An analysis of Danaos (DAC) in the current market downturn. The challenges of rapid growth in a bear market environment. DAC is similar in fleet size and order book to Seaspan (SSW). There are a large number of competing liner shipping companies, who market their vessels to a limited number of liner operators. The key issue is whether the liner operators, under pressure from falling demand and financial losses, be able to carry the all theie present chartered units and absorb such a large orderbook.
DAC's most recent investor presentation shows a current fleet of 39 vessels with an orderbook of 31 units. Danaos projects +150% contracted fleet growth. The major issue is how will this new tonnage be employed, whether there will be order cancelations and the impact on company earnings forward. Are past record rates of investment return sustainable in this business model based on insatiable long-term charter demand from liner operators and low funding costs in this new business and financial environment?
Container markets have been weakening since the first signs of US recession in 2007. The market was sustained for a period by increased EU traffic in part due to Euro appreciation. With the financial crisis in the fall 2008, the bottom fell out of the market. Major liner operators were already struggling with high bunker prices but then demand collapsed for cargo with the hard landing in Asia economies. Liner companies started redelivering vessels on charter termination. Many liner companies are rolling up financial losses and there will be increased counter party risk ahead with the potential of defaults and charter renegotiations.
As of fall 2008, DAC has a debt equity ratio of 50% and US$ 1 billion in liquidity, putting it in a good financial position. Its commercial management is prudent. It has a good spread of charterers with well-established liner operator names. The charter renewals are staggered.
Its share issue policies have recently been a bit contradictory. Danaos announced in the fall 2008 a share repurchase program, but then in January 2009 made an SEC filing for a supplementary issue to raise an additional US$ 1 billion. The company seems to be maximizing its options. In current market conditions, there is likelihood that the funds will be raised by the ATM technique rather than sold in large blocks to investors.
Its challenges are the decline in market asset values and falling charters rates. This means that its current fleet asset value is declining and charter renewal rates will be at lower rates. The credit markets for senior debt finance are tight and finance costs are rising. This puts in question the viability of the fleet expansion program of 31 vessels in the next few years.
DAC is not alone in their expansion plans. It is about the same size as Seaspan, which has a fleet of 35 units with an orderbook of 33 units. So far SSW share value has been recovering somewhat better since December 2008 lows than DAC, which shows a weaker chart pattern. Seaspan has an employment portfolio of seven liner companies. Indeed there are 17 additional competitors with orderbooks, too. Six of them have comparable large fleet expansion plans.
Their business model as ship providers is heavily dependent on liner company charterers. Will the liner companies be able to carry DAC and its competitors in current market conditions and absorb the large orderbooks of contracted tonnage? If something gives here, DAC will suffer and it will not be alone.
DAC's most recent investor presentation shows a current fleet of 39 vessels with an orderbook of 31 units. Danaos projects +150% contracted fleet growth. The major issue is how will this new tonnage be employed, whether there will be order cancelations and the impact on company earnings forward. Are past record rates of investment return sustainable in this business model based on insatiable long-term charter demand from liner operators and low funding costs in this new business and financial environment?
Container markets have been weakening since the first signs of US recession in 2007. The market was sustained for a period by increased EU traffic in part due to Euro appreciation. With the financial crisis in the fall 2008, the bottom fell out of the market. Major liner operators were already struggling with high bunker prices but then demand collapsed for cargo with the hard landing in Asia economies. Liner companies started redelivering vessels on charter termination. Many liner companies are rolling up financial losses and there will be increased counter party risk ahead with the potential of defaults and charter renegotiations.
As of fall 2008, DAC has a debt equity ratio of 50% and US$ 1 billion in liquidity, putting it in a good financial position. Its commercial management is prudent. It has a good spread of charterers with well-established liner operator names. The charter renewals are staggered.
Its share issue policies have recently been a bit contradictory. Danaos announced in the fall 2008 a share repurchase program, but then in January 2009 made an SEC filing for a supplementary issue to raise an additional US$ 1 billion. The company seems to be maximizing its options. In current market conditions, there is likelihood that the funds will be raised by the ATM technique rather than sold in large blocks to investors.
Its challenges are the decline in market asset values and falling charters rates. This means that its current fleet asset value is declining and charter renewal rates will be at lower rates. The credit markets for senior debt finance are tight and finance costs are rising. This puts in question the viability of the fleet expansion program of 31 vessels in the next few years.
DAC is not alone in their expansion plans. It is about the same size as Seaspan, which has a fleet of 35 units with an orderbook of 33 units. So far SSW share value has been recovering somewhat better since December 2008 lows than DAC, which shows a weaker chart pattern. Seaspan has an employment portfolio of seven liner companies. Indeed there are 17 additional competitors with orderbooks, too. Six of them have comparable large fleet expansion plans.
Their business model as ship providers is heavily dependent on liner company charterers. Will the liner companies be able to carry DAC and its competitors in current market conditions and absorb the large orderbooks of contracted tonnage? If something gives here, DAC will suffer and it will not be alone.
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