 million Series B Preferred Shares outstanding as at December 31, 2021 amounts to $9.5 million each year. We have also announced an increase in the dividend to be paid on our Class A common shares to $0.375 per share per quarter from the first quarter 2022. Based on the number of Class A common shares outstanding as at March 10, 2022, this dividend, which is subject to approval by the Board of Directors, would amount to $13.8 million per quarter. In addition to funds generated by the business, we may require new borrowings, issuances of equity or other securities, or a combination of the former and the latter to purchase additional vessels and will likely require such further funding to meet all of our repayment obligations under the 2024 Notes and other borrowings.
C. Research and Development
None.
D. Trend Information
All of the information and data presented in this section, including the analysis of the container shipping industry, has been provided by MSI. MSI has advised that (i) some information in MSI’s database is derived from estimates derived from industry sources or subjective judgments, (ii) the information in the databases of other maritime data collection agencies may differ from the information in MSI’s database, (iii) whilst MSI has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures and may accordingly contain errors, (iv) MSI, its agents, officers and employees cannot accept liability for any loss suffered in consequence of reliance on such information or in any other manner, and (v) the provision of such information does not obviate any need to make appropriate further inquiries.
Container shipping is the most convenient low-carbon and cost-effective way to transport a wide range of cargoes, predominantly a diverse selection of consumer, manufactured, semi-manufactured, and perishable goods. It is estimated that around 90% of non-bulk cargoes traded by sea are carried by containership. Approximately 201 million TEU, equating to around 1.9 billion tonnes, of containerized cargo are estimated to have been carried in 2021. Global containerized cargo volumes have grown every year since the industry’s inception in 1956, with two exceptions: 2009, during the Global Financial Crisis, and 2020, due to the impact of COVID-19. However, the industry has displayed resilience during the COVID-19 crisis: after contracting significantly in the first half of 2020, leaving global containerized volumes 6.6% lower compared to the same period of 2019, cargo volumes rebounded strongly during the second half of 2020, with the recovery accelerating in 2021. Overall, negative growth of 1.9% was seen in 2020, with positive growth of 7.1% estimated for 2021. On the supply side: as at December 31, 2021, idle capacity of the global containership fleet was only 0.6% - which is effectively full employment – and the orderbook-to-fleet ratio stood at 23.4%.
The containerized supply chain extends throughout the world. Mainlane trades are those linking the major manufacturing economies in Asia with the major consumer economies in North America (the Transpacific trades) and Europe (the Asia-Europe trades), and those linking Europe with the Americas (the Transatlantic trades). These trades tend to be served by the largest containerships on the water. In 2021, an estimated 72% of global containerized volumes were on the non-Mainlane trades, with intra-regional trades—of which the largest is Intra-Asia—representing just over 40%. These non-Mainlane and intra-regional trades are predominantly served by mid-sized and smaller containerships (10,000 TEU, or smaller).
| 66 |
Growth in containerized trade is linked to consumer-led demand for goods and thereby to regional economic growth. Historically, underlying growth was boosted by both the containerization of breakbulk goods, including refrigerated cargoes, and the relocation of manufacturing from developed economies, such as those in Europe and North America, to lower cost regions, most notably in Asia. Of these, the continued containerization of refrigerated (or ‘reefer’) cargoes is expected to continue to outpace overall container trade growth.
From 2000 through 2008, a period of super-cyclical growth largely catalyzed by China, the Compound Annual Growth Rate (“CAGR”) of global containerized trade was 9.9%. Having contracted by 8.0% in 2009, during the Global Financial Crisis, growth rebounded to 15.3% the following year. The CAGR from 2010 through 2019 was 3.8%. As already noted, in 2020 – during the COVID-19 crisis – global containerized trade volumes contracted by 1.9%, followed by a 7.1% rebound in 2021. Analyst consensus for this volume recovery involves a combination of changing consumption habits (consumers purchasing “things” rather than “experiences” during COVID-19 lock-downs), re-stocking, and making supply chains more robust (moving from “just in time” to “just in case” inventory management).
Expansion in containerized trade has also led to expansion in the global containership fleet, of which the vast majority of vessels are fully cellular containerships which are ships specialized for the transport of containers and fitted with cell guides throughout the ship to optimize container stowage and significantly enhance the efficiency of load and discharge operations. At the same time, liner shipping companies have sought to reduce slot costs (unit costs) through economies of scale achievable with ever larger ships.
Between 1995 and 2008, the nominal carrying capacity of the industry-wide fully cellular fleet grew by a compound annual rate of 11.4%; and from 2009 through 2020 at 5.7%, as the industry digested the legacy, pre-financial crisis orderbook. In 2021, net supply is estimated to have expanded by 4.5% and, as of December 31, 2021, the containership fleet was estimated to be 5,467 ships, with an aggregate capacity estimated at 24.8 million TEU – just under half of which is chartered in from containership owners like Global Ship Lease.
In December 2008, the orderbook was estimated to represent over 60% of existing global capacity. Since then, however, the industry has been adjusting to lower demand growth, capital constraints, and consolidation. By the end of 2021, the overall orderbook-to-fleet ratio stood at 23.4%. For ships between 2,000 TEU and 9,999 TEU it was 8.7%, and for those between 5,500 TEU and 9,999 TEU (mid-size Post-Panamax) it was 7.7%.
Vessel newbuilding prices, secondhand values, and charter rates have tended to be closely correlated and are all strongly influenced by the dynamics of supply and demand, combined with sentiment. From 2000 through 2021, the average newbuilding price for a theoretical 3,500 – 3,600 TEU containership was around $43.7 million, with prices ranging between $31.5 million (2002) and $65.0 million (2008). During the same period, secondhand values for a 10 year old ship of similar size averaged around $23.8 million and ranged between $5.0 million (2016) and $58.0 million (2021). Meantime, spot market charter rates for such tonnage averaged about $18,700 per day and ranged between $5,300 per day (2016) and $92,200 per day (2021). In January 2022, prevailing rates in the market for short term charters (under 12 months) were around $92,300 per day, with newbuilding prices at approximately $51.0 million and secondhand values for a 10 year old ship at about $62.0 million.
Containerization is a low-carbon form of transportation, with Green House Gas (“GHG”) emissions per ton-mile of cargo carried significantly lower than that for other common modes of freight transport such as air, road, and rail. As a key component of global supply chains, container shipping is also a contributor to the UN’s Sustainable Development Goals—particularly those associated with poverty alleviation, economic growth, and infrastructure.
The industry’s principal regulator, the IMO, has set targets for the reduction of GHG emissions from shipping. The key agreed target is to reduce annual GHG emissions in absolute terms by at least 50% by 2050, compared to benchmark 2008 levels. Further targets have also been set on carbon intensity: specifically, a reduction in CO2 emissions “per transport work” by at least 40% by 2030, with efforts towards 70% by 2050. Emissions-reducing regulations expected to be introduced from January 1, 2023 include EEXI (Energy Efficiency Existing Ship Index), Enhanced SEEMP (Ship Energy Efficiency Management Plan), and CII (Carbon Intensity Indicator). Among other things, these measures are intended to reduce emissions by limiting the power output from vessels’ main engines, which may have the effect of reducing the operating speed of the global fleet, tightening effective supply. Other national and pan-national regulators, such as the EU, are also implementing regulations focused upon decarbonization which are expected to evolve and tighten over time.
Some liner companies are adopting Liquified Natural Gas, or LNG, as a transition fuel towards the next generation of genuinely green fuels. Others have expressed skepticism about LNG as part of a de-carbonization strategy given that it is still a hydrocarbon, suggesting they may wait until net-zero emission fuels are commercially available. The current consensus view is that 2030 will be the earliest inflection point at which next-generation green fuels (with the considerable infrastructure required to support them) will become commercially available, allowing industry adoption to begin to accelerate. In the interim, it is expected that the industry will continue to rely predominantly on existing, conventionally-fueled containerships that are optimized for lower emissions.
For conventionally-fueled containerships, there is considerable variation in vessel emissions per tonne of cargo carried, with the economies of scale yielded by larger vessels typically resulting in lower emissions per container carried. Other factors, such as vessel age and design, fuel saving and energy efficiency retrofits, sailing speed, time in port, weather routing and other operational differences, can also have a significant impact on the relative fuel efficiency of different classes of containership. Logically, there is a strong correlation between ships with low fuel costs per TEU slot and ships with low emissions per slot. There is a significant increase in efficiency in the transition from small feeder containerships (sub-3,000 TEU) to intermediate-sized vessels (4,000 – 10,000 TEU).
| 67 |
Whilst even larger vessels (above 12,000 TEU) offer further efficiencies relative to intermediate vessels, the incremental improvement curve tends to flatten as vessel sizes increase beyond that point.
While the emissions profile of a ship during its operating lifetime is comparatively well understood, insufficient work has been done on a full life-cycle basis: quantifying the material carbon footprints associated with building a new ship, and subsequently de-commissioning and re-cycling it at the end of its economic life.
E. Critical Accounting Estimates
The consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates in the application of certain accounting policies based on our best assumptions, judgments and opinions. We base these estimates on the information available to us at the time and on various other assumptions we believe are reasonable under the circumstances. The following is a discussion of our principal accounting policies, some of which involve a high degree of judgment, and the methods of their application.
For a further description of our material accounting policies, please see note 2 to the consolidated financial statements included at “Item 18. Financial Statements”.
Revenue Recognition
Our revenue is generated from time charters for each vessel. The charters are regarded as operating leases and provide for a per vessel fixed daily charter rate. Revenue is recorded on a straight-line basis. Our charter revenues are fixed for the period of the current charters, subject to any offhire, and, accordingly, little judgment is required to be applied to the amount of revenue recognition. Operating revenue is stated net of address commissions, which represent a discount provided directly to the charterer based on a fixed percentage of the agreed upon charter rate.
If a time charter contains one or more consecutive option periods, then subject to the options being exercisable solely by us, the time charter revenue will be recognized on a straight-line basis over the total remaining life of the time charter, including any options which are more likely than not to be exercised. If a time charter is modified, including the agreement of a direct continuation at a different rate, the time charter revenue will be recognized on a straight-line basis over the total remaining life of the time charter from the date of modification. During the year ended December 31, 2021 an amount of $16.2 million has been recorded in time charter revenue for such modifications. Any difference between the charter rate invoiced and the time charter revenue recognized is classified as, or released from, deferred revenue.
We elected the practical expedient which allows us to treat the lease and non-lease components as a single lease component for the leases where the timing and pattern of transfer for the non-lease component and the associated lease component to the lessees are the same and the lease component, if accounted for separately, would be classified as an operating lease. The combined component is therefore accounted for as an operating lease under ASC 842, as the lease components are the predominant characteristics.
Vessels in Operation
Vessels are generally recorded at their historical cost, which consists of the acquisition price and any material expenses incurred upon acquisition, adjusted for the fair value of intangible assets or liabilities associated with above or below market charters attached to the vessels at acquisition. Vessels acquired in a corporate transaction accounted for as an asset acquisition are stated at the acquisition price, which consists of consideration paid, plus transaction costs, considering pro rata allocation based on vessels fair value at the acquisition date. Vessels acquired in a corporate transaction accounted for as a business combination are recorded at fair value. Vessels acquired as part of the Marathon Merger in 2008 were accounted for under ASC 805, which required that the vessels be recorded at fair value, less the negative goodwill arising as a result of the accounting for the merger.
The Poseidon Transaction has been accounted for under ASU 2017-01 as an asset acquisition. The vessels acquired on November 15, 2018 were recorded at their fair value, based on valuations obtained from third party independent ship brokers, less negative goodwill arising as a result of the accounting for the overall Poseidon Transaction, allocated pro-rata.
| 68 |
Subsequent expenditures for major improvements and upgrades are capitalized, provided they appreciably extend the life, increase the earnings capacity or improve the efficiency or safety of the vessels.
Borrowing costs incurred during the construction of vessels or as part of the prefinancing of the acquisition of vessels are capitalized. There was no capitalized interest for the years ended December 31, 2021 or 2020.
Vessels are stated less accumulated depreciation and impairment, if applicable. Vessels are depreciated to their estimated residual value using the straight-line method over their estimated useful lives which are reviewed on an ongoing basis to ensure they reflect current technology, service potential and vessel structure. The useful lives are estimated to be 30 years from original delivery by the shipyard.
Management estimates the residual values of the our container vessels based on a scrap price of steel times the weight of the vessel noted in lightweight tons (LWT). Residual values are periodically reviewed and revised to recognize changes in conditions, new regulations or other reasons. Revision of residual values affect the depreciable amount of the vessels and affects depreciation expense in the period of the revision and future periods. Management estimated the residual values of its vessels based on scrap rate of $400 per LWT.
For any vessel group which is impaired, the impairment charge is recorded against the cost of the vessel and the accumulated depreciation as at the date of impairment is removed from the accounts.
The cost and related accumulated depreciation of assets retired or sold are removed from the accounts at the time of sale or retirement and any gain or loss is included in the Consolidated Statements of Income.
Drydocking
Drydocking costs are reported in the Consolidated Balance Sheets within "Deferred charges, net", and include planned major maintenance and overhaul activities for ongoing certification. We follow the deferral method of accounting for drydocking costs, whereby actual costs incurred are deferred and amortized on a straight-line basis over the period until the next scheduled drydocking, which is generally five years. Any remaining unamortized balance from the previous drydocking is written-off.
The amortization period reflects the estimated useful economic life of the deferred charge, which is the period between each drydocking. Costs incurred during the drydocking relating to routine repairs and maintenance are expensed. The unamortized portion of drydocking costs for vessels sold is included as part of the carrying amount of the vessel in determining the gain or (loss) on sale of the vessel.
Prior to the completion of the Poseidon Transaction on November 15, 2018, we allocated an element of the purchase price of a vessel to a drydocking component which was amortized on a straight-line basis to the next anticipated drydocking date.
Costs capitalized as part of the drydock include costs directly associated with the special survey of the ship, its hull and its machinery and for the defouling and repainting of the hull. Any cost of repair to hull or machinery that extends useful life is capitalized. Other repair costs are expensed. 11 drydockings were completed in 2021 for regulatory reasons and 11 vessel upgrades were completed, the total cost of which, excluding the effect of the associated 752 days of offhire, was $28.3 million. Nine drydockings were completed in 2020 for regulatory reasons and 11 vessel upgrades were completed, the total cost of which, excluding the effect of the associated 687 days of offhire, was $26.6 million. The duration of drydockings was adversely affected in 2021 by delays caused by COVID-19 and by continuing congestion at Chinese and other shipyards, which also affected 2020. Five drydockings were completed in 2019 for regulatory reasons and five vessel upgrades were completed, the total cost of which, excluding the effect of the associated 537 days of offhire, was $8.7 million.
Intangible assets and liabilities-charter agreements
The Company’s intangible assets and liabilities consist of unfavorable lease terms on charter agreements acquired in assets acquisitions. When intangible assets or liabilities associated with the acquisition of a vessel are identified, they are recorded at fair value. Fair value is determined by reference to market data and the discounted amount of expected future cash flows. Where charter rates are higher than market charter rates, an intangible asset is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel and equivalent duration of charter party at the date the vessel is delivered. Where charter rates are less than market charter rates, an intangible liability is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel. The determination of the fair value of acquired assets and liabilities requires the Company to make significant assumptions and estimates of many variables including market charter rates (including duration), the level of utilization of its vessels and its weighted average cost-of capital. The estimated market charter rate (including duration) is considered a significant assumption. The use of different assumptions could result in a material change in the fair value of these items, which could have a material impact on the Company’s financial position and results of operations. The amortizable value of favorable and unfavorable leases is amortized over the remaining life of the relevant lease term and the amortization expense or income respectively is included under the caption “Amortization of intangible liabilities charter agreements” in the Consolidated Statements of Income. For any vessel group which is impaired, the impairment charge is recorded against the cost of the vessel and the accumulated depreciation as at the date of impairment is removed from the accounts.
| 69 |
Impairment of Long-lived Assets
Tangible fixed assets, such as vessels, that are held and used or to be disposed of by the Company are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. In these circumstances, the Company performs step one of the impairment test by comparing the undiscounted projected net operating cash flows for each vessel group to its carrying value. A vessel group comprises the vessel, the unamortized portion of deferred drydocking related to the vessel and the related carrying value of the intangible asset or liability (if any) with respect to the time charter attached to the vessel at its purchase. If the undiscounted projected net operating cash flows of the vessel group are less than its carrying amount, management proceeds to step two of the impairment assessment by comparing the vessel group’s carrying amount to its fair value, including any applicable charter, and an impairment loss is recorded equal to the difference between the vessel group’s carrying value and fair value. Fair value is determined with the assistance from valuations obtained from third party independent ship brokers.
The Company uses a number of assumptions in projecting its undiscounted net operating cash flows analysis including, among others, (i) revenue assumptions for charter rates on expiry of existing charters, which are based on forecast charter rates, where relevant, in the four years from the date of the impairment test and a reversion to the historical mean of time charter rates for each vessel thereafter (ii) off-hire days, which are based on actual off-hire statistics for the Company’s fleet (iii) operating costs, based on current levels escalated over time based on long term trends (iv) dry docking frequency, duration and cost (v) estimated useful life, which is assessed as a total of 30 years from original delivery by the shipyard and (vi) scrap values.
Revenue assumptions are based on contracted charter rates up to the end of the existing contract of each vessel, and thereafter, estimated time charter rates for the remaining life of the vessel. The estimated time charter rate used for non-contracted revenue days of each vessel is considered a significant assumption. Recognizing that the container shipping industry is cyclical and subject to significant volatility based on factors beyond the Company’s control, management believes that using forecast charter rates in the four years from the date of the impairment assessment and a reversion to the historical mean of time charter rates thereafter, represents a reasonable benchmark for the estimated time charter rates for the non-contracted revenue days, and takes into account the volatility and cyclicality of the market.
Two 1999-built, 2,200 TEU feeder ships, GSL Matisse and Utrillo, were sold on July 3, 2020 and July 20, 2020, respectively. As of June 30, 2020, the vessels were immediately available for sale and qualified as assets held for sale. As of March 31, 2020, the Company had an expectation that the vessels would be sold before the end of their previously estimated useful life, and as a result performed an impairment test of the specific asset group. An impairment charge of $7.6 million was recognized for the three months ended March 31, 2020 and an additional impairment charge of $0.9 million has been recognized in the three months ended June 30, 2020.
The Company has evaluated the impact of current economic situation on the recoverability of all its other vessel groups and has determined that there were no events or changes in circumstances which indicated that their carrying amounts may not be recoverable. Accordingly, there was no triggering event and no impairment test was performed for the year ended December 31, 2021.
Through 2020 whilst charter rates in the spot market and asset values saw improvements, taking into account the seasonal as well as cyclical nature of the container shipping industry, the recovery was not considered to have been sufficiently sustained not to undertake a review for impairment for vessel groups where the carrying value as at December 31, 2020 might not be recoverable.
As a result, step one of the impairment assessment of each of the vessel groups was performed as at December 31, 2020. As the undiscounted projected net operating cash flows of each of the vessel groups exceeded the carrying amount, step two of the impairment test was not required and there were no impairment charges as of December 31, 2020.
The assessment performed for 2019 resulted in no impairment charges.
As of December 31, 2018, it was determined that step two of the impairment analysis was required for three vessels groups, as the undiscounted projected net operating cash flows did not exceed the carrying value. As a result, an impairment loss of $71.8 million was recorded for three vessels, shown as “Impairment of vessels” in the Consolidated Statements of Income, being the aggregate difference between the fair value of the vessel group (which included the charter attached) and the vessel group’s carrying value.
No impairment test was performed for the vessels comprising the Poseidon Fleet as at December 31, 2018, as no events or circumstances existed indicating that their carrying value may not be recoverable. The carrying value of the vessels at December 31, 2018 was significantly lower than their fair value, mainly as a result of the allocation of negative goodwill arising from the accounting for the Poseidon Transaction.
| 70 |
In September 2018, we agreed with CMA CGM to extend the charter on GSL Julie and entered a new charter with Maersk Line for GSL Ningbo (formerly OOCL Ningbo). These extensions triggered the performance of an impairment test on the two vessels; no impairment was identified.
In January 2018, we agreed with CMA CGM to extend the charter on GSL Tianjin by eight to 12 months (at the charterer’s option) at a fixed rate of $11,900 per day, commencing January 26, 2018. In February 2018, we agreed with OOCL to extend the charter of OOCL Qingdao to between January 1, 2019 and March 15, 2019 (at the charterer’s option) at a fixed rate of $14,000 per day, commencing March 11, 2018. These extensions triggered the performance of an impairment test on the two vessels; no impairment was identified.
Although we currently intend to continue to hold and operate all of our vessels, the following table presents information with respect to the carrying value of our vessels, which are after the impairment charges noted above. The estimated market values, based on charter attached valuations as at December 31, 2021 with the assistance of an independent ship broking firm and totaling $3,211.3 million, are above their carrying values as at December 31, 2021. The carrying value of each of the vessels does not necessarily represent its fair market value or the amount that could be obtained if the vessel were sold. During 2021 charter rates in the spot market and asset values saw significant improvements and increase. As of December 31, 2021 charter attached values are above vessels’ carrying values. We evaluated the impact of current economic situation on the recoverability of all our vessel groups and we determined that there were no events or changes in circumstances which indicated that their carrying amounts may not be recoverable. Accordingly, there was no triggering event and no impairment test was performed for the year ended December 31, 2021.
