DANAOS CORP, 6-K filed on 7/30/2014
Report of Foreign Issuer
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Document and Entity Information
 
Entity Registrant Name
Danaos Corp 
Entity Central Index Key
0001369241 
Document Type
6-K 
Document Period End Date
Jun. 30, 2014 
Amendment Flag
false 
Current Fiscal Year End Date
--12-31 
Document Fiscal Year Focus
2014 
Document Fiscal Period Focus
Q2 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 51,506 
$ 68,153 
Restricted cash
3,250 
14,717 
Accounts receivable, net
8,743 
8,038 
Inventories
11,320 
14,496 
Prepaid expenses
694 
819 
Due from related parties
13,464 
14,459 
Other current assets
14,671 
6,184 
Total current assets
103,648 
126,866 
Fixed assets, net
3,730,498 
3,842,617 
Deferred charges, net
61,775 
67,949 
Restricted cash, net of current portion
55,151 
 
Other non-current assets
27,600 
29,120 
Total non-current assets
3,875,024 
3,939,686 
Total assets
3,978,672 
4,066,552 
CURRENT LIABILITIES
 
 
Accounts payable
13,720 
13,124 
Accrued liabilities
29,203 
30,911 
Current portion of long-term debt
150,062 
146,462 
Current portion of vendor financing
57,388 
57,388 
Unearned revenue
7,862 
7,305 
Other current liabilities
90,897 
114,698 
Total current liabilities
349,132 
369,888 
LONG-TERM LIABILITIES
 
 
Long-term debt, net of current portion
2,886,006 
2,965,641 
Vendor financing, net of current portion
35,673 
64,367 
Other long-term liabilities
34,136 
68,180 
Total long-term liabilities
2,955,815 
3,098,188 
Total liabilities
3,304,947 
3,468,076 
Commitments and Contingencies
   
   
STOCKHOLDERS' EQUITY
 
 
Preferred stock (par value $0.01, 100,000,000 preferred shares authorized and not issued as of June 30, 2014 and December 31, 2013)
   
   
Common stock (par value $0.01, 750,000,000 common shares authorized as of June 30, 2014 and December 31, 2013. 109,669,429 and 109,653,363 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)
1,097 
1,097 
Additional paid-in capital
546,097 
546,097 
Accumulated other comprehensive loss
(182,498)
(232,697)
Retained earnings
309,029 
283,979 
Total stockholders' equity
673,725 
598,476 
Total liabilities and stockholders' equity
$ 3,978,672 
$ 4,066,552 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2014
Dec. 31, 2013
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
109,669,429 
109,653,363 
Common stock, shares outstanding
109,669,429 
109,653,363 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
OPERATING REVENUES
$ 136,440 
$ 146,580 
$ 271,926 
$ 292,668 
OPERATING EXPENSES
 
 
 
 
Voyage expenses
(3,245)
(2,822)
(6,520)
(5,879)
Vessel operating expenses
(28,903)
(31,621)
(59,149)
(60,914)
Depreciation
(34,132)
(34,164)
(68,075)
(68,147)
Amortization of deferred drydocking and special survey costs
(1,155)
(1,449)
(2,157)
(3,179)
General and administrative expenses
(5,309)
(4,746)
(10,702)
(9,663)
Gain on sale of vessels
5,216 
171 
5,709 
156 
Income From Operations
68,912 
71,949 
131,032 
145,042 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest income
521 
18 
1,013 
Interest expense
(20,260)
(23,292)
(41,259)
(46,156)
Other finance costs
(4,922)
(5,016)
(9,913)
(10,093)
Other income (expense), net
233 
232 
287 
231 
Unrealized and realized losses on derivatives
(27,323)
(24,855)
(55,115)
(57,066)
Total Other (Expenses) Income, net
(52,269)
(52,410)
(105,982)
(112,071)
Net Income
$ 16,643 
$ 19,539 
$ 25,050 
$ 32,971 
EARNINGS PER SHARE
 
 
 
