DANAOS CORP, 6-K filed on 7/29/2013
Report of Foreign Issuer
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Document and Entity Information
 
Entity Registrant Name
Danaos Corp 
Entity Central Index Key
0001369241 
Document Type
6-K 
Document Period End Date
Jun. 30, 2013 
Amendment Flag
false 
Current Fiscal Year End Date
--12-31 
Document Fiscal Year Focus
2013 
Document Fiscal Period Focus
Q2 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 75,034 
$ 55,628 
Restricted cash
2,815 
2,821 
Accounts receivable, net
10,669 
3,741 
Inventories
15,405 
17,731 
Prepaid expenses
708 
706 
Due from related parties
8,052 
12,664 
Other current assets
5,901 
5,382 
Total current assets
118,584 
98,673 
Fixed assets, net
3,906,431 
3,986,138 
Deferred charges, net
77,951 
88,821 
Restricted cash
16,026 
430 
Other non-current assets
40,176 
37,983 
Total non-current assets
4,040,584 
4,113,372 
Total assets
4,159,168 
4,212,045 
CURRENT LIABILITIES
 
 
Accounts payable
12,573 
13,982 
Accrued liabilities
33,134 
32,894 
Current portion of long-term debt
145,941 
125,076 
Current portion of vendor financing
57,388 
57,388 
Unearned revenue
6,089 
5,447 
Other current liabilities
121,246 
130,465 
Total current liabilities
376,371 
365,252 
LONG-TERM LIABILITIES
 
 
Long-term debt, net of current portion
3,031,227 
3,097,472 
Vendor financing, net of current portion
93,060 
121,754 
Other long-term liabilities
124,424 
187,263 
Total long-term liabilities
3,248,711 
3,406,489 
Total liabilities
3,625,082 
3,771,741 
Commitments and Contingencies
   
   
STOCKHOLDERS' EQUITY
 
 
Preferred stock (par value $0.01, 100,000,000 preferred shares authorized and none issued as of June 30, 2013 and December 31, 2012)
   
   
Common stock (par value $0.01, 750,000,000 common shares authorized as of June 30, 2013 and December 31, 2012. 109,653,363 and 109,604,040 issued and outstanding as of June 30, 2013 and December 31, 2012, respectively)
1,097 
1,096 
Additional paid-in capital
546,022 
546,023 
Accumulated other comprehensive loss
(292,460)
(353,271)
Retained earnings
279,427 
246,456 
Total stockholders' equity
534,086 
440,304 
Total liabilities and stockholders' equity
$ 4,159,168 
$ 4,212,045 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2013
Dec. 31, 2012
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
100,000,000 
100,000,000 
Preferred stock, shares issued
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
750,000,000 
750,000,000 
Common stock, shares issued
109,653,363 
109,604,040 
Common stock, shares outstanding
109,653,363 
109,604,040 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
OPERATING REVENUES
$ 146,580 
$ 146,657 
$ 292,668 
$ 280,894 
OPERATING EXPENSES
 
 
 
 
Voyage expenses
(2,822)
(3,366)
(5,879)
(6,256)
Vessel operating expenses
(31,621)
(31,392)
(60,914)
(61,487)
Depreciation
(34,164)
(35,226)
(68,147)
(66,907)
Amortization of deferred drydocking and special survey costs
(1,449)
(1,412)
(3,179)
(2,614)
General and administrative expenses
(4,746)
(5,247)
(9,663)
(10,084)
Gain on sale of vessels
171 
830 
156 
830 
Income From Operations
71,949 
70,844 
145,042 
134,376 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest income
521 
401 
1,013 
754 
Interest expense
(23,292)
(21,460)
(46,156)
(39,850)
Other finance costs
(5,016)
(4,102)
(10,093)
(7,959)
Other income (expense), net
232 
280 
231 
476 
Unrealized and realized losses on derivatives
(24,855)
(36,997)
(57,066)
(69,489)
Total Other Income (Expenses), net
(52,410)
(61,878)
(112,071)
(116,068)
Net Income
$ 19,539 
$ 8,966 
$ 32,971 
$ 18,308 
EARNINGS PER SHARE
 
 
 
 
Basic and diluted net income per share (in dollars per share)
$ 0.18 
$ 0.08 
$ 0.30 
$ 0.17 
Basic and diluted weighted average number of common shares (in shares)
109,653 
109,611 
109,653 
109,608 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
Net income for the period
$ 19,539 
$ 8,966 
$ 32,971 
$ 18,308 
Other comprehensive income
 
 
 
 
Change in fair value of financial instruments
 
23,415 
 
40,536 
Deferred realized losses on cash flow hedges amortized over the life of the newbuildings
 
(2,196)
 
(7,035)
Amortization of deferred realized losses on cash flow hedges
1,002 
850 
1,992 
1,499 
Reclassification of unrealized losses/(gains) to earnings
29,501 
(318)
58,819 
(1,843)
Total Other Comprehensive Income
30,503 
21,751 
60,811 
33,157 
Comprehensive Income
$ 50,042 
$ 30,717 
$ 93,782 
$ 51,465 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Cash Flows from Operating Activities
 
 
Net income
$ 32,971 
$ 18,308 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Depreciation
68,147 
66,907 
Amortization of deferred drydocking and special survey costs
3,179 
2,614 
Amortization of finance costs
7,754 
6,630 
Exit fees accrued on debt
1,882 
913 
Stock based compensation
 
31 
Payments for drydocking/special survey costs deferred
(422)
(4,158)
Gain on sale of vessels
(156)
(830)
Amortization of deferred realized losses on interest rate swaps
1,992 
1,499 
Unrealized gains on derivatives
(16,770)
(4,556)
Realized losses on cash flow hedges deferred in Other Comprehensive Loss
 
(7,035)
(Increase)/Decrease in
 
 
Accounts receivable
(6,928)
(1,263)
Inventories
2,326 
(400)
Prepaid expenses
(2)
1,009 
Due from related parties
4,612 
37,997 
Other assets, current and long-term
(1,296)
(3,286)
Increase/(Decrease) in
 
 
Accounts payable
(1,409)
4,107 
Accrued liabilities
240 
5,215 
Unearned revenue, current and long term
642 
1,154 
Other liabilities, current and long-term
1,787 
1,307 
Net Cash provided by Operating Activities
98,549 
126,163 
Cash Flows from Investing Activities
 
 
Vessels additions, vessel acquisitions and vessels under construction
(17,757)
(375,277)
Net proceeds from sale of vessels
29,875 
5,635 
Net Cash provided by/(used in) Investing Activities
12,118 
(369,642)
Cash Flows from Financing Activities
 
 
Proceeds from long-term debt
 
266,920 
Payments of long-term debt
(46,977)
(27,144)
Payments of vendor financing
(28,694)
 
Deferred finance costs
 
(100)
Increase of restricted cash
(15,590)
(341)
Net Cash (used in)/provided by Financing Activities
(91,261)
239,335 
Net Increase/(Decrease) in Cash and Cash Equivalents
19,406 
(4,144)
Cash and Cash Equivalents at beginning of period
55,628 
51,362 
Cash and Cash Equivalents at end of period
75,034 
47,218 
Supplementary Cash Flow information
 
 
Final installments for delivered vessels financed under Vendor Financing arrangement
 
$ 124,855 
Basis of Presentation and General Information
Basis of Presentation and General Information

1                                        Basis of Presentation and General Information

 

The accompanying condensed consolidated financial statements (unaudited) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The reporting and functional currency of the Company is the United States Dollar.

 

Danaos Corporation (“Danaos”), formerly Danaos Holdings Limited, was formed on December 7, 1998 under the laws of Liberia and is presently the sole owner of all outstanding shares of the companies listed below. Danaos Holdings Limited was redomiciled in the Marshall Islands on October 7, 2005. In connection with the redomiciliation, the Company changed its name to Danaos Corporation. On October 14, 2005, the Company filed and the Marshall Islands accepted Amended and Restated Articles of Incorporation. The authorized capital stock of Danaos Corporation is 750,000,000 shares of common stock with a par value of $0.01 and 100,000,000 shares of preferred stock with a par value of $0.01. Refer to Note 12, Stockholders’ Equity.

 

In the opinion of management, the accompanying condensed consolidated financial statements (unaudited) of Danaos and subsidiaries contain all adjustments necessary to present fairly, in all material respects, the Company’s consolidated financial position as of June 30, 2013, the consolidated results of operations for the three and six months ended June 30, 2013 and 2012 and the consolidated cash flows for the six months ended June 30, 2013 and 2012. All such adjustments are deemed to be of a normal, recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Danaos’ Annual Report on Form 20-F for the year ended December 31, 2012. The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year.

 

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

The Company’s principal business is the acquisition and operation of vessels. Danaos conducts its operations through the vessel owning companies whose principal activity is the ownership and operation of containerships that are under the exclusive management of a related party of the Company.

 

The accompanying condensed consolidated financial statements (unaudited) represent the consolidation of the accounts of the Company and its wholly owned subsidiaries. The subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases. Inter-company transaction balances and unrealized gains on transactions between the companies are eliminated.

 

The Company also consolidates entities that are determined to be variable interest entities as defined in the authoritative guidance under U.S. GAAP. A variable interest entity is defined as a legal entity where either (a) equity interest holders as a group lack the characteristics of a controlling financial interest, including decision making ability and an interest in the entity’s residual risks and rewards, or (b) the equity holders have not provided sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support, or (c) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

 

The condensed consolidated financial statements (unaudited) have been prepared to reflect the consolidation of the companies listed below. The historical balance sheets and results of operations of the companies listed below have been reflected in the consolidated balance sheets and consolidated statements of income, cash flows and stockholders’ equity at and for each period since their respective incorporation dates.

 

The consolidated companies are referred to as “Danaos,” or “the Company.”

 

As of June 30, 2013, Danaos included the vessel owning companies (the “Danaos Subsidiaries”) listed below. All vessels are container vessels:

 

Company

 

Date of Incorporation

 

Vessel Name

 

Year
Built

 

TEU

 

Seacaravel Shipping Ltd.

 

June 11, 1996

 

Hope

 

1989

 

3,908

 

Appleton Navigation S.A.