The amount, if any, and timing of any impairment charges we may recognize in the future will depend upon then current and expected future charter rates and vessel values, which may differ materially from those fair values as at December 31, 2021. In addition, vessel values are highly volatile; as such, the estimated market values may not be indicative of the current or future market value of our vessels or prices that we could achieve if we were to sell them, with or without charters attached.
| 71 |
The table below sets out the carrying value of each of the vessel group we owned as of December 31, 2021 and 2020:
| Vessel Name | Capacity in TEUs | Year Built | Carrying Value as at December 31, 2020 (in millions of U.S. dollars) | Carrying Value as at December 31, 2021 (1) (in millions of U.S. dollars) |
| CMA CGM Thalassa | 11,040 | 2008 | $95.6 | $91.7 |
| UASC Al Khor | 9,115 | 2015 | 65.7 | 63.5 |
| Anthea Y | 9,115 | 2015 | 65.7 | 63.6 |
| Maira XL | 9,115 | 2015 | 66.3 | 64.0 |
| MSC Tianjin | 8,603 | 2005 | 42.1 | 41.7 |
| MSC Qingdao | 8,603 | 2004 | 46.4 | 43.8 |
| GSL Ningbo | 8,603 | 2004 | 42.5 | 41.2 |
| GSL Eleni | 7,847 | 2004 | 18.8 | 18.1 |
| GSL Kalliopi | 7,847 | 2004 | 16.1 | 15.6 |
| GSL Grania | 7,847 | 2004 | 16.0 | 15.5 |
| Mary | 6,927 | 2013 | 45.6 | 44.0 |
| Kristina | 6,927 | 2013 | 47.0 | 45.1 |
| Katherine | 6,927 | 2013 | 47.0 | 45.1 |
| Alexandra | 6,927 | 2013 | 46.7 | 44.9 |
| Alexis | 6,882 | 2015 | 52.5 | 50.6 |
| Olivia I | 6,882 | 2015 | 52.5 | 50.6 |
| GSL Christen | 6,840 | 2002 | 13.3 | 13.1 |
| GSL Nicoletta | 6,840 | 2002 | 12.9 | 12.7 |
| CMA CGM Berlioz | 6,621 | 2001 | 29.2 | 28.7 |
| Agios Dimitrios | 6,572 | 2011 | 27.6 | 26.6 |
| GSL Vinia | 6,080 | 2004 | 13.8 | 13.4 |
| GSL Christel Elisabeth | 6,080 | 2004 | 13.7 | 13.2 |
| GSL Dorothea | 5,992 | 2001 | 0.0 | 18.5 |
| GSL Arcadia | 6,008 | 2000 | 0.0 | 15.3 |
| GSL Violetta | 6,008 | 2000 | 0.0 | 15.2 |
| GSL Maria | 6,008 | 2001 | 0.0 | 18.7 |
| GSL MYNY | 6,008 | 2000 | 0.0 | 18.4 |
| GSL Melita | 6,008 | 2001 | 0.0 | 20.5 |
| GSL Tegea | 5,992 | 2001 | 0.0 | 20.3 |
| Tasman | 5,936 | 2000 | 13.3 | 12.7 |
| ZIM Europe | 5,936 | 2000 | 12.6 | 12.2 |
| Ian H | 5,936 | 2000 | 12.9 | 12.6 |
| GSL Tripoli | 5,470 | 2009 | 0.0 | 36.3 |
| GSL Kithira | 5,470 | 2009 | 0.0 | 36.4 |
| GSL Tinos | 5,470 | 2010 | 0.0 | 37.5 |
| GSL Syros | 5,470 | 2010 | 0.0 | 37.5 |
| Dolphin II | 5,095 | 2007 | 11.8 | 11.6 |
| Orca I | 5,095 | 2006 | 11.0 | 12.8 |
| CMA CGM Alcazar | 5,089 | 2007 | 31.8 | 30.3 |
| GSL Château d’If | 5,089 | 2007 | 29.6 | 28.1 |
| GSL Susan | 4,363 | 2008 | 0.0 | 27.0 |
| CMA CGM Jamaica | 4,298 | 2006 | 26.7 | 25.6 |
| CMA CGM Sambhar | 4,045 | 2006 | 25.7 | 27.0 |
| CMA CGM America | 4,045 | 2006 | 25.2 | 24.2 |
| GSL Rossi | 3,421 | 2012 | 0.0 | 24.4 |
| GSL Alice (G) | 3,421 | 2014 | 0.0 | 26.1 |
| GSL Eleftheria (G) | 3,404 | 2013 | 0.0 | 28.2 |
| GSL Melina (G) | 3,404 | 2013 | 0.0 | 23.0 |
| GSL Valerie | 2,824 | 2005 | 12.1 | 11.4 |
| 72 |
| Vessel Name | Capacity in TEUs | Year Built | Carrying Value as at December 31, 2020 (in millions of U.S. dollars) | Carrying Value as at December 31, 2021 (1) (in millions of U.S. dollars) |
| Matson Molokai | 2,824 | 2007 | 0.0 | 22.2 |
| GSL Lalo | 2,824 | 2006 | 0.0 | 20.2 |
| GSL Mercer | 2,824 | 2007 | 0.0 | 25.6 |
| Athena | 2,762 | 2003 | 8.1 | 7.8 |
| GSL Elizabeth | 2,741 | 2006 | 0.0 | 20.3 |
| tbr GSL Chloe (G) | 2,546 | 2012 | 0.0 | 24.7 |
| GSL Maren (G) | 2,546 | 2014 | 0.0 | 21.7 |
| Maira (G) | 2,506 | 2000 | 7.0 | 6.9 |
| Nikolas (G) | 2,506 | 2000 | 6.7 | 7.3 |
| Newyorker (G) | 2,506 | 2001 | 5.9 | 7.8 |
| La Tour (G) | 2,272 | 2001 | 9.0 | 0.0 |
| Manet (G) | 2,272 | 2001 | 9.6 | 9.1 |
| Keta (G) | 2,207 | 2003 | 4.3 | 5.8 |
| Julie (G) | 2,207 | 2002 | 4.7 | 4.4 |
| Kumasi (G) | 2,207 | 2002 | 7.0 | 7.2 |
| Akiteta (G) | 2,207 | 2002 | 7.1 | 7.3 |
| GSL Amstel (G) | 1,118 | 2008 | 0.0 | 8.3 |
| $1,159.1 | $1,665.1 |
| (1) | Carrying value includes unamortized drydocking costs and excludes intangible liabilities-charter agreements. |
| (G) | Indicates geared vessel. |
Share-Based Compensation
We have awarded restricted stock units to certain of our employees. The accounting fair value of restricted stock unit grants is determined by reference to the quoted stock price on the date of grant, as adjusted for estimated dividends forgone until the restricted stock units vest. Compensation expense is recognized based on a graded expense model over the expected vesting period.
Recent Accounting Pronouncements
We do not believe that any recently issued accounting pronouncements would have a material impact on our consolidated financial statements.
| Item 6. | Directors, Senior Management and Employees |
A. Directors and Senior Management
Our directors and executive officers as of the date of this Annual Report and their ages as of December 31, 2021 are listed below:
Name |
Age | Position |
| George Giouroukos | 56 | Executive Chairman |
| Michael S. Gross | 60 | Director |
| Alain Wils | 78 | Director |
| Philippe Lemonnier | 61 | Director |
| Michael Chalkias | 51 | Director |
| Henry Mannix III | 42 | Director |
| Alain Pitner | 72 | Director |
| Menno van Lacum | 51 | Director |
| Ian J. Webber | 64 | Chief Executive Officer |
| Thomas A. Lister | 52 | Chief Commercial Officer |
| Anastasios Psaropoulos | 43 | Chief Financial Officer |
| 73 |
George Giouroukos: Mr. Giouroukos has been our Executive Chairman since November 2018 when the strategic combination with Poseidon Containers was completed. He has been involved in Shipping since 1993, when he joined a major Greek shipowning company and worked in various departments. He founded Technomar, an internationally recognized ship management company, in 1994, where he has served as Managing Director. With over 25 years of experience in the sector, he has negotiated and executed over 200 secondhand and newbuilding ship transactions, creating partnerships with a number of major shipping banks resulting in co-investment of approximately $230 million in workout transactions. He has also partnered with Private Equity firms to jointly invest in container and dry bulk ships. Mr. Giouroukos serves as the Chairman of the Hellenic Advisory Committee of International classification society, RINA and holds a Bachelor in Mechanical Engineering from University College London and a Master in Engineering from Brunel University.
Michael S. Gross: Mr. Gross has been a director since inception and was Chairman from September 2008 to November 2018 when the strategic combination with Poseidon Containers closed. Mr. Gross is the Chairman of the board of directors and Co-Chief Executive Officer of SLR Investment Corp. and SLR Senior Investment Corp., publicly traded BDC’s focused on private direct lending. From 2004 to 2006, Mr. Gross was the President and Chief Executive Officer of Apollo Investment Corporation (“AIC”), a publicly traded business development company, and was the managing partner of Apollo Investment Management, L.P. (“AIM”), the investment adviser to AIC. From 1990 to 2006 Mr. Gross was a senior partner of Apollo Management, a leading private equity firm which he co-founded in 1990.
Alain Wils: Mr. Wils has been a director since May 2014. He is a consultant in the shipping and logistics industries, after more than 40 years of experience in the sector. Mr. Wils joined the CMA CGM group in 1996 as managing director of the previously state-owned shipping company, CGM, on its acquisition by CMA. He was appointed an executive board member of CMA CGM in 2001 on the merger of CMA and CGM until his retirement in 2008. From 1992 to 1996, he was chairman and CEO of Sceta International, later renamed Geodis International, a leading European logistics and freight forwarding company. He was the managing director of the shipping group Delmas Vieljeux, which he joined in 1971, from 1982 to 1992. Mr. Wils, who is a graduate of HEC Paris and of Paris University, was appointed Chevalier de la Légion d’Honneur in 1995 and chaired the French Shipowners’ Association from 1998 to 2000.
Philippe Lemonnier: Mr. Lemonnier has been a director since September 2017. He currently serves as Vice President Group Performance Control at CMA CGM group. Previously he was Global Head of Efficiency Programs at CEVA Logistics, also responsible for Procurement and the Margin Improvement Program. He has served as Group Financial Controller and in charge of the Agility Program (cost savings program) at CMA CGM, having joined the company in 2005. He has more than 30 years of experience in finance and accounting and has served in senior leadership roles across multiple industries, including as the Chief Financial Officer of two French telecommunications companies.
Michael Chalkias: Mr. Chalkias has been a director since November 2018 when the strategic combination with Poseidon Containers was completed. He is the Co-founder and Co-Chief Executive Officer of the Prime Marine group, a leading global operator and manager in the seaborne oil and gas transportation space, which has managed more than 100 ships since its inception, Since March 2018, Mr. Chalkias has also served as non-executive, non-independent director of First Ship Lease Trust (“FSL Trust”), a Singapore-based business trust listed on the Mainboard of the Singapore Exchange Securities Trading Limited. Mr. Chalkias counts more than 25 years in the shipping industry, during which he has accumulated extensive in-depth knowledge in all aspects of the business and established strong relationships in the sector. Through Prime Marine, he has invested in many ships, primarily product tankers and gas carriers and has partnered with a number of international banks and US private equity firms. Prior to co-founding Prime Marine’s predecessor in 1999, he was employed by Tufton Oceanic Limited, a specialized shipping finance and investment firm in London, where he was actively involved with debt and equity instruments as well as structured financing. Mr. Chalkias holds an MSc with Distinction in Shipping, Trade & Finance from the Cass Business School at the City University of London and a BSc with Honors in Maritime Business and Maritime Law from the University of Plymouth.
Henry (Hank) Mannix III: Mr. Mannix was appointed a director in November 2018. He has served as a director of Poseidon Containers since 2010. Mr. Mannix joined Kelso & Company, a U.S. private equity firm (“Kelso”), in 2004 and became a Managing Director in 2015. He spent the preceding two years in the investment banking division of Credit Suisse First Boston. Mr. Mannix is also a director of Elara Caring, Physicians Endoscopy and Refresh Mental Health. Mr. Mannix received a B.A. in Math and Economics from the College of the Holy Cross in 2001. Mr. Mannix has extensive experience in corporate financing and in evaluating the financial performance and operations of companies across a variety of business sectors, including the shipping sector.
Alain Pitner: Mr. Pitner, who has 30 years of shipping experience, was appointed a director in November 2018. Mr. Pitner commenced his career in 1974 in the Risk Department of Banque Indosuez, now part of Credit Agricole Group. He held various operational and commercial responsibilities in the Bank’s French Export Credit Department. In 1987, Mr. Pitner joined the Shipping Division of the Bank’s Structured Finance Department, where he financed newbuildings and was also responsible for special projects. He then was entrusted with increasingly senior roles. In September 2017, after 42 years, Mr. Pitner retired from the bank. He graduated from Reims business school and holds a MSIA from Krannert Business School—Purdue University, USA.
| 74 |
Menno van Lacum: Mr. van Lacum was appointed a director in November 2018. He commenced his career in 1997 by joining the Transportation Group at MeesPierson where he was responsible, in different capacities, for arranging and structuring debt capital markets and leasing products predominantly for the Transportation Equipment Leasing sector. In 2005, Mr. van Lacum became Director of the Fortis Principal Finance Group in the USA, responsible for holding equity investments and structuring debt instruments within the Transportation Sector. In 2009, Mr. van Lacum joined the Transportation Capital Group (“TCG”) as a Partner in the Netherlands focusing primarily on holding investments in the maritime industry. In 2019, Mr. van Lacum became CEO of Prow Capital, a private debt fund manager focusing on ESG investments in the shipping industry. Mr. van Lacum holds a Master’s Degree in Economics from the University of Amsterdam, Netherlands.
Ian J. Webber: Mr. Webber became our Chief Executive Officer in August 2008. From 1979 to 1996, Mr. Webber worked for PriceWaterhouse, the last five years of which he was a partner. From 1996 to 2006, Mr. Webber served as the Chief Financial Officer and a director of CP Ships Limited, a subsidiary of Canadian Pacific Limited until 2001 and thereafter a public company listed on the New York and Toronto stock exchanges until its acquisition by TUI A.G. in 2005. Mr. Webber is a graduate of Cambridge University.
Thomas A. Lister: Mr. Lister has been our Chief Commercial Officer since August 2008 and, from April 2017 until the merger with Poseidon Containers in November 2018, was also our Chief Financial Officer. From 2005 until 2007, Mr. Lister was a Senior Vice President at DVB Bank. Before that, from 2004 to 2005, he worked for the German KG financier and ship owning group, Nordcapital & E.R.Schiffahrt, as Director of Business Development. From 1991 to 2002, Mr. Lister worked in a number of managerial, strategic and operational roles for liner shipping companies and their agents. Mr. Lister graduated from Durham University and holds an MBA from INSEAD.
Anastasios Psaropoulos: Mr. Psaropoulos became our Chief Financial Officer in November 2018. He has over 12 years of experience in finance in the shipping sector. He has served as Chief Financial Officer of Poseidon Containers and Technomar, which he joined in 2011, participating in more than 190 successful S&P transactions including distressed deals. Prior to Poseidon, he was financial controller in Dolphin Capital, an AIM listed real estate development fund. He has also worked as an external auditor with PricewaterhouseCoopers, covering shipping and oil & gas industries. Mr. Psaropoulos holds a Master in Economics with specialization in Finance and Investments, from the Athens University of Economics and Business. He has also participated in the Program for Leadership Development (PLDA) of Harvard Business School.
B. Compensation
Compensation of Executive Officers
For the year ended December 31, 2021, we have expensed an aggregate of $2.34 million in compensation to our executive officers. Set forth below is a description of certain material terms of the employment agreements with each of our executive officers, which is qualified in its entirety by the respective agreements which are filed as exhibits hereto.
George Giouroukos, Executive Chairman
Mr. Giouroukos has entered into an employment contract with GSL Enterprises, our wholly-owned subsidiary, and Mr. Giouroukos serves as our Executive Chairman pursuant to the terms of an inter-company agreement between us and GSL Enterprises.
Pursuant to his employment agreement, Mr. Giouroukos receives an annual salary and is eligible to receive an annual performance-based cash bonus payment out of the profits of GSL Enterprises.
The agreement is terminable by Mr. Giouroukos if he provides not less than six months’ advance written notice to GSL Enterprises except if such termination is for “good reason”, including a “change in control” of Global Ship Lease, Inc., as such terms are defined in his employment agreement, in which case Mr. Giouroukos is able to terminate the agreement by providing not less than 14 days’ advance written notice to GSL Enterprises. GSL Enterprises is able to terminate Mr. Giouroukos’s employment agreement by providing no less than 12 months’ advance written notice to Mr. Giouroukos (subject to exceptions in the case of summary termination). If Mr. Giouroukos resigns for “good reason” or GSL Enterprises terminates his employment for any reason whatsoever other than for “cause”, Mr. Giouroukos is entitled to receive a severance payment in lieu of a salary and contractual benefits for 12 months following the termination date, together with any bonus payable in accordance with the terms of the employment agreement.
Ian Webber, Chief Executive Officer
GSLS, our wholly-owned subsidiary, has entered into an employment agreement with Mr. Webber and Mr. Webber serves as our Chief Executive Officer pursuant to the terms of an inter-company agreement between us and GSLS.
Mr. Webber receives a salary and is eligible to receive a cash bonus payment up to an annual maximum of 60% of his salary at the discretion of GSLS. He is also eligible to receive share based incentives.
| 75 |
The agreement will automatically terminate on September 20, 2025, except as otherwise agreed in writing. In addition, the agreement may be earlier terminated by Mr. Webber if he provides not less than six months advance written notice to GSLS, or by GSLS if it provides not less than 12 months advance written notice to him (subject to exceptions in the case of summary termination). GSLS has the right to terminate Mr. Webber at any time and in its absolute discretion by paying Mr. Webber a sum equal to his salary and contractual benefits for the relevant period of notice.
The agreement also provides that, during his employment or for a period of one year thereafter, Mr. Webber will not, among other actions, solicit or attempt to solicit certain employees or certain customers of ours (or one of our group companies) or be involved in any relevant business in competition with us (or one of our group companies).
Anastasios Psaropoulos, Chief Financial Officer
Mr. Psaropoulos has entered into an employment contract with GSL Enterprises, our wholly-owned subsidiary, and pursuant to the terms of an inter-company agreement between us and GSL Enterprises Mr. Psaropoulos serves as our Chief Financial Officer and Treasurer.
Pursuant to the employment agreement, Mr. Psaropoulos receives an annual salary and is eligible to receive an annual performance-based cash bonus payment out of the profits of GSL Enterprises.
The agreement is terminable by Mr. Psaropoulos if he provides not less than six months’ advance written notice to GSL Enterprises except if such termination is for “good reason”, including a “change in control” of Global Ship Lease, Inc., as such terms are defined in the employment agreement, in which case Mr. Psaropoulos is able to terminate the agreement by providing not less than 14 days’ advance written notice to GSL Enterprises. GSL Enterprises is able to terminate Mr. Psaropoulos’ employment agreement by providing no less than 12 months’ advance written notice to Mr. Psaropoulos (subject to exceptions in the case of summary termination). If Mr. Psaropoulos resigns for “good reason” or GSL Enterprises terminates his employment for any reason whatsoever other than for “cause”, Mr. Psaropoulos is entitled to receive a severance payment in lieu of a salary and contractual benefits for 12 months following the termination date, together with any bonus payable in accordance with the terms of the employment agreement.
Thomas Lister, Chief Commercial Officer
Mr. Lister entered into an employment contract with GSL Enterprises, our wholly-owned subsidiary, with effect from January 1, 2022, and pursuant to the terms of an inter-company agreement between us and GSL Enterprises, Mr. Lister serves as our Chief Commercial Officer.
Pursuant to the employment agreement, Mr. Lister receives an annual salary and is eligible to receive an annual performance-based cash bonus payment out of the profits of GSL Enterprises.
The agreement is terminable by Mr. Lister if he provides not less than six months’ advance written notice to GSL Enterprises except if such termination is for “good reason”, including a “change in control” of Global Ship Lease, Inc., as such terms are defined in the employment agreement, in which case Mr. Lister is able to terminate the agreement by providing not less than 14 days’ advance written notice to GSL Enterprises. GSL Enterprises is able to terminate Mr. Lister’s employment agreement by providing no less than 12 months’ advance written notice to Mr. Lister (subject to exceptions in the case of summary termination). If Mr. Lister resigns for “good reason” or GSL Enterprises terminates his employment for any reason whatsoever other than for “cause”, Mr. Lister is entitled to receive a severance payment in lieu of a salary and contractual benefits for 12 months following the termination date, together with any bonus payable in accordance with the terms of the employment agreement.
Up to December 31, 2021, Mr. Lister was employed by GSLS, our wholly-owned subsidiary, and pursuant to the terms of an inter-company agreement between us and GSLS, Mr. Lister served as our Chief Commercial Officer. Mr. Lister also previously served as our Chief Financial Officer from April 1, 2017 to November 15, 2018 until the merger with Poseidon Containers.
Mr. Lister received a salary and was eligible to receive a cash bonus payment up to an annual maximum of 40% of his salary at the discretion of GSLS. He was also eligible to receive share based incentives.
The agreement was terminated by mutual consent without any payments on December 31, 2021 when Mr. Lister entered into the new employment contract with GSL Enterprises.
Compensation of Directors
Our Executive Chairman is employed and remunerates as an executive by GSL Enterprises and is entitled to a net annual salary of about $80,000 and an annual performance-based cash bonus which is anticipated to be at least $170,000. Our other directors receive an annual fee of $105,000. The Chairman of the audit committee receives an additional fee of $15,000 and each member of the audit committee receives an additional $7,500. The Chairman of the nominating and corporate governance committee and the compensation committee each receive an additional $5,000 and each member of those committees receives an additional $2,500. In addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of our Board of Directors or committees.
| 76 |
2019 Omnibus Incentive Plan
On February 4, 2019, our Board of Directors adopted the Global Ship Lease, Inc. the 2019 Omnibus Incentive Plan, and on September 29, 2021, we amended and restated the plan to provide for the issuance of additional shares thereunder (the “2019 Plan”). Under the 2019 Plan, directors, officers and employees (including any prospective director, officer or employee) of us and our subsidiaries and affiliates are eligible to receive non-qualified options, stock appreciation rights, restricted stock units, dividend equivalents, cash awards, unrestricted stock and other equity-based or equity-related awards as set forth fully in the 2019 Plan. During any calendar year, each non-employee director may not be granted more than 25,000 shares of Class A common stock or cash awards in excess of $100,000. We initially reserved a total of 1,812,500 Class A common shares, which was subsequently increased to 3,412,500 Class A common shares, for issuance under the 2019 Plan during its 10-year term. We currently have 368,780 Class A common shares available to be awarded under the 2019 Plan.
The purpose of the 2019 Plan is to provide directors, officers and employees, whose initiative and efforts are deemed to be important to the successful conduct of our business, with incentives to (a) enter into and remain in the service of our company or our subsidiaries and affiliates, (b) acquire a proprietary interest in the success of our company, (c) maximize their performance and (d) enhance the long-term performance of our company. The 2019 Plan is administered by the compensation committee of our Board of Directors or such other committee of our Board of Directors as may be designated by the board.
Under the terms of the 2019 Plan, stock options and appreciation rights granted under the 2019 Plan will have an exercise price equal to the fair market value of a common share on the date of grant, provided that in no event may the exercise price be less than the fair market value of a common share on the date of grant. Options and stock appreciation rights will be exercisable at times and under conditions as determined by the plan administrator, but in no event will they be exercisable later than 10 years from the date of grant.
The plan administrator may grant restricted stock and awards of restricted stock units subject to vesting and forfeiture provisions and other terms and conditions as determined by the administrator of the 2019 Plan. Upon the vesting of a restricted stock unit, the award recipient will be paid an amount equal to the number of restricted stock units that then vest multiplied by the fair market value of a common share on the date of vesting, which payment may be paid in the form of cash or common shares or a combination of both, as determined by the administrator of the 2019 Plan. The 2019 Plan administrator may grant dividend equivalents with respect to grants of restricted stock units.
Adjustments may be made to outstanding awards in the event of a corporate transaction or change in capitalization or other extraordinary event. In the event of a “change in control” (as defined in the 2019 Plan), unless otherwise provided by the 2019 Plan administrator in an award agreement, awards then outstanding shall become fully vested and exercisable in full.
Our Board of Directors may amend or terminate the 2019 Plan and may amend outstanding awards, provided that no such amendment or termination may be made that would materially impair the rights or materially increase any obligations, of a grantee under an outstanding award. Shareholders’ approval of 2019 Plan amendments may be required in certain circumstances if required by applicable rules of a national securities exchange or the SEC. Unless terminated earlier by our Board of Directors, the 2019 Plan will expire 10 years from the date on which the 2019 Plan was adopted by the Board of Directors.
Following the adoption of the 2019 Plan, the 2015 and 2008 Plans were terminated.
In 2019, our Board of Directors approved awards to our executive officers under the 2019 Plan, providing our executive officers with the opportunity to receive up to 1,359,375 Class A common shares in aggregate, in four tranches. In addition, On March 11, 2021, our Board of Directors approved additional awards of 61,625 of Class A common shares under 2019 Plan resulting in a total amount of awards totaling up to 1,421,000 shares.
| • | Tranche A, to vest based on time served only, over the three years commencing January 1, 2019. One third of Tranche A vested in the first quarter of 2020 and the remainder will vest in eight equal instalments over consecutive three month intervals which commenced March 31, 2020. |
| • | Tranche B, vested in January 2020, as the 60 Day Volume Weighted Average Price (the “60 Day VWAP”) of the Class A common shares exceeded $8.00. |
| • | Tranche C, vested in January 2021, as the 60 Day VWAP of the Class A common shares exceeded $11.00. |
| • | Tranche D, vested in March 2021, as the 60 Day VWAP of the Class A common shares exceeded $14.00. |
| 77 |
Mr. Giouroukos, Mr. Webber, Mr. Psaropoulos, Mr. Lister and other employees were awarded 34%, 28%, 17%, 17% and 4% of the total number of Class A common shares, respectively, with Tranche A, B, C and D representing 25%, 15%, 25% and 35% respectively.