 
Basic and diluted net income per share (in dollars per share)
$ 0.15 
$ 0.18 
$ 0.23 
$ 0.30 
Basic and diluted weighted average number of common shares (in shares)
109,669 
109,653 
109,669 
109,653 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
Net income for the period
$ 16,643 
$ 19,539 
$ 25,050 
$ 32,971 
Other comprehensive income
 
 
 
 
Amortization of deferred realized losses on cash flow hedges
1,002 
1,002 
1,992 
1,992 
Reclassification of unrealized losses to earnings
23,189 
29,501 
48,207 
58,819 
Total Other Comprehensive Income
24,191 
30,503 
50,199 
60,811 
Comprehensive Income
$ 40,834 
$ 50,042 
$ 75,249 
$ 93,782 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash Flows from Operating Activities
 
 
Net income
$ 25,050 
$ 32,971 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Depreciation
68,075 
68,147 
Amortization of deferred drydocking and special survey costs
2,157 
3,179 
Amortization of finance costs
7,564 
7,754 
Exit fee accrued on debt
1,874 
1,882 
Payments for drydocking/special survey costs deferred
(3,789)
(422)
Gain on sale of vessels
(5,709)
(156)
Amortization of deferred realized losses on interest rate swaps
1,992 
1,992 
Unrealized gains on derivatives
(10,207)
(16,770)
(Increase)/Decrease in
 
 
Accounts receivable
(705)
(6,928)
Inventories
3,176 
2,326 
Prepaid expenses
125 
(2)
Due from related parties
995 
4,612 
Other assets, current and long-term
(8,341)
(1,296)
Increase/(Decrease) in
 
 
Accounts payable
596 
(1,409)
Accrued liabilities
(1,708)
240 
Unearned revenue, current and long term
557 
642 
Other liabilities, current and long-term
1,615 
1,787 
Net Cash provided by Operating Activities
83,317 
98,549 
Cash Flows from Investing Activities
 
 
Vessels additions
(563)
(17,757)
Net proceeds from sale of vessels
50,602 
29,875 
Net Cash provided by Investing Activities
50,039 
12,118 
Cash Flows from Financing Activities
 
 
Payments of long-term debt
(77,625)
(46,977)
Payments of vendor financing
(28,694)
(28,694)
Increase of restricted cash
(43,684)
(15,590)
Net Cash used in Financing Activities
(150,003)
(91,261)
Net (Decrease)/Increase in Cash and Cash Equivalents
(16,647)
19,406 
Cash and Cash Equivalents at beginning of period
68,153 
55,628 
Cash and Cash Equivalents at end of period
$ 51,506 
$ 75,034 
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.

 

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 condensed consolidated financial position as of June 30, 2014, the condensed consolidated results of operations for the three and six months ended June 30, 2014 and 2013 and the condensed consolidated cash flows for the six months ended June 30, 2014 and 2013. 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, 2013. The results of operations for the three and six months ended June 30, 2014, 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 condensed consolidated balance sheets and condensed consolidated statements of operations, 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, 2014, 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

 

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

 

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

 

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

 

Teucarrier (No. 5) Corp.

 

September 17, 2007

 

CMA CGM Melisande

 

2012

 

8,530

 

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

 

Oceanew Shipping Ltd.

 

January 14, 2002

 

CSCL Europe

 

2004

 

8,468

 

Oceanprize Navigation Ltd.

 

January 21, 2003

 

CSCL America

 

2004

 

8,468

 

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

 

Boxcarrier (No. 1) Corp.

 

June 27, 2006

 

CMA CGM Moliere(1)

 

2009

 

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

 

Federal Marine Inc.

 

February 14, 2006

 

Federal

 

1994

 

4,651

 

Auckland Marine Inc.

 

January 27, 2005

 

SNL Colombo

 

2004

 

4,300

 

Wellington Marine Inc.

 

January 27, 2005

 

YM Singapore

 

2004

 

4,300

 

Continent Marine Inc.

 

March 22, 2006

 

Zim Monaco

 

2009

 

4,253

 

Medsea Marine Inc.