 

May 12, 1998

 

Komodo

 

1991

 

2,917

 

Geoffrey Shipholding Ltd.

 

September 22, 1997

 

Kalamata

 

1991

 

2,917

 

Victory Shipholding Inc.

 

October 9, 2002

 

Lotus

 

1988

 

3,098

 

Duke Marine Inc.

 

April 14, 2003

 

Hyundai Duke

 

1992

 

4,651

 

Commodore Marine Inc.

 

April 14, 2003

 

Commodore

 

1992

 

4,651

 

Containers Services Inc.

 

May 30, 2002

 

Deva

 

2004

 

4,253

 

Containers Lines Inc.

 

May 30, 2002

 

Derby D

 

2004

 

4,253

 

Oceanew Shipping Ltd.

 

January 14, 2002

 

CSCL Europe

 

2004

 

8,468

 

Oceanprize Navigation Ltd.

 

January 21, 2003

 

CSCL America

 

2004

 

8,468

 

Federal Marine Inc.

 

February 14, 2006

 

Hyundai Federal

 

1994

 

4,651

 

Karlita Shipping Co. Ltd.

 

February 27, 2003

 

CSCL Pusan

 

2006

 

9,580

 

Ramona Marine Co. Ltd.

 

February 27, 2003

 

CSCL Le Havre

 

2006

 

9,580

 

Boxcarrier (No. 6) Corp.

 

June 27, 2006

 

Marathonas

 

1991

 

4,814

 

Boxcarrier (No. 7) Corp.

 

June 27, 2006

 

Messologi

 

1991

 

4,814

 

Boxcarrier (No. 8) Corp.

 

November 16, 2006

 

Mytilini

 

1991

 

4,814

 

Auckland Marine Inc.

 

January 27, 2005

 

SNL Colombo

 

2004

 

4,300

 

Seacarriers Services Inc.

 

June 28, 2005

 

YM Seattle

 

2007

 

4,253

 

Speedcarrier (No. 1) Corp.

 

June 28, 2007

 

Hyundai Vladivostok

 

1997

 

2,200

 

Speedcarrier (No. 2) Corp.

 

June 28, 2007

 

Hyundai Advance

 

1997

 

2,200

 

Speedcarrier (No. 3) Corp.

 

June 28, 2007

 

Hyundai Stride

 

1997

 

2,200

 

Speedcarrier (No. 5) Corp.

 

June 28, 2007

 

Hyundai Future

 

1997

 

2,200

 

Speedcarrier (No. 4) Corp.

 

June 28, 2007

 

Hyundai Sprinter

 

1997

 

2,200

 

Wellington Marine Inc.

 

January 27, 2005

 

YM Singapore

 

2004

 

4,300

 

Seacarriers Lines Inc.

 

June 28, 2005

 

YM Vancouver

 

2007

 

4,253

 

Speedcarrier (No. 7) Corp.

 

December 6, 2007

 

Hyundai Highway

 

1998

 

2,200

 

Speedcarrier (No. 6) Corp.

 

December 6, 2007

 

Hyundai Progress

 

1998

 

2,200

 

Speedcarrier (No. 8) Corp.

 

December 6, 2007

 

Hyundai Bridge

 

1998

 

2,200

 

Trindade Maritime Company

 

April 10, 2013

 

Amalia C

 

1998

 

2,452

 

Vilos Navigation Company Ltd.

 

May 30, 2013

 

Niledutch Zebra

 

2001

 

2,602

 

Bayview Shipping Inc.

 

March 22, 2006

 

Zim Rio Grande

 

2008

 

4,253

 

Channelview Marine Inc.

 

March 22, 2006

 

Zim Sao Paolo

 

2008

 

4,253

 

Balticsea Marine Inc.

 

March 22, 2006

 

Zim Kingston

 

2008

 

4,253

 

Continent Marine Inc.

 

March 22, 2006

 

Zim Monaco

 

2009

 

4,253

 

Medsea Marine Inc.

 

May 8, 2006

 

Zim Dalian

 

2009

 

4,253

 

Blacksea Marine Inc.

 

May 8, 2006

 

Zim Luanda

 

2009

 

4,253

 

Boxcarrier (No. 1) Corp.

 

June 27, 2006

 

CMA CGM Moliere(1)

 

2009

 

6,500

 

Boxcarrier (No. 2) Corp.

 

June 27, 2006

 

CMA CGM Musset(1)

 

2010

 

6,500

 

Boxcarrier (No. 3) Corp.

 

June 27, 2006

 

CMA CGM Nerval(1)

 

2010

 

6,500

 

Boxcarrier (No. 4) Corp.

 

June 27, 2006

 

CMA CGM Rabelais(1)

 

2010

 

6,500

 

Boxcarrier (No. 5) Corp.

 

June 27, 2006

 

CMA CGM Racine(1)

 

2010

 

6,500

 

Expresscarrier (No. 1) Corp.

 

March 5, 2007

 

YM Mandate

 

2010

 

6,500

 

Expresscarrier (No. 2) Corp.

 

March 5, 2007

 

YM Maturity

 

2010

 

6,500

 

CellContainer (No. 1) Corp.

 

March 23, 2007

 

Hanjin Buenos Aires

 

2010

 

3,400

 

CellContainer (No. 2) Corp.

 

March 23, 2007

 

Hanjin Santos

 

2010

 

3,400

 

CellContainer (No. 3) Corp.

 

March 23, 2007

 

Hanjin Versailles

 

2010

 

3,400

 

CellContainer (No. 4) Corp.

 

March 23, 2007

 

Hanjin Algeciras

 

2011

 

3,400

 

CellContainer (No. 5) Corp.

 

March 23, 2007

 

Hanjin Constantza

 

2011

 

3,400

 

CellContainer (No. 6) Corp.

 

October 31, 2007

 

Hanjin Germany

 

2011

 

10,100

 

CellContainer (No. 7) Corp.

 

October 31, 2007

 

Hanjin Italy

 

2011

 

10,100

 

CellContainer (No. 8) Corp.

 

October 31, 2007

 

Hanjin Greece

 

2011

 

10,100

 

Teucarrier (No. 1) Corp.

 

January 31, 2007

 

CMA CGM Attila

 

2011

 

8,530

 

Teucarrier (No. 2) Corp.

 

January 31, 2007

 

CMA CGM Tancredi

 

2011

 

8,530

 

Teucarrier (No. 3) Corp.

 

January 31, 2007

 

CMA CGM Bianca

 

2011

 

8,530

 

Teucarrier (No. 4) Corp.

 

January 31, 2007

 

CMA CGM Samson

 

2011

 

8,530

 

Teucarrier (No. 5) Corp.

 

September 17, 2007

 

CMA CGM Melisande

 

2012

 

8,530

 

Megacarrier (No. 1) Corp.

 

September 10, 2007

 

Hyundai Together

 

2012

 

13,100

 

Megacarrier (No. 2) Corp.

 

September 10, 2007

 

Hyundai Tenacity

 

2012

 

13,100

 

Megacarrier (No. 3) Corp.

 

September 10, 2007

 

Hyundai Smart

 

2012

 

13,100

 

Megacarrier (No. 4) Corp.

 

September 10, 2007

 

Hyundai Speed

 

2012

 

13,100

 

Megacarrier (No. 5) Corp.

 

September 10, 2007

 

Hyundai Ambition

 

2012

 

13,100

 

 

 

(1)   Vessel subject to charterer’s option to purchase vessel after first eight years of time charter term for $78.0 million.

Significant Accounting Policies
Significant Accounting Policies

2                 Significant Accounting Policies

 

All accounting policies are as described in the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 1, 2013.

 

Recent Accounting Pronouncements

 

Comprehensive Income

 

In February 2013, the FASB issued new guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The amendment requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods. The amended guidance was effective for the Company for reporting periods beginning after December 15, 2012. The adoption of the new guidance did not have an effect on the Company’s condensed consolidated financial statements.

Restricted Cash
Restricted Cash

3                 Restricted Cash

 

Restricted cash is comprised of the following (in thousands):

 

 

 

As of June 30,
2013

 

As of December 31,
2012

 

Retention account

 

$

2,815

 

$

2,821

 

Restricted deposits

 

16,026

 

430

 

Total

 

$

18,841

 

$

3,251

 

 

The Company was required to maintain cash of $2.8 million as of June 30, 2013 and December 31, 2012, respectively, in a retention bank account as collateral for the upcoming scheduled debt payments of its KEXIM and KEXIM-ABN Amro credit facilities, which were recorded under current assets in the Company’s Balance Sheets.

 

On March 27, 2013, the Company has entered into an agreement with the lenders under the HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank credit facility. The agreement provides the Company the option to sell, for cash, up to 9 mortgaged vessels (the Henry, the Pride, the Independence, the Honour, the Elbe, the Hope, the Lotus, the Kalamata and the Komodo) with the sale proceeds less sale commissions from such vessels’ sales to be deposited in a restricted cash account and used to finance the acquisition of new containership vessels no later than December 31, 2013. Any funds remaining in this restricted cash account after that date will be applied towards prepayment of the respective credit facility. As of June 30, 2013, the Company had concluded the sales of the Henry, the Pride, the Independence, the Honour and the Elbe and has acquired a 2,452 TEU containership, the Amalia C, built in 1998 for a contract price of $6.6 million and a 2,602 TEU containership, the Niledutch Zebra, built in 2001 for a contract price of $10.1 million. As of June 30, 2013, an amount of $15.6 million was recorded as non-current restricted cash with respect to this agreement.

 

Furthermore, the Company recorded non-current restricted cash of $0.4 million as cash collateral for one of its outstanding swaps as of June 30, 2013 and December 31, 2012.

Fixed assets, net
Fixed assets, net

4                 Fixed assets, net

 

Fixed assets consist of vessels. Vessels’ cost, accumulated depreciation and changes thereto were as follows (in thousands):

 

 

 

Vessel
Cost

 

Accumulated
Depreciation

 

Net Book
Value

 

As of January 1, 2012

 

$

3,703,781

 

$

(461,830

)

$

3,241,951

 

Additions

 

1,022,560

 

(143,938

)

878,622

 

Disposal

 

(20,606

)

15,801

 

(4,805

)

Impairment loss

 

(129,630

)

 

(129,630

)

As of December 31, 2012

 

$

4,576,105

 

$

(589,967

)

$

3,986,138

 

Additions

 

17,757

 

(68,147

)

(50,390

)

Disposal

 

(92,123

)

62,806

 

(29,317

)

As of June 30, 2013

 

$

4,501,739

 

$

(595,308

)

$

3,906,431

 

 

i.                                          On February 13, 2013, the Company sold and delivered the Independence. The gross sale consideration was $7.0 million. The Independence was 26 years old.