In July 2021, Mr. Giouroukos received 17,720 Class A common shares as a special bonus.
As at December 31, 2021, all of the above awards have vested as the criteria have been met. 931,874 shares were settled and issued and 506,846 remained to be issued. As at March 10, 2022, a further 308,095 shares had been settled and issued and 198,751 remained to be issued.
On September 29, 2021, the Compensation Committee and the Board of Directors approved an increase in the aggregate number of Class A common shares available for issuance as awards under the Plan by 1,600,000, as reflected in the adoption of the 2019 Omnibus Incentive Plan, and approved new awards to senior management, totaling 1,500,000 shares of incentive stock, in three tranches with a grant date October 1, 2021. The first tranche, representing 55% of the total, is to vest quarterly conditioned only on continued service over the four-year period which commenced October 1, 2021. Tranches two and three, each representing 22.5% of the total, will vest quarterly up to September 30, 2025, when the Company’s stock price exceeds $27.00 and $30.00, respectively, over a 60-day period. The Board of Directors also approved stock-based awards to the seven non-executive directors under the 2019 Plan totaling 105,000 shares of incentive stock to vest in a similar manner to those awarded to senior management.
Mr. Giouroukos, Mr. Webber, Mr. Psaropoulos, Mr. Lister, other employees and the non-executive directors were awarded 37%, 22%, 15%, 15%, 4% and 7% of the total number of Class A common shares.
55,175 incentive shares vested in the year ended December 31, 2021 under the new awards. Of the total of 55,175 incentive shares which vested up to December 31, 2021, no shares were settled or issued as at December 31, 2021. As at March 10, 2022 39,188 shares had been settled and issued and 15,987 remained to be issued.
C. Board Practices
Our Board of Directors is divided into three classes with one class of directors being elected in each year and each class serving a three-year term. The current term of office of the Term I class of directors consisting of Mr. Lemonnier, Mr. Mannix and Mr. Pitner, expires at the annual meeting of shareholders to be held in 2024. The current term of office of the Term II class of directors, consisting of Mr. Chalkias and Mr. Giouroukos, expires at the annual meeting of shareholders to be held in 2022. The current term of office of the Term III class of directors, consisting of Mr. Gross, Mr. van Lacum and Mr. Wils, expires at the annual meeting of shareholders to be held in 2023.
Other than our Executive Chairman, none of our directors have service contracts with us or any of our subsidiaries providing for benefits upon the termination of their employment.
For information about the period during which each director and executive officer has served in such position at our company, see “Item 6. Directors, Senior Management and Employees – A. Directors and Senior Management.”
Director Independence
Our Board of Directors has determined that all directors other than Mr. Lemonnier are “independent directors” as such term is defined in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the NYSE rules. Mr. Lemonnier, a senior executive of CMA CGM, was appointed as a Director in September 2017, following his nomination by CMA CGM.
Board Observer Agreement
On November 12, 2019, we entered into a Board Observer Agreement with B. Riley Financial, Inc. and B. Riley FBR which (i) amended the prior engagement letter and underwriting agreement by and between B. Riley FBR and ourselves to eliminate the right of B. Riley FBR to appoint a director to our Board of Directors; and (ii) granted a right to B. Riley Financial, Inc. to designate an observer to our Board of Directors (“Observer”), provided that B. Riley Financial, Inc. and/or its affiliates own more than 5% of the outstanding voting power of us. On March 24, 2022, B. Riley Financial, Inc. notified us that its ownership of our stock decreased and that the Observer has stepped down.
| 78 |
Board Committees
Our Board of Directors has formed an audit committee, a compensation committee, a nominating and corporate governance committee, a conflicts committee and an environmental, social and governance committee. Our board committee charters are available on our website (www.globalshiplease.com) and in print to any investor upon request. The information included on our website is not incorporated herein by reference.
Audit Committee
We have established an audit committee, comprised of three members of our Board of Directors, which, as directed by our written audit committee charter, is responsible for overseeing the management’s conduct of our systems of internal accounting and financial controls, reviewing our financial statements, recommending to the Board of Directors the engagement of our independent auditors, and pre-approving audit and audit-related services and fees.
The audit committee will at all times be composed exclusively of “independent directors” who, as may be required by the NYSE listing standards, are able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. Our audit committee currently consists of Messrs. Chalkias, van Lacum and Wils, each of whom is “independent” as defined in Rule 10A-3 under the Exchange Act and the NYSE rules.
In addition, the audit committee has at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. Our Board of Directors has determined that Mr. van Lacum satisfies the NYSE’s definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under Item 401 of Regulation S-K under the Exchange Act.
Compensation Committee
U.S. domestic issuers are required to have a compensation committee that is comprised entirely of independent directors. Although as a foreign private issuer this rule does not apply to us, we have a compensation committee. Our compensation committee consists of Messrs. Gross, Mannix and Pitner. The compensation committee is responsible for and reports to our Board of Directors on the evaluation and compensation of executives, oversees the administration of compensation plans, reviews and determines director and executive compensation and prepares any report on executive compensation required by the rules and regulations of the SEC.
Nominating and Corporate Governance Committee
U.S. issuers are required to have a nominating and corporate governance committee that is comprised entirely of independent directors. Although as a foreign private issuer this rule does not apply to us, we have a nominating and corporate governance committee. Our nominating and corporate governance committee consists of Messrs. Chalkias, Pitner and Wils. The nominating and corporate governance committee reports to our Board of Directors on and is responsible for succession planning and the appointment, development and performance evaluation of our board members and senior executives. It also assesses the adequacy and effectiveness of our corporate governance guidelines, reviewing and recommending changes to the board whenever necessary.
Conflicts Committee
We have established a Conflicts Committee to review, evaluate, and approve any transaction or other matter referred or disclosed to it where a conflict of interest or potential conflict of interest exists or arises, whether real or perceived. Such matters may include transactions between us on the one hand, and Technomar, or Conchart, or any of our officers or directors or affiliates of our officers or directors, on the other hand. Our Conflicts Committee consists of Messrs. Chalkias, van Lacum, and Wils.
Environment, Social, and Governance (“ESG”) Committee
We have established an ESG Committee to (i) guide, support, and supervise management in developing, articulating, and continuing to evolve, our ESG strategy, (ii) evaluate and recommend ESG initiatives for adoption by us, (iii) assess ESG risks and opportunities, and (iv) promote ESG practices within our business culture and processes. Our ESG committee consists of Messrs. Chalkias, van Lacum, Wils, and Giouroukos.
D. Employees
As of December 31, 2021, we had seven employees.
| 79 |
E. Share Ownership
See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” for information regarding beneficial ownership by our directors and executive officers.
See “Item 6. Directors, Senior Management and Employees—B. Compensation—2019 Omnibus Incentive Plan” for information regarding our equity incentive plan.
| Item 7. | Major Shareholders and Related Party Transactions |
A. Major Shareholders
The following table sets forth information regarding the beneficial ownership of our Class A common shares as of the date of this report by:
| • | each person known by us to be the beneficial owner of more than 5% of our outstanding common shares; |
| • | each of our officers and directors; and |
| • | all of our officers and directors as a group. |
Except as otherwise indicated, each person or entity named in the table below has sole voting and investment power with respect to all of our Class A common shares, shown as beneficially owned, subject to applicable community property laws. As of the date of this report, an aggregate of 36,911,392 Class A common shares were issued and outstanding.
The Class A common shares each have one vote and vote together as a single class except that any amendment to the articles of incorporation, including those made pursuant to the terms of any merger, consolidation or similar transaction, that would increase or decrease the aggregate number of authorized common shares of a class, increase or decrease the par value of common shares of a class, or alter or change the powers, preferences or rights of the class of common shares so as to affect them adversely, must be approved by the holders of not less than a majority of the votes entitled to be cast by the holders of such class of common shares then outstanding, voting separately as a class.
|
Name of Beneficial Owner |
Class A Common Shares |
Approximate Percentage |
| 5% Shareholders: | ||
| CMA CGM S.A.(2) | 3,051,587 | 8.3 % |
| Punch & Associates Investment Management, Inc.(3) | 2,331,394 | 6.3% |
| George Giouroukos(4) | 2,254,387 | 6.1 % |
| Other Directors and Executive Officers: | ||
| Michael Gross | 50,000 | 0.1 % |
| Alain Wils | 1,312 | 0.0 % |
| Menno van Lacum | 13,794 | 0.0 % |
| Ian Webber | 192,606 | 0.5 % |
| Thomas Lister | 33,801 | 0.1 % |
| Anastasios Psaropoulos | 185,810 | 0.5 % |
| All directors and executive officers as a group (7 individuals) (5) | 2,731,710 | 7.4 % |
| (1) | Calculated based on 36,911,392 Class A common shares outstanding as of the date of this report. |
| (2) | This information is derived from a Schedule 13D/A filed with the SEC on October 15, 2019. CMA CGM S.A. is controlled by Merit Corporation S.A.L., which may be deemed to exercise voting and investment power over all securities of Global Ship Lease, Inc. held by CMA CGM S.A. and thus may be deemed to beneficially own such securities. |
| (3) | This information is derived from a Schedule 13G filed with the SEC on February 14, 2022. |
| (4) | Mr. Giouroukos, who serves as our Executive Chairman, owns and controls Shipping Participations Inc., which is the record holder of 2,234,020 Class A common shares. As a result, Mr. Giouroukos may be deemed to beneficially own the shares held by Shipping Participations Inc. |
| (5) | The number of shares of Class A common shares beneficially owned by a person and the percentage ownership of that person, includes Class A common shares under stock-based awards held by that person that are exercisable, vested or convertible as of March 21, 2022 or that will become exercisable, vested or convertible within 60 days after March 21 , 2022 and which are described above under the heading “Item 6. Directors, Senior Management and Employees-B. Compensation-2019 Omnibus Incentive Plan”. |
| 80 |
As of February 28, 2022, we had 12 registered shareholders of record, two of which were located in the United States holding an aggregate of 33,716,887 of our Class A common shares, representing 91.6% of our outstanding common shares. However, one of the U.S. shareholders of record is Cede & Co., a nominee of The Depository Trust Company, which held 33,714,573 of our Class A common shares as of February 28, 2022. We believe that the shares held by Cede & Co. include common shares beneficially owned by both holders in the United States and non-U.S. beneficial owners.
We are not aware of any arrangements the operation of which may at a subsequent date result in our change of control.
B. Related Party Transactions
Registration Rights Agreement
At the time of the Marathon Merger, we entered into a registration rights agreement with CMA CGM, Marathon Investors, LLC, Marathon Founders, LLC and the other initial shareholders of Marathon common stock (including Michael S. Gross), pursuant to which we agreed to register for resale on a registration statement under the Securities Act of 1933, as amended, and applicable state securities laws, the common shares issued to such shareholders pursuant to the Marathon Merger or upon exercise of warrants (the “Marathon Registration Rights Agreement”).
On October 29, 2018, we entered into an Amended and Restated Registration Rights Agreement (the “Amended and Restated Registration Rights Agreement”), which amended and restated the Marathon Registration Rights Agreement, with KEP VI, KIA VIII, CMA CGM, Management Investor Co., Anmani Consulting Inc., Marathon Founders, LLC, Michael S. Gross and Maas Capital Investments B.V. with respect to all Class A common shares and Series C Preferred Shares held by such shareholders on the closing date of the Poseidon Transaction, including any Class A common shares issued on conversion of the Series C Preferred Shares (the “Registrable Securities”). The Amended and Restated Registration Rights Agreement became effective on the closing of the Poseidon Transaction. Pursuant to the Amended and Restated Registration Rights Agreement, we filed with the SEC a shelf registration statement to register the offer and resale of all of the Registrable Securities.. The Amended and Restated Registration Rights Agreement also provides certain piggyback and demand registration rights to the holders of Registrable Securities and contains customary indemnification and other provisions. Based on information provided to us by Kelso, KEP VI and KIA VIII no longer hold Registrable Securities.
Letter Agreement
On October 29, 2018, we entered into a Letter Agreement with affiliates of Kelso, CMA CGM, Marathon Founders, LLC and Michael S. Gross. The Letter Agreement became effective on the closing of the Poseidon Transaction.
Pursuant to the Letter Agreement, (a) for so long as CMA CGM holds at least 5% of our voting power, CMA CGM has the right to designate (and Kelso has the obligation to vote in favor of) an individual nominee to serve on our Board of Directors (and such nominee will also have a right to serve on the Audit Committee of the Board of Directors), (b) for so long as CMA CGM holds at least 10% of our voting power, CMA CGM has the right to designate (and Kelso has the obligation to vote in favor of) two individuals to serve on the Board of Directors and (c) CMA CGM designated Philippe Lemonnier and Alain Wils as the two individuals to serve on the Board of Directors.
The Letter Agreement also contains certain participation and tag-along rights. For example, each of Kelso and CMA CGM has the right to purchase a pro rata portion of any new issuance of securities by us (other than certain exempt issuances) for so long as it holds at least 10% of our voting power. Additionally, each of CMA CGM, Marathon Founders, LLC and Mr. Gross have the right to transfer Class A common shares pro rata alongside Kelso in any transfer or series of related transfers by Kelso to a third party that would result in the third party acquiring more than 30% of our voting power (with the exception of certain exempt transfers).
The Letter Agreement also provides that, for so long as CMA CGM holds at least 5% of our voting power, we may not make any material change in the nature of our business without the unanimous consent of the Board of Directors.
Non-Compete Agreement
On October 29, 2018, we entered into a Non-Compete Agreement with Mr. George Giouroukos and Conchart reflecting, among others, the provisions described below. The Non-Compete Agreement became effective on the closing of the Poseidon Transaction.
| 81 |
Restricted Business
For so long as Mr. Giouroukos is our Executive Chairman, Mr. Giouroukos and any entity which he controls will agree not to acquire, own or operate containerships. However, under certain exceptions, Mr. Giouroukos, and any entity which he controls, may compete with us, which could affect our business. Specifically, Mr. Giouroukos, and any entity which he controls, will not be prevented from:
| (1) | acquiring, owning, operating or chartering vessels other than containerships; |
| (2) | acquiring or owning one or more containerships if we decide not to exercise our right of first refusal to acquire such containership, in accordance with the terms of the Non-Compete Agreement described below under “Right of First Refusal”; |
| (3) | Acquiring, owning, operating or chartering one or more containerships as part of the acquisition of a controlling interest in a business or package of assets that owns, operates or charters such containerships; provided, however, that Mr. Giouroukos, and any entity which he controls must offer to sell such containership(s) to us at their fair market value plus any additional tax or other similar costs that Mr. Giouroukos, and any entity which he controls, incurs in connection with the acquisition and the transfer of such containership to us separate from the acquired business, if a majority of the value of the business or the package of assets acquired is attributable to containerships; |
| (4) | providing vessel management services relating to containerships, or other vessel types, including technical and commercial management, warehouse transactions for financial institutions and pool management; |
| (5) | Acquiring, owning, operating or chartering any containership that Mr. Giouroukos, and any entity which he controls, owned or operated or had a contractual arrangement with respect to as of the closing date of the Plan of Merger by and among Poseidon Containers Holdings LLC, K&T Marine LLC, us and other parties; |
| (6) | transferring to Mr. Giouroukos or any entity which he controls, title to a vessel that Mr. Giouroukos or such entity that he controls or any third party is entitled to acquire, own and operate under the Non-Compete Agreement, pursuant to or in connection with the termination of a financing arrangement, including by way of a sale and leaseback or similar transaction, which is accounted for under United States generally accepted accounting principles as a financial lease; and |
| (7) | acquiring, owning, operating or chartering any containership that is subject to an offer to purchase as described in paragraphs (2) and (3) above, in each case pending the offer of such containership to us and our determination whether to purchase the containership and, if so, pending the closing of such purchase. |
Further to the above, notwithstanding this agreement, Mr. Giouroukos, and any entity which he controls, may claim business opportunities that would benefit us, and this could have an adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.
Right of First Refusal
Mr. Giouroukos, and any entity he controls, will also agree to grant us a right of first refusal to acquire any containership, after Mr. Giouroukos, or an entity controlled by him, enters into an agreement that sets forth terms upon which he or it would acquire such containership. Mr. Giouroukos, or such entity controlled by him, shall notify us within 30 days of any agreement that he, or his controlled entity, has entered into to purchase a containership and will provide a period of seven calendar days in respect of a single vessel transaction, or a period of 14 calendar days in respect of a multi-vessel transaction, from the date that he delivers such notice to us of said opportunity, within which to decide whether or not to accept the opportunity and nominate a subsidiary of ours to become the purchaser of such containership, before Mr. Giouroukos, or any entity he controls, will accept the opportunity or offer it to any of his other affiliates or entities controlled by him. The opportunity offered to us will be on no less favorable terms than those offered to Mr. Giouroukos, or entity controlled by him. The approval of our conflicts committee which is comprised of independent directors will be required to accept or reject this offer.
Upon a change of control of us, these rights of first refusal will terminate immediately. In addition, at such time that Mr. Giouroukos ceases to serve as our Executive Chairman, these rights of first refusal as applicable to Mr. Giouroukos will terminate immediately.
Right of First Offer on Containerships
Mr. Giouroukos will also agree to grant a right of first offer to us for any containership he, or any entity controlled by him, owns or acquires, upon any proposed sale, transfer, or other disposition.
| 82 |
Prior to entering into any transaction regarding any containership’s disposition with a non-affiliated third party, Mr. Giouroukos, or such entity controlled by him, will deliver a written notice to us setting forth the material terms and conditions of the proposed transaction. During the 14-day period after the delivery of such notice, and at our election we (through our conflicts committee) and Mr. Giouroukos, or such entity controlled by him, will negotiate in good faith to reach an agreement on the transaction, which shall be approved by our conflicts committee which is comprised of independent directors. If we do not reach an agreement within such 14-day period, Mr. Giouroukos, or such entity controlled by him, as the case may be, will be able within the next 180 calendar days to sell, transfer, dispose or re-contract the containership to a third party (or to agree in writing to undertake such transaction with a third party) on terms generally no less favorable than those offered pursuant to the written notice.
Upon a change of control of us, these rights of first offer will terminate immediately. In addition, at such time that Mr. Giouroukos ceases to serve as our Executive Chairman, these rights of first offer as applicable to Mr. Giouroukos will terminate immediately.
Chartering Opportunities
If Conchart, or any entity it controls, acquires knowledge of a potential opportunity to enter into a potential charter with or without profit sharing for a particular containership that it believes in good faith would be suitable for our vessels, which we refer to as a “Potential Charter Opportunity,” then Conchart, or such entity that it controls, would be obliged to offer such Potential Charter Opportunity to us and, for a period of up to two business days, we shall have the right to elect to pursue such Potential Charter Opportunity for ourselves or allow Conchart to direct such Potential Charter Opportunity to itself or another person or entity. In determining suitability of a Potential Charter Opportunity, Conchart shall take into consideration certain factors, such as the availability, suitability and positioning of the relevant vessel, the potential charterer’s demands for the vessel’s specifications and costs. In the event we do not elect to accept the Potential Charter Opportunity, Conchart shall be free to pursue such Potential Charter Opportunity or direct it to another person or entity for a period of 15 calendar days on the same terms and conditions as presented to us.
Ship Management Agreements
As of December 31, 2021, Technomar provided day-to-day technical ship management services for all but six vessels in the Borealis Fleet. Another third party provides management on these six vessels as well as on the remaining six vessels in the Borealis Fleet ships from the time of their delivery in July 2021 until a change of management to Technomar in September 2021. Mr. George Giouroukos, our Executive Chairman, is the Founder, Managing Director, and majority beneficial owner of Technomar. Technomar’s services being provided under technical ship management agreements include crewing, purchasing stores, lubricating oils and spare parts, paying wages, pensions and insurance for the crew, and organizing other vessel operating necessities, including the arrangement and management of drydocking. We pay Technomar a daily management fee of EUR 700 (EURO 715 from January 1, 2022) per vessel, to be paid in U.S. Dollars at an agreed rate of exchange, which, in addition to covering the technical ship management services being provided, includes administrative support services, including accounting and financial reporting, treasury management services and legal services also being provided pursuant to the technical ship management agreements. The technical ship management agreements with Technomar for the vessels that serve as collateral under our credit facilities are for a minimum duration equal to the duration of such respective credit facilities. The technical ship management agreements may be terminated by either party by giving not less than six months’ prior written notice with termination to be effective no sooner than the expiry of the minimum term. If the technical ship management agreements are terminated on at least six months prior written notice, a termination fee equal to 50% of the annual management fee is payable to Technomar if the technical ship management agreements are terminated by the managers and a termination fee equal to two times the annual fee is payable to Technomar if the technical ship management agreements are terminated by the owners. Our other ship technical ship management agreements may generally be terminated by either party on two months prior written notice following their minimum duration. The Technomar technical ship management agreements may also be terminated (i) by one party on the change of control in the other party, (ii) automatically on the insolvency of a party, (iii) by one party upon the breach by the other party of the technical ship management agreement, and (iv) upon the sale or total loss of a vessel; except where the owner is terminating the technical ship management agreements for cause, a termination fee is payable to Technomar and will range from 25% of the annual management fee to two times the annual management fee, depending on the reason for the termination.
The management fees paid by us to Technomar for the year ended December 31, 2021 amounted to $15.3 million. The management fees paid by us to Technomar for the year ended December 31, 2020 amounted to $12.6 million. For the year ended December 31, 2019 management fees paid by us to Technomar and CMA Ships amounted to $9.2 million and $0.8 million, respectively.
We have also entered into Supervision Agreements with Technomar with respect to our Third-Party Managed Vessels. Please see “Item 4. Information on the Company—B. Business Overview—Management of Our Fleet” for additional information on the Supervision Agreements.
| 83 |
Conchart provides commercial management services to us on all of our vessels pursuant to commercial management agreements. Mr. George Giouroukos, our Executive Chairman, is the sole beneficial owner of Conchart. Under the commercial management agreements, Conchart is responsible for (i) marketing of our vessels, (ii) seeking and negotiating employment of our vessels, (iii) advising us on market developments, and on the development of new rules and regulations with respect to trading and cargo restrictions, (iv) assisting in the calculation of hires, and the collection of any sums related to the operation of vessels, (v) communicating with agents, and (vi), negotiating memoranda of agreement for the sale of the vessels. We have agreed to pay Conchart a commission of 1.25% on all monies earned under each charter fixture, and we have agreed to pay Conchart a 1.00% commission on any sale and purchase transaction. No commission is payable on any charter of a vessel in the GSL Fleet to CMA CGM in place as of November 15, 2018, if applicable. However, commission is payable to the managers for any extension of such charters after March 31,2021. The commercial management agreements with Conchart for the vessels provided as security under our credit facilities have a minimum term equal to the duration of their respective credit facilities. The commercial management agreements may be terminated by either party by giving not less than six months’ prior written notice with termination to be effective no sooner than the expiry of the minimum term. If the commercial management agreements are terminated on at least six months prior written notice, a termination fee equal to six times the average monthly commission paid by us to Conchart (or which accrued) in the prior six month period is payable to Conchart if the commercial management agreements are terminated by the mangers and a termination fee equal to twelve times the average monthly commission paid by us to Conchart (or which accrued) in the prior twelve month period is payable to Conchart if the commercial management agreements are terminated by the owners. The Conchart commercial management agreements may also be terminated (i) by one party on the change of control in the other party, (ii) automatically on the insolvency of a party, (iii) by one party upon the breach by the other party of the commercial management agreement, and (iv) upon the sale or total loss of a vessel; except where the owner is terminating the commercial management agreements for cause, a termination fee is payable to Conchart and will range from three times the average monthly commission paid by us to Conchart (or which accrued) in the prior three month period to twelve times the average monthly commission paid by us to Conchart (or which accrued) in the prior twelve month period, depending on the reason for the termination.
