gsl investment memo and model

7/31/2019 GSL Investment Memo and Model

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Global Ship Lease (NYSE Ticker: GSL)

Company Description:

GSL owns 17 containerships that it leases on fixed-rate, long-term contracts.

Investment Summary:

GSL is an off the radar special small-cap situation. The major catalyst is a dividend reinstatement which will occur

in 2013 when the company achieves compliance with their current bank agreement.

The current peer group valuation suggests that GSL is trading at 2.6x EBITDA multiple discount. Each EBITDAmultiple equates to ~$2.00 and the stock is currently $2.28. A valuation commensurate with peers would suggest acurrent stock price in the range of $6.00 to $9.00.

GSL will have free cash flow in 2013 of approximately $78M ($1.66/ "A Share"). A 50% dividend payout ratio

would yield an annual dividend of ~$0.80. A $8 share price would be supported by a dividend yield of 10%, a freecash flow yield of ~20%, and a 2013 estimated NAV/share of ~$8.00. The sustainability of the dividend in 2013would be supported by assets with a remaining life of ~20 years, average duration of contracts of ~7 years and no re-

charter risk until the end of 2016.

Rating and Recommendation:

Key Statistics:


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Summary Comparables:

Traditional vs. Variant View:


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Investment Thesis

A potential investor in GSL needs to answer two main questions:

1) When will GSL be compliant with their loan facility and reinstate their dividend?

2) Are you comfortable the counterparty risk?

Background and history:

In August of 2008, GSL went public at $8.00 per share and was created as a long term sustainable dividend yielding

stock with in initial annual dividend of $0.92.

On April 30, 2009, GSL fell out of compliance with its bank loan as it failed its LTV (Loan-to-Value) leverage ratiotest. GSL was therefore forced to suspend its dividend.

On August 21, 2009, after numerous bank waivers, GSL's credit facility was amended. GSL's credit facility which

was originally structured as a 5 year non-amortizing term loan became an amortizing loan which required GSL to usea majority of their operating cash flow to pay down debt. The bank also removed its revolver capacity. A dividendcould not be reinstated until after April 30, 2011 and an LTV below 75%.

On April 30, 2011, after two years of suspended valuation tests, GSL conducted a LTV test and was now temporarily

in compliance. Future semi-annual market valuation tests could still expose GSL to potentially violate the leverage

ratio covenant.

On November 30, 2011, GSL preemptively obtained a waiver as they assumed that they would fail the leverage ratio

test as the company assumed the results would yield a ratio between 75% and 90%. The waiver agreement

suspended the test until November 30, 2012.

This caused three changes:

1) Borrowing were increased to a fixed rate of 3.5% (from 3.0%)

This represents an annual increase of ~$2.5M ($0.05 / Share).

2) Cash Flow Sweep

All FCF generated and any cash on the B/S greater then $20M would be used for accelerated amortization pre-payments.

3) A Dividend would not be permitted until after 11/30/12 and an LTV below 75%

On November 30, 2012, GSL is scheduled to conduct its next LTV test.


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Dividend and LTV Discussion:

A dividend of $0.80 in 2013 is achievable. This seems reasonable given that the same contracts which have continued

to perform were originally supporting an annual dividend of $0.92 before the dividend was suspended. My base case

suggests that GSL will generate $78M or $1.66/"A share" of FCF in 2013. GSL needs to be in compliance with their

LTV covenant in order to reinstate the dividend. The next LTV test in on November 30, 2012.

The market value of the vessels as of November 2011 was between $554M and $665M ($610M is the midpoint). A

fleet value of $533M and $480M will satisfy the 75% LTV threshold needed in 2012 and 2013, respectively (shown

below).

Bottoms up vessel valuations for April and October 2011 were $715M and $597M, respectively.

Based on recent sale and purchases, Vessel values seem to have bottomed. On January 10, 2012, DianaContainerships (Ticker: DCIX) bought two ships 4,750 TEU ships for $30M. One ship was built in 1995 and the

other was built in 1996. This comparable purchase is favorable for the bottoms up fleet vessel valuation (as of

October, 30, 2011) shown above.


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CMA CGM Counterparty / Sole Customer risk:

There is a high probability that CMA CGM will continue to pay their charters and not attempt to renegotiate any of

the charters. CMA CGM never once attempted to renegotiate any of their charters with GSL in the prior downturn.