 

ii.                                       On February 28, 2013, the Company sold and delivered the Henry. The gross sale consideration was $6.1 million. The Henry was 27 years old.

 

iii.                                    On March 25, 2013, the Company sold and delivered the Pride. The gross sale consideration was $6.5 million. The Pride was 25 years old.

 

iv.                                   On May 14, 2013, the Company sold and delivered the Honour. The gross sale consideration was $9.1 million. The Honour was 24 years old.

 

iv.                                   On May 14, 2013, the Company acquired a 2,452 TEU containership, the Amalia C, built in 1998 for a contract price of $6.6 million.

 

v.                                      On June 13, 2013, the Company sold and delivered the Elbe. The gross sale consideration was $5.6 million. The Elbe was 22 years old.

 

vi.                                   On June 25, 2013, the Company acquired a 2,602 TEU containership, the Niledutch Zebra, built in 2001 for a contract price of $10.1 million.

 

As of December 31, 2012, the Company recorded an impairment loss of $129.6 million in relation to thirteen of its older vessels (including vessels sold in 2013), which were laid up or on short-term charters in the spot market. Fair value of each vessel was determined with the assistance from valuations obtained by third party independent shipbrokers. There was no impairment loss recognized for the three or six months ended June 30, 2013.

 

The residual value (estimated scrap value at the end of the vessels’ useful lives) of the fleet was estimated at $415.1 million as of June 30, 2013 and $431.9 million as of December 31, 2012. The Company has calculated the residual value of the vessels taking into consideration the 10 year average and the 5 year average of the scrap. The Company has applied uniformly the scrap value of $300 per ton for all vessels. The Company believes that $300 per ton is a reasonable estimate of future scrap prices, taking into consideration the cyclicality of the nature of future demand for scrap steel. Although the Company believes that the assumptions used to determine the scrap rate are reasonable and appropriate, such assumptions are highly subjective, in part, because of the cyclical nature of future demand for scrap steel.

Deferred Charges, net
Deferred Charges, net

5                 Deferred Charges, net

 

Deferred charges, net consisted of the following (in thousands):

 

 

 

Drydocking and
Special Survey
Costs

 

Finance
and other
Costs

 

Total
Deferred
Charges

 

As of January 1, 2012

 

$

6,431

 

$

93,280

 

$

99,711

 

Additions

 

9,308

 

186

 

9,494

 

Amortization

 

(6,070

)

(14,314

)

(20,384

)

As of December 31, 2012

 

$

9,669

 

$

79,152

 

$

88,821

 

Additions

 

422

 

43

 

465

 

Written off amounts

 

(402

)

 

(402

)

Amortization

 

(3,179

)

(7,754

)

(10,933

)

As of June 30, 2013

 

$

6,510

 

$

71,441

 

$

77,951

 

 

The Company follows the deferral method of accounting for drydocking and special survey 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 survey, which is two and a half years.  If special survey or drydocking is performed prior to the scheduled date, the remaining unamortized balances are immediately written off. Furthermore, when a vessel is drydocked for more than one reporting period, the respective costs are identified and recorded in the period in which they were incurred and not at the conclusion of the drydocking.

Other Non-current Assets
Other Non-current Assets

6                 Other Non-current Assets

 

Other non-current assets consisted of the following (in thousands):

 

 

 

As of June 30,
 2013

 

As of December 31,
 2012

 

Fair value of swaps

 

$

4,324

 

$

2,908

 

Notes receivable from ZIM

 

34,821

 

33,899

 

Other non-current assets

 

1,031

 

1,176

 

Total

 

$

40,176

 

$

37,983

 

 

On October 30, 2009, the Company agreed with one of its charterers, Zim Integrated Shipping Services Ltd. (“ZIM”), revisions to charterparties for six of its vessels in operation, which kept the original charter terms in place, reducing the cash settlement of each charter hire by 17.5%, for a period ending on December 31, 2012, which would become a subsequent payment. Each subsequent payment, which accumulates in any financial quarter, is satisfied by callable exchange notes (the “CENs”). CENs were issued by ZIM once per financial quarter at a face value equal to the aggregate amount of such subsequent payments from that financial quarter plus a premium amount (being an amount calculated as if each such subsequent payment had accrued interest at the rate of 6% p.a. from the date when it would have been due under the original charter party until the relevant issue date for the CENs). Unless previously converted at the holder’s option into ZIM’s common stock (only upon ZIM becoming a publicly listed company) or redeemed partially prior to or in full in cash, on July 1, 2016, ZIM is obliged to redeem the CENs at their remaining nominal amount together with the 6% interest accrued up to that date in cash only. In this respect, the Company recorded notes receivable from ZIM in “Other non-current assets” of $34.8 million and $33.9 million as of June 30, 2013 and December 31, 2012, respectively. Furthermore, following ZIM’s request the Company has agreed to extend the 17.5% charter hire payment deferral until December 31, 2013. As of June 30, 2013, the amount outstanding related to the new charter hire deferral was $4.4 million and was reported under Accounts Receivable in the Company’s Balance Sheet. As part of the announced reorganization of its parent company Israel Corporation, Zim Integrated Shipping Services Ltd. is expected to restructure certain of its obligations.  We do not know whether this restructuring will affect ZIM’s time charters, expiring in 2020 and 2021, for six of our vessels, or the $39.2 million aggregate outstanding receivable as of June 30, 2013.  We will continue to monitor the situation on an ongoing basis and the impact, if any, this would have on the Company’s metrics.

 

In respect of the fair value of swaps, refer to Note 10a, Financial Instruments — Cash Flow Interest Rate Swap Hedges and Note 10b, Financial Instruments — Fair Value Interest Rate Swap Hedges.

Accrued Liabilities
Accrued Liabilities

7                 Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

As of June 30,
2013

 

As of December 31,
2012

 

Accrued payroll

 

$

1,241

 

$

969

 

Accrued interest

 

12,421

 

12,473

 

Accrued expenses

 

19,472

 

19,452

 

Total

 

$

33,134

 

$

32,894

 

 

Accrued expenses mainly consisted of accrued realized losses on cash flow interest rate swaps of $15.0 million and $15.2 million as of June 30, 2013 and December 31, 2012, respectively, as well as other accruals related to the operation of the Company’s fleet of $4.5 million and $4.3 million as of June 30, 2013 and December 31, 2012, respectively.

Other Current and Long-term Liabilities
Other Current and Long-term Liabilities

8                 Other Current and Long-term Liabilities

 

Other current liabilities consisted of the following (in thousands):

 

 

 

As of June 30,
2013

 

As of December 31,
2012

 

Fair value of swaps

 

$

120,881

 

$

130,100

 

Other current liabilities

 

365

 

365

 

Total

 

$

121,246

 

$

130,465

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

As of June 30,
2013

 

As of December 31,
2012

 

Fair value of swaps

 

$

112,279

 

$

176,948

 

Other long-term liabilities

 

12,145

 

10,315

 

Total

 

$

124,424

 

$

187,263

 

 

Other long-term liabilities mainly consist of $4.9 million and $4.8 million as of June 30, 2013 and December 31, 2012, respectively, in relation to a deferred fee accrued pursuant to the Bank Agreement (refer to Note 9, Long-Term Debt), which will be cash settled on December 31, 2014 and is recorded at amortized cost.

 

In respect of the fair value of swaps, refer to Note 10a, Financial Instruments — Cash Flow Interest Rate Swap Hedges.

Long-Term Debt
Long-Term Debt

9                 Long-Term Debt

 

Long-term debt consisted of the following (in thousands):

 

Lender

 

As of
June 30,
2013

 

Current
portion

 

Long-term
portion

 

As of
December 31,
2012

 

Current
portion

 

Long-term
portion

 

The Royal Bank of Scotland

 

$

686,597

 

$

4,934

 

$

681,663

 

$

686,800

 

$

3,771

 

$

683,029

 

HSH Nordbank

 

33,280

 

4,774

 

28,506

 

35,000

 

6,123

 

28,877

 

The Export-Import Bank of Korea (“KEXIM”)

 

34,126

 

10,369

 

23,757

 

39,311

 

10,369

 

28,942

 

The Export-Import Bank of Korea & ABN Amro

 

73,734

 

11,250

 

62,484

 

79,359

 

11,250

 

68,109

 

Deutsche Bank

 

179,064

 

2,119

 

176,945

 

180,000

 

2,406

 

177,594

 

Credit Agricole

 

154,664

 

7,122

 

147,542

 

156,800

 

6,279

 

150,521

 

HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank

 

658,160

 

4,092

 

654,068

 

658,160

 

 

658,160

 

Credit Suisse

 

219,347

 

7,779

 

211,568

 

221,100

 

6,076

 

215,024

 

ABN Amro-Lloyds TSB-National Bank of Greece

 

250,806

 

8,245

 

242,561

 

253,200

 

6,966

 

246,234

 

Commerzbank-Credit Suisse- Credit Agricole

 

295,285

 

14,097

 

281,188

 

298,500

 

11,401

 

287,099

 

The Royal Bank of Scotland (New Credit Facility)

 

98,160

 

8,246

 

89,914

 

100,000

 

6,069

 

93,931

 

HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank (New Credit Facility)

 

117,250

 

20,417

 

96,833

 

123,750

 

17,727

 

106,023

 

ABN Amro-Lloyds TSB-National Bank of Greece (New Credit Facility)

 

34,588

 

5,281

 

29,307

 

37,100

 

5,438

 

31,662

 

Sinosure CEXIM-Citi-ABN Amro Credit Facility

 

172,890

 

20,340

 

152,550

 

183,060

 

20,340

 

162,720

 

Club Facility (New Credit Facility)

 

83,900

 

12,013

 

71,887

 

83,900

 

6,180

 

77,720

 

Citi—Eurobank Credit Facility

 

77,212

 

4,863

 

72,349

 

80,000

 

4,681

 

75,319

 

Comprehensive Financing Plan exit fee accrued

 

6,236

 

 

6,236

 

4,354

 

 

4,354

 

Fair value hedged debt

 

1,869

 

 

1,869

 

2,154

 

 

2,154

 

Total long-term debt

 

$

3,177,168

 

$

145,941

 

$

3,031,227

 

$

3,222,548

 

$

125,076

 

$

3,097,472

 

Hyundai Samho Vendor Financing

 

$

150,448

 

$

57,388

 

$

93,060

 

$

179,142

 

$

57,388

 

$

121,754

 

 

All floating rate loans discussed above are collateralized by first and second preferred mortgages over the vessels financed, general assignment of all hire freights, income and earnings, the assignment of their insurance policies, as well as any proceeds from the sale of mortgaged vessels and the corporate guarantee of Danaos Corporation.