The fees paid by us to Conchart for the year ended December 31, 2021 amounted to $3.6 million. For the year ended December 31, 2020, fees paid to Conchart amounted to $2.4 million.
Until January 20, 2021, 16 vessels which we provided as security to the 2022 Notes and Citi Credit facility were commercially managed by GSLS which had entered into a Commercial Advisory Services and Exclusive Brokerage Services Agreement (“EBSA”) with Conchart, whereby Conchart was appointed to provide commercial advisory and exclusive brokerage services to GSLS on those vessels on substantially the same terms as described above.
By mutual consent, the EBSA was terminated without penalty on the repayment of the 2022 Notes on January 20, 2021 and the relevant 16 vessels became subject to commercial management agreements directly with Conchart.
For additional information on our related party transactions, please see the notes to our consolidated financial statements included herein.
Kelso Letter Agreement
In September 2019, we entered into an agreement with Kelso, whereby Kelso agreed to convert all of its outstanding Series C Preferred Shares into Class A common shares upon the repayment in full of our 2022 Notes, which occurred in January 2021.
Please see Note 14, Related Party Transactions, to our consolidated financial statements for additional information about our related party transactions.
C. Interests of Experts and Counsel
Not applicable.
| Item 8. | Financial Information |
A. Consolidated Statements and Other Financial Information
Please see “Item 18. Financial Statements” below.
| 84 |
Legal Proceedings
We have not been involved in any legal proceedings that may have, or have had a significant effect on our business, financial position, results of operations or liquidity, and we are not aware of any proceedings that are pending or threatened that may have a material adverse effect on our business, financial position, results of operations or liquidity. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims associated with operating containerships. We expect that these claims would be covered by insurance, subject to customary deductibles. Claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.
Dividend Policy
On January 12, 2021, we announced that our Board of Directors had initiated a dividend policy under which we intended to pay shareholders a regular quarterly cash dividend of $0.12 per Class A common share with effect from the first quarter of 2021. We paid dividends of $0.25 per Class A common share for the first, second, third and fourth quarter of 2021 and we announced on November 22, 2021 that from first quarter of 2022 the dividend will increase by 50% to $0.375 per Class A common share per quarter.
Dividends, if any, will be based on available cash flow, rather than net income, after all relevant cash expenditures, including cash interest expense on borrowings that finance operating assets, cash income taxes and after an allowance for the cash cost of future drydockings but not including deductions for non-cash items including depreciation and amortization and changes in the fair values of financial instruments, if any.
The declaration and payment of any dividend is always subject at all times to the discretion of our Board of Directors which reviews our dividend policy quarterly, taking into consideration capital structure, growth opportunities, industry fundamentals, asset value trends and financial performance including cash flow, restrictions under our current and future agreements governing our indebtedness, including our credit facilities, the provisions of Marshall Islands law affecting the payment of distributions to shareholders, required capital and drydocking expenditures, reserves established by our Board of Directors, increased or unanticipated expenses, additional borrowings or future issuances of securities and other factors, many of which will be beyond our control.
There were 4,359,190 Depositary Shares outstanding at December 31, 2021, each of which represents 1/100th of one share of our Series B Preferred Shares. Dividends on the Series B Preferred Shares are payable at 8.75% per annum in arrears on a quarterly basis, when and if declared by the Board of Directors. Following the issuance of the Series B Preferred Shares, no dividend may be declared or paid or set apart for payment on our common shares and other junior securities, unless full cumulative dividends have been or contemporaneously are being paid or declared and set aside for payment on all outstanding Series B Preferred Shares, subject to certain exceptions. See “Item 10. Additional Information—B. Memorandum and Articles of Association.” Dividends have been declared as scheduled with respect to our Series B Preferred Shares.
Our ability to pay dividends is also limited by the amount of cash we can generate from operations following the payment of fees and expenses and the establishment of any reserves as well as additional factors unrelated to our profitability. We are a holding company, and we will depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to pay dividend payments. Further, our Board of Directors may elect to not distribute any dividends or may significantly reduce the dividends. As a result, the amount of dividends actually paid, if any, may vary from the amount previously paid and such variations may be material. See “Item 3. Key Information—D. Risk Factors” for a discussion of the risks associated with our ability to pay dividends.
Marshall Islands law generally prohibits the payment of dividends other than from surplus (retained earnings and the excess of consideration received for the sale of shares above the par value of the shares) or while a company is insolvent or would be rendered insolvent by the payment of such a dividend.
We believe that, under current U.S. federal income tax law, some portion of the distributions you receive from us will constitute dividends and, if you are an individual that is a citizen or resident of the United States and that meets certain holding period and other requirements, such dividends will be treated as “qualified dividend income” subject to tax at preferential rates. See “Item. 10. Additional Information—E. Taxation—Tax Consequences of Holding Class A common shares —Taxation of distributions paid on Class A common shares” for information regarding the eligibility requirements for “qualified dividend income.”
B. Significant Changes
None.
| 85 |
| Item 9. | The Offer and Listing. |
A. Offer and Listing Details
Please see “Item 9. Offer and the Listing—C. Markets”.
B. Plan of Distribution
Not applicable
C. Markets
On August 15, 2008, our Class A common shares began trading on the NYSE under the symbol “GSL”. On August 20, 2014, our Depositary Shares, each of which represents a 1/100th interest in a share of our Series B Preferred Shares, began trading on the NYSE under the symbol “GSL-B”. On November 19, 2019, our 2024 Notes began trading on the NYSE under the symbol “GSLD”.
D. Selling Shareholders
Not applicable
E. Dilution
Not applicable
F. Expenses of the Issue
Not applicable
| Item 10. | Additional Information |
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Our Amended and Restated Articles of Incorporation have previously been filed as Exhibit 3.1 to Amendment No. 1 to our Registration Statement on Form 8-A (File No. 001-34153) filed with the SEC on March 26, 2019 and are hereby incorporated by reference into this Annual Report. Articles of Amendment to the Amended and Restated Articles of Incorporation have previously been filed as Exhibit 3.3 to our Report on Form 6-K, filed with the SEC on March 25, 2019 and are hereby incorporated by reference into this Annual Report. Our Third Amended and Restated Bylaws have previously been filed as Exhibit 99.1 to our Report on Form 6-K filed with the SEC on March 23, 2020 and are hereby incorporated by reference into this Annual Report.
The necessary actions required to change the rights of shareholders and the conditions governing the manner in which annual general meetings and special meetings of shareholders are convoked are described in our Amended and Restated Articles of Incorporation, as amended, and Third Amended and Restated Bylaws and are hereby incorporated by reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of shares of our capital stock are described in the sections “Description of Capital Shares” and “Description of Preferred Shares” of the Amendment No. 1 to our registration statement on Form F-3 (File No. 333-197518) filed with the SEC on July 28, 2014 and hereby incorporated by reference into this Annual Report. The rights, preferences and restrictions attaching to our Depositary Shares and Series B Preferred Shares are described in the sections “Description of Preferred Shares” and “Description of Depositary Shares” of our registration statement on Form F-3 (File No. 333-235305) filed with the SEC on November 27, 2019 and incorporated by reference into this Annual Report. There have been no changes since that date, other than the issuance of Series B Preferred Shares and Depositary Shares pursuant to our Depositary Shares ATM Program, as described below.
| 86 |
On August 20, 2014, we issued 1,400,000 Depositary Shares, each of which represents 1/100th of one share of our Series B Preferred Shares. A further 42,756 Depositary Shares were issued during the year ended December 31, 2019 under our Depositary Shares ATM Program, 839,442 Depositary Shares were issued during the year ended December 31, 2020 under the program and a further 2,076,992 Depositary Shares have been issued during the year ended December 31, 2021. Each Series B Preferred Share has the right to receive the liquidation preference of $2,500.00 per share (equivalent to $25.00 per depositary share) plus an amount equal to all accumulated and unpaid dividends thereon to the date of payment, whether or not declared. Dividends are payable at 8.75% per annum in arrears on a quarterly basis, when and if declared by the Board of Directors. Following the issuance of our Series B Preferred Shares, no dividend may be declared or paid or set apart for payment on our common stock and each other class or series of capital stock established after the original issue date of the Series B Preferred Shares that is not expressly made senior to or on parity with the Series B Preferred Shares as to the payment of dividends and amounts payable upon liquidation, dissolution or winding up, whether voluntary or involuntary (“Junior Securities”) (other than a dividend payable solely in Junior Securities), unless full cumulative dividends have been or contemporaneously are being paid or declared and set aside for payment on all outstanding Series B Preferred Shares and any securities that rank pari passu with the Series B Preferred Shares through the most recent respective dividend payment dates. Holders of the Series B Preferred Shares generally have no voting rights, except in limited circumstances. The Series B Preferred Shares may be redeemed at any time, at our discretion, in whole or in part, at a redemption price of $2,500.00 per share (equivalent to $25.00 per depositary share). The rights, preferences and restrictions attaching to the Series B Preferred Shares are described in the sections “Description of Preferred Shares” and “Description of Depositary Shares” of our registration statement on Form F-3 (File No. 333-235305) filed with the SEC on November 27, 2019 and incorporated by reference into this Annual Report. There have been no changes since that date with the exception of the issuance of further Series B Preferred Shares in connection with our Depositary Shares ATM Program. The rights, preferences and restrictions attaching to the Series B Preferred Shares are further qualified by (i) the Certificate of Designations of Global Ship Lease, Inc., filed with the Registrar or Deputy Registrar of Corporations of the Republic of the Marshall Islands and effective August 19, 2014, (ii) the Certificate of Amendment to the Certificate of Designations of Global Ship Lease, Inc., filed with the Registrar or Deputy Registrar of Corporations of the Republic of the Marshall Islands and effective December 9, 2019 and (iii) the Deposit Agreement, dated as of August 20, 2014, by and among Global Ship Lease, Inc., Computershare Inc. and Computershare Trust Company, N.A., as applicable, as depositary, registrar and transfer agent, and the holders from time to time of the depositary receipts described therein (each of (i) and (iii) being incorporated by reference to Exhibits 3.1 and 4.1, respectively, of Global Ship Lease, Inc.’s Report on Form 6-K filed on August 20, 2014 and (ii) being incorporated by reference to Exhibit 3.1 of Global Ship Lease Inc.’s Report on Form 6-K filed on December 10, 2019), each of which is hereby incorporated by reference into this Annual Report. There have been no changes since the respective dates.
On November 15, 2018, we issued 250,000 Series C Preferred Shares of par value $0.01 per share. The Series C Preferred Shares were converted to an aggregate of 12,955,188 Class A common shares on January 20, 2021.
We are not aware of any limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities, imposed by the laws of the Republic of the Marshall Islands or by our Articles of Incorporation or Bylaws.
Registration Rights Agreements
In connection with registered public offering of our Class A common shares that closed on October 1, 2019, or the October 2019 Offering, we have entered into a registration rights agreement with certain affiliates of B. Riley FBR, Inc., or the B. Riley Affiliates, the underwriter in the October 2019 Offering, pursuant to which we agreed to register any shares of our Class A common stock held by the B. Riley Affiliates following the completion of the October 2019 Offering to the extent such shares constitute “restricted” or “control” securities under applicable rules and regulations of the Commission, or the B. Riley Registration Rights Agreement. The B. Riley Registration Rights Agreement provides the B. Riley Affiliates with certain piggyback and demand registration rights, and contains customary indemnification and other provisions.
We also have a registration rights agreement with certain of our shareholders that was amended and restated in October 2018 upon closing of the Poseidon Transaction. For a description of the Amended and Restated Registration Rights Agreement, please see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
C. Material Contracts
We refer you to “Item 4. Information on the Company—B. Business Overview,” “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity, Working Capital and Dividends—Indebtedness,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for a discussion of the contracts that we consider to be both material and outside the ordinary course of business during the two-year period immediately preceding the date of this Annual Report. Certain of these material agreements that are to be performed in whole or in part after the date of this annual report are attached as exhibits to this Annual Report.
Other than as discussed in this Annual Report, we have no material contracts, other than contracts entered into in the ordinary course of business, to which we are a party.
| 87 |
D. Exchange Controls
We are not aware of any governmental laws, decrees or regulations in the Republic of the Marshall Islands that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities.
E. Taxation
The following represents the opinion of our United States and Marshall Islands tax counsel, Seward & Kissel LLP, and is a summary of the material U.S. federal income tax and Marshall Islands tax consequences of the ownership and disposition of our Class A common shares and Series B Preferred Shares.
This section is based on current provisions of the Code, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change or differing interpretation, possibly on a retroactive basis. Changes in these authorities may cause the tax consequences of Class A common share ownership to vary substantially from the consequences described below.
This section does not purport to be a comprehensive description of all of the tax considerations that may be relevant to us or each investor. This section does not address all aspects of U.S. federal income taxation that may be relevant to any particular investor based on such investor’s individual circumstances. In particular, this section considers only investors that will own Class A common shares as capital assets and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to investors that are subject to special treatment, including:
| • | broker-dealers; |
| • | insurance companies; |
| • | taxpayers who have elected mark-to-market accounting; |
| • | tax-exempt organizations; |
| • | regulated investment companies; |
| • | real estate investment trusts; |
| • | financial institutions or “financial services entities”; |
| • | taxpayers who hold Class A common shares as part of a straddle, hedge, conversion transaction or other integrated transaction; |
| • | taxpayers required to recognize income for U.S. federal income tax purposes no later than when such income is reported on an “applicable financial statement”; |
| • | taxpayers that are subject to the “base-erosion and anti-avoidance” tax; |
| • | taxpayers that own 10% or more, directly or constructively, of our common shares; |
| • | certain expatriates or former long-term residents of the United States; and |
| • | U.S. holders (as defined herein) whose functional currency is not the U.S. dollar. |
No ruling has been or will be requested from the IRS regarding any matter affecting us or our shareholders. The statements made herein may be challenged by the IRS and, if so challenged, may not be sustained upon review in a court.
The following does not address any aspect of U.S. federal gift or estate tax laws, or state or local tax laws. Additionally, the section does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our Class A common shares through such entities. Shareholders should consult their tax advisors regarding the specific tax consequences to them of the acquisition, holding or disposition of our Class A common shares, in light of their particular circumstances.
Taxation of Global Ship Lease
Taxation of operating income
Unless exempt from U.S. federal income taxation under the rules described below in “The Section 883 exemption,” a foreign corporation that earns only transportation income is generally subject to U.S. federal income taxation under one of two alternative tax regimes: (1) the 4% gross basis tax or (2) the net basis tax and branch profits tax.
| 88 |
The 4% gross basis tax
For foreign corporations not engaged in a U.S. trade or business, the United States imposes a 4% U.S. federal income tax (without allowance of any deductions) on the corporation’s U.S. source gross transportation income. For this purpose, transportation income includes income from the use, hiring or leasing of a vessel, or the performance of services directly related to the use of a vessel (and thus includes time charter and bareboat charter income). The U.S. source portion of transportation income includes 50% of the income attributable to voyages that begin or end (but not both) in the United States. Generally, no amount of the income from voyages that begin and end outside the United States is treated as U.S. source, and consequently none of the transportation income attributable to such voyages is subject to this 4% tax. Although the entire amount of transportation income from voyages that begin and end in the United States would be U.S. source, we do not expect to have any transportation income from voyages that begin and end in the United States.
The net basis tax and branch profits tax
We do not expect to engage in any activities in the United States or otherwise have a fixed place of business in the United States. Nonetheless, if this situation were to change or were we to be treated as engaged in a U.S. trade or business, all or a portion of our taxable income, including gains from the sale of vessels, could be treated as effectively connected with the conduct of this U.S. trade or business, or effectively connected income. Any effectively connected income would be subject to U.S. federal corporate income tax, currently imposed at a rate of 21%. In addition, an additional 30% branch profits tax would be imposed on us at such time as our after-tax effectively connected income is viewed as having been repatriated to our offshore office. The 4% gross basis tax described above is inapplicable to income that is treated as effectively connected income.
The Section 883 exemption
The 4% gross basis tax described above is inapplicable to U.S. source transportation income that qualifies for exemption under Section 883 of the Code. To qualify for the Section 883 exemption, a foreign corporation must, among other things:
| • | be organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States, which we call an Equivalent Exemption; |
| • | satisfy one of the following three ownership tests (discussed in more detail below): (1) the more than 50% ownership test, or 50% Ownership Test, (2) the controlled foreign corporation test, or CFC Test or (3) the “Publicly Traded Test”; and |
| • | meet certain substantiation, reporting and other requirements (that include the filing of U.S. income tax returns). |
We are organized under the laws of the Marshall Islands. Each of the vessels in the fleet is owned by a separate wholly owned subsidiary organized either in the Marshall Islands, Liberia Cyprus or Hong Kong. The U.S. Treasury Department recognizes the Marshall Islands, Liberia, Cyprus and Hong Kong as jurisdictions that grant an Equivalent Exemption; therefore, we should meet the first requirement for the Section 883 exemption. Additionally, we intend to comply with the substantiation, reporting and other requirements that are applicable under Section 883 of the Code. As a result, qualification for the Section 883 exemption will turn primarily on our ability to satisfy the second requirement enumerated above.
(1) The 50% Ownership Test
In order to satisfy the 50% Ownership Test, a non-U.S. corporation must be able to substantiate that more than 50% of the value of its stock is owned, directly or indirectly, by “qualified shareholders.” For this purpose, qualified shareholders include: (1) individuals who are residents (as defined in the regulations promulgated under Section 883 of the Code, or Section 883 Regulations) of countries, other than the United States, that grant an Equivalent Exemption, (2) non-U.S. corporations that meet the Publicly Traded Test of the Section 883 Regulations and are organized in countries that grant an Equivalent Exemption, or (3) certain foreign governments, non-profit organizations, and certain beneficiaries of foreign pension funds. A corporation claiming the Section 883 exemption based on the 50% Ownership Test must obtain all the facts necessary to satisfy the IRS that the 50% Ownership Test has been satisfied (as detailed in the Section 883 Regulations). Given the widely held nature of our Class A common shares, we do not currently anticipate circumstances under which we would be able to satisfy the 50% Ownership Test.
| 89 |
(2) The CFC Test
The CFC Test requires that the non-U.S. corporation be treated as a controlled foreign corporation, or CFC, for U.S. federal income tax purposes. We believe that we are not a CFC but cannot predict whether we will become a CFC, and satisfaction of the CFC definitional test is outside of our control.
(3) The Publicly Traded Test
The Publicly Traded Test requires that one or more classes of equity representing more than 50% of the voting power and value in a non-U.S. corporation be “primarily and regularly traded” on an established securities market either in the United States or in a foreign country that grants an Equivalent Exemption.
The Section 883 Regulations provide, in pertinent part, that stock of a non-U.S. corporation will be considered to be “primarily traded” on an established securities market in a given country if the number of shares of each class of stock that are traded during any taxable year on all established securities markets in that country exceeds the number of shares in each such class that are traded during that year on established securities markets in any other single country. Our Class A common shares are listed on the NYSE and are not listed on any other securities exchange. Therefore, our Class A common shares should be treated as primarily traded on an established securities market in the United States.
The Section 883 Regulations also generally provide that stock will be considered to be “regularly traded” on an established securities market if one or more classes of stock in the corporation representing in the aggregate more than 50% of the total combined voting power and value of all classes of stock of the corporation are listed on an established securities market during the taxable year. During 2021, the Class A common shares represented more than 50% of the total combined voting power and value of all classes of our stock. However, even if a class of shares is so listed, it is not treated as regularly traded under the Section 883 Regulations unless (1) trades are made in the shares on the established securities market, other than in minimal quantities, on at least 60 days during the taxable year (or 1/6 of the days in a short taxable year); and (2) the aggregate number of shares traded on the established securities market during the taxable year is at least 10% of the average number of outstanding shares of that class during that year (as appropriately adjusted in the case of a short taxable year). Even if these trading frequency and trading volume tests are not satisfied with respect to the Class A common shares, however, the Section 883 Regulations provide that such tests will be deemed satisfied if the Class A common shares are regularly quoted by dealers making a market in such Class A common shares. While we anticipate that these trading frequency and trading volume tests will be satisfied each year, satisfaction of these requirements is outside of our control and, hence, no assurances can be provided that we will satisfy the Publicly Traded Test each year. However, the Class A common shares may not represent more than half of the voting power or value of all classes of our stock.
In addition, even if the “primarily and regularly traded” tests described above are satisfied, a class of stock will not be treated as primarily and regularly traded on an established securities market if, during more than half the number of days during the taxable year, one or more shareholders holding, directly or indirectly, at least 5% of the vote and value of that class of stock, or 5% Shareholders, own, in the aggregate, 50% or more of the vote and value of that class of stock. This is referred to as the 5% Override Rule. In performing the analysis, we are entitled to rely on current Schedule 13D and 13G filings with the SEC to identify our 5% Shareholders, without having to make any independent investigation to determine the identity of the 5% Shareholder. In the event the 5% Override Rule is triggered, the Section 883 Regulations provide that the 5% Override Rule will nevertheless not apply if the company can establish that among the closely-held group of 5% Shareholders, sufficient shares are owned by 5% Shareholders that are considered to be “qualified shareholders,” as defined above, to preclude non-qualified 5% Shareholders in the closely-held group from owning 50% or more of the total value of the relevant class of stock held by 5% Shareholders for more than half the number of days during the taxable year.
Based on information that we have as to our shareholders and other matters, we believed that we qualified for the Section 883 exemption for 2009 through 2018 under the Publicly Traded Test. We do not believe that we were able to satisfy the “publicly-traded” test for 2019 and, consequently, we were not exempt from U.S. federal income taxation on our U.S. source gross transportation income. Based on information that we have as to our shareholders and other matters, we believed that we qualified for the Section 883 exemption for 2020 and 2021. Whether we may satisfy the “publicly-traded” test for 2022 and future taxable years depends on factors that are outside of our control, and we cannot provide any assurances that we will or will not satisfy the “publicly-traded” test to claim exemption from U.S. taxation for 2022 or future taxable years.
If we were not to qualify for the Section 883 exemption in any year, the U.S. income taxes that become payable could have a negative effect on our business, and could result in decreased earnings available for distribution to our shareholders. However, under our charter agreements, the charterers have agreed to provide reimbursement for any such taxes.
United States taxation of gain on sale of vessels
If we qualify for the Section 883 exemption, then gain from the sale of any vessel may be exempt from tax under Section 883. Even if such gain is not exempt from tax under Section 883, we will not be subject to U.S. federal income taxation with respect to such gain, assuming that we are not, and have never been, engaged in a U.S. trade or business. Under certain circumstances, if we are so engaged, gain on sale of vessels could be subject to U.S. federal income tax.
| 90 |
Tax Consequences of Holding Class A common shares
U.S. holders
For purposes of this discussion, a U.S. holder is a beneficial owner of our Class A common shares that owns (actually or constructively) less than 10% of our equity and that is:
| • | an individual who is a citizen or resident of the United States (as determined for U.S. federal income tax purposes); |
| • | a corporation (or other entity taxed as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| • | a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) it has in effect a valid election to be treated as a U.S. person. |
Taxation of distributions paid on Class A common shares
When we make a distribution with respect to our Class A common shares, subject to the discussions of the passive foreign investment company, or PFIC rules below, a U.S. holder will be required to include in gross income as foreign source dividend income the amount of the distribution to the extent paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. holder’s tax basis in the Class A common shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of the Class A common shares.
Subject to the discussions of the PFIC rules below, in the case of a U.S. holder that is a corporation, dividends that we pay will generally be taxable at the regular corporate rate of 21% and generally will not qualify for a dividends-received deduction available for dividends received from U.S. corporations. In the case of certain non-corporate U.S. holders, dividends that we pay generally will be treated as “qualified dividend income” subject to tax at preferential rates, provided that the Class A common shares are listed on an established securities market in the United States (such as the NYSE), the U.S. holder meets certain holding period and other requirements and we are not a PFIC in the taxable year in which the dividends are paid or in the immediately preceding taxable year.