CMA CGM is in a stronger financial position today then they were at the end of 2009. CMA CGM will end 2011

with approximately $4.0B of equity (versus $2.0 at the end of 2009). CMA CGM repurchased ~$120M of theirrecent bond issuance in Q2 and Q3 of 2011. This was financed partially with bank financing which indicates that the

banks are acting as a strategic financial partner and support CMA CGM in the long term. Furthermore, CMA CGM

has implemented cost savings initiatives that will decrease operating costs by $400M in 2012 (versus 2011). CMA

CGM also has no unfunded CAPX requirements until the end of 2012. Last favorable bankruptcy laws in France(where CMA CGM is headquartered) support a continuation of business and the protection of employment overrepayment to the creditors.

CMA CGM will end 2011 will approximately $1.8B of more equity then they did in 2009.

Non-traditional sources of Liquidity in the range of $2.1B to $3.0B are potentially available.

Favorable bankruptcy laws in France support a going concern for CMA CGM.

Pg 37 of CMA CGM prospectus dated May 16, 2011Insolvency laws in France could impede your abili ty to enforce your rights under the notes.

The Issuer is incorporated under the laws of France. Accordingly, any insolvency proceedings with respect to us or our French subsidiaries

would likely proceed under the laws of France. Certain provisions of insolvency laws in France are less favorable to creditors than bankruptcy

laws in the United States. French insolvency legislation generally favors the continuation of a business and the protection of employment over

the repayment of creditors.


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Peer Group Comparison (Valuation):

A peer group comparison illustrates that GSL is currently trading at a discount to all of its peers based on every

valuation metric. A valuation inline with its peer group based on 2013 valuation metrics support a current value

between $6.00 and $9.00.


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Peer Group Comparison (Fleet Stats and Charter Coverage):

GSL has the least amount of spot exposure in its peer group. GSL is the only company in the peer group with no spot

exposure in 2012 and only 12% in 2013.


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Favorable Shareholder Structure:

The current shareholder structure implies that only "A shares" will be eligible for a dividend for the foreseeable

future.

The current shareholder structure has two classes of shares: There are 47.2M "A shares" and 7.4M "B Shares". "Ashares" are currently owed $2.76 in arrearages (as of 12/31/11). "B shares" are not eligible for Class A Share status

until all arrearages have been paid and a base rate quarterly dividend of $0.23 is maintained for 4 future quarters.

This structure currently implies that "A Shares" would need to be paid $3.68 of total dividends in order for the "B

Shares" to unsubordinate and convert to "A Shares".

Negative Industry Sentiment:

Current Wall Street sentiment for shippers implies profitability concerns remaining an issue in the medium term.

Industry profitability concerns create fear for containership chartering companies like GSL. GSL's fixed contracts

generates predictable cash flows from its long-term charters which mitigates the macro-industry fear and keeps GSLlargely unexposed from the cyclical nature of the shipping industry.

Neglected Name:

GSL has no major Wall Street coverage versus its peer group of five companies all of which have at least four major

investment banks covering them.


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Cash flow characteristics are misunderstood:

The fixed rate and long term duration of GSL's contracts leave them relatively unexposed from current depressed spot

market charter rates.

Interest savings from the roll off of unfavorable and over-hedged interest rate hedges will begin to materialize in2013. Additional interest savings will also occur from continued debt pay down. Last, the anniversary of heavily

weighted dry docking expense in 2011 and 2012 will expose incremental cash flow in 2013 and 2014.

A decrease in cash expense for interest and dry dockings will increase FCF by $15.0M and $21.0M in 2013 and 2014,respectively, versus 2012 levels.


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Upcoming Key Catalysts:

Dividend Reinstatement and Credit Facility Compliance

The next test date for LTV compliance is November 30, 2012. A fleet value of $530M (fleet value is estimated at~$600M as of November 2011) would yield an LTV of 75%, thus putting GSL back into compliance with its lenders.

Q1 2012 liner earnings

Container Box Rates (rates which GSL's customer, CMA CGM generates 40% of revenue from) on the key Asia/

Europe route are up over 30% from their Q4/2011 lows. An improvement in direction will change the sentiment is

the entire investable space.

CMA CGM bankruptcy/ distressed sentiment dissipating

GSL's only customer is CMA CGM. An up tick in earnings along with the implementation of an announced $400M

cost savings initiative will alleviate GSL's counterparty concern. Recent CMA CGM bond performance suggeststhat bond investors feel more comfortable with the credit.


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Model (Base Case) - Income Statement


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Model (Base Case) - Cash Flow and Balance Sheet

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