 

May 8, 2006

 

OOCL Novorossiysk

 

2009

 

4,253

 

Blacksea Marine Inc.

 

May 8, 2006

 

Zim Luanda

 

2009

 

4,253

 

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

 

OOCL Istanbul

 

2008

 

4,253

 

Seacarriers Services Inc.

 

June 28, 2005

 

YM Seattle

 

2007

 

4,253

 

Seacarriers Lines Inc.

 

June 28, 2005

 

YM Vancouver

 

2007

 

4,253

 

Containers Services Inc.

 

May 30, 2002

 

Deva

 

2004

 

4,253

 

Containers Lines Inc.

 

May 30, 2002

 

Derby D

 

2004

 

4,253

 

Boulevard Shiptrade S.A.

 

September 12, 2013

 

Dimitris C

 

2001

 

3,430

 

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. 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

 

Vilos Navigation Company Ltd.

 

May 30, 2013

 

Niledutch Zebra

 

2001

 

2,602

 

Trindade Maritime Company

 

April 10, 2013

 

Amalia C

 

1998

 

2,452

 

Sarond Shipping Inc.

 

January 18, 2013

 

Niledutch Palanca

 

2001

 

2,524

 

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

 

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

 

Vessels sold during the six months ended June 30, 2014

 

 

 

 

 

 

 

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

 

Duke Marine Inc.

 

April 14, 2003

 

Duka

 

1992

 

4,651

 

Commodore Marine Inc.

 

April 14, 2003

 

Commodore

 

1992

 

4,651

 

 

(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, 2013 filed with the Securities and Exchange Commission on February 28, 2014.

 

Restricted Cash
Restricted Cash

3                              Restricted Cash

 

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

 

 

 

As of
June 30, 2014

 

As of
December 31, 2013

 

Retention account

 

$

2,820

 

$

2,841

 

Restricted deposits

 

55,581

 

11,876

 

Total

 

$

58,401

 

$

14,717

 

 

The Company was required to maintain cash of $2.8 million as of June 30, 2014 and December 31, 2013, 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.

 

Furthermore, the Company recorded current restricted cash of $0.4 million in relation to cash collateral for one of its outstanding swaps as of June 30, 2014 and December 31, 2013 (which swap expires within 2014). In addition, on March 27, 2013, the Company entered into an agreement with the lenders under the HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank credit facility. The agreement provided 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 were to be applied towards prepayment of the respective credit facility. As of December 31, 2013, the Company had concluded the sales of all vessels under the agreement. Furthermore, the Company had acquired a 2,452 TEU containership, the Amalia C, built in 1998 for a contract price of $6.6 million, a 2,602 TEU containership, the Niledutch Zebra, built in 2001 for a contract price of $10.1 million, a 2,524 TEU containership, the Niledutch Palanca, built in 2001 for a contract price of $11.9 million and a 3,430 TEU containership, the Dimitris C, built in 2001 for a contract price of $14.9 million. As of December 31, 2013, an amount of $11.4 million was recorded as current restricted cash, which was applied towards prepayment of the respective credit facility on February 18, 2014.

 

As of June 30, 2014, the Company recorded non-current restricted cash of $55.2 million in relation to the sale proceeds less sale commissions of the Marathonas, the Commodore, the Duka, the Mytilini and the Messologi, representing collateral under the HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank credit facility.

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, 2013

 

$

4,576,106

 

$

(589,968

)

$

3,986,138

 

Additions

 

46,839

 

(137,414

)

(90,575

)

Disposals

 

(172,226

)

119,280

 

(52,946

)

As of December 31, 2013

 

$

4,450,719

 

$

(608,102

)

$

3,842,617

 

Additions

 

563

 

(68,075

)

(67,512

)

Disposals

 

(120,376

)

75,769

 

(44,607

)

As of June 30, 2014

 

$

4,330,906

 

$

(600,408

)

$

3,730,498

 

 

i.