Special rules may apply to any “extraordinary dividend” paid by us. An extraordinary dividend is, generally, a dividend with respect to a share if the amount of the dividend is equal to or in excess of 10 percent of a shareholder’s adjusted basis (or fair market value in certain circumstances) in such share. In addition, extraordinary dividends include dividends received within a one-year period that, in the aggregate, equal or exceed 20% of a U.S. holder’s tax basis (or fair market value). If we pay an “extraordinary dividend” on our Class A common shares that is treated as “qualified dividend income,” then any loss derived by certain non-corporate U.S. holders from the sale or exchange of such shares will be treated as long-term capital loss to the extent of the amount of such dividend.
Taxation of the disposition of Class A common shares
Subject to the discussions of the PFIC rules below, upon the sale, exchange or other disposition of Class A common shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and such U.S. holder’s tax basis in our Class A common shares. The U.S. holder’s initial tax basis in its Class A common shares generally will be the U.S. holder’s purchase price for the Class A common shares and that tax basis will be reduced (but not below zero) by the amount of any distributions on the units that are treated as non-taxable returns of capital, as discussed above under ‘Taxation of distributions paid on Class A common shares’.
Subject to the discussions of the PFIC rules below, capital gain from the sale, exchange or other disposition of Class A common shares held more than one year is long-term capital gain, and is eligible for a reduced rate of taxation for individuals. Gain recognized by a U.S. holder on a sale, exchange or other disposition of Class A common shares generally will be treated as U.S. source income. A loss recognized by a U.S. holder on the sale, exchange or other disposition of Class A common shares generally will be allocated to U.S. source income. The deductibility of a capital loss recognized on the sale, exchange or other disposition of Class A common shares may be subject to limitations, and U.S. holders may want to consult their own tax advisors regarding their ability to deduct any such capital loss in light of their particular circumstances.
| 91 |
3.8% tax on net investment income
A U.S. holder that is an individual, estate, or, in certain cases, a trust, will generally be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s net investment income (or undistributed net investment income in the case of an estate or trust) for the taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000). A U.S. holder’s net investment income will generally include distributions made by us that constitute dividends and gain upon a sale, exchange or other disposition of our Class A common shares. This tax is in addition to any income taxes due on such investment income.
If you are a U.S. holder that is an individual, estate or trust, you are encouraged to consult your tax advisors regarding the applicability of the 3.8% tax on net investment income to the ownership of our Class A common shares.
Consequences of possible passive foreign investment company classification
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to a “look through” rule, either: (1) 75% or more of its gross income is “passive” income or (2) 50% or more of the average value of its assets is attributable to assets that produce passive income or are held for the production of passive income. For purposes of these tests, “passive income” includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business; income derived from the performance of services does not, however, constitute “passive income.” The determination of whether a corporation is a PFIC is made annually. If a corporation is a PFIC in any taxable year that a person holds stock in the corporation (and was not a qualified electing fund with respect to such year, as discussed below), the stock held by such person will be treated as stock in a PFIC for all future years (absent an election which, if made, may require the electing person to pay taxes in the year of the election).
Based on the projected composition of our income and valuation of our assets, we do not expect that we will constitute a PFIC with respect to the current or any future taxable year, although there can be no assurance in this regard. Our expectation is based principally on the position that, for purposes of determining whether we are a PFIC, the majority, if not all, of the gross income we derive from our chartering activities should constitute services income rather than rental income.
In this regard, we have been advised by our tax advisor that the income from our chartering activities is, more likely than not, services income. There is, however, no direct legal authority under the PFIC rules addressing our current and projected future operations or supporting our position. Accordingly, no assurance can be given that the IRS will not assert that we are a PFIC with respect to any taxable year, nor that a court would not uphold any such assertion and we have not obtained advice from our tax advisor on whether we are a PFIC.
If we were to be classified as a PFIC in any year, each U.S. holder of our Class A common shares that does not make a timely qualified electing fund or mark-to-market election (as discussed below) will be subject (in that year and all subsequent years) to special rules with respect to: (1) any “excess distribution” (generally defined as any distribution received by a U.S. holder in a taxable year that is greater than 125% of the average annual distributions received by the U.S. holder in the three preceding taxable years or, if shorter, the U.S. holder’s holding period for the Class A common shares), and (2) any gain realized upon the sale or other disposition of the Class A common shares. Under these rules:
| • | the excess distribution or gain will be allocated ratably over the U.S. holder’s holding period for our Class A common shares; |
| • | the amount allocated to the current taxable year and any year prior to the first year in which we were a PFIC will be taxed as ordinary income in the current year; and |
| • | the amount allocated to each of the other taxable years in the U.S. holder’s holding period for our Class A common shares will be subject to U.S. federal income tax at the highest rate in effect for the applicable class of taxpayer for that year, and an interest charge will be added as though the amount of the taxes computed with respect to these other taxable years were overdue. |
In addition, each U.S. holder of our Class A common shares will generally be required to file an IRS Form 8621 if such U.S. holder holds its shares in any year in which we were classified as a PFIC.
| 92 |
In order to avoid the application of the PFIC rules discussed above with respect to excess distributions and realized gains, U.S. holders of our Class A common shares may make a qualified electing fund, or a QEF, election provided in Section 1295 of the Code. In lieu of the PFIC rules discussed above, a U.S. holder that makes a valid QEF election will, in very general terms, be required to include its pro rata share of our ordinary income and net capital gains, unreduced by any prior year losses, in income for each taxable year (as ordinary income and long-term capital gain, respectively) and to pay tax thereon, even if the amount of that income is not the same as the distributions paid on the Class A common shares during the year. If we later distribute the income or gain on which the U.S. holder has already paid taxes under the QEF rules, the amounts so distributed will not again be subject to tax in the hands of the U.S. holder. A U.S. holder’s tax basis in any Class A common shares as to which a QEF election has been validly made will be increased by the amount included in such U.S. holder’s income as a result of the QEF election and decreased by the amount of nontaxable distributions received by the U.S. holder. On the disposition of a common share, a U.S. holder making the QEF election generally will recognize capital gain or loss equal to the difference, if any, between the amount realized upon such disposition and its adjusted tax basis in the common share. In general, a QEF election should be made on or before the due date for filing a U.S. holder’s federal income tax return for the first taxable year for which we are a PFIC or, if later, the first taxable year for which the U.S. holder held common stock. In this regard, a QEF election is effective only if certain required information is made available by the PFIC. Subsequent to the date that we first determine that we are a PFIC, we will use commercially reasonable efforts to provide any U.S. holder of Class A common shares, upon request, with the information necessary for such U.S. holder to make the QEF election. If we do not believe that we are a PFIC for a particular year but it is ultimately determined that we were a PFIC, it may not be possible for a holder to make a QEF election for such year.
In addition to the QEF election, Section 1296 of the Code permits U.S. persons to make a “mark-to-market” election with respect to marketable stock in a PFIC. If a U.S. holder of our Class A common shares makes a mark-to-market election, such U.S. holder generally would, in each taxable year that we are a PFIC: (1) include as ordinary income the excess, if any, of the fair market value of the Class A common shares at the end of the taxable year over such U.S. holder’s adjusted tax basis in the Class A common shares, and (2) be permitted an ordinary loss in respect of the excess, if any, of such U.S. holder’s adjusted tax basis in the Class A common shares over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election (with the U.S. holder’s basis in the Class A common shares being increased and decreased, respectively, by the amount of such ordinary income or ordinary loss). If a U.S. holder makes an effective mark-to-market election, any gain such U.S. holder recognizes upon the sale or other disposition of our Class A common shares in a year that we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. The consequences of this election are generally less favorable than those of a QEF election for U.S. holders that are sensitive to the distinction between ordinary income and capital gain, although this is not necessarily the case. U.S. holders should consult their tax advisors as to the consequences to them of making a mark-to-market or QEF election, as well as other U.S. federal income tax consequences of holding stock in a PFIC in light of their particular circumstances.
As previously indicated, if we were to be classified as a PFIC for a taxable year in which we pay a dividend or the immediately preceding taxable year, dividends paid by us would not constitute “qualified dividend income” and, hence, would not be eligible for the preferential rates of U.S. federal income tax that apply to certain non-corporate U.S. holders.
If we are classified as a PFIC for any taxable year during which a U.S. holder holds our Class A common shares and any of our non-U.S. subsidiaries is also classified as a PFIC, such U.S. holder will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. U.S. holders are urged to consult their tax advisors about the application of the PFIC rules to any of our subsidiaries.
Non-U.S. holders
For purposes of this discussion, a non-U.S. holder is a beneficial owner of our Class A common shares that is neither a U.S. holder nor a partnership (or any other entity taxed as a partnership for U.S. federal income tax purposes).
A non-U.S. holder will generally not be subject to U.S. federal income tax on dividends paid in respect of the Class A common shares or on gains recognized in connection with the sale or other disposition of the Class A common shares, provided, in each case, that such dividends or gains are not effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business. However, even if not engaged in a U.S. trader or business, individual non-U.S. holders may be subject to tax on gain resulting from the disposition of our Class A common shares if they are present in the U.S. for 183 days or more during the taxable year in which those Class A common shares are disposed and meet certain other requirements.
Dividends or gains that are effectively connected with a non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment) are subject to U.S. federal income tax on a net income basis in the same manner as if the non-U.S. holder were a U.S. holder, and may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
| 93 |
Information Reporting and Back-up Withholding
U.S. holders generally are subject to information reporting requirements with respect to dividends paid on Class A common shares, and on the proceeds from the sale, exchange or disposition of Class A common shares. In addition, a holder may be subject to back-up withholding (currently at 24%) on dividends paid on Class A common shares, and on the proceeds from the sale, exchange or other disposition of Class A common shares, unless the holder provides certain identifying information, such as a duly executed IRS Form W-9, W-8BEN or W-8BEN-E, or otherwise establishes an exemption. Back-up withholding is not an additional tax and the amount of any back-up withholding will be allowable as a credit against a holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Tax Consequences of Holding 8.75% Series B Cumulative Redeemable Perpetual Preferred Shares
Our Series B Preferred Shares are treated as equity rather than debt for U.S. federal income tax purposes. Similar considerations apply as those described above in “—Tax Consequences of Holding Class A common shares.” Holders of Series B Preferred Shares should consult their tax advisors regarding the specific tax consequences to them of the acquisition, holding or disposition of our Series B Preferred Shares, in light of their particular circumstances.
Special rules may apply to any “extraordinary dividend” paid by us to U.S. holders of Series B Preferred Shares. Dividends paid by us in respect of stock which is preferred as to dividends will be treated as an “extraordinary dividend” if the issue price of such stock exceeds its liquidation rights or its stated redemption price. If we pay an “extraordinary dividend” on our Series B Preferred Shares that is treated as “qualified dividend income,” then any loss derived by certain non-corporate U.S. holders from the sale or exchange of such shares will be treated as long-term capital loss to the extent of the amount of such dividend. U.S. holders of Series B Preferred Shares are urged to consult their tax advisors about the potential treatment of dividends as “extraordinary dividends” for U.S. federal income tax purposes.
Marshall Islands Taxation
In the opinion of our Marshall Islands tax counsel, Seward & Kissel LLP, because we do not (and do not expect in the future that we will) conduct business or operations in the Republic of The Marshall Islands, we are not subject to income, capital gains, profits or other taxation under current Marshall Islands law. Distributions on our Class A common shares or on our Series B Preferred Shares will not be subject to Marshall Islands withholding tax.
Other Taxation
We may be subject to taxation in certain non-U.S. jurisdictions because we are either organized, or conduct business or operations, in such jurisdictions. We intend that our business and the business of our subsidiaries will be conducted and operated in a manner that minimizes taxes imposed upon us and our subsidiaries. However, we cannot assure this result as tax laws in these or other jurisdictions may change or we may enter into new business transactions relating to such jurisdictions, which could affect our tax liability.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
We filed reports and other information with the SEC. These materials, including this annual report and the accompanying exhibits, are available from www.sec.gov. Shareholders may also request a copy of our filings by writing to us at the following address: c/o Global Ship Lease Services Limited, 25 Wilton Road, London SW1V 1LW, United Kingdom or telephoning us at +44 (0) 20 3998 0063.
I. Subsidiaries
Not applicable.
| 94 |
| Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We are exposed to the impact of interest rate changes primarily through our floating-rate borrowings under our credit facilities. Significant increases in interest rates could adversely affect our results of operations and our ability to service our own debt.
Sensitivity Analysis
In December 2021 and February 2022, we entered into interest rate cap agreements with respect to an aggregate of $992.0 million of our floating rate debt, effective through the fourth quarter of 2026, for a USD one-month LIBOR cap of 0.75%. For additional information, please see “Item 4. Information on the Company—A. History and Development of the Company—Other Recent Developments.”
Our analysis of the potential effects of variations in market interest rates is based on a sensitivity analysis, which models the effects of potential market interest rate changes on our financial condition and results of operations. The following sensitivity analysis may have limited use as a benchmark and should not be viewed as a forecast as it does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.
Based on the outstanding balance at December 31, 2021 of our floating rate credit facilities of $941.9 million and ignoring amortization thereon and cash on hand, a hypothetical increase in LIBOR up to 0.75% following the interest rate cap agreements we entered into, would have the impact of reducing our annual net income, before income taxes, by approximately $4.9 million.
Foreign Currency Exchange Risk
The shipping industry’s functional currency is the U.S. dollar. All of our revenues and the majority of our operating costs are in U.S. dollars. In the future, we do not expect to be exposed to any significant extent to the impact of changes in foreign currency exchange rates. Consequently, we do not presently intend to enter into derivative instruments to hedge the foreign currency translation of assets or liabilities or foreign currency transactions or to use financial instruments for trading or other speculative purposes.
Inflation
With the exception of rising costs associated with the employment of international crews for our vessels, the impact of global oil prices on the cost of lubricating oil and other global commodity prices such as steel which is used in drydocking and other repairs we do not believe that inflation has had, or is likely in the foreseeable future to have, a significant impact on vessel operating expenses, drydocking expenses and general and administrative expenses. For the duration of the global expense agreement, under certain predefined circumstances, we will be able to recover a portion of our vessel operating costs above a pre-determined threshold.
| Item 12. | Description of Securities Other than Equity Securities |
Not applicable.
PART II
| Item 13. | Defaults, Dividend Arrearages and Delinquencies |
None.
| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
None.
| Item 15. | Controls and Procedures |
Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
| 95 |
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management acknowledges its responsibility for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | relate to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021 using the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the foregoing, management has concluded that internal control over financial reporting was effective as of December 31, 2021.
Changes in Internal Control over Financial Reporting
In accordance with Rule 13a-15(d), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the period covered by this Annual Report on Form 20-F, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
PricewaterhouseCoopers S.A, which has audited the consolidated financial statements of the Company for the year ended December 31, 2021, has also audited the effectiveness of the Company’s internal control over financial reporting as stated in their audit report which is incorporated into Item 18 of this Form 20-F from page F-2 hereof.
| 96 |
| Item 16A. | Audit Committee Financial Expert |
The Board has determined that our director and chairman of the audit committee, Mr. van Lacum, qualifies as an audit committee financial expert and is independent under applicable NYSE and SEC standards.
| Item 16B. | Code of Ethics |
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. This document is available in the Corporate Governance section of our website (www.globalshiplease.com). The information included on our website is not incorporate herein by reference. We also intend to disclose on our website any waivers to or amendments of our Code of Business Conduct and Ethics for the benefit of our executive officers that we may be required to disclose under applicable rules.
| Item 16C. | Principal Accountant Fees and Services |
Our principal accountant for 2021 and 2020 was PricewaterhouseCoopers S.A., independent registered public accounting firm.
Fees Incurred by Global Ship Lease for PricewaterhouseCoopers S.A.’s Services
The fees for services rendered by the principal accountant in 2021 and 2020 were as follows:
| 2021 | 2020 | ||
| Audit Fees | $ 569,833 | $ 492,398 | |
| Audit related fees | 286,873 | 51,568 | |
| Tax Fees | 67,191 | 132,158 | |
| Total | $ 923,897 | $ 676,124 |
Audit Fees
Audit fees represent professional services rendered for the audit of our consolidated annual financial statements, the quarterly reviews and services provided by our principal accountant in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees consist of assurance and related services rendered by the principal accountant related to the performance of the audit or review of our consolidated financial statements or other filings which have not been reported under Audit Fees above.
Tax Fees
Tax fees for 2021 and 2020 are primarily for tax compliance and consultation services.
The audit committee has the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the audit committee or entered into pursuant to detailed pre-approval policies and procedures established by the audit committee, as long as the audit committee is informed on a timely basis of any engagement entered into on that basis. The audit committee has pre-approved all non-audit services, subject to a detailed pre-approval policy and procedure established by them.
| Item 16D. | Exemptions from the Listing Standards for Audit Committees |
None.
| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
| Item 16F. | Change in Registrant’s Certifying Accountant |
None.
| 97 |
| Item 16G. | Corporate Governance |
As a foreign private issuer, we are exempt from certain corporate governance rules that apply to domestic companies under NYSE listing standards. Even though we are not required to do so, we follow certain corporate governance practices applicable to domestic companies under NYSE listing standards, such as:
| • | we have a compensation committee that consists of four directors, all of whom satisfy NYSE standards for independence; |
| • | we have a nominating and corporate governance committee that consists of three directors, all of whom satisfy NYSE standards for independence; and |
| • | we hold annual meetings of shareholders under the Business Corporations Act of the Republic of the Marshall Islands, similar to NYSE requirements. |
The significant differences between our corporate governance practices and the NYSE standards are set forth below.
Shareholder Approval of Equity Compensation Plans
The NYSE requires listed companies to obtain prior shareholder approval to adopt or materially revise any equity compensation plan. As permitted under Marshall Islands law and our amended and restated bylaws, we do not need prior shareholder approval to adopt or revise equity compensation plans, including our equity incentive plan.
Share Issuances
In lieu of obtaining shareholder approval prior to the issuance of designated securities, we will comply with provisions of the Marshall Islands Business Corporations Act, which allows the Board of Directors to approve share issuances. However, pursuant to 313.00 of Section 3 of the NYSE Listed Company Manual, the NYSE will accept any action or issuance relating to the voting rights structure of a non-U.S. company that is in compliance with the NYSE’s requirements for domestic companies or that is not prohibited by the company’s home country law. We are not subject to such restrictions under our home country, Marshall Islands, law.
| Item 16H. | Mine Safety Disclosure |
Not applicable.
| Item 16I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
PART III
| Item 17. | Financial Statements |
Not applicable.
| Item 18. | Financial Statements |
The following financial statements, together with the report of PricewaterhouseCoopers S.A. thereon, beginning on page F-1, are filed as part of this Annual Report:
| 98 |
| Item 19. | Exhibits |
The agreements and other documents filed as exhibits to this Annual Report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the registrant in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
The following exhibits are filed as part of this Annual Report:
| 99 |
| 100 |
| 101 |
| 102 |
| * | Filed herewith. |
| 103 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| GLOBAL SHIP LEASE, INC. | ||
| By: |
/s/ IAN J. WEBBER | |
| Ian J. Webber | ||
| Chief Executive Officer | ||
Date: March 24, 2022
| 104 |
GLOSSARY OF SHIPPING TERMS
Unless otherwise stated, references to the following terms have the following meaning as used in this Annual Report:
Address commission. A discount provided directly to a charterer based on a fixed percentage of the agreed upon charter rate
Annual survey. The inspection of a ship pursuant to international conventions, by a classification society surveyor, on behalf of the flag state, that takes place every year.
Backhaul. The weaker leg of a round trip voyage with less volume than the stronger headhaul leg or the return movement of a container—often empty—from a destination of unloading to a point of reloading of cargo.
Ballast. Weight in solid or liquid form, such as seawater, taken on a ship to increase draught, to change trim, or to improve stability or a voyage in which a ship is not laden with cargo.
Bareboat charter. A charter of a ship under which the ship-owner is usually paid a fixed amount of charterhire for a certain period of time during which the charterer is responsible for all ship operating expenses, including expenses for crewing, lubricating oil, insurance, maintenance and drydockings, and for all voyage expenses such as bunker fuel. A bareboat charter is also known as a “demise charter” or a “time charter by demise.”
Bunkers. Heavy fuel and diesel oil used to power a ship’s engines and generators.
Capacity. The nominal carrying capacity of the ship, measured in TEU.
Charter. The hire of a ship for a specified period of time or a particular voyage to carry a cargo from a loading port to a discharging port.
Charterer. The party that hires a ship for a period of time or for a voyage.
Charterhire. A sum of money paid to the ship-owner by a charterer for the use of a ship.
Charter owner. A company that owns containerships and charters out its ships to container shipping companies rather than operating the ships for liner services; also known as ship-owner or lessor.
Charter rate. The rate charged by a Charter owner normally as a daily rate for the use of its containerships by a charterer. Charter rates can be on a time charter or bareboat charter basis.
Classification society. An independent organization that certifies that a ship has been built and maintained according to the organization’s rules for that type of ship and complies with the applicable rules and regulations of the country of the ship’s registry and the international conventions of which that country is a member. A ship that receives its certification is referred to as being “in-class.”
Container shipping company. A shipping company operating liner services using owned or chartered ships with fixed port of call schedules. Also known as a carrier, liner company or an operator.
Drydocking. Placing the ship in a drydock in order to check and repair areas and parts below the water line. During drydockings, which are required to be carried out periodically, certain mandatory classification society inspections are carried out and relevant certifications are issued. Under Classification Society rules, drydockings for containerships are generally required once every three to five years or after an accident resulting in under-water damage.
Freight rate. The amount charged by container shipping companies for transporting cargo, normally as a rate per 20-foot or 40-foot container.
Geared containerships. Self-sustained containerships, which are able to load and discharge containers with their own on-board cranes and derricks.
Gross tonnage. A unit of measurement of the entire internal cubic capacity of the ship expressed in tons at 100 cubic feet to the ton.
| 105 |
Headhaul. The stronger leg of a round trip voyage with greater volume than the weaker backhaul or the outgoing goods to be delivered from a point of origin.
Hull. The main body of the ship without engines, buildings and cranes.
Liner company or liner. A container shipping company (also referred to as lines or operators).
KG. Kommanditgesellschaft, a closed end fund construct broadly analogous to a limited partnership. It has been employed as an investment vehicle for high net worth individuals (primarily German) in various types of assets, including shipping assets.
IMO. International Maritime Organization, a United Nations agency that issues international standards for shipping.
Intermediate survey. The inspection of a ship by a classification society surveyor that takes place 24 to 36 months after each special survey.
Newbuilding. A ship on order, under construction or just delivered.
Off-hire. The period in which a ship is not available for service under a charter and, accordingly, the charterer generally is not required to pay the hire. Off-hire periods can include days spent on repairs, drydocking and surveys, whether or not scheduled.
Orderbook-to-fleet ratio. The ratio of the orderbook for new vessels yet to be delivered to the existing on-the-water fleet determined on the basis of TEU capacity and expressed as a percentage.
Scrapping. The sale of a ship for conversion into scrap metal.
Ship management. The provision of shore-based ship management services related to crewing, technical and safety management and the compliance with all government, flag state, class certification and international rules and regulations.
Shipper. Someone who prepares goods for shipment or arranges seaborne transportation; essentially a customer of a container shipping company.
Sister ships. Ships of the same class and specification typically built at the same shipyard.
Special survey. The inspection of a ship by a classification society surveyor that takes place every five years, as part of the recertification of the ship by a classification society.
Spot market. The market for immediate chartering of a ship, usually for single voyages or for short periods of time, up to 12 months.
