Global Ship Lease – Focusing On Shareholder Returns – Shielded From Short Term Market Volatility

Capital Link President Nicolas Bornozis hosted an interview on August 8, 2023 with members of the senior management team of Global Ship Lease GSL, Mr. Ian Webber, Chief Executive Officer, Mr. Thomas Lister, Chief Commercial Officer & Head of ESG, and Mr. Tassos Psaropoulos, Chief Financial Officer. The interview, which is part of Capital Link’s “Trending News Podcast Series,” touched upon the company’s recently announced Q2 2023 results, with the main focus on GSL’s development, strategy, and the container shipping sector outlook.

Interview Highlights

• GSL’s risk-averse strategy of securing long-term charters insulates it from short term market volatility and allows for stable, predictable cash flow.
• Sustainable capital allocation policy—balancing company development with shareholder rewards including opportunistic share buybacks and sustainable quarterly dividend.
• Measured approach to vessel acquisitions, investing in second-hand ships rather than new builds given the uncertainty on the ultimate green fuels and ship designs.
• Small and mid-size container shipping sector has favorable supply and demand fundamentals compared to larger vessels.
• GSL is poised to benefit from the emerging reefer cargo segment.

GSL Shielded From Short Term Market Volatility Through Strong Fixed Rate Charter Cover

To mitigate short term market volatility, GSL opts for multi-year fixed rate time charters, a strategy that creates cash flow stability and predictability. As a result of this strategy, despite macroeconomic concerns that have caused uncertainty in the container sector, GSL was able to achieve strong earnings during Q2 2023—its revenues totaled $162.1 million, while its Net Income and EBITDA were $75.5 million and $108.2 million, respectively and continued with its quarterly dividend and share buy-back program.

GSL’s Chief Executive Officer, Mr. Ian Webber, stressed the company’s strategy of opting for medium to longer-term fixed rate charters given the stability they provide in such a cyclical market as key to GSL’s strength. Securing such charters for its fleet of 68 ships insulates the company from short term market volatility, while also allowing GSL to have reliable cash flows.

Describing the company’s approach as “risk averse,” Mr. Webber highlighted GSL’s significant contract cover of $2 billion for the next 2.3 years. Nearly all of the available days for 2023, and 80% of those for 2024, are covered, “which allows us to sleep at night,” Mr. Webber said. The cash flow produced from these contracts covers not only operating costs, but also for debt service, the quarterly dividend, some share buybacks, and routine capex maintenance of the fleet well into 2024 and beyond.

Quarterly Dividend & Share Buy Back Key Components of Capital Allocation Strategy

Maintaining “a robust and prudent” balance sheet is a cornerstone of the company, its CEO stressed, highlighting the GSL’s strong earnings and low financial leverage. Mr. Psaropoulos, CFO pointed out that at the end of Q2 2023, Gross Debt was reduced to $925.3 million, down from $1,125.7 million from Q2 2022.

Following a “dynamic and disciplined” philosophy toward capital allocation, GSL continued both its share buyback program and its quarterly dividend of $0.375 per share. Mr. Tassos Psaropoulos, CFO, stressed that the company constantly assesses and reassesses its dividend to make sure that it is sustainable and beneficial for its shareholders. At current share price levels, the quarterly dividend of $0.375 per share, or $1.50 annually, translates into an annualized yield of about 8%.

In addition to its dividend, GSL has also bought back a significant amount of its shares. Over the last 18 months, GSL has repurchased $47 million worth of its own stock and has $43 million unused buy-back authorization.

Unlike many shipping companies, GSL has public credit ratings. During Q2 of 2023, its credit rating was upgraded by Moody’s to Ba3 from B1, with S&P improving GSL’s outlook from stable to positive, while KBRA reaffirmed the BBB investment grade rating of the $350 million, 5.69% Senior Secured notes due July 15, 2027. As Mr. Psaropoulos pointed out, this is a positive development that enhances the company’s access to cheaper capital and debt.

Additionally, the company is completely insulated from interest rate volatility, as GSL has interest rate caps in place on its floating-rate debt until the end of 2026.