On February 26, 2014, the Company sold and delivered the Marathonas. The gross sale consideration was $11.5 million. The Marathonas was 23 years old. Refer to Note 15, Sale of Vessels.

 

 

ii.

On April 25, 2014, the Company sold and delivered the Commodore. The gross sale consideration was $11.1 million. The Commodore was 22 years old. Refer to Note 15, Sale of Vessels.

 

 

iii.

On May 15, 2014, the Company sold and delivered the Duka. The gross sale consideration was $11.0 million. The Duka was 22 years old. Refer to Note 15, Sale of Vessels.

 

 

iv.

On May 15, 2014, the Company sold and delivered the Mytilini. The gross sale consideration was $12.0 million. The Mytilini was 23 years old. Refer to Note 15, Sale of Vessels.

 

 

v.

On May 20, 2014, the Company sold and delivered the Messologi. The gross sale consideration was $12.1 million. The Messologi was 23 years old. Refer to Note 15, Sale of Vessels.

 

The residual value (estimated scrap value at the end of the vessels’ useful lives) of the fleet was estimated at $370.0 million as of June 30, 2014 and $404.6 million as of December 31, 2013. 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, 2013

 

$

9,669

 

$

79,152

 

$

88,821

 

Additions

 

283

 

187

 

470

 

Written off amounts

 

(429

)

 

(429

)

Amortization

 

(5,482

)

(15,431

)

(20,913

)

As of December 31, 2013

 

$

4,041

 

$

63,908

 

$

67,949

 

Additions

 

3,789

 

44

 

3,833

 

Written off amounts

 

(286

)

 

(286

)

Amortization

 

(2,157

)

(7,564

)

(9,721

)

As of June 30, 2014

 

$

5,387

 

$

56,388

 

$

61,775

 

 

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 Current and Non-current Assets
Other Current and Non-current Assets

6                              Other Current and Non-current Assets

 

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

 

 

 

As of
June 30, 2014

 

As of
December 31, 2013

 

Claims receivable

 

$

9,849

 

$

2,815

 

Other assets

 

4,822

 

3,369

 

Total

 

$

14,671

 

$

6,184

 

 

As of June 30, 2014 and December 31, 2013, claims receivable consists of insurance and other claims. As of June 30, 2014, the Company recorded a claim receivable of $8.1 million in relation to a collision incident of the Hanjin Italy outside Singapore.

 

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

 

 

 

As of
June 30, 2014

 

As of
December 31, 2013

 

Fair value of swaps

 

$

1,098

 

$

2,472

 

Receivable from ZIM

 

25,765

 

25,765

 

Other assets

 

737

 

883

 

Total

 

$

27,600

 

$

29,120

 

 

Israel Corporation Ltd., the parent company of ZIM Integrated Shipping Services Ltd. (“ZIM”), has announced that ZIM has reached an agreement in principle with its creditors, including the Company, for a restructuring of its obligations. This agreement includes a significant reduction in the charter rates payable by ZIM for the remaining life of its time charters, expiring in 2020 or 2021, for six of the Company’s vessels and the Company’s receipt of unsecured, interest bearing ZIM notes maturing in nine years and ZIM shares in exchange for such reductions and cancellation of ZIM’s other obligations to the Company. Based on these anticipated terms, the Company has written down the value of its long-term receivables from ZIM as of December 31, 2013 and recognized a $19.0 million impairment charge with respect thereto, resulting in an outstanding long-term receivable of $25.8 million as of June 30, 2014 and December 31, 2013. In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM’s restructuring (refer to Note 16, Subsequent Events).