TEU. A 20-foot equivalent unit, the international standard measure for containers and containership capacity.
Time charter. A charter under which the ship-owner hires out a ship for a specified period of time. The ship-owner is responsible for providing the crew and paying vessel operating expenses while the charterer is responsible for paying the voyage expenses such as fuel and additional voyage insurance. The ship-owner is paid charterhire, which accrues on a daily basis.
Time charter and voyage expenses. Expenses incurred including brokerage commission and those for owner’s account attributable to a ship’s voyage, such as bunkers costs when the vessel is idle or offhire and expenses incurred due to a ship’s voyage from a loading port to a discharging port, such as bunkers costs, port expenses, stevedoring costs, agents’ fees, canal dues, extra war risk insurance and commissions.
Utilization. The percentage of days for which owner receives charterhire. The difference to 100% or full utilization will be offhire, both planned for, say, regulatory drydocking, and unplanned for, say, breakdown, and idle time between charters.
Vessel operating expenses. The costs of operating a ship, primarily consisting of crew wages and associated costs, insurance premiums, ship management fees, costs of lubricants and spare parts, and repair and maintenance costs. Vessel operating expenses exclude bunker costs, port expenses, stevedoring costs, agents’ fees, canal dues, extra war risk insurance and commissions, which are included in “voyage expenses.”
Voyage expenses. Expenses incurred due to a ship’s voyage from a loading port to a discharging port, such as bunkers costs, port expenses, stevedoring costs, agents’ fees, canal dues, extra war risk insurance and commissions
| 106 |
Global Ship Lease, Inc.
Index to Consolidated Financial Statements
| F-1 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Global Ship Lease, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Global Ship Lease, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
| F-2 |
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Initial Recognition of “Intangible liabilities - charter agreements”
As described in Notes 2 and 6 to the consolidated financial statements, as of December 31, 2021, the carrying value of the Company’s intangible liabilities – charter agreements was $55.4 million. The Company’s intangible assets and liabilities consist of unfavorable lease terms on charter agreements acquired in assets acquisitions. When intangible assets or liabilities associated with the acquisition of a vessel are identified, they are recorded at fair value. Fair value is determined by reference to market data and the discounted amount of expected future cash flows. Where charter rates are higher than market charter rates, an intangible asset is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel and equivalent duration of charter party at the date the vessel is delivered. Where charter rates are less than market charter rates, an intangible liability is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel. The determination of the fair value of acquired assets and liabilities requires the Company to make significant assumptions and estimates of many variables including market charter rates (including duration), the level of utilization of its vessels and its weighted average cost-of capital (“WACC”). The estimated market charter rate (including duration) is considered a significant assumption.
The principal considerations for our determination, that performing procedures relating to Initial Recognition of “Intangible liabilities - charter agreements” is a critical audit matter, are (i) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value of “Intangible liabilities - charter agreements”, due to the significant judgement by management when developing the estimate; and (ii) the significant audit effort in evaluating the significant assumptions related to the estimated market charter rates (including duration).
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of the initial recognition of “Intangible liabilities - charter agreements” and controls over the development of significant assumptions related to the estimated market charter rate (including duration). These procedures also included testing management’s process for estimating the fair value of intangible liabilities - charter agreements. Testing management’s process included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to the estimated market charter rate (including duration) for an equivalent vessel and equivalent duration of charter party at the date the vessel is delivered. Evaluating the reasonableness of the assumption related to the estimated market charter rate (including duration) involved, i) comparing the daily time charter rate assumption with other relevant market data, and ii) assessing whether the assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s cash flow models and developing an independent estimate of the discount rate.
/s/
March 24, 2022
We have served as the Company’s auditor since 2018.
| F-3 |
Global Ship Lease, Inc.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except share data)
| As of | |||||||
| Note | December 31, 2021 | December 31, 2020 | |||||
| ASSETS | |||||||
| CURRENT ASSETS | |||||||
| Cash and cash equivalents | $ | $ | |||||
| Time deposits | |||||||
| Restricted cash | 3 | ||||||
| Accounts receivable, net | |||||||
| Inventories | 8 | ||||||
| Prepaid expenses and other current assets | 7 | ||||||
| Derivative asset | 9 | ||||||
| Due from related parties | 14 | ||||||
| Total current assets | $ | $ | |||||
| NON - CURRENT ASSETS | |||||||
| Vessels in operation | 4 | $ | $ | ||||
| Advances for vessels acquisitions and other additions | 4 | ||||||
| Deferred charges, net | 5 | ||||||
| Other non-current assets | 2p | ||||||
| Derivative asset, net of current portion | 9 | ||||||
| Restricted cash, net of current portion | 3 | ||||||
| Total non - current assets | |||||||
| TOTAL ASSETS | $ | $ | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
| CURRENT LIABILITIES | |||||||
| Accounts payable | 10 | $ | $ | ||||
| Accrued liabilities | 11 | ||||||
| Current portion of long - term debt | 12 | ||||||
| Current portion of deferred revenue | |||||||
| Due to related parties | 14 | ||||||
| Total current liabilities | $ | $ | |||||
| LONG - TERM LIABILITIES | |||||||
| Long - term debt, net of current portion and deferred financing costs | 12 | $ | $ | ||||
| Intangible liabilities - charter agreements | 6 | ||||||
| Deferred revenue, net of current portion | 3 | ||||||
| Total non - current liabilities | |||||||
| Total liabilities | $ | $ | |||||
| Commitments and Contingencies | 15 | ||||||
| SHAREHOLDERS' EQUITY | |||||||
| Class A common shares - authorized shares with a $ par value shares issued and outstanding (2020 – shares) | 16 | $ | $ | ||||
| Series B Preferred Shares - authorized shares with a $ par value shares issued and outstanding (2020 – shares) | 16 | ||||||
| Series C Preferred Shares - authorized shares with a $ par value Nil shares issued and outstanding (2020 - shares) | 16 | ||||||
| Additional paid in capital | |||||||
| Retained Earnings/(Accumulated deficit) | ( | ||||||
| Accumulated other comprehensive income | 9 | ||||||
| Total shareholders' equity | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ | |||||
See accompanying notes to Consolidated Financial Statements
| F-4 |
Global Ship Lease, Inc.
Consolidated Statements of Income
(Expressed in thousands of U.S. dollars except share and per share data)
| Year ended December 31, | ||||||||||
| Note | 2021 | 2020 | 2019 | |||||||
| OPERATING REVENUES | ||||||||||
| Time charter revenue (include related party revenues of $ |
13,14 | $ | $ | $ | ||||||
| Amortization of intangible liabilities-charter agreements (includes related party amortization of intangible liabilities-charter
agreements of $ |
6 | |
( | |||||||
| Total operating revenues | ||||||||||
| OPERATING EXPENSES: | ||||||||||
| Vessel operating expenses (include related party vessels operating expenses of $ |
14 | |||||||||
| Time charter and voyages expenses (include related party time charter and voyage expenses of $ |
14 | |||||||||
| Depreciation and amortization | 4,5 | |||||||||
| Impairment of vessels | 4 | |||||||||
| General and administrative expenses | ||||||||||
| (Gain)/loss on sale of vessels | 4 | ( |
||||||||
| Operating Income | |
|||||||||
| NON-OPERATING INCOME/(EXPENSES) | ||||||||||
| Interest income | ||||||||||
| Interest and other finance expenses (includes $ |
( |
( |
( | |||||||
| Other income, net | |
|||||||||
| Total non-operating expenses | ( |
( |
( | |||||||
| Income before income taxes | ||||||||||
| Income taxes | ( |
( |
( | |||||||
| Net Income | $ | $ | |
$ | ||||||
| Earnings allocated to Series B Preferred Shares | ( |
( |
( | |||||||
| Net Income available to Common Shareholders | $ | $ | |
$ | ||||||
| Earnings per Share | ||||||||||
| Weighted average number of Class A common shares outstanding | ||||||||||
| Basic | 18 | |||||||||
| Diluted | 18 | |
||||||||
| Net Earnings per Class A common share | ||||||||||
| Basic | 18 | |
||||||||
| Diluted | 18 | |
||||||||
See accompanying notes to Consolidated Financial Statements
| F-5 |
Global Ship Lease, Inc.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of U.S. dollars)
| Year ended December 31, | ||||||||||
| Note | 2021 | 2020 | 2019 | |||||||
| Net Income available to Common Shareholders | $ | $ | $ | |||||||
| Other comprehensive income: | ||||||||||
| Cash Flow Hedge: | ||||||||||
| Unrealized gain on interest rate cap | 9 | |||||||||
| Total Other Comprehensive Income | ||||||||||
| Total Comprehensive Income | $ | $ | $ | |||||||
See accompanying notes to Consolidated Financial Statements
| F-6 |
Global Ship Lease, Inc.
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
| Year ended December 31, | ||||||||||||
| Note | 2021 | 2020 | 2019 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Impairment of vessels | 4 | |||||||||||
| (Gain)/loss on sale of vessels | 4 | ( |
||||||||||
| Amortization of deferred financing costs | 12 | |||||||||||
| Amortization of original issue discount/premium on repurchase of notes | ||||||||||||
| Amortization of intangible (liabilities)/assets - charter agreements | 6 | ( |
( |
|||||||||
| Share based compensation | 17 | |||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| (Increase)/decrease in accounts receivable and other assets | ( |
( | ||||||||||
| (Increase)/decrease in inventories | ( |
( |
||||||||||
| Increase in derivative asset | 9 | ( |
||||||||||
| Increase/(decrease) in accounts payable and other liabilities | ( |
|||||||||||
| (Decrease)/increase in related parties' balances, net | ( |
( | ||||||||||
| Increase/(decrease) in deferred revenue | 3 | ( |
||||||||||
| Unrealized foreign exchange loss | ||||||||||||
| Net cash provided by operating activities | ||||||||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisition of vessels and intangibles | ( |
( |
( | |||||||||
| Cash paid for vessel expenditures | ( |
( |
( | |||||||||
| Net proceeds from sale of vessels | ||||||||||||
| Advances for vessel acquisitions and other additions | ( |
( |
( | |||||||||
| Cash paid for drydockings | ( |
( |
( | |||||||||
| Time deposits acquired | ( |
|||||||||||
| Cash acquired in Poseidon Transaction, net of capitalized expenses | ( | |||||||||||
| Net cash used in investing activities | ( |
( |
( | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of 2024 Notes | ||||||||||||
| Repurchase of 2022 Notes, including premium | 12 | ( |
( |
( | ||||||||
| Proceeds from drawdown of credit facilities and sale and leaseback | 12 | |||||||||||
| Repayment of credit facilities and sale and leaseback | 12 | ( |
( |
( | ||||||||
| Repayment of refinanced debt | ( |
( |
( | |||||||||
| Deferred financing costs paid | ( |
( |
( | |||||||||
| Net proceeds from offering of Class A common shares, net of offering costs | ( |
|||||||||||
| Retirement of Class A common shares | ( |
|||||||||||
| Proceeds from offering of Series B preferred shares, net of offering costs | ||||||||||||
| Class A common shares - dividend paid | ( |
|||||||||||
| Series B Preferred Shares - dividend paid | 16 | ( |
( |
( | ||||||||
| Net cash provided by/(used in) financing activities | $ | $ | ( |
$ | ||||||||
| Net increase/(decrease) in cash and cash equivalents and restricted cash | ( |
|||||||||||
| Cash and cash equivalents and restricted cash at beginning of the year | ||||||||||||
| Cash and cash equivalents and restricted cash at end of the year | $ | $ | $ | |||||||||
| Supplementary Cash Flow Information: | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Non-cash investing activities: | ||||||||||||
| Unpaid drydocking expenses | ||||||||||||
| Unpaid vessel expenditures | ||||||||||||
| Unpaid advances for vessels' acquisitions and other additions | ||||||||||||
| Acquisition of vessels and intangibles | ||||||||||||
| Non-cash financing activities: | ||||||||||||
| Issuance of 2024 Notes for the acquisition of vessels | ||||||||||||
| Premium on the 2024 Notes issued for the acquisition of vessels | ||||||||||||
| Unpaid offering costs | ||||||||||||
| Net unrealized gain on interest rate cap | ||||||||||||
See accompanying notes to Consolidated Financial Statements
| F-7 |
Global Ship Lease, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of U.S. dollars except share data)
Number of Common Shares at par value $ |
Number of Series B Preferred Shares at par value $ |
Number of Series C Preferred Shares at par value $ |
Common Shares | Series B Preferred Shares | Series C Preferred Shares | Additional paid-in capital | (Accumulated Deficit)/ Retained Earnings | Accumulated Other Comprehensive Income | Total Shareholders' Equity | |
| Balance at January 1, 2019 | $ |
$ |
$ |
$ |
$( |
$ |
$ | |||
| Issuance of Restricted Stock Units (Note 17) | — | — | — | |||||||
| Issuance of Class A common shares, net of offering costs (Notes 16 and 17) | — | — | ||||||||
| Net Income for the year | — | — | — | |||||||
| Series B Preferred Shares dividend (Note 16) | — | — | — | ( |
( | |||||
| Issuance of Series B Preferred shares, net of offering costs | — | — | ||||||||
| Balance at December 31, 2019 | $ |
$ |
$ |
$ |
$( |
$ |
$ | |||
| Issuance of Restricted Stock Units (Note 17) | — | — | — | |||||||
| Issuance of Class A common shares, net of offering costs (Notes 16 and 17) | — | — | ( |
( | ||||||
| Net Income for the year | — | — | — | |||||||
| Series B Preferred Shares dividend (Note 16) | — | — | — | ( |
( | |||||
| Issuance of Series B Preferred shares, net of offering costs | — | — | ||||||||
| Balance at December 31, 2020 | $ |
$ |
$ |
$ |
$( |
$ |
$ | |||
| Issuance of Restricted Stock Units (Note 17) | — | — | ||||||||
| Issuance of Class A common shares, net of offering costs (Notes 16 and 17) | — | — | ||||||||
| Conversion of Series C Preferred shares to Class A common shares (Note 16) | — | ( |
( |
( |
||||||
| Cancellation of Class A common shares (Note 16) | ( |
— | — | ( |
( |
( | ||||
| Other comprehensive income | — | — | — | |||||||
| Net Income for the year | — | — | — | |||||||
| Series B Preferred Shares dividend (Note 16) | — | — | — | ( |
( | |||||
| Issuance of Series B Preferred shares, net of offering costs (Note 7) | — | — | ||||||||
| Class A common shares dividend (Note 16) | — | — | — | ( |
( | |||||
| Balance at December 31, 2021 | $ |
$
|
$
|
$ |
$ |
$ |
$ | |||
See accompanying notes to Consolidated Financial Statements
| F-8 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
1. Description of Business
On August 14, 2008, Global Ship Lease, Inc. (the “Company”) merged indirectly with Marathon Acquisition Corp., a company then listed on The American Stock Exchange, and with the pre-existing Global Ship Lease, Inc. GSL Holdings, Inc. was the surviving entity (the “Marathon Merger”), changed its name to Global Ship Lease, Inc. and became listed on The New York Stock Exchange (the “NYSE”).
On November 15, 2018, the Company completed
a transformative transaction and acquired Poseidon Containers’
The Company’s business is to own
and charter out containerships to leading liner companies. On June 30, 2021, the Company sold La Tour, a
The following table provides information about the 65 vessels owned as at December 31, 2021.
Description of Business - Schedule of Vessels (Table)
| Company Name (1) | Country of Incorporation | Vessel Name | Capacity in TEUs (2) | Year Built | Earliest Charter Expiry Date |
| Global Ship Lease 54 LLC | |||||
| Laertis Marine LLC | |||||
| Penelope Marine LLC | |||||
| Telemachus Marine LLC (3) | |||||
| Global Ship Lease 53 LLC | |||||
| Global Ship Lease 52 LLC | |||||
| Global Ship Lease 43 LLC | |||||
| Global Ship Lease 30 Limited | |||||
| Global Ship Lease 31 Limited | |||||
| Global Ship Lease 32 Limited | |||||
| Alexander Marine LLC | |||||
| Hector Marine LLC | |||||
| Ikaros Marine LLC | |||||
| Philippos Marine LLC | |||||
| Aristoteles Marine LLC | |||||
| Menelaos Marine LLC | |||||
| Global Ship Lease 35 LLC | |||||
| Global Ship Lease 36 LLC | |||||
| Global Ship Lease 48 LLC | |||||
| Leonidas Marine LLC | |||||
| Global Ship Lease 33 LLC | |||||
| Global Ship Lease 34 LLC | |||||
| GSL Arcadia LLC | |||||
| GSL Melita LLC | |||||
| GSL Maria LLC | |||||
| GSL Violetta LLC (3) | |||||
| GSL Tegea LLC | |||||
| GSL Dorothea LLC | |||||
| GSL MYNY LLC | |||||
| Tasman Marine LLC | |||||
| Hudson Marine LLC | |||||
| Drake Marine LLC | |||||
| Global Ship Lease 68 LLC (3) | |||||
| Global Ship Lease 69 LLC (3) | |||||
| Global Ship Lease 70 LLC (3) | |||||
| Global Ship Lease 71 LLC (3) | |||||
| Hephaestus Marine LLC | |||||
| Zeus One Marine LLC | |||||
| Global Ship Lease 47 LLC | |||||
| GSL Alcazar Inc. | |||||
| Global Ship Lease 55 LLC | |||||
| Global Ship Lease 50 LLC | |||||
| Global Ship Lease 49 LLC | |||||
| Global Ship Lease 51 LLC | |||||
| Global Ship Lease 57 LLC | |||||
| Global Ship Lease 58 LLC | |||||
| Global Ship Lease 59 LLC | |||||
| Global Ship Lease 60 LLC | |||||
| Global Ship Lease 61 LLC | |||||
| Global Ship Lease 62 LLC | |||||
| Global Ship Lease 63 LLC | |||||
| Global Ship Lease 42 LLC | |||||
| Pericles Marine LLC | |||||
| Global Ship Lease 64 LLC | |||||
| Global Ship Lease 65 LLC | |||||
| Global Ship Lease 66 LLC | |||||
| Aris Marine LLC | |||||
| Aphrodite Marine LLC | |||||
| Athena Marine LLC | |||||
| Global Ship Lease 38 LLC | |||||
| Global Ship Lease 40 LLC | |||||
| Global Ship Lease 41 LLC | |||||
| Global Ship Lease 45 LLC | |||||
| Global Ship Lease 44 LLC | |||||
| Global Ship Lease 67 LLC |
| F-9 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| (1) | All subsidiaries are 100% owned, either directly or indirectly; |
| (2) | Twenty-foot Equivalent Units; |
| (3) | Currently, under a sale and leaseback transaction;During 2021, the Company has entered into six agreements which qualify as failed sale and leaseback transactions as the Company is required to repurchase the vessels at the end of the lease term and the Company has accounted for the six agreements as financing transactions; |
| (4) | GSL Eleni delivered 2Q2019 and is chartered for five years; GSL Kalliopi (delivered 4Q2019) and GSL Grania (delivered 3Q2019) are chartered for three years plus two successive periods of one year at the option of the charterer; |
| (5) | GSL Arcadia, GSL Melita, GSL Maria, GSL Violetta, GSL Tegea, GSL Dorothea, GSL MYNY. Thereafter, the charterer has the option to extend each charter for a further 12 months, after which they have the option to extend each charter for a second time – for a period concluding immediately prior to each respective vessel’s 25th year drydocking and special survey; |
| (6) | Tasman. Thereafter, the charterer has the option to charter the vessel for a further 12 months; |
| (7) | Ian H & Zim Europe. A package agreement with the charterer, for direct charter extensions on two 5,900 TEU ships: Ian H from May 2021 and Zim Europe (formerly Dimitris Y) from May 2022. On April 9, 2021, Dimiris Y was renamed Zim Europe; |
| (8) | GSL Kithira, GSL Tripoli, GSL Syros, GSL Tinos. Thereafter, the charterer has the option to extend each charter by three years; |
| (9) | Orca I. Thereafter, the charterer has the option to extend the charter the vessel for a further 12-14 months; |
| (10) | “tbr” means “to be renamed”; |
| (11) | On January 5, 2022, Marie Delmas was renamed Akiteta |
| F-10 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 1. | Description of Business (continued) |
In February 2021, the Company contracted to purchase
In June 2021, the Company contracted to purchase
In June 2021, the Company contracted to purchase
With these additions and following the sale of La
Tour on June 30, 2021, the Company’s fleet comprises
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements
are prepared in accordance with United States Generally Accepted Accounting Principles (“
Adoption of new accounting standards
In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform (Topic 848)” (“ASU 2020-4”), which provides optional guidance intended to ease the potential burden in accounting for the expected discontinuation of LIBOR as a reference rate in the financial markets. The guidance can be applied to modifications made to certain contracts to replace LIBOR with a new reference rate. The guidance, if elected, will permit entities to treat such modifications as the continuation of the original contract, without any required accounting reassessments or remeasurements. The ASU 2020-4 was effective for the Company beginning on March 12, 2020 and the Company will apply the amendments prospectively through December 31, 2022. There was no impact to the Company’s audited consolidated financial statements for the year ended December 31, 2021 . Currently, the Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications.
| F-11 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued)
|
| (a) | Basis of Presentation (continued) |
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a pandemic. Since the beginning of calendar year 2020, the outbreak of COVID-19 pandemic has resulted in the implementation of numerous actions taken by governments and governmental agencies in an attempt to mitigate the spread of the virus, including, among others, business closures, quarantines, travel restrictions, and physical distancing requirements. These actions have caused substantial disruptions in the global economy and the shipping industry, as well as significant volatility in the financial markets, the severity and duration of which remains uncertain.
While the Company cannot predict the long-term economic impact of the COVID-19 pandemic, it will continue to actively monitor the situation and may take further actions altering the Company’s business operations that it determines are in the best interests of its employees, customers, partners, suppliers, and stakeholders, or as required by authorities in the jurisdictions where the Company operates. As a result, many of the Company’s estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. The ultimate effects that any such alterations or modifications may have on the Company’s business are not clear, including any potential negative effects on its business operations and financial results.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries; the Company has no other interests. All significant intercompany balances and transactions have been eliminated in the Company’s consolidated financial statements.
(c) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions and/or conditions.
(d) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Deposits held at call with banks with original maturities of more than three months are included under caption “Time deposits”.
(e) Restricted cash
Restricted cash consists of retention accounts which are restricted in use and held in order to service debt and interest payments. In addition, restricted cash consists of pledged cash maintained with lenders and amounts built-up for future drydockings. Also includes restricted cash received in advance from charterers for future charter service.
(f) Insurance claims
Insurance claims consist of claims submitted and/or claims in the process of compilation or submission. They are recorded on an accrual basis and represent the claimable expenses, net of applicable deductibles, incurred through December 31 of each reported period, which are probable to be recovered from insurers. Any outstanding costs to complete the claims are included in accrued liabilities. The classification of insurance claims into current and non-current assets is based on management’s expectation as to the collection dates.
| F-12 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(g) Inventories
Inventories consist of bunkers, lubricants, stores and provisions. Inventories are stated at the lower of cost or net realizable value as determined using the first-in, first-out method.
(h) Accounts receivable, net
The Company carries its accounts receivable
at cost less, if appropriate, an allowance for doubtful accounts, based on a periodic review of accounts receivable, taking into account
past write-offs, collections and current credit conditions. The Company does not generally charge interest on past-due accounts. Allowances
for doubtful accounts amount to $nil as of December 31, 2021 (2020: $nil).