 

Maturities of long-term debt for the next five years and thereafter subsequent to June 30, 2013, are as follows (in thousands):

 

Payment due by period ended

 

Fixed
principal
repayments

 

Variable
principal
payments

 

Final Payment
due on
December 31, 2018*

 

Total
principal
payments

 

June 30, 2014

 

$

129,273

 

$

16,668

 

$

 

$

145,941

 

June 30, 2015

 

142,862

 

15,835

 

 

158,697

 

June 30, 2016

 

168,810

 

81,895

 

 

250,705

 

June 30, 2017

 

192,367

 

186,607

 

 

378,974

 

June 30, 2018

 

169,336

 

175,275

 

 

344,611

 

June 30, 2019 and thereafter

 

244,376

 

34,900

 

1,610,859

 

1,890,135

 

Total long-term debt

 

$

1,047,024

 

$

511,180

 

$

1,610,859

 

$

3,169,063

 

 

 

* The last payment due on December 31, 2018, includes the unamortized remaining principal debt balances under the restructuring agreement, as such amount will be determinable following the fixed and variable amortization.

 

The maturities of long-term debt for the twelve month periods subsequent to June 30, 2013 are based on the terms of the Bank Agreement, under which the Company was not required to repay any outstanding principal amounts under its existing credit facilities, other than the KEXIM and KEXIM-ABN Amro credit facilities which are not covered by the Bank Agreement, until May 15, 2013; thereafter until December 31, 2018 it is required to make quarterly principal payments in fixed amounts. In addition, the Company is required to make an additional payment in such amount that, together with the fixed principal payment, equals a certain percentage of its Actual Free Cash Flow of the preceding financial quarter. The table above includes both the fixed payments for which the Company has a contractual obligation, as well as the Company’s estimate of the future Actual Free Cash Flows and resulting variable amortization. The last payment due on December 31, 2018, will also include the unamortized remaining principal debt balances, as such amount will be determinable following the fixed and variable amortization.

 

Maturities of Hyundai Samho vendor financing for the next periods subsequent to June 30, 2013, are as follows (in thousands):

 

Payment due by period ended

 

 

 

June 30, 2014

 

$

57,388

 

June 30, 2015

 

57,388

 

June 30, 2016

 

35,672

 

Total vendor financing

 

$

150,448

 

 

As of February 9, 2012, the Company signed a supplemental letter extending the terms of the August 12, 2010 supplemental letter through June 30, 2014, which amended the interest rate margin and the financial covenants of its KEXIM-ABN Amro credit facility. More specifically, the financial covenants were aligned with those set forth in the Bank Agreement (see below), and the interest rate margin was increased by 0.5 percentage points for the same period.

 

Bank Agreement

 

On January 24, 2011, the Company entered into a definitive agreement, which became effective on March 4, 2011, referred to as the Bank Agreement, that superseded, amended and supplemented the terms of each of the Company’s then-existing credit facilities (other than its credit facilities with KEXIM and KEXIM-ABN Amro which are not covered thereby), and provided for, among other things, revised amortization schedules, maturities, interest rates, financial covenants, events of defaults, guarantee and security packages and approximately $425 million of new debt financing. Subject to the terms of the Bank Agreement and the intercreditor agreement (the “Intercreditor Agreement”), which the Company entered into with each of the lenders participating under the Bank Agreement to govern the relationships between the lenders thereunder, under the New Credit Facilities (as described and defined below) and under the Hyundai Samho Vendor Financing described below, the lenders participating thereunder continue to provide the Company’s then-existing credit facilities and amended the covenants under the existing credit facilities in accordance with the terms of the Bank Agreement.

 

Under the terms of the Bank Agreement, borrowings under each of the Company’s existing credit facilities, other than the KEXIM and KEXIM-ABN Amro credit facilities which are not covered by the Bank Agreement, bear interest at an annual interest rate of LIBOR plus a margin of 1.85%.

 

The Company is required to pay an amendment fee of $5.0 million on December 31, 2014. This amendment fee was accrued under the “Other long-term liabilities” in the consolidated balance sheet and is deferred and amortized over the life of the respective credit facilities with the effective interest method. In addition, the Company is required to pay exit fees, which are discussed in detail below.

 

Principal Payments

 

Under the terms of the Bank Agreement, the Company was not required to repay any outstanding principal amounts under its existing credit facilities, other than the KEXIM and KEXIM-ABN Amro credit facilities which are not covered by the Bank Agreement, until May 15, 2013; thereafter until December 31, 2018, the Company is required to make quarterly principal payments in fixed amounts, in relation to the Company’s total debt commitments from the Company’s lenders under the Bank Agreement and New Credit Facilities, as specified in the table below:

 

 

 

February 15,

 

May 15,

 

August 15,

 

November 15,

 

December 31,

 

Total

 

2013

 

 

19,481,395

 

21,167,103

 

21,482,169

 

 

62,130,667

 

2014

 

22,722,970

 

21,942,530

 

22,490,232

 

24,654,040

 

 

91,809,772

 

2015

 

26,736,647

 

27,021,750

 

25,541,180

 

34,059,102

 

 

113,358,679

 

2016

 

30,972,971

 

36,278,082

 

32,275,598

 

43,852,513

 

 

143,379,164

 

2017

 

44,938,592

 

36,690,791

 

35,338,304

 

31,872,109

 

 

148,839,796

 

2018

 

34,152,011

 

37,585,306

 

44,398,658

 

45,333,618

 

65,969,274

 

227,438,867

 

Total

 

 

 

 

 

 

 

 

 

 

 

786,956,945

 

 

 

*                      The Company may elect to make the scheduled payments shown in the above table three months earlier.

 

Furthermore, an additional variable payment in such amount that, together with the fixed principal payment (as disclosed above), equals 92.5% of Actual Free Cash Flow of the preceding financial quarter until the earlier of (x) the date on which the Company’s consolidated net leverage is below 6:1 and (y) May 15, 2015; and thereafter through maturity, which will be December 31, 2018 for each covered credit facility, it will be required to make fixed quarterly principal payments in fixed amounts as specified in the Bank Agreement and described above plus an additional payment in such amount that, together with the fixed principal payment, equals 89.5% of Actual Free Cash Flow of the preceding financial quarter. In addition, any additional amounts of cash and cash equivalents, but during the final principal payment period described above only such additional amounts in excess of the greater of (1) $50 million of accumulated unrestricted cash and cash equivalents and (2) 2% of the Company’s consolidated debt, would be applied first to the prepayment of the New Credit Facilities and after the New Credit Facilities are repaid, to the existing credit facilities. The last payment due on December 31, 2018 will also include the unamortized remaining principal debt balances, as such amount will be determinable following the fixed and variable amortization.

 

Under the Bank Agreement, “Actual Free Cash Flow” with respect to each credit facility covered thereby is equal to revenue from the vessels collateralizing such facility, less the sum of (a) interest expense under such credit facility, (b) pro-rata portion of payments under its interest rate swap arrangements, (c) interest expense and scheduled amortization under the Hyundai Samho Vendor Financing and (d) per vessel operating expenses and pro rata per vessel allocation of general and administrative expenses (which are not permitted to exceed the relevant budget by more than 20%), plus (e) the pro-rata share of operating cash flow of any Applicable Second Lien Vessel (which means, with respect to an existing facility, a vessel with respect to which the participating lenders under such facility have a second lien security interest and the first lien credit facility has been repaid in full).

 

Under the terms of the Bank Agreement, the Company continues to be required to make any mandatory prepayments provided for under the terms of its existing credit facilities and is required to make additional prepayments as follows

 

·                                         50% of the first $300 million of net equity proceeds (including convertible debt and hybrid instruments), excluding the $200 million of net equity proceeds which was a condition to the Bank Agreement and were received in August 2010 for which there are no specified required uses, after entering into the Bank Agreement and 25% of any additional net equity proceeds thereafter until December 31, 2018; and

 

·                                         any debt proceeds (after repayment of any underlying secured debt covered by vessels collateralizing the new borrowings) (excluding the New Credit Facilities, the Sinosure-CEXIM Credit Facility and the Hyundai Samho Vendor Financing),

 

which amounts would first be applied to repayment of amounts outstanding under the New Credit Facilities and then to the existing credit facilities. Any equity proceeds retained by the Company and not used within 12 months for certain specified purposes would be applied for prepayment of the New Credit Facilities and then to the existing credit facilities. The Company would also be required to prepay the portion of a credit facility attributable to a particular vessel upon the sale or total loss of such vessel; the termination or loss of an existing charter for a vessel, unless replaced within a specified period by a similar charter acceptable to the lenders; or the termination of a newbuilding contract. The Company’s respective lenders under its existing credit facilities covered by the Bank Agreement and the New Credit Facilities may, at their option, require the Company to repay in full amounts outstanding under such respective credit facilities, upon a “Change of Control” of the Company, which for these purposes is defined as (i) Dr. Coustas ceasing to be its Chief Executive Officer, (ii) its common stock ceasing to be listed on the NYSE (or Nasdaq or other recognized stock exchange), (iii) a change in the ultimate beneficial ownership of the capital stock of any of its subsidiaries or ultimate control of the voting rights of those shares, (iv) Dr. Coustas and members of his family ceasing to collectively own over one-third of the voting interest in its outstanding capital stock or (v) any other person or group controlling more than 20% of the voting power of its outstanding capital stock.