Fleet Development Focused on Accretive Second-Hand Vessel Acquisitions

In terms of fleet development, GSL has focused on mid-aged second-hand vessels, acquiring 27 vessels since early-2021, despite staying out of the sale & purchase market from July 2021 through March 2023 when asset-values were over-heated.   The most recent acquisitions are four 8,500 TEU vessels built in 2003 and 2004 which were acquired during Q2 2023.

Mr. Thomas Lister, Chief Commercial Officer & Head of ESG, noted that during a time when the sector is focused on decarbonization and while the clean fuels and propulsion technologies of the future have yet to be clearly established, purchasing mid-life ships generates better returns, for lower risk, than taking a 30 year view on newbuilds.

For a combined price of $123 million, GSL purchased the four ships, all of which have firm two-year charters attached. GSL calculates that the four ships will bring in roughly $76 million of contracted EBITDA over the secured period of two years. That figure, combined with the ships’ aggregate scrap value of around $60 million, exceeds the purchase price of the vessels and provides strong downside cover, while onward employment prospects for these well-specified ships provide good upside potential. GSL has put attractive financing in place for the ships, making use of headroom under their existing interest rate caps - resulting in a blended cost of debt around 4.5% - to further enhance returns.

Investing In Fleet Upgrades Collaboratively With Charterers

In order to maintain a competitive fleet, especially given the new environmental regulatory landscape and push toward green shipping, GSL has begun upgrading its existing fleet with energy-efficient retrofits in co-operation with its charterers. Additionally, as Mr. Lister noted, the energy-efficient technology benefits the charterer financially due to reduced fuel costs, and therefore it’s reasonable that the charterer should contribute to funding the retrofits.

While retrofits are beneficial, GSL believes that the installation of automated data capture and real-time performance management systems will further assist in reducing fuel consumption and optimizing vessel operation, to accelerate decarbonization. The company aims to share this data with its charterers, increasing efficiency and collaboration between vessel operators and owners.

The question of fuel is prominent in the sector, and GSL is in the process of increasing the flexibility of its vessels to use low-carbon biofuel blends, depending on the preferences of its charterers, as they purchase the fuels used to run the vessels.

Container Sector Outlook

GSL operates in the mid-to-small-sized container shipping segment, with vessels generally smaller than 10,000 TEUs. This segment alone carries over 70% of the world’s containerized trade volume, making it the backbone of global trade. Although these ships operate within the broader container shipping sector, the market fundamentals are significantly different than those at play amongst the larger containerships.

While analyzing the demand fundamentals in the segment is difficult, Mr. Lister argued that the company’s strategy of remaining flexible and securing medium to longer term charters insulates it from the effects of any near-term volatility on the demand side. By their nature, smaller containerships under 10,000 TEUs are extremely flexible operationally, as they can be traded anywhere in the world.

GSL is also well positioned in terms of reefer cargo, or refrigerated cargo, which is one of the fastest growing and most lucrative cargo segments and thus attractive to charterers. The company’s existing fleet already has high reefer capacity, which is a factor that the company takes into consideration when acquiring assets.

In terms of supply, much of the orderbook for new container ships is for larger ships. The orderbook-to-fleet ratio for containerships below 10,000 TEUs sits at 14%, while the orderbook-to-fleet ratio for the entire container fleet is around 29%. Furthermore, the mid-size and small container segments have not been heavily invested, meaning that vessels of this size are aging, and many may soon be scrapped. Widespread scrapping in the sector would lead to tighter supply fundamentals among ships of this size. As depicted in GSL’s Q2 2023 presentation, if all 25+ year old vessels in this segment are scrapped, the implied net growth for the sub 10,000 TEU fleet through 2026 would be just 1.4%.

Mr. Lister pointed out that after increasing in Q1 2023, idle capacity in the container sector has trended down, to 1.1% of the fleet. Another significant factor in the supply and demand balance is slow steaming brought about by environmental regulations. Slower journeys could offset any growth in the supply side for the sub-10,000 TEU sector, GSL’s CEO stated, as slowing steaming absorbs capacity.

This article is for information purposes only and does not constitute investment advice.