(i) Vessels in operation
Vessels are generally recorded at their historical cost, which consists of the acquisition price and any material expenses incurred upon acquisition, adjusted for the fair value of intangible assets or liabilities associated with above or below market charters attached to the vessels at acquisition. See Intangible Assets and Liabilities at note 2(k) below. Vessels acquired in a corporate transaction accounted for as an asset acquisition are stated at the acquisition price, which consists of consideration paid, plus transaction costs, considering pro rata allocation based on vessels fair value at the acquisition date. Vessels acquired in a corporate transaction accounted for as a business combination are recorded at fair value. Vessels acquired as part of the Marathon Merger in 2008 were accounted for under ASC 805, which required that the vessels be recorded at fair value, less the negative goodwill arising as a result of the accounting for the merger.
Subsequent expenditures for major improvements and upgrades are capitalized, provided they appreciably extend the life, increase the earnings capacity or improve the efficiency or safety of the vessels.
Borrowing costs incurred during the construction
of vessels or as part of the prefinancing of the acquisition of vessels are capitalized. There was
Vessels are stated less accumulated depreciation
and impairment, if applicable. Vessels are depreciated to their estimated residual value using the
Management estimates the residual values of
the Company’s container vessels based on a scrap value cost of steel times the weight of the vessel noted in lightweight tons (LWT).
Residual values are periodically reviewed and revised to recognize changes in conditions, new regulations or other reasons. Revision of
residual values affect the depreciable amount of the vessels and affects depreciation expense in the period of the revision and future
periods. Management estimated the residual values of its vessels based on scrap rate of $
For any vessel group which is impaired, the impairment charge is recorded against the cost of the vessel and the accumulated depreciation as at the date of impairment is removed from the accounts.
The cost and related accumulated depreciation of assets retired or sold are removed from the accounts at the time of sale or retirement and any gain or loss is included in the Consolidated Statements of Income.
| F-13 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(j) Deferred charges, net
Drydocking costs are reported in the Consolidated
Balance Sheets within "Deferred charges, net", and include planned major maintenance and overhaul activities for ongoing certification.
The Company follows the deferral method of accounting for drydocking costs, whereby actual costs incurred are deferred and amortized on
a straight-line basis over the period until the next scheduled drydocking, which is generally
The amortization period reflects the estimated useful economic life of the deferred charge, which is the period between each drydocking. Costs incurred during the drydocking relating to routine repairs and maintenance are expensed. The unamortized portion of drydocking costs for vessels sold is included as part of the carrying amount of the vessel in determining the gain or (loss) on sale of the vessel.
(k) Intangible assets and liabilities – charter agreements
The Company’s intangible assets and liabilities consist of unfavorable lease terms on charter agreements acquired in assets acquisitions. When intangible assets or liabilities associated with the acquisition of a vessel are identified, they are recorded at fair value. Fair value is determined by reference to market data and the discounted amount of expected future cash flows. Where charter rates are higher than market charter rates, an intangible asset is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel and equivalent duration of charter party at the date the vessel is delivered. Where charter rates are less than market charter rates, an intangible liability is recorded, based on the difference between the acquired charter rate and the market charter rate for an equivalent vessel. The determination of the fair value of acquired assets and liabilities requires the Company to make significant assumptions and estimates of many variables including market charter rates (including duration), the level of utilization of its vessels and its weighted average cost-of capital (“WACC”). The estimated market charter rate (including duration) is considered a significant assumption. The use of different assumptions could result in a material change in the fair value of these items, which could have a material impact on the Company’s financial position and results of operations. The amortizable value of favorable and unfavorable leases is amortized over the remaining life of the relevant lease term and the amortization expense or income respectively is included under the caption “Amortization of intangible liabilities -charter agreements” in the Consolidated Statements of Income. For any vessel group which is impaired, the impairment charge is recorded against the cost of the vessel and the accumulated depreciation as at the date of impairment is removed from the accounts.
(l) Impairment of Long-lived assets
Tangible fixed assets, such as vessels, that are held and used or to be disposed of by the Company are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. In these circumstances, the Company performs step one of the impairment test by comparing the undiscounted projected net operating cash flows for each vessel group to its carrying value. A vessel group comprises the vessel, the unamortized portion of deferred drydocking related to the vessel and the related carrying value of the intangible asset or liability (if any) with respect to the time charter attached to the vessel at its purchase. If the undiscounted projected net operating cash flows of the vessel group are less than its carrying amount, management proceeds to step two of the impairment assessment by comparing the vessel group’s carrying amount to its fair value, including any applicable charter, and an impairment loss is recorded equal to the difference between the vessel group’s carrying value and fair value. Fair value is determined with the assistance from valuations obtained from third party independent ship brokers.
| F-14 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(l) Impairment of Long-lived assets (continued)
Revenue assumptions are based on contracted charter rates up to the end of the existing contract of each vessel, and thereafter, estimated time charter rates for the remaining life of the vessel. The estimated time charter rate used for non-contracted revenue days of each vessel is considered a significant assumption. Recognizing that the container shipping industry is cyclical and subject to significant volatility based on factors beyond the Company’s control, management believes that using forecast charter rates in the four years from the date of the impairment assessment and a reversion to the historical mean of time charter rates thereafter, represents a reasonable benchmark for the estimated time charter rates for the non-contracted revenue days, and takes into account the volatility and cyclicality of the market.
The Company has evaluated the impact of current economic situation on the recoverability of all its other vessel groups and has determined that there were no events or changes in circumstances which indicated that their carrying amounts may not be recoverable. Accordingly, there was no triggering event and no impairment test was performed for the year ended December 31, 2021.
Through 2020 whilst charter rates in the spot market and asset values saw improvements, taking into account the seasonal as well as cyclical nature of the container shipping industry, the recovery was not considered to have been sufficiently sustained not to undertake a review for impairment for vessel groups where the carrying value as at December 31, 2020 might not be recoverable.
As a result, step one of the impairment assessment of each of the vessel groups was performed as at December 31, 2020. As the undiscounted projected net operating cash flows of each of the vessel groups exceeded the carrying amount, step two of the impairment test was not required and there were no impairment charges as of December 31, 2020.
The assessment performed for 2019 resulted in no impairment charges.
(m) Deferred financing costs
Costs incurred in connection with obtaining long-term debt and in obtaining amendments to existing facilities are recorded as deferred financing costs and are amortized to interest expense using the effective interest method over the estimated duration of the related debt. Such costs include fees paid to the lenders or on the lenders’ behalf and associated legal and other professional fees. Debt issuance costs, other than any up-front arrangement fee for revolving credit facilities, related to a recognized debt liability are presented as a direct deduction from the carrying amount of that debt.
The Series B Preferred Shares were originally
issued in August 2014 and have been included within Equity in the Consolidated Balance Sheets since their initial issue in August 2014
and increased in 2019, 2020 and 2021 with the introduction of ATM program, and the dividends are presented as a reduction of Retained
Earnings or addition to Accumulated Deficit in the Consolidated Statements of Changes in Shareholders’ Equity as their nature is
similar to that of an equity instrument rather than a liability. Holders of these redeemable perpetual preferred shares, which may only
be redeemed at the discretion of the Company, are entitled to receive a dividend equal to
| F-15 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued)
|
(n) Preferred shares (continued)
The Series C Perpetual Convertible Preferred
Shares (the “Series C Preferred Shares”) have been included within Equity in the Consolidated Balance Sheets, from their issue
on November 15, 2018. The Series C Preferred Shares were convertible in certain circumstances to Class A common shares and they were entitled
to a dividend only should such a dividend be declared on the Class A common shares. On January 20, 2021, upon the redemption in full of
the
(o) Other comprehensive income
Other comprehensive income, which is reported in
the Consolidated Statements of Changes in Shareholders’ Equity, consists of net income and other gains and losses affecting equity
that, under U.S. GAAP, are excluded from net income. Under ASU 2011-05, an entity reporting comprehensive income in a single continuous
financial statement shall present its components in two sections, net income and other comprehensive income. For year ended December
31, 2021, the Company recorded an unrealized gain on the interest rate caps of $
(p) Revenue recognition and related expense
The Company charters out its vessels on time
charters which involves placing a vessel at a charterer’s disposal for a specified period of time during which the charterer uses
the vessel in return for the payment of a specified daily hire rate. Such charters are accounted for as operating leases and therefore
revenue is recognized on a straight-line basis as the average revenues over the rental periods of such charter agreements, as service
is performed. Cash received in excess of earned revenue is recorded as deferred revenue. If a time charter contains one or more consecutive
option periods, then subject to the options being exercisable solely by the Company, the time charter revenue will be recognized on a
straight-line basis over the total remaining life of the time charter, including any options which are more likely than not to be exercised.
If a time charter is modified, including the agreement of a direct continuation at a different rate, the time charter revenue will
be recognized on a straight-line basis over the total remaining life of the time charter from the date of modification. During
the year ended December 31, 2021, an amount of $
Revenues are recorded net of address commissions, which represent a discount provided directly to the charterer based on a fixed percentage of the agreed upon charter rate. Charter revenue received in advance which relates to the period after a balance sheet date is recorded as deferred revenue within current liabilities until the respective charter services are rendered.
Under time charter arrangements the Company, as owner, is responsible for all the operating expenses of the vessels, such as crew costs, insurance, repairs and maintenance, and such costs are expensed as incurred and are included in vessel operating expenses.
Commission paid to brokers to facilitate the agreement of a new charter are included in time charter and voyage expenses as are certain expenses related to a voyage, such as the costs of bunker fuel consumed when a vessel is off-hire or idle.
Leases: In cases of lease agreements where the Company acts as the lessee, the Company recognizes an operating lease asset and a corresponding lease liability on the Consolidated Balance Sheets. Following initial recognition and with regards to subsequent measurement the Company remeasures lease liability and right of use asset at each reporting date.
Leases where the Company acts as the lessor are classified as either operating or sales-type / direct financing leases.
| F-16 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(p) Revenue recognition and related expense (continued)
In cases of lease agreements where the Company acts as the lessor under an operating lease, the Company keeps the underlying asset on the Consolidated Balance Sheets and continues to depreciate the assets over its useful life. In cases of lease agreements where the Company acts as the lessor under a sales-type / direct financing lease, the Company derecognizes the underlying asset and records a net investment in the lease. The Company acts as a lessor under operating leases in connection with all of its charter out – bareboat-out arrangements.
In cases of sale and leaseback transactions, if the transfer of the asset to the lessor does not qualify as a sale, then the transaction constitutes a failed sale and leaseback and is accounted for as a financial liability. For a sale to have occurred, the control of the asset would need to be transferred to the lessor, and the lessor would need to obtain substantially all the benefits from the use of the asset. During 2021, the Company has entered into six agreements which qualify as failed sale and leaseback transactions as the Company is required to repurchase the vessels at the end of the lease term and the Company has accounted for the six agreements as financing transactions.
The Company elected the practical expedient which allows the Company to treat the lease and non-lease components as a single lease component for the leases where the timing and pattern of transfer for the nonlease component and the associated lease component to the lessees are the same and the lease component, if accounted for separately, would be classified as an operating lease. The combined component is therefore accounted for as an operating lease under ASC 842, as the lease components are the predominant characteristics.
(q) Foreign currency transactions
The Company’s functional currency is the U.S. dollar as substantially all revenues and a majority of expenditures are denominated in U.S. dollars. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet dates. Expenses paid in foreign currencies are recorded at the rate of exchange at the transaction date. Exchange gains and losses are included in the determination of net Income/(Loss).
The Company has awarded incentive stock units to its management and Directors as part of their compensation.
Using the graded vesting method of expensing the incentive stock unit grants, the weighted average fair value of the stock units is recognized as compensation costs in the Consolidated Statements of Income over the vesting period. The fair value of the incentive stock units for this purpose is calculated by multiplying the number of stock units by the fair value of the shares at the grant date. The Company has not factored any anticipated forfeiture into these calculations based on the limited number of participants.
(s) Income taxes
The Company and its Marshall Island subsidiaries are exempt from taxation in the Marshall Islands. The Company’s vessels are liable for tax based on the tonnage of the vessel, under the regulations applicable to the country of incorporation of the vessel owning company, which is included within vessels’ operating expenses.
The Cyprus and Hong Kong subsidiaries are also liable for income tax on any interest income earned from non-shipping activity.
The Company has
The Company recognizes uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the position.
| F-17 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(t) Dividends
Dividends are recorded in the period in which they are declared by the Company’s Board of Directors. Dividends to be paid are presented in the Consolidated Balance Sheets in the line item “Accrued Liabilities”.
Basic earnings per common share are based on income available to common shareholders divided by the weighted average number of common shares outstanding during the period, excluding unvested restricted stock units. Diluted income per common share are calculated by applying the treasury stock method. All unvested restricted stock units that have a dilutive effect are included in the calculation. The basic and diluted earnings per share for the period are presented for each category of participating common shares under the two-class method.
(v) Risks Associated with Concentration
The Company is exposed to certain concentration risks that may adversely affect the Company’s financial position in the near term:
| (i) | The Company derives its revenue from liner companies which are exposed to the cyclicality of the container shipping industry. | |
| (ii) | There is a minimum concentration of credit risk with respect to cash and cash equivalents at December 31, 2021, to the extent that substantially all of the amounts are deposited with
|
(w) Segment Reporting
The Company reports financial information and
evaluates its operations by charter revenues and not by the length of ship employment for its customers. The Company does not use discrete
financial information to evaluate operating results for each type of charter. Management does not identify expenses, profitability or
other financial information by charter type. As a result, management reviews operating results solely by revenue per day and operating
results of the fleet and thus the Company has determined that it operates under
(x) Fair Value Measurement and Financial Instruments
Financial instruments carried on the Consolidated Balance Sheets include cash and cash equivalents, time deposits, restricted cash, trade receivables and payables, other receivables and other liabilities and long-term debt. The particular recognition methods applicable to each class of financial instrument are disclosed in the applicable significant policy description of each item or included below as applicable.
Fair value measurement: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
| F-18 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(x) Fair Value Measurement and Financial Instruments (continued)
During 2020, two of the Company’s vessel
groups with a total aggregate carrying amount of $
In
December 2021, the Company purchased interest rate caps with an aggregate notional amount of $
Financial Risk Management: The Company activities expose it to a variety of financial risks including fluctuations in, time charter rates, credit and interest rates risk. Risk management is carried out under policies approved by executive management. Guidelines are established for overall risk management, as well as specific areas of operations.
Credit risk: The Company closely monitors its credit exposure to customers and counter-parties for credit risk. The Company has entered into commercial management agreement with Conchart Commercial Inc. (“Conchart”), pursuant to which Conchart has agreed to provide commercial management services to the Company, including the negotiation, on behalf of the Company, of vessel employment contracts (see note 14). Conchart has policies in place to ensure that it trades with customers and counterparties with an appropriate credit history.
Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable, cash and cash equivalents and time deposits. The Company does not believe its exposure to credit risk is likely to have a material adverse effect on its financial position, results of operations or cash flows.
Liquidity Risk: Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Company monitors cash balances appropriately to meet working capital needs.
Foreign Exchange Risk: Foreign currency transactions are translated into the measurement currency rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated Statements of Income.
(y) Derivative instruments
The Company is exposed to interest rate risk relating
to its variable rate borrowings. In December 2021, the Company purchased interest rate caps with an aggregate notional amount of $
| F-19 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 2. | Summary of Significant Accounting Policies (continued) |
(y) Derivative instruments (continued)
At the inception of the transaction, the Company documents the relationship between hedging instruments and hedged items, as well as its risk management objective and the strategy for undertaking various hedging transactions. The Company also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
This Transaction is designated as a cash flow hedge, and under ASU 2017-12, cash flow hedge accounting allows all changes in fair value to be recorded through Other Comprehensive Income once hedge effectiveness has been established. Under ASC 815-30-35-38, amounts in accumulated other comprehensive income shall be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings (i.e., each quarter) and shall be presented in the same income statement line item as the earnings effect of the hedged item in accordance with paragraph 815-20-45-1A.
The Company receives payments on the interest
rate caps for any period that the one-month USD LIBOR rate is beyond the strike rate, which is
There were no interest rate caps in place before 2021. The amounts included in accumulated other comprehensive income (see Note 9) will be reclassified to interest expense should the hedge no longer be considered effective. No amount of ineffectiveness was included in net income for the year ended December 31, 2021. The Company will continue to assess the effectiveness of the hedge on an ongoing basis.
(z) Recently issued accounting standards
The Company does not believe that any recently issued, but not yet effective, accounting pronouncements would have a material impact on its consolidated financial statements.
| F-20 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
3. Restricted Cash
Restricted cash as of December 31, 2021 and 2020 consisted of the following:
Restricted Cash (Table)
December 31, 2021 |
December 31, 2020 | ||||
| Retention accounts | $ | $ | |||
| Restricted bank deposits/Drydock reserves | |||||
| Cash collateral | |||||
| Total Current Restricted Cash | $ | $ | |||
| Cash collateral(*) | $ | $ | |||
| Guarantee deposits | |||||
| Restricted bank deposits/Drydock reserves | |||||
| Cash in custody | |||||
| Total Non - Current Restricted Cash | |||||
| Total Current and Non - Current Restricted Cash | $ | $ | |||
| (*) |
4. Vessels in Operation
Vessels in Operation as of December 31, 2021 and 2020 consisted of the following:
Vessels in Operation - Schedule of Vessels in Operation (Table)
|
Vessel Gross Cost, as adjusted for impairment charges |
Accumulated Depreciation |
Net Book Value | ||||||
| As of January 1, 2020 | $ | $ | ( |
$ | ||||
| Additions | — | |||||||
| Disposals | ( |
— | ( | |||||
| Depreciation | — | ( |
( | |||||
| Impairment loss | ( |
( | ||||||
| As of December 31, 2020 | $ | $ | ( |
$ | ||||
| Additions | — | |||||||
| Disposals | ( |
( | ||||||
| Depreciation | — | ( |
( | |||||
| As of December 31, 2021 | $ | $ | ( |
$ | ||||
2021 Vessels acquisitions
In September and October 2021, the Company took delivery of the Four Vessels as per below:
Vessels in Operation - Vessels Acquisitions
| Name | Capacity in TEUs | Year Built | Purchase Price | Delivery date |
| GSL Tripoli | ||||
| GSL Tinos | ||||
| GSL Syros | ||||
| GSL Kithira |
The charters of the Four vessels resulted in an intangible liability of $17,100 that was recognized and will be amortized over the remaining useful life of the charters.
| F-21 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 4. | Vessels in Operation (continued) |
2021 Vessels acquisitions (continued)
In July 2021, the Company took delivery of the Twelve Vessels as per below:
| Name | Capacity in TEUs | Year Built | Purchase Price | Delivery Date |
| GSL Susan | ||||
| GSL Rossi | ||||
| GSL Alice | ||||
| GSL Melina | ||||
| GSL Eleftheria | ||||
| GSL Mercer | ||||
| GSL Lalo | ||||
| Matson Molokai | ||||
| GSL Elizabeth | ||||
| tbr GSL Chloe | ||||
| GSL Maren | ||||
| GSL Amstel |
The charters of the Twelve vessels resulted in an intangible liability of $76,193 that was recognized and will be amortized over the remaining useful life of the charters.
In April, May and July 2021, the Company took delivery of the Seven Vessels as per below:
| Name | Capacity in TEUs | Year Built | Purchase Price | Delivery Date |
| GSL MYNY | ||||
| GSL Melita | ||||
| GSL Violetta(*) | ||||
| GSL Maria(*) | ||||
| GSL Arcadia | ||||
| GSL Dorothea | ||||
| GSL Tegea |
| (*) |
2021 Sale of Vessel
On June 30, 2021, the Company sold La Tour for net
proceeds of $
2020 Vessels acquisitions
On
On
| F-22 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 4. | Vessels in Operation (continued) |
2020 Sale of Vessels
On July 20, 2020, the Company sold Utrillo for net
proceeds of $
On July 3, 2020, the Company sold GSL Matisse for net
proceeds of $
Impairment
The Company has evaluated the impact of current economic situation on the recoverability of all its other vessel groups and has determined that there were no events or changes in circumstances which indicated that their carrying amounts may not be recoverable. Accordingly, there was no triggering event and no impairment test was performed during the year ended December 31, 2021.
During the three months ended March 31, 2020, the Company
determined that the vessels Utrillo and GSL Matisse should be divested. As at March 31, 2020, the vessels were not immediately available
for sale and therefore did not qualify as “assets held for sale”. As of March 31, 2020, the Company had an expectation that
the vessels would each be sold before the end of their estimated useful life, and as a result an impairment test of each of the specific
asset groups was performed, recognizing an impairment loss of $
Whilst charter rates in the spot market and asset values saw overall improvements through 2020, taking into account the seasonal as well as cyclical nature of the container shipping industry, the recovery was not considered to have been sufficiently sustained not to undertake a review for impairment for vessel groups where the carrying value as at December 31, 2020 might not be recoverable. As a result, step one of the impairment assessment of each of the vessel groups was performed, by comparing the undiscounted projected net operating cash flows for each vessel group to the carrying value of the vessel group. The Company’s assessment performed as at December 31, 2020 resulted in no additional impairment charges.
The total impairment loss recognized for the years
ended December 31, 2021, 2020 and 2019 amounted to $nil, $
Collateral
As of December 31, 2021, vessels were pledged as collateral under the Company’s loan facilities. No vessels were unencumbered as of December 31, 2021.
Advances for vessel acquisitions and other additions
As of December 31, 2021, and December 31, 2020, there
were no advances for vessel acquisitions, as all vessels had been delivered as at these dates. As of December 31, 2021, and December 31,
2020, the Company had other vessel additions mainly for ballast water treatments totaling $
| F-23 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
5. Deferred charges, net
Deferred charges, net as of December 31, 2021 and 2020 consisted of the following:
Deferred charges, net (Table)
|
Dry - docking Costs | ||
| As of January 1, 2020 | $ | |
| Additions | ||
| Amortization | ( | |
| Write – off | ( | |
| As of December 31, 2020 | $ | |
| Additions | ||
| Amortization | ( | |
| Write – off | ( | |
| As of December 31, 2021 | $ | |
The Company follows the deferral method of accounting
for dry-docking costs in accordance with accounting for planned major maintenance activities, whereby actual costs incurred are deferred
and amortized on a straight-line basis over the period until the next scheduled dry-docking, which is generally
6. Intangible Liabilities/Assets – Charter Agreements
Intangible Liabilities – Charter Agreements as of December 31, 2021 and 2020 consisted of the following:
Intangible Liabilities/ Assets - Charter Agreements - Schedule of Intangible Liabilities (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Opening balance | $ | $ | |||
| Additions | |||||
| Amortization | ( |
( | |||
| Total | $ | $ | |||
Intangible liabilities are related to (i) acquisition of the Seven, the Twelve and the Four Vessels, and (ii) management’s estimate of the fair value of below-market charters on August 14, 2008, the date of the Marathon Merger (see note 1). These intangible liabilities are being amortized over the remaining life of the relevant lease terms and the amortization income is included under the caption “Amortization of intangible liabilities-charter agreements” in the Consolidated Statements of Income.
Amortization income of intangible liabilities-charter
agreements for each of the years ended December 31, 2021 and 2020 was $
Intangible Assets – Charter Agreements as of December 31, 2021 and 2020 consisted of the following:
Intangible Liabilities/ Assets – Charter Agreements - Schedule of Intangible Assets (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Opening balance | $ | $ | |||
| Amortization | ( | ||||
| Total | $ | $ | |||
| F-24 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
6. Intangible Liabilities/Assets – Charter Agreements (continued)
Intangible assets were derived from the management’s estimate of the fair value of above-market charters. These intangible assets, were being amortized over the remaining term of the relevant charter, giving rise to a reduction in time charter revenue. The unamortized balance of the intangible assets recognized following the Poseidon Transaction (Note 1) as of December 31, 2019, was fully amortized during the second quarter of 2020.