 

In respect of the fair value of swaps, refer to 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, 2014

 

As of
December 31, 2013

 

Accrued payroll

 

$

1,244

 

$

1,140

 

Accrued interest

 

10,485

 

11,614

 

Accrued expenses

 

17,474

 

18,157

 

Total

 

$

29,203

 

$

30,911

 

 

Accrued expenses mainly consisted of accrued realized losses on cash flow interest rate swaps of $13.8 million and $14.3 million as of June 30, 2014 and December 31, 2013, respectively, as well as other accruals related to the operation of the Company’s fleet of $3.7 million and $3.9 million as of June 30, 2014 and December 31, 2013, 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, 2014

 

As of
December 31, 2013

 

Fair value of swaps

 

$

85,214

 

$

109,431

 

Other current liabilities

 

5,683

 

5,267

 

Total

 

$

90,897

 

$

114,698

 

 

As of June 30, 2014 and December 31, 2013, other current liabilities mainly consist of $4.9 million in relation to deferred fees accrued in accordance with the Bank Agreement (refer to Note 9, Long-Term Debt), which will be cash settled on December 31, 2014 and are recorded at amortized cost.

 

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

 

 

 

As of
June 30, 2014

 

As of
December 31, 2013

 

Fair value of swaps

 

$

23,790

 

$

59,077

 

Other long-term liabilities

 

10,346

 

9,103

 

Total

 

$

34,136

 

$

68,180

 

 

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,
2014

 

Current
portion

 

Long-term
portion

 

As of
December 31,
2013

 

Current
portion

 

Long-term
portion

 

The Royal Bank of Scotland

 

$

681,677

 

$

7,069

 

$

674,608

 

$

683,614

 

$

4,628

 

$

678,986

 

HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank

 

646,713

 

 

646,713

 

658,160

 

11,447

 

646,713

 

HSH Nordbank

 

30,166

 

4,614

 

25,552

 

31,163

 

2,545

 

28,618

 

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

 

23,757

 

10,369

 

13,388

 

28,942

 

10,369

 

18,573

 

The Export-Import Bank of Korea & ABN Amro

 

62,484

 

11,250

 

51,234

 

68,109

 

11,250

 

56,859

 

Deutsche Bank

 

176,905

 

4,487

 

172,418

 

177,968

 

3,251

 

174,717

 

Credit Agricole

 

147,922

 

7,188

 

140,734

 

151,239

 

6,770

 

144,469

 

Credit Suisse

 

211,715

 

7,472

 

204,243

 

215,613

 

7,026

 

208,587

 

ABN Amro-Lloyds TSB-National Bank of Greece

 

243,037

 

7,921

 

235,116

 

247,001

 

7,537

 

239,464

 

Commerzbank-Credit Suisse-[Credit Agricole]

 

281,408

 

14,108

 

267,300

 

288,474

 

13,489

 

274,985

 

The Royal Bank of Scotland (January 2011 Credit Facility)

 

89,912

 

10,210

 

79,702

 

94,245

 

9,226

 

85,019

 

HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank (January 2011 Credit Facility)

 

102,994

 

20,834

 

82,160

 

110,396

 

15,503

 

94,893

 

ABN Amro-Lloyds TSB-National Bank of Greece (January 2011 Credit Facility)

 

29,306

 

5,536

 

23,770

 

31,953

 

5,415

 

26,538

 

Sinosure CEXIM-Citi-ABN Amro Credit Facility

 

152,550

 

20,340

 

132,210

 

162,720

 

20,340

 

142,380

 

Club Facility (January 2011 Credit Facility)

 

71,887

 

13,440

 

58,447

 

78,001

 

12,618

 

65,383

 

Citi—Eurobank Credit Facility (January 2011 Credit Facility)

 

72,348

 

5,224

 

67,124

 

74,808

 

5,048

 

69,760

 

Comprehensive Financing Plan exit fee accrued

 

9,991

 

 

9,991

 

8,117

 

 

8,117

 

Fair value hedged debt

 

1,296

 

 

1,296

 

1,580

 

 

1,580

 

Total long-term debt

 

$

3,036,068

 

$

150,062

 

$

2,886,006

 

$

3,112,103

 

$

146,462

 

$

2,965,641

 

Hyundai Samho Vendor Financing

 

$

93,061

 

$

57,388

 

$

35,673

 

$

121,755

 

$

57,388

 

$

64,367

 

 

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, 2014, are as follows (in thousands):

 

Payment due by period ended

 