 

Covenants and Events of Default

 

Under the Bank Agreement, the financial covenants under each of the Company’s existing credit facilities (other than under the KEXIM-ABN Amro credit facility which is not covered thereby, but which has been aligned with those covenants below through June 30, 2014 under the supplemental letter dated August 12, 2010 and amendment thereto dated February 9, 2012 and our KEXIM credit facility, which contains only a collateral coverage covenant of 130%), have been reset to require the Company to:

 

·                                         maintain a ratio of (i) the market value of all of the vessels in the Company’s fleet, on a charter-inclusive basis, plus the net realizable value of any additional collateral, to (ii) the Company’s consolidated total debt above specified minimum levels gradually increasing from 90% through December 31, 2011 to 130% from September 30, 2017 through September 30, 2018;

 

·                                         maintain a minimum ratio of (i) the market value of the nine vessels (Hyundai Smart, Hyundai Speed, Hyundai Ambition, Hyundai Together, Hyundai Tenacity, Hanjin Greece, Hanjin Italy, Hanjin Germany and CMA CGM Rabelais) collateralizing the New Credit Facilities, calculated on a charter-free basis, plus the net realizable value of any additional collateral, to (ii) the Company’s aggregate debt outstanding under the New Credit Facilities of 100% from September 30, 2012 through September 30, 2018;

 

·                                         maintain minimum free consolidated unrestricted cash and cash equivalents, less the amount of the aggregate variable principal amortization amounts, described above, of $30.0 million at the end of each calendar quarter, other than during 2012 when the Company will be required to maintain a minimum amount of $20.0 million;

 

·                                         ensure that the Company’s (i) consolidated total debt less unrestricted cash and cash equivalents to (ii) consolidated EBITDA (defined as net income before interest, gains or losses under any hedging arrangements, tax, depreciation, amortization and any other non-cash item, capital gains or losses realized from the sale of any vessel, finance charges and capital losses on vessel cancellations and before any non-recurring items and excluding any accrued interest due to us but not received on or before the end of the relevant period; provided that non-recurring items excluded from this calculation shall not exceed 5% of EBITDA calculated in this manner) for the last twelve months does not exceed a maximum ratio gradually decreasing from 12:1 on December 31, 2010 to 4.75:1 on September 30, 2018;

 

·                                         ensure that the ratio of the Company’s (i) consolidated EBITDA for the last twelve months to (ii) net interest expense (defined as interest expense (excluding capitalized interest), less interest income, less realized gains on interest rate swaps (excluding capitalized gains) and plus realized losses on interest rate swaps (excluding capitalized losses)) exceeds a minimum level of 1.50:1 through September 30, 2013 and thereafter gradually increasing to 2.80:1 by September 30, 2018; and

 

·                                         maintain a consolidated market value adjusted net worth (defined as the amount by which the Company’s total consolidated assets adjusted for the market value of the Company’s vessels in the water less cash and cash equivalents in excess of the Company’s debt service requirements exceeds the Company’s total consolidated liabilities after excluding the net asset or liability relating to the fair value of derivatives as reflected in the Company’s financial statements for the relevant period) of at least $400 million.

 

For the purpose of these covenants, the market value of the Company’s vessels will be calculated, except as otherwise indicated above, on a charter-inclusive basis (using the present value of the “bareboat-equivalent” time charter income from such charter) so long as a vessel’s charter has a remaining duration at the time of valuation of more than 12 months plus the present value of the residual value of the relevant vessel (generally equivalent to the charter free value of such a vessel at the age such vessel would be at the expiration of the existing time charter). The market value for newbuilding vessels, all of which currently have multi-year charters, would equal the lesser of such amount and the newbuilding vessel’s book value.

 

Under the terms of the Bank Agreement, the existing credit facilities also contain customary events of default, including those relating to cross-defaults to other indebtedness, defaults under its swap agreements, non-compliance with security documents, material adverse changes to its business, a Change of Control as described above, a change in its Chief Executive Officer, its common stock ceasing to be listed on the NYSE (or Nasdaq or another recognized stock exchange), a change in, or breach of the management agreement by the manager for the vessels securing the respective credit facilities and cancellation or amendment of the time charters (unless replaced with a similar time charter with a charterer acceptable to the lenders) for the vessels securing the respective credit facilities.

 

Under the terms of the Bank Agreement, the Company generally will not be permitted to incur any further financial indebtedness or provide any new liens or security interests, unless such security is provided for the equal and ratable benefit of each of the lenders party to the Intercreditor Agreement, other than security arising by operation of law or in connection with the refinancing of outstanding indebtedness, with the consent, not to be unreasonably withheld, of all lenders with a lien on the security pledged against such outstanding indebtedness. In addition, the Company would not be permitted to pay cash dividends or repurchase shares of its capital stock unless (i) its consolidated net leverage is below 6:1 for four consecutive quarters and (ii) the ratio of the aggregate market value of its vessels to its outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an event of default has not occurred and the Company is not, and after giving effect to the payment of the dividend, in breach of any covenant.

 

Collateral and Guarantees

 

Each of the Company’s existing credit facilities and swap arrangements, to the extent applicable, continue to be secured by their previous collateral on the same basis, and received, to the extent not previously provided, pledges of the shares of the Company’s subsidiaries owning the vessels collateralizing the applicable facilities, cross-guarantees from each subsidiary owning the vessels collateralizing such facilities, assignment of the refund guarantees in relation to any newbuildings funded by such facilities and other customary shipping industry collateral.

 

New Credit Facilities (Aegean Baltic Bank—HSH Nordbank—Piraeus Bank, RBS, ABN Amro Club facility, Club Facility and Citi-Eurobank)

 

On January 24, 2011, the Company entered into agreements for the following new term loan credit facilities (“New Credit Facilities”):

 

(i)                                    a $123.8 million credit facility provided by HSH, which is secured by Hyundai Speed, Hanjin Italy and CMA CGM Rabelais and customary shipping industry collateral related thereto;

 

(ii)                                 a $100.0 million credit facility provided by RBS, which is secured by Hyundai Smart and Hanjin Greece and customary shipping industry collateral related thereto;

 

(iii)                              a $37.1 million credit facility with ABN Amro and lenders participating under the Bank Agreement which is secured by Hanjin Germany and customary shipping industry collateral related thereto;

 

(iv)                             a $83.9 million new club credit facility to be provided, on a pro rata basis, by the other existing lenders participating under the Bank Agreement, which is secured by Hyundai Together and Hyundai Tenacity and customary shipping industry collateral related thereto; and

 

(v)                                a $80 million credit facility with Citibank and Eurobank, which is secured by Hyundai Ambition and customary shipping industry collateral related thereto ((i)-(v), collectively, the “New Credit Facilities”).

 

As of June 30, 2013, $411.1 million was outstanding under the above New Credit Facilities and there were nil undrawn funds available.

 

Borrowings under each of the New Credit Facilities above bear interest at an annual interest rate of LIBOR plus a margin of 1.85%, subject, on and after January 1, 2013, to increases in the applicable margin to: (i) 2.50% if the aggregate outstanding indebtedness thereunder exceeds $276 million, (ii) 3.00% if the aggregate outstanding indebtedness thereunder exceeds $326 million and (iii) 3.50% if the aggregate outstanding indebtedness thereunder exceeds $376 million.

 

Principal Payments

 

Under the Bank Agreement, the Company was not required to repay any outstanding principal amounts under its New Credit Facilities until May 15, 2013 and thereafter it is required to make quarterly principal payments in fixed amounts as specified in the Bank Agreement plus an additional quarterly variable amortization payment, all as described above under “—Bank Agreement—Principal Payments.”

 

Covenants, Events of Default and Other Terms

 

The New Credit Facilities contain substantially the same financial and operating covenants, events of default, dividend restrictions and other terms and conditions as applicable to the Company’s existing credit facilities as revised under the Bank Agreement described above.

 

Collateral and Guarantees

 

The collateral described above relating to the newbuildings financed by the respective credit facilities, will be (other than in respect of the CMA CGM Rabelais) subject to a limited participation by Hyundai Samho in any enforcement thereof until repayment of the related Hyundai Samho Vendor financing (described below) for such vessels. In addition lenders who participate in the new $83.9 million club credit facility described above received a lien on Hyundai Together and Hyundai Tenacity as additional security in respect of the existing credit facilities the Company has with such lenders. The lenders under the other New Credit Facilities also received a lien on the respective vessels securing such New Credit Facilities as additional collateral in respect of its existing credit facilities and interest rate swap arrangements with such lenders and Citibank and Eurobank also received a second lien on Hyundai Ambition as collateral in respect of its previously unsecured interest rate arrangements with them.

 

In addition, Aegean Baltic—HSH Nordbank—Piraeus Bank also received a second lien on the Deva (ex Maersk), the CSCL Europe and the CSCL Pusan as collateral in respect of all borrowings from Aegean Baltic—HSH Nordbank—Piraeus Bank and RBS also received a second lien on the Derby D, CSCL America and the CSCL Le Havre as collateral in respect of all borrrowings from RBS.

 

The Company’s obligations under the New Credit Facilities are guaranteed by its subsidiaries owning the vessels collateralizing the respective credit facilities. The Company’s Manager has also provided an undertaking to continue to provide the Company with management services and to subordinate its rights to the rights of its lenders, the security trustee and applicable hedge counterparties.

 

Sinosure-CEXIM-Citi-ABN Amro Credit Facility

 

On February 21, 2011, the Company entered into a bank agreement with Citibank, acting as agent, ABN Amro and the Export-Import Bank of China (“CEXIM”) for a senior secured credit facility (as amended and restated, as described below, the “Sinosure-CEXIM Credit Facility”) of up to $203.4 million, in three tranches each in an amount equal to the lesser of $67.8 million and 60.0% of the contract price for the newbuilding vessels, CMA CGM Tancredi, CMA CGM Bianca and CMA CGM Samson, securing such tranche for post-delivery financing of these vessels. The Company took delivery of the respective vessels in 2011. The China Export & Credit Insurance Corporation, or Sinosure, covers a number of political and commercial risks associated with each tranche of the credit facility.