The aggregate amortization of the intangible liabilities in each of the 12-month periods up to December 31, 2025 is estimated to be as follows:
Intangible Liabilities/ Assets - Charter Agreements - Aggregate Amortization of Intangible Liabilities (Table)
|
Amount | ||
| December 31, 2022 | $ | |
| December 31, 2023 | ||
| December 31, 2024 | ||
| December 31, 2025 | ||
| $ | ||
The
weighted average useful lives are
7. Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets as at December 31, 2021 and December 31, 2020 consisted of the following:
Prepaid Expenses and Other Current Assets (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Insurance and other claims | $ | $ | |||
| Advances to suppliers and other assets | |||||
| Prepaid insurances | |||||
| Other (1) | |||||
| Total | $ | $ | |||
| (1) |
8. Inventories
Inventories as at December 31, 2021 and December 31, 2020 consisted of the following:
Inventories (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Bunkers | $ | $ | |||
| Lubricants | |||||
| Stores | |||||
| Victualling | |||||
| Total | $ | $ | |||
| F-25 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
9. Derivative Asset
In December 2021, the Company purchased interest
rate caps with an aggregate notional amount of $
Derivative Asset - Schedule of Derivative Assets
December 31, 2021 |
December 31, 2020 | ||||
| Opening balance | $ | $ | |||
| Interest rate cap premium | |||||
| Unrealized gain on interest rate cap | |||||
| Closing balance | $ | $ | |||
| Less: Current portion of derivative asset | ( |
||||
| Non-current portion of derivative asset | $ | $ | |||
The amounts included in accumulated other comprehensive income will be reclassified to interest expense should the hedge no longer be considered effective. No amount of ineffectiveness was included in net income for the year ended December 31, 2021. The Company will continue to assess the effectiveness of the hedge on an ongoing basis.
10. Accounts Payable
Accounts payable as of December 31, 2021 and 2020 consisted of the following:
Accounts Payable (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Suppliers, repairers | $ | $ | |||
| Insurers, agents and brokers | |||||
| Payables to charterers | |||||
| Other creditors | |||||
| Total | $ | $ | |||
11. Accrued Liabilities
Accrued liabilities as of December 31, 2021 and 2020 consisted of the following:
Accrued Liabilities (Table)
|
December 31, 2021 |
December 31, 2020 | ||||
| Accrued expenses | $ | $ | |||
| Accrued interest | |||||
| Total | $ | $ | |||
| F-26 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
12. Long-Term Debt
Long-term debt as of December 31, 2021 and 2020 consisted of the following:
Long-Term Debt - Schedule of Long - Term Debt (Table)
| Facilities |
December 31, 2021 |
December 31, 2020 | |||
| Sinopac Credit Facility (a) | $ | $ | |||
| HCOB, CACIB, ESUN, CTBC, Taishin Credit Facility (b) | |||||
| Deutsche Credit Facility (c) | |||||
| HCOB Credit Facility (d) | |||||
| CACIB, Bank Sinopac, CTBC Credit Facility (e) | |||||
| New Hayfin Credit Facility (f) | |||||
| Chailease Credit Facility (g) | |||||
| 2024 Notes (h) | |||||
| Syndicated Senior Secured Credit Facility (CACIB, ABN, First-Citizens & Trust Company, Siemens, CTBC, Bank Sinopac, Palatine) (i) | |||||
| Blue Ocean Junior Credit Facility (i, j) | |||||
| Hellenic Bank Credit Facility (k) | |||||
| Deutsche, First-Citizens & Trust Company, HCOB, Entrust, Blue Ocean Credit Facility (l) | |||||
| Hayfin Credit Facility (m) | |||||
| $ | 907,241 | $ | 548,503 | ||
| 2022 Notes (n) | |||||
| Less redemptions and repurchases (n) | ( |
( | |||
| 2022 Notes (n) | $ | $ | |||
| Total credit facilities | $ | $ | |||
| Sale and Leaseback Agreement CMBFL – $120,000 (o) | |||||
| Sale and Leaseback Agreement CMBFL – $54,000 (p) | |||||
| Sale and Leaseback Agreement – Neptune $14,735 (q) | |||||
| Total Sale and Leaseback Agreements | $ | $ | |||
| Total borrowings | $ | $ | |||
| Less: Current portion of 2022 Notes (n) | ( | ||||
| Less: Current portion of long-term debt | ( |
( | |||
| Less: Current portion of Sale and Leaseback Agreements (o,p,q) | ( |
||||
| Less: Original issue discount of 2022 Notes (n) | ( | ||||
| Plus/(Less): Original issue premium/(discount) of 2024 Notes (h) | ( | ||||
| Less: Deferred financing costs (s) | ( |
( | |||
| Non-current portion of Long-Term Debt | $ | $ | |||
| F-27 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| a) | $12.0 Million Sinopac Capital International Credit Facility |
On
The new Facility is repayable in
This facility bears interest at
As of December 31, 2021, the outstanding
balance of this facility was $
| b) | $140.0 Million HCOB, CACIB, ESUN, CTBC, Taishin Credit Facility |
On
The Facility is repayable in 6 equal consecutive
This facility bears interest at
As of December 31, 2021, the outstanding
balance of this facility was $
| c) | $51.7 Million Deutsche Bank AG Credit Facility |
On
The new Facility is repayable in
This facility bears interest at
As of December 31, 2021, the outstanding
balance of this facility was $
| d) | $64.2 Million Hamburg Commercial Bank AG Credit Facility |
On
Tranche A, E and F amounting to $
Each Tranche of the Facility is repayable in
This facility bears interest at
As of December 31, 2021, the outstanding balance
of this facility was $
| F-28 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| e) | $51.7 Million CACIB, Bank Sinopac, CTBC Credit Facility |
On
The Lenders are Credit Agricole Corporate and Investment Bank (“CACIB”), Bank Sinopac Co. Ltd. (“Bank Sinopac”) and CTBC Bank Co. Ltd. (“CTBC”).
The Facility is repayable in
This facility bears interest at
As of December 31, 2021, the outstanding balance
of this facility was $
| f) | $236.2 Million Senior secured loan facility with Hayfin Capital Management, LLP |
On
As of December 31, 2021, the outstanding
balance of this facility was $
| g) | $9.0 Million Chailease Credit Facility |
On
The Facility is repayable in 36 consecutive
This facility bears interest at
As of December 31, 2021, the outstanding
balance of this facility was $
| h) | 8.00% Senior Unsecured Notes due 2024 |
On
The Company has the option to redeem the 2024 Notes
for cash, in whole or in part, at any time (i) on or after December 31, 2021 and prior to December 31, 2022, at a price equal to
| F-29 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| h) | 8.00% Senior Unsecured Notes due 2024 (continued) |
On November 27, 2019, the Company entered into an “At Market Issuance Sales Agreement” with B. Riley FBR, Inc. (the “Agent”) under which and in accordance with the Company’s instructions, the Agent may offer and sell from time to time newly issued 2024 Notes.
As of December 31, 2021, the outstanding aggregate
principal amount of the 2024 notes was $
| i) | $268.0 Million Syndicated Senior Secured Credit Facility (CACIB, ABN, First-Citizens & Trust Company, Siemens, CTBC, Bank Sinopac, Palatine) |
On
The Senior Syndicated Secured Credit Facility
was agreed to be borrowed in
Tranche A amounting to $
Tranche B amounts to $
The interest rate is
As of December 31, 2021, the outstanding balance
of this facility was $
In January 2022, the Company also agreed
a new senior secured debt facility to
| j) | $38.5 Million Blue Ocean Junior Credit Facility |
On
The Company fully drew down the facility on September
23, 2019 and it is scheduled to be repaid in a single
During the year ended December 31, 2021, the Company
using a portion of the net proceeds from the at-the-market issuance programs prepaid an amount of $
On January 19, 2022, the Company using a portion
of the net proceeds from the new facility agreement entered on December 31, 2021 fully prepaid the amount $
| F-30 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| k) | $59.0 Million Hellenic Bank Credit Facility |
On
An initial tranche of $
A second tranche of $
The third tranche of $
On
Both tranches were drawn on December 10, 2019
and are each repayable in
This facility bears interest at
As of December 31, 2021, the outstanding balance
of this facility was $
| l) | $180.5 Million Deutsche, First-Citizens & Trust Company, HCOB, Entrust, Blue Ocean Credit Facility |
In connection with the Poseidon Transaction,
the Company assumed debt from the three vessel owning companies of UASC Al Khor, Maira XL and Anthea Y on the date of completion of the
transaction of $
On December 31, 2018, the Company entered
a deed of amendment and restatement with the bank. Based on this restatement there was a re-tranche of the existing facility such that
it was split into a senior facility in an amount of $
Senior Facility
The Senior Facility was comprised of
The Senior Facility bore interest at
On April 13, 2021, and May 6, 2021, the Company entered
into two new secured credit facilities amounting to $
As of December 31, 2021, the outstanding balance of the Senior Facility was fully repaid.
| F-31 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| l) | $180.5 Million Deutsche, First-Citizens & Trust Company, HCOB, Entrust, Blue Ocean Credit Facility (continued) |
Junior Facility
The Junior Facility was comprised of
The Junior Facility bore interest at
Following the refinancing that took place in April and May 2021, as described above, as of December 31, 2021, the outstanding balance of the Junior Facility was fully repaid.
| m) | $65.0 Million Hayfin Credit Facility |
On
On August 27, 2021, the Company entered into
a new secured credit facility amounting to $
| n) | 9.875% First Priority Secured Notes due 2022 |
On
On February 10, 2020, the Company completed an optional
redemption of $
On January 20, 2021, the Company optionally redeemed,
in full, $
| F-32 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| o) | $120.0 Million Sale and Leaseback agreements – CMBFL Four Vessels |
On
Each sale and leaseback agreement will be
repayable in
The sale and leaseback agreements for the
three vessels mature in September 2027 and for the fourth vessel in October 2027 and bear interest at
As of December 31, 2021, the outstanding
balance of these sale and lease back agreements was $
| p) | $54.0 Million Sale and Leaseback agreement – CMBFL |
On
The sale and leaseback agreement will be repayable
in
The sale and leaseback agreement matures
in
In May 2021, on the actual delivery date
of the vessel, the Company drew $
As of December 31, 2021, the outstanding balance
of this sale and leaseback agreement was $
| q) | $14.7 Million Sale and Leaseback agreement – Neptune Maritime Leasing |
On
The sale and leaseback agreement will be repayable
in
The sale and leaseback agreement matures
in
As of December 31, 2021, the outstanding
balance of this sale and leaseback agreement was $
| F-33 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 12. | Long-Term Debt (continued) |
| r) | Repayment Schedule |
Maturities of long-term debt for the years subsequent to December 31, 2021 are as follows:
Long-Term Debt - Repayment Schedule (Table)
| Payment due by year ended |
Amount | ||
| December 31, 2022 | |||
| December 31, 2023 | |||
| December 31, 2024 | |||
| December 31, 2025 | |||
| December 31, 2026 | |||
| December 31, 2027 and thereafter | |||
| $ | |||
| s) | Deferred Financing Costs |
|
December 31, 2021 |
December 31, 2020 | ||||
| Opening balance | $ | $ | |||
| Expenditure in the period | |||||
| Amortization included within interest expense | ( |
( | |||
| Closing balance | $ | $ | |||
During 2021, total costs amounting $
During 2020, total costs amounting $
(t) Debt covenants-securities
| F-34 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
13. Time charter revenue
Operating revenue from significant customers (constituting more than 10% of total time charter revenue) was as follows:
Time charter revenue - Operating revenue (Table)
| Year Ended December 31, | |||||
| Charterer | 2021 | 2020 | 2019 | ||
| CMA CGM | |||||
| COSCO | |||||
| MAERSK | |||||
| MSC | |||||
14. Related Party Transactions
CMA CGM is presented as a related party due
to the fact that as of December 31, 2021 and December 31, 2020, it was a shareholder, owning Class A common shares representing
Time Charter Agreements
A number of the Company’s time charter
arrangements are with CMA CGM, representing
Ship Management Agreements
Technomar Shipping Inc. (“Technomar”)
is presented as a related party, as the Company’s Executive Chairman is a significant shareholder. The Company has currently a
number of ship management agreements with Technomar under which the ship manager is responsible for all day-to-day ship management, including
crewing, purchasing stores, lubricating oils and spare parts, paying wages, pensions and insurance for the crew, and organizing other
ship operating necessities, including the arrangement and management of dry-docking. As of December 31, 2021, and 2020, Technomar provides
all day-to-day technical ship management services for all but Twelve Vessels which were delivered in July 2021. Another third party provided
such management on the 12 ships, from the time of their delivery in July 2021 upon change of management for six of them in September
2021. During September 2021, management for six out of the 12 vessels was transferred to Technomar as well, and the remaining six vessels
were continued to be outsourced for day-to-day technical management to a third party manager for the provision of crew, lubricating oils
and routine maintenance. The management fees charged to the Company by third party managers for the year ended December 31, 2021, amounted
to $
The management fees charged to the Company
by Technomar and CMA Ships for the year ended December 31, 2021, amounted to $
| F-35 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 14. | Related Party Transactions (continued) |
Ship Management Agreements (continued)
Conchart Commercial Inc. (“Conchart”) provides commercial management services to the Company and is presented as a related party, as the Company’s Executive Chairman is the sole beneficial owner. Under the management agreements, Conchart, is responsible for (i) marketing of the Company’s vessels, (ii) seeking and negotiating employment of the Company’s vessels, (iii) advise the Company on market developments, developments of new rules and regulations, (iv) assisting in calculation of hires, freights, demurrage and/or dispatch monies and collection any sums related to the operation of vessels, (v) communicating with agents, and (vi) negotiating sale and purchase transactions. For the 19 vessels that the Company acquired as a result of the Poseidon Transaction, excluding the Argos, the agreements were effective from the date of the completion of the Poseidon Transaction; for the 19 vessels that were owned by the Company prior to the consummation of the Poseidon Transaction till refinance of 2022 Notes which took place on January 2021, an EBSA agreement was in place that was terminated and replaced with commercial management agreements also same agreements applied to all vessels delivered up to December 31, 2021; for all new acquired vessels during 2019 and going forward, the agreements were effective upon acquisition.
The fees charged to the Company by Conchart
for the year ended December 31, 2021 amounted to $
Any outstanding fees due to Conchart are presented
in the Consolidated Balance Sheets under "Due to related parties" totaling to $
15. Commitments and Contingencies
Charter Hire Receivable
The Company has entered time charters for its
vessels. The charter hire is fixed for the duration of the charter. The minimum contracted future charter hire receivable, net of address
commissions, not allowing for any unscheduled off-hire, assuming expiry at earliest possible dates and assuming options callable by the
Company included in the charters are not exercised, for the
Commitments and Contingencies - Charter Hire Receivable (Table)
Amount | ||
| December 31, 2022 | $ | |
| December 31, 2023 | ||
| December 31, 2024 | ||
| December 31, 2025 | ||
| Thereafter | ||
| Total minimum lease revenue, net of address commissions | $ |
| F-36 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
16. Share Capital
Common shares
As of December 31, 2021, the Company has
On March 25, 2019, the Company effected a
one-for-
Restricted stock units or incentive stock units have been granted periodically to the Directors and management, under the Company’s Equity Incentive Plans, as part of their compensation arrangements (see note 17). In April 2020, shares were issued under grants made under the Equity Incentive Plan. During 2021, Class A common shares were issued under the 2019 Plan.
On January 11, 2021, the Board of Directors approved the initiation of a quarterly cash dividend of $per Class A Common Share, with effect from the first quarter of 2021.
On January 20, 2021, upon the redemption in full of the 2022 Notes, KEP VI (Newco Marine) Ltd. and KIA VIII (Newco Marine) Ltd. (together, “Kelso”), both affiliates of Kelso & Company, a U.S. private equity firm, exercised their right to convert an aggregate of Series C Perpetual Convertible Preferred Shares, representing all such shares outstanding, into Class A common shares of the Company, resulting in issuance of an aggregate of Class A common shares to Kelso.
On January 26, 2021, the Company completed its underwritten
public offering of Class A common shares, at a public offering price of $per share, for gross proceeds to the Company of approximately $
On April 13, 2021, Kelso and Maas Capital Investments B.V. sold an aggregate of Class A common shares which they held in an underwritten public offering at $ per share (including 675,000 Class A common shares that were sold pursuant to the underwriters’ exercise, in full, of their option to purchase additional shares). The Company did not receive any proceeds from this sale of Class A Common Shares.
On May 10, 2021, the Company declared a dividend
of $per Class A common share from the earnings of the first quarter 2021, paid on June 3 to common shareholders of record as of
On August 5, 2021, the Company declared a
dividend of $
per Class A common share from the earnings of the second quarter 2021, paid on September
3 to common shareholders of record as of
| F-37 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 16. | Share Capital (continued) |
Common shares (continued)
On November 2, 2021, the Company declared
a dividend of $per Class A common share from the earnings of the third quarter 2021 paid on December 2 to common shareholders of record as of
Preferred shares
On December 10, 2019, the Company entered into
At Market Issuance Sales Agreement with B. Riley FBR under which the Company may, from time to time, issue additional depositary shares,
each of which represents 1/100th of one share of the Company’s Series B Preferred Shares (the “Depositary Share ATM Program”).
Pursuant to the Depositary Share ATM Program, in 2019, the Company issued depositary shares (representing an interest in Series
B Preferred Shares) for net proceeds of $
These shares are classified as Equity in the Consolidated Balance Sheets. The dividends payable on the Series B Preferred Shares are presented as a reduction of Retained Earnings in the Consolidated Statements of Changes in Shareholders’ Equity, when and if declared by the Board of Directors. An initial dividend was declared on September 22, 2014 for the third quarter 2014. Subsequent dividends have been declared for all quarters.
On February 4, 2019, the 2019 Plan was adopted. The 2019 Plan is administered by the Compensation Committee of the Board. The maximum aggregate number of Class A common shares that may be delivered pursuant to awards granted under the 2019 Plan during its -year term is . The maximum number of Class A common shares with respect to which awards may be granted to any non-employee director in any calendar year is shares or $.
In July 2019, the Compensation Committee of the Board of Directors approved stock-based awards to senior management under the 2019 Plan. In 2021, the Board of Directors approved additional awards of of Class A common shares under the 2019 Omnibus Incentive Plan (the “2019 Plan”) resulting in a total amount of awards totaling up to shares. In July 2021, the Board of Directors approved the issuance of shares to one member of senior management as a special bonus.
The shares of incentive stock may be issued pursuant to the awards, in tranches. The first tranche was to vest conditioned only on continued service over the three-year period which commenced January 1, 2019. Tranches two, three and four would vest when the Company’s stock price exceeded $, $and $, respectively, over a -day period. The $8.00 threshold was achieved in January 2020 and the $11.00 threshold was achieved in January 2021 and the $14.00 threshold was achieved in March 2021. Accordingly, incentive shares vested in the year ended December 31, 2019, incentive shares vested in the year ended December 31, 2020 and incentive shares vested in the year ended December 31, 2021. Of the total of incentive shares which vested up to December 31, 2020, were settled and issued as Class A common shares in April 2020. A further Class A common shares were settled and issued during the year ended December 31, 2021. A total of incentive shares have vested as at December 31, 2021. As of December 31, 2021, Class A common shares were issued under the 2019 Plan.
| F-38 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 17. | Share-Based Compensation (continued) |
On September 29, 2021, the Compensation Committee
and the Board of Directors approved an increase in the aggregate number of Class A common shares available for issuance as awards under
the Plan of and approved new awards to senior management, totaling shares of incentive stock, in tranches with a grant date October 1, 2021. The first tranche, representing 55% of the total, is to vest quarterly conditioned
only on continued service over the four-year period which commenced
Share based awards since January 1, 2020, are summarized as follows:
| Restricted Stock Units | ||||||||
| Number of Units | ||||||||
| Number |
Weighted Average Fair Value on Grant Date |
Actual Fair Value on Vesting Date | ||||||
| Unvested as at January 1, 2020 | $ | n/a | ||||||
| Vested in 2020 | — | |||||||
| Unvested as at December 31, 2020 | $ | n/a | ||||||
| Granted in March 2021 | n/a | |||||||
| Granted in July 2021 | n/a | |||||||
| Granted in October 2021 | n/a | |||||||
| Vested in year ended December 31, 2021 | n/a | |||||||
| Unvested as at December 31, 2021 | $ | n/a | ||||||
Using the graded vesting method of expensing the incentive shares grants, the weighted average fair value of the stock units is recognized as compensation costs in the Consolidated Statements of Income over the vesting period. The fair value of the incentive share grants for this purpose is calculated by multiplying the number of stock units by the fair value of the shares at the grant date. The Company has not factored any anticipated forfeiture into these calculations based on the limited number of participants.
For the year ended December 31, 2021 and 2020, the Company recognized a total of $ and $, respectively, in respect of stock-based compensation.
Under the two-class method, net income, if any, is first reduced by the amount of dividends declared in respect of common shares for the current period, if any, and the remaining earnings are allocated to common shares and participating securities to the extent that each security can share the earnings assuming all earnings for the period are distributed. The net income allocated to Class A and Series C shares was based on an as converted basis utilizing the two-class method.
Earnings are only allocated to participating securities in a period of net income if, based on the contractual terms, the relevant common shareholders have an obligation to participate in such earnings. As a result, earnings are only be allocated to the Class A common shareholders and Series C preferred shareholders.
At December 31, 2021, there were shares of incentive share grants unvested as part of senior management’s and non-executive directors incentive awards approved on September 29, 2021. At December 31, 2020, there were shares of incentive share grants unvested as part of management’s equity incentive awards.
| F-39 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
| 18. | Earnings per Share (continued) |
| Numerator: | December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||
| Net income attributable to common shareholders | $ | $ | $ | | ||||
| Undistributed income attributable to Series C participating preferred shares |
( |
( | ||||||
| Net income available to common shareholders, basic and diluted | $ |
|
$ |
|
$ |
| ||
| Net income available to: | ||||||||
| Class A, basic and diluted | $ | $ | $ | |||||
| Denominator: | ||||||||
| Class A Common shares | ||||||||
| Basic weighted average number of common shares outstanding | ||||||||
| Plus weighted average number of RSUs with service conditions | ||||||||
| Common share and common share equivalents, dilutive | ||||||||
| Basic earnings per share: | ||||||||
| Class A | ||||||||
| Diluted earnings per share: | ||||||||
| Class A | ||||||||
| Series C Preferred Shares-basic and diluted earnings per share: | ||||||||
| Undistributed income attributable to Series C participating preferred shares | $ | $ |
|
$ |
| |||
| Basic weighted average number of Series C Preferred shares outstanding, as converted |
|
| ||||||
| Plus weighted average number of RSUs with service conditions | ||||||||
| Dilutive weighted average number of Series C Preferred shares outstanding, as converted | ||||||||
| Basic earnings per share | ||||||||
| Diluted earnings per share |
| F-40 |
Global Ship Lease, Inc.
Notes to the Consolidated Financial Statements (continued)
(Expressed in thousands of U.S. dollars)
19. Subsequent events
The Company declared a dividend of $ per
Class A common share for the fourth quarter of 2021 to be paid on
On November 22, 2021, the Board of Directors announced its intention to increase the quarterly dividend to be paid to common shareholders by 50% to $ per share, with effect from the first quarter of 2022.
The Company agreed a new senior secured debt
facility to refinance its outstanding Syndicated Senior Secured Credit Facility, which extended the maturity date from September
2024 to December 2026, amend certain covenants in the Company’s favor, and release three vessels from the facility’s
collateral basket (the “Unencumbered Vessels”), at an unchanged rate of LIBOR + 3.00%. The Unencumbered Vessels were subsequently
used as collateral for a new $
In
On March 2, 2022, we announced that our Board
of Directors authorized share repurchases in the amount of up to $
On March 4, 2022, the Company provide a
notice of partial redemption of its 2024 Notes to the trustee. The Company has elected to effect a redemption of $