Fixed
principal
repayments

 

Variable
principal
payments

 

Final Payment
due on
December 31, 2018*
[and other
payments
thereafter]

 

Total
principal
payments

 

June 30, 2015

 

$

142,861

 

$

7,201

 

$

 

$

150,062

 

June 30, 2016

 

168,810

 

58,236

 

 

227,046

 

June 30, 2017

 

192,367

 

94,126

 

 

286,493

 

June 30, 2018

 

170,538

 

99,532

 

 

270,070

 

June 30, 2019 and thereafter

 

178,406

 

17,402

 

1,895,302

 

2,091,110

 

Total long-term debt

 

$

852,982

 

$

276,497

 

$

1,895,302

 

$

3,024,781

 

 

* The last payment due on December 31, 2018, includes the unamortized remaining principal debt balances under the Bank 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, 2014 are based on the terms of the Bank Agreement, under which the Company was not required to repay any outstanding principal amounts under its 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, 2014, are as follows (in thousands):

 

Payment due by period ended

 

 

 

June 30, 2015

 

$

57,388

 

June 30, 2016

 

35,673

 

Total vendor financing

 

$

93,061

 

 

As of September 12, 2013, the Company signed a supplemental letter extending the terms of the February 9, 2012 supplemental letter through November 20, 2018 (the maturity of the respective credit facility), which amended the interest rate margin and the financial covenants of its KEXIM  ABN Amro credit facility. More specifically, under the February 9, 2012 supplemental letter 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.

 

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 January 2011 Credit Facilities (as described and defined below) and under the Hyundai Samho Vendor Financing described below, the lenders participating thereunder continued to provide the Company’s then outstanding credit facilities and amended the covenants under such 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 then oustanding credit facilities, other than the KEXIM and KEXIM ABN Amro credit facilities which were 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 current liabilities” in the condensed 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 (other than the KEXIM and KEXIM ABN Amro credit facilities, which are not covered by the Bank Agreement), 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 the January 2011 Credit Facilities, as specified in the table below:

 

 

 

February 15,

 

May 15,

 

August 15,

 

November 15,

 

December 31,

 

Total

 

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

 

 

*           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 for such 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 for such 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 January 2011 Credit Facilities and after the January 2011 Credit Facilities are repaid, to the oustanding credit facilities covered by the Bank Agreement. 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 will mean, 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), after entering into the Bank Agreement and 25% of any additional net equity proceeds; and

 

·                     any debt proceeds (after repayment of any underlying secured debt covered by vessels collateralizing the new borrowings) (excluding the January 2011 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 January 2011 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 January 2011 Credit Facilities and then to the credit facilities covered by the Bank Agreement. 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 credit facilities covered by the Bank Agreement and the January 2011 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) whilst an event of default is continuing, 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

 

On January 24, 2011, the Company entered into the Bank Agreement that superseded, amended and supplemented the terms of each of its then oustanding credit facilities (other than its credit facilities with KEXIM and KEXIM ABN Amro) and provided for, among other things, revised financial covenant levels under such credit facilities as described below, with which the Company was in compliance as of June 30, 2014 and December 31, 2013.

 

Under the Bank Agreement, the financial covenants under each of the Company’s then oustanding credit facilities (other than under the KEXIM ABN Amro credit facility which is not covered thereby, but which has been aligned with those covenants until maturity of the respective facility under the supplemental letter dated September 12, 2013 and the 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;

 

·                     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 covered 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 breach of the management agreement 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 (“January 2011 Credit Facilities”):

 

(i)

a $123.8 million credit facility provided by HSH, which is secured by the Hyundai Speed, the Hanjin Italy and the CMA CGM Rabelais and customary shipping industry collateral related thereto (the $123.8 million amount includes principal commitment of $23.75 million under the Aegean Baltic Bank—HSH Nordbank—Piraeus Bank credit facility already drawn as of December 31, 2010, which was transferred to the new facility upon finalization of the agreement in 2011);

 

 

(ii)

a $100.0 million credit facility provided by RBS, which is secured by the Hyundai Smart and the 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 $80.0 million credit facility with Citibank and Eurobank, which is secured by the Hyundai Ambition and customary shipping industry collateral related thereto ((i)-(v), collectively, the “January 2011 Credit Facilities”).