 

Borrowings under the Sinosure-CEXIM Credit Facility bear interest at an annual interest rate of LIBOR plus a margin of 2.85% payable semi-annually in arrears. The Company is required to repay principal amounts drawn under each tranche of the Sinosure-CEXIM Credit Facility in consecutive semi-annual installments over a ten-year period commencing after the delivery of the respective newbuilding being financed by such amount through the final maturity date of the respective tranches and repay the respective tranche in full upon the loss of the respective newbuilding.

 

As of June 30, 2013, $172.9 million was outstanding under the credit facility and there were no undrawn funds available.

 

Covenants, Events of Default and Other Terms

 

The Sinosure-CEXIM credit facility was amended and restated, effective on June 30, 2013, to align its financial covenants with the Company’s Bank Agreement (except for the minimum ratio of the charter free market value of certain vessels, as described in the Bank Agreement, which is not applicable) described above and continues to require the Company to maintain a minimum ratio of the market value of the vessel collateralizing a tranche of the facility to debt outstanding under such tranche of 125%.

 

The Sinosure-CEXIM credit facility also contains customary events of default, including those relating to cross-defaults to other indebtedness, defaults under its swap agreements, non-compliance with security documents, material adverse changes to its business, a Change of Control as described above, a change in its Chief Executive Officer, its common stock ceasing to be listed on the NYSE (or Nasdaq or another recognized stock exchange), a change in, or breach of the management agreement by, the manager for the mortgaged vessels and cancellation or amendment of the time charters (unless replaced with a similar time charter with a charterer acceptable to the lenders) for the mortgaged vessels.

 

The Company will not be permitted to pay cash dividends or repurchase shares of its capital stock unless (i) its consolidated net leverage is below 6:1 for four consecutive quarters and (ii) the ratio of the aggregate market value of its vessels to its outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an event of default has not occurred and the Company is not, and after giving effect to the payment of the dividend is not, in breach of any covenant

 

Collateral

 

The Sinosure-CEXIM Credit Facility is secured by customary post-delivery shipping industry collateral with respect to the vessels, the CMA CGM Tancredi, the CMA CGM Bianca and the CMA CGM Samson, securing the respective tranche.

 

Hyundai Samho Vendor Financing

 

The Company entered into an agreement with Hyundai Samho Heavy Industries (“Hyundai Samho”) for a financing facility of $190.0 million in respect of eight of its newbuilding containerships being built by Hyundai Samho, Hyundai Smart, Hyundai Speed, Hyundai Ambition, Hyundai Together, Hyundai Tenacity, Hanjin Greece, Hanjin Italy and Hanjin Germany, in the form of delayed payment of a portion of the final installment for each such newbuilding. As of June 30, 2013, outstanding balance of the respective credit facility was $150.4 million.

 

Borrowings under this facility bear interest at a fixed interest rate of 8%. The Company will be required to repay principal amounts under this financing facility in six consecutive semi-annual installments commencing one and a half years, in the case of three of the newbuilding vessels being financed, and in seven consecutive semi-annual installments commencing one year, in the case of the other five newbuilding vessels, after the delivery of the respective newbuilding being financed. This financing facility does not require the Company to comply with financial covenants, but contains customary events of default, including those relating to cross-defaults. This financing facility is secured by second priority collateral related to the newbuilding vessels being financed.

 

Exit Fees

 

The Company will be required to pay an Initial Exit Fee of $15.0 million. Furthermore, the Company will be required to pay an Additional Exit Fee of $10.0 million, if it does not repay at least $150.0 million in the aggregate with equity proceeds by December 31, 2013. Both Exit Fees, in the respective proportion to Existing Facilities and New Money Facilities, are payable the earlier of (a) December 31, 2018 and (b) the date on which the respective facilities are repaid in full. The Exit Fees will accrete in the condensed consolidated Statement of Income over the life of the respective facilities (with the effective interest method) and are reported under “Long-term debt, net of current portion” in the condensed consolidated Balance Sheet. The Company has recognized an amount of $6.2 million and $4.4 million as of June 30, 2013 and December 31, 2012, respectively.

 

Credit Facilities Summary Table

 

Lender

 

Outstanding
Principal
Amount
(in millions)(1)

 

Collateral Vessels

 

The Royal Bank of Scotland(2)

 

$

686.6

 

The Hyundai Progress, the Hyundai Highway, the Hyundai Bridge, the Hyundai Federal (ex APL Federal), the Zim Monaco, the Hanjin Buenos Aires, the Hanjin Versailles, the Hanjin Algeciras, the CMA CGM Racine and the CMA CGM Melisande

 

Aegean Baltic Bank—HSH Nordbank—Piraeus Bank(3)

 

$

658.2

 

The Kalamata, the Komodo, the Commodore (ex Hyundai Commodore), the Hyundai Duke (ex APL Duke), the Marathonas, the Messologi, the Mytilini, the Hope, the Lotus, the Hyundai Vladivostok, the Hyundai Advance, the Hyundai Stride, the Hyundai Future, the Hyundai Sprinter, the Amalia C and the Niledutch Zebra

 

Credit Agricole

 

$

154.7

 

The CMA CGM Moliere and the CMA CGM Musset

 

Deutsche Bank

 

$

179.1

 

The Zim Rio Grande, the Zim Sao Paolo and the Zim Kingston

 

Credit Suisse

 

$

219.3

 

The Zim Luanda, the CMA CGM Nerval and the YM Mandate

 

ABN Amro—Lloyds TSB—National Bank of Greece

 

$

250.8

 

The YM Colombo (ex SNL Colombo), the YM Seattle, the YM Vancouver and the YM Singapore

 

Commerzbank—Credit Suisse—Credit Agricole

 

$

295.3

 

The ZIM Dalian, the Hanjin Santos, the YM Maturity, the Hanjin Constantza and the CMA CGM Attila

 

HSH Nordbank

 

$

33.3

 

The Deva and the Derby D

 

KEXIM

 

$

34.1

 

The CSCL Europe and the CSCL America

 

KEXIM-ABN Amro

 

$

73.7

 

The CSCL Pusan and the CSCL Le Havre

 

Aegean Baltic—HSH Nordbank—Piraeus Bank(3)

 

$

117.2

 

The Hyundai Speed, the Hanjin Italy and the CMA CGM Rabelais

 

RBS(2)

 

$

98.2

 

The Hyundai Smart and the Hanjin Germany

 

ABN Amro Club Facility

 

$

34.6

 

The Hanjin Greece

 

Club Facility

 

$

83.9

 

The Hyundai Together and the Hyundai Tenacity

 

Citi-Eurobank

 

$

77.2

 

The Hyundai Ambition

 

Sinosure-CEXIM

 

$

172.9

 

The CMA CGM Tancredi, the CMA CGM Bianca and the CMA CGM Samson

 

Vendor Financing

 

Hyundai Samho

 

$

150.4

 

Second priority liens on the Hyundai Smart, the Hyundai Speed, the Hyundai Ambition, the Hyundai Together, the Hyundai Tenacity, the Hanjin Greece, the Hanjin Italy and the Hanjin Germany

 

 

 

(1)                                          As of June 30, 2013.

(2)                                          Pursuant to the Bank Agreement, this credit facility is also secured by a second priority lien on the Derby D, the CSCL America and the CSCL Le Havre.

(3)                                          Pursuant to the Bank Agreement, this credit facility is also secured by a second priority lien on the Deva, the CSCL Europe and the CSCL Pusan.

 

As of June 30, 2013, there was no remaining borrowing availability under the Company’s credit facilities. The Company was in compliance with the covenants under its Bank Agreement and its other credit facilities as of June 30, 2013.

Financial Instruments
Financial Instruments

10                    Financial Instruments

 

The principal financial assets of the Company consist of cash and cash equivalents, trade receivables and other assets. The principal financial liabilities of the Company consist of long-term bank loans, accounts payable and derivatives.

 

Derivative Financial Instruments:  The Company only uses derivatives for economic hedging purposes. The following is a summary of the Company’s risk management strategies and the effect of these strategies on the Company’s condensed consolidated financial statements.

 

Interest Rate Risk:  Interest rate risk arises on bank borrowings. The Company monitors the interest rate on borrowings closely to ensure that the borrowings are maintained at favorable rates.

 

Concentration of Credit Risk:  Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, trade accounts receivable and derivatives. The Company places its temporary cash investments, consisting mostly of deposits, with established financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. The Company is exposed to credit risk in the event of non-performance by counterparties to derivative instruments, however, the Company limits this exposure by diversifying among counterparties with high credit ratings. The Company depends upon a limited number of customers for a large part of its revenues. Credit risk with respect to trade accounts receivable is generally managed by the selection of customers among the major liner companies in the world and their dispersion across many geographic areas. The Company’s maximum exposure to credit risk is mainly limited to the carrying value of its derivative instruments. The Company is not a party to master netting arrangements.

 

Fair Value:  The carrying amounts reflected in the accompanying condensed consolidated balance sheets of financial assets and liabilities excluding long-term bank loans approximate their respective fair values due to the short maturity of these instruments. The fair values of long-term floating rate bank loans approximate the recorded values, generally due to their variable interest rates. The fair value of the swap agreements equals the amount that would be paid by the Company to cancel the swaps.

 

Interest Rate Swaps:  The off-balance sheet risk in outstanding swap agreements involves both the risk of a counter-party not performing under the terms of the contract and the risk associated with changes in market value. The Company monitors its positions, the credit ratings of counterparties and the level of contracts it enters into with any one party. The counterparties to these contracts are major financial institutions. The Company has a policy of entering into contracts with parties that meet stringent qualifications and, given the high level of credit quality of its derivative counter-parties, the Company does not believe it is necessary to obtain collateral arrangements.

 

a.  Cash Flow Interest Rate Swap Hedges

 

The Company, according to its long-term strategic plan to maintain relative stability in its interest rate exposure, has decided to swap part of its interest expense from floating to fixed. To this effect, the Company has entered into interest rate swap transactions with varying start and maturity dates, in order to pro-actively and efficiently manage its floating rate exposure.

 

These interest rate swaps are designed to economically hedge the variability of interest cash flows arising from floating rate debt, attributable to movements in three-month USD$ LIBOR. According to the Company’s Risk Management Accounting Policy, and after putting in place the formal documentation required by hedge accounting in order to designate these swaps as hedging instruments, as from their inception, these interest rate swaps qualified for hedge accounting, and, accordingly, from that time until June 30, 2012, only hedge ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item were recognized in the Company’s earnings. Assessment and measurement of prospective and retrospective effectiveness for these interest rate swaps were performed on a quarterly basis. For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge was recognized initially in stockholders’ equity, and recognized to the Statement of Income in the periods when the hedged item affects profit or loss.

 

On July 1, 2012, the Company elected to prospectively de-designate cash flow interest rate swaps for which it was obtaining hedge accounting treatment due to the compliance burden associated with this accounting policy. As a result, all changes in the fair value of the Company’s cash flow interest rate swap agreements are recorded in earnings under “Unrealized and Realized Losses on Derivatives” from the de-designation date forward. The Company evaluated whether it is probable that the previously hedged forecasted interest payments are probable to not occur in the originally specified time period. The Company has concluded that the previously hedged forecasted interest payments are probable of occurring. Therefore, unrealized gains or losses in accumulated other comprehensive loss associated with the previously designated cash flow interest rate swaps will remain in accumulated other comprehensive loss and recognized in earnings when the interest payments will be recognized. If such interest payments were to be identified as being probable of not occurring, the accumulated other comprehensive loss balance pertaining to these amounts would be reversed through earnings immediately.

 

The interest rate swap agreements converting floating interest rate exposure into fixed were as follows (in thousands):

 

Counter-party

 

Contract
Trade
Date

 

Effective
Date

 

Termination
Date

 

Notional
Amount on
Effective
Date

 

Fixed Rate
(Danaos
pays)

 

Floating Rate
(Danaos receives)

 

Fair Value
June 30,
2013

 

Fair Value
December 31,
2012

 

RBS

 

03/09/2007

 

3/15/2010

 

3/15/2015

 

$

200,000

 

5.07

% p.a.

USD LIBOR 3M BBA

 

$

(16,003

)

$

(20,759

)

RBS

 

03/16/2007

 

3/20/2009

 

3/20/2014

 

$

200,000

 

4.922

% p.a.

USD LIBOR 3M BBA

 

(6,716

)

(11,253

)

RBS

 

11/28/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.855

% p.a.

USD LIBOR 3M BBA

 

(1,925

)

(4,172

)

RBS

 

11/28/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.875

% p.a.

USD LIBOR 3M BBA

 

(1,934

)

(4,190

)

RBS

 

12/01/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.78

% p.a.

USD LIBOR 3M BBA

 

(1,894

)

(4,103

)

HSH Nordbank

 

12/06/2006

 

12/8/2009

 

12/8/2014

 

$

400,000

 

4.855

% p.a.

USD LIBOR 3M BBA

 

(25,866

)

(34,952

)

CITI

 

04/17/2007

 

4/17/2008

 

4/17/2015

 

$

200,000

 

5.124

% p.a.

USD LIBOR 3M BBA

 

(16,919

)

(21,792

)

CITI

 

04/20/2007

 

4/20/2010

 

4/20/2015

 

$

200,000

 

5.1775

% p.a.

USD LIBOR 3M BBA

 

(17,186

)

(22,116

)

RBS

 

09/13/2007

 

9/15/2009

 

9/15/2014

 

$

200,000

 

4.9775

% p.a.

USD LIBOR 3M BBA

 

(11,284

)

(15,882

)

RBS

 

11/16/2007

 

11/22/2010

 

11/22/2015

 

$

100,000

 

5.07

% p.a.

USD LIBOR 3M BBA

 

(10,839

)

(13,424

)

RBS

 

11/15/2007

 

11/19/2010

 

11/19/2015

 

$

100,000

 

5.12

% p.a.

USD LIBOR 3M BBA

 

(10,920

)

(13,523

)

Eurobank

 

12/06/2007

 

12/10/2010

 

12/10/2015

 

$

200,000

 

4.8125

% p.a.

USD LIBOR 3M BBA

 

(21,054

)

(25,725

)

CITI

 

10/23/2007

 

10/25/2009

 

10/27/2014

 

$

250,000

 

4.9975

% p.a.

USD LIBOR 3M BBA

 

(15,437

)

(21,241

)

CITI

 

11/02/2007

 

11/6/2010

 

11/6/2015

 

$

250,000

 

5.1

% p.a.

USD LIBOR 3M BBA

 

(26,749

)

(33,273

)

CITI

 

11/26/2007

 

11/29/2010

 

11/30/2015

 

$

100,000

 

4.98

% p.a.

USD LIBOR 3M BBA

 

(10,658

)

(13,243

)

CITI

 

02/07/2008

 

2/11/2011

 

2/11/2016

 

$

200,000

 

4.695

% p.a.

USD LIBOR 3M BBA

 

(21,234

)

(26,357

)

Eurobank

 

02/11/2008

 

5/31/2011

 

5/31/2015

 

$

200,000

 

4.755

% p.a.

USD LIBOR 3M BBA

 

(16,542

)

(21,043

)

Fair value of swap liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(233,160

)

$

(307,048

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABN Amro

 

06/6/2013

 

1/4/2016

 

12/31/2016

 

$

325,000

 

1.4975

% p.a.

USD LIBOR 3M BBA

 

1,124

 

 

ABN Amro

 

06/4/2013

 

1/4/2016

 

12/31/2016

 

$

250,000

 

1.4125

% p.a.

USD LIBOR 3M BBA

 

1,074

 

 

Fair value of swap assets

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,198

 

$

 

 

The Company recorded in the condensed consolidated statements of income unrealized gains of $76.0 million and $2.2 million in relation to fair value changes of interest rate swaps for the six months ended June 30, 2013 and 2012, respectively, and hedge ineffectiveness gains of $1.8 million for the six months ended June 30, 2012. Furthermore, unrealized losses of $58.8 million were reclassified from Accumulated Other Comprehensive Loss to earnings for the six months ended June 30, 2013 (following the hedge accounting discontinuance as of July 1, 2012). The total fair value change of the interest rate swaps for the six months ended June 30, 2013 and 2012, amounted to $76.1 million and $42.7 million, respectively.

 

The variable-rate interest on specific borrowings was associated with vessels under construction and was capitalized as a cost of the specific vessels. In accordance with the accounting guidance on derivatives and hedging, the amounts in accumulated other comprehensive income/(loss) related to realized gains or losses on cash flow hedges that have been entered into and qualify for hedge accounting, in order to hedge the variability of that interest, were classified under other comprehensive income/(loss) and are reclassified into earnings over the depreciable life of the constructed asset, since that depreciable life coincides with the amortization period for the capitalized interest cost on the debt. Deferred realized losses on cash flow hedges of nil and $7.0 million were recorded in other comprehensive loss for the six months ended June 30, 2013 and 2012, respectively. In addition, an amount of $2.0 million and $1.5 million was reclassified into earnings for the six months ended June 30, 2013 and 2012, respectively, representing its amortization over the depreciable life of the vessels. Following the delivery of all of our vessels under construction, deferral of realized losses on cash flow hedges was eliminated since June 30, 2012.

 

 

 

Three months
ended
June 30, 2013

 

Three months
ended
June 30, 2012

 

 

 

(in millions)

 

Total realized losses

 

$

(36.6

)

$

(40.4

)

Realized losses deferred in Other Comprehensive Loss

 

 

2.2

 

Realized losses expensed in condensed consolidated Statements of Income

 

(36.6

)

(38.2

)

Amortization of deferred realized losses

 

(1.0

)

(0.8

)

Unrealized gains

 

12.6

 

1.3

 

Unrealized and realized losses on cash flow interest rate swaps

 

$

(25.0

)

$

(37.7

)

 

 

 

Six months
ended
June 30, 2013

 

Six months
ended
June 30, 2012

 

 

 

(in millions)

 

Total realized losses

 

$

(72.5

)

$

(80.4

)

Realized losses deferred in Other Comprehensive Loss

 

 

7.0

 

Realized losses expensed in condensed consolidated Statements of Income

 

(72.5

)

(73.4

)

Amortization of deferred realized losses

 

(2.0

)

(1.5

)

Unrealized gains

 

17.2

 

4.0

 

Unrealized and realized losses on cash flow interest rate swaps

 

$

(57.3

)

$

(70.9

)

 

b.  Fair Value Interest Rate Swap Hedges

 

These interest rate swaps are designed to economically hedge the fair value of the fixed rate loan facilities against fluctuations in the market interest rates by converting the Company’s fixed rate loan facilities to floating rate debt. Pursuant to the adoption of the Company’s Risk Management Accounting Policy, and after putting in place the formal documentation required by hedge accounting in order to designate these swaps as hedging instruments, as of June 15, 2006, these interest rate swaps qualified for hedge accounting, and, accordingly, from that time until June 30, 2012, hedge ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item were recognized in the Company’s earnings. The Company considered its strategic use of interest rate swaps to be a prudent method of managing interest rate sensitivity, as it prevented earnings from being exposed to undue risk posed by changes in interest rates. Assessment and measurement of prospective and retrospective effectiveness for these interest rate swaps was performed on a quarterly basis, on the financial statement and earnings reporting dates.

 

On July 1, 2012, the Company elected to prospectively de-designate fair value interest rate swaps for which it was applying hedge accounting treatment due to the compliance burden associated with this accounting policy. All changes in the fair value of the Company’s fair value interest rate swap agreements continue to be recorded in earnings under “Unrealized and Realized Losses on Derivatives” from the de-designation date forward.

 

The Company evaluated whether it is probable that the previously hedged forecasted interest payments will not occur in the originally specified time period. The Company has concluded that the previously hedged forecasted interest payments continue to be probable of occurring. Therefore, the fair value of the hedged item associated with the previously designated fair value interest rate swaps will be frozen and recognized in earnings when the interest payments are recognized. If such interest payments were to be identified as being probable of not occurring, the fair value of hedged debt balance pertaining to these amounts would be reversed through earnings immediately.

 

The interest rate swap agreements converting fixed interest rate exposure into floating were as follows (in thousands):

 

Counter party

 

Contract
trade Date

 

Effective
Date

 

Termination
Date

 

Notional
Amount
on
Effective
Date

 

Fixed Rate
(Danaos
receives)

 

Floating Rate
(Danaos pays)

 

Fair Value
June 30,
2013

 

Fair Value
December 31,
2012

 

RBS

 

11/15/2004

 

12/15/2004

 

8/27/2016

 

$

60,528

 

5.0125

% p.a.

USD LIBOR 3M BBA + 0.835

% p.a.

$

1,012

 

$

1,390

 

RBS

 

11/15/2004

 

11/17/2004

 

11/2/2016

 

$

62,342

 

5.0125

% p.a.

USD LIBOR 3M BBA + 0.855

% p.a.

1,114

 

1,518

 

Total fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,126

 

$

2,908

 

 

The total fair value change of the interest rate swaps for the period from January 1, 2013 until June 30, 2013, amounted to $0.8 million loss, and is included in the condensed consolidated statement of income in “Unrealized and realized loss on derivatives”. The related asset of $2.1 million is shown under “Other non-current assets” in the condensed consolidated balance sheet. The Company reclassified from “Long-term debt, net of current portion”, where its fair value of hedged item was recorded, to its earnings unrealized gains of $0.3 million for the six months ended June 30, 2013 (following the hedge accounting discontinuance as of July 1, 2012).

 

 

 

Three months
ended
June 30, 2013

 

Three months
ended
June 30, 2012

 

 

 

(in millions)

 

Unrealized losses on swap asset

 

$

(0.4

)

$

(0.2

)

Unrealized gains on fair value of hedged debt

 

 

0.3

 

Amortization of fair value of hedged debt

 

0.1

 

0.2

 

Realized gains

 

0.4

 

0.4

 

Unrealized and realized gains on fair value interest rate swaps

 

$

0.1

 

$

0.7

 

 

 

 

Six months
ended
June 30, 2013

 

Six months
ended
June 30, 2012

 

 

 

(in millions)

 

Unrealized losses on swap asset

 

$

(0.8

)

$

(0.4

)

Unrealized gains on fair value of hedged debt

 

 

0.6

 

Amortization of fair value of hedged debt

 

0.3

 

0.3

 

Realized gains

 

0.7

 

0.9

 

Unrealized and realized gains on fair value interest rate swaps

 

$

0.2

 

$

1.4

 

 

c.  Fair Value of Financial Instruments

 

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

Level I:  Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.

 

Level II: Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.

 

Level III: Inputs that are unobservable. The Company did not use any Level 3 inputs as of June 30, 2013.

 

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

 

 

Fair Value Measurements as of June 30, 2013

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

4,324

 

$

 

$

4,324

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

233,160

 

$

 

$

233,160

 

$

 

 

 

 

Fair Value Measurements as of December 31, 2012

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

2,908

 

$

 

$

2,908

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

307,048

 

$

 

$

307,048

 

$

 

 

Interest rate swap contracts are measured at fair value on a recurring basis. Fair value is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Such instruments are typically classified within Level 2 of the fair value hierarchy. The fair values of the interest rate swap contracts have been calculated by discounting the projected future cash flows of both the fixed rate and variable rate interest payments. Projected interest payments are calculated using the appropriate prevailing market forward rates and are discounted using the zero-coupon curve derived from the swap yield curve. Refer to Note 10(a)-(b) above for further information on the Company’s interest rate swap contracts.

 

The Company is exposed to credit-related losses in the event of nonperformance of its counterparties in relation to these financial instruments. As of June 30, 2013, these financial instruments are in the counterparties’ favor. The Company has considered its risk of non-performance and of its counterparties in accordance with the relevant guidance of fair value accounting. The Company performs evaluations of its counterparties for credit risk through ongoing monitoring of their financial health and risk profiles to identify risk or changes in their credit ratings.

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

 

As of June 30, 2013

 

As of December 31, 2012

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

 

 

 

(in thousands of $)

 

Cash and cash equivalents

 

$

75,034

 

$

75,034

 

$

55,628

 

$

55,628

 

Restricted cash

 

$

18,841

 

$

18,841

 

$

3,251

 

$

3,251

 

Accounts receivable, net

 

$

10,669

 

$

10,669

 

$

3,741

 

$

3,741

 

Due from related parties

 

$

8,052

 

$

8,052

 

$

12,664

 

$

12,664

 

Notes receivable from ZIM

 

$

34,821

 

$

34,503

 

$

33,899

 

$

34,071

 

Accounts payable

 

$

12,573

 

$

12,573

 

$

13,982

 

$

13,982

 

Accrued liabilities

 

$

33,134

 

$

33,134

 

$

32,894

 

$

32,894

 

Long-term debt, including current portion

 

$

3,177,168

 

$

3,178,764

 

$

3,222,548

 

$

3,223,337

 

Vendor financing, including current portion

 

$

150,448

 

$

149,651

 

$

179,142

 

$

179,500

 

 

The estimated fair value of the financial instruments that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows (in thousands):

 

 

 

Fair Value Measurements as of June 30, 2013

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $ )

 

Notes receivable from ZIM(1)

 

$

34,503

 

$

 

$

34,503

 

$

 

Long-term debt, including current portion(2)

 

$

3,178,764

 

$

 

$

$3,178,764

 

$

 

Vendor financing, including current portion(3)

 

$

149,651

 

$

 

$

 149,651

 

$

 

Accrued liabilities(4)

 

$

33,134

 

$

 

$

 33,134

 

$

 

 

 

 

Fair Value Measurements as of December 31, 2012

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Notes receivable from ZIM(1)

 

$

34,071

 

$

 

$

34,071

 

$

 

Long-term debt, including current portion(2)

 

$

3,223,337

 

$

 

$

3,223,337

 

$

 

Vendor financing, including current portion(3)

 

$

179,500

 

$

 

$

179,500

 

$

 

Accrued liabilities(4)

 

$

32,894

 

$

 

$

32,894

 

$

 

 

 

(1)              The fair value is estimated based on currently available information on the Company’s counterparty, other contracts with similar terms, remaining maturities and interest rates.

 

(2)              The fair value of the Company’s debt is estimated based on currently available debt with similar contract terms, interest rate and remaining maturities, as well as taking into account our creditworthiness.

 

(3)              The fair value of the Company’s Vendor financing is estimated based on currently available financing with similar contract terms, interest rate and remaining maturities, as well as taking into account our creditworthiness.

 

(4)              The fair value of the Company’s accrued liabilities, which mainly consists of accrued interest on our credit facilities and accrued realized losses on our cash flow interest rate swaps, is estimated based on currently available debt and swap agreements with similar contract terms, interest rates and remaining maturities, as well as taking into account our creditworthiness.

Contingencies
Contingencies

11               Contingencies

 

On November 22, 2010, a purported Company shareholder filed a derivative complaint in the High Court of the Republic of the Marshall Islands. The derivative complaint names as defendants seven of the eight members of the Company’s board of directors at the time the complaint was filed. The derivative complaint challenges the amendments in 2009 and 2010 to the Company’s management agreement with Danaos Shipping and certain aspects of the sale of common stock in August 2010. The complaint includes counts for breach of fiduciary duty and unjust enrichment. On February 11, 2011, the Company filed a motion to dismiss the Complaint. After briefing was completed, the Court heard oral argument on October 26, 2011. On December 21, 2011, the Court granted the Company’s motion to dismiss but gave the plaintiff leave to file an amended complaint. Plaintiff filed the amended complaint on January 30, 2012. The amended complaint names the same parties and bases its claims on the same transactions. The Company has moved to dismiss the amended complaint and completed briefing on that motion on July 16, 2012. A hearing on the Company’s motion to dismiss was held on April 24, 2013. On July 3, 2013, the Court granted the Company’s motion to dismiss the amended complaint with prejudice. The Plaintiff has until August 2, 2013 to file an appeal with the Supreme Court of the Marshall Islands.

 

Other than as described above, there are no material legal proceedings to which the Company is a party or to which any of its properties are the subject, or other contingencies that the Company is aware of, other than routine litigation incidental to the Company’s business.

Stockholders' Equity
Stockholders' Equity

12                    Stockholders’ Equity

 

As of April 18, 2008, the Board of Directors and the Compensation Committee approved incentive compensation of Manager’s employees with its shares from time to time, after specific for each such time, decision by the compensation committee and the Board of Directors in order to provide a means of compensation in the form of free shares to certain employees of the Manager of the Company’s common stock. The plan was effective as of December 31, 2008. Pursuant to the terms of the plan, employees of the Manager may receive (from time to time) shares of the Company’s common stock as additional compensation for their services offered during the preceding period. The stock will have no vesting period and the employee will own the stock immediately after grant. The total amount of stock to be granted to employees of the Manager will be at the Company’s Board of Directors’ discretion only and there will be no contractual obligation for any stock to be granted as part of the employees’ compensation package in future periods. During the six months ended June 30, 2013, the Company had not granted any shares under the plan and it issued 35,710 new shares of common stock, which were distributed to the employees of the Manager in full settlement of prior grants.

 

The Company has also established the Directors Share Payment Plan under its 2006 equity compensation plan. The purpose of the plan is to provide a means of payment of all or a portion of compensation payable to directors of the Company in the form of Company’s Common Stock. The plan was effective as of April 18, 2008. Each member of the Board of Directors of the Company may participate in the plan. Pursuant to the terms of the plan, directors may elect to receive in Common Stock all or a portion of their compensation. During 2012, one director elected to receive in Company shares 50% of his compensation and one director elected to receive in Company shares 100% of his compensation only for the first quarter of 2012. During the six months ended June 30, 2013, none of the directors elected to receive their compensation in Company shares. Following December 31 of each year, the Company delivers to each Director the number of shares represented by the rights credited to their Share Payment Account during the preceding calendar year. During the six months ended June 30, 2013 the Company issued 13,613 new shares of common stock, which were distributed to directors of the Company in full settlement of shares credited as of December 31, 2012.

Earnings per Share
Earnings per Share

13                    Earnings per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three months ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

Net income

 

$

19,539

 

$

8,966

 

 

 

 

 

 

 

Denominator (number of shares):

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

109,653

 

109,611