 

As of June 30, 2014, $366.4 million was outstanding under the above January 2011 Credit Facilities and there were no remaining borrowing availability under the remaining credit facilities.

 

Borrowings under each of the January 2011 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 outstanding indebtedness thereunder exceeds $276 million, (ii) 3.00% if the outstanding indebtedness thereunder exceeds $326 million and (iii) 3.50% if the 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 January 2011 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 January 2011 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 then oustanding 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 participating in the $83.9 million club credit facility described above received a lien on Hyundai Together and Hyundai Tenacity as additional security in respect of the pre-existing credit facilities the Company had with such lenders. The lenders under the other January 2011 Credit Facilities also received a lien on the respective vessels securing such January 2011 Credit Facilities as additional collateral in respect of its pre-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 , 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 January 2011 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 (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, 2014, $152.6 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 breach of the management agreement 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 pre-delivery and post-delivery shipping industry collateral with respect to the newbuilding vessels, CMA CGM Tancredi, CMA CGM Bianca and 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 built by Hyundai Samho, the Hyundai Speed, the Hyundai Smart, the Hyundai Ambition, the Hyundai Together, the Hyundai Tenacity, the Hanjin Greece, the Hanjin Italy and the Hanjin Germany, in the form of delayed payment of a portion of the final installment for each such newbuilding. As of June 30, 2014, the outstanding balance of the this credit facility was $93.1 million

 

Borrowings under this facility bear interest at a fixed interest rate of 8%. The Company is 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 is required to pay an Initial Exit Fee of $15.0 million. Furthermore, the Company is required to pay an Additional Exit Fee of $10.0 million (as it has not repaid at least $150.0 million in the aggregate with equity proceeds by December 31, 2013). Both Exit Fees, in the respective proportion to facilities covered by the Bank Agreement and the January 2011 Credit 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 Operations over the life of the respective facilities (with the effective interest rate method) and are reported under “Long-term debt, net of current portion” in the condensed consolidated Balance Sheets. The Company has recognized an amount of $10.0 million and $8.1 million as of June 30, 2014 and December 31, 2013, respectively.

 

Credit Facilities Summary Table

 

Lender

 

Outstanding
Principal
Amount
(in millions)(1)

 

Collateral Vessels

The Royal Bank of Scotland(2)

 

$

681.7

 

The Hyundai Progress, the Hyundai Highway, the Hyundai Bridge, the Federal (ex Hyundai 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)

 

$

646.7

 

The Hyundai Vladivostok, the Hyundai Advance, the Hyundai Stride, the Hyundai Future, the Hyundai Sprinter, the Amalia C, the Niledutch Zebra, the Niledutch Palanca, the Dimitris C,

Credit Agricole

 

$

147.9

 

The CMA CGM Moliere and the CMA CGM Musset

Deutsche Bank

 

$

176.9

 

The Zim Rio Grande, the Zim Sao Paolo and the OOCL Istanbul (ex Zim Kingston)

Credit Suisse

 

$

211.7

 

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

ABN Amro—Lloyds TSB—National Bank of Greece

 

$

243.0

 

The SNL Colombo, the YM Seattle, the YM Vancouver and the YM Singapore

Commerzbank—Credit Suisse—Credit Agricole

 

$

281.4

 

The OOCL Novorossiysk (ex ZIM Dalian), the Hanjin Santos, the YM Maturity, the Hanjin Constantza and the CMA CGM Attila

HSH Nordbank

 

$

30.2

 

The Deva and the Derby D

KEXIM

 

$

23.8

 

The CSCL Europe and the CSCL America

KEXIM-ABN Amro

 

$

62.5

 

The CSCL Pusan and the CSCL Le Havre

January 2011 Credit Facilities

Aegean Baltic—HSH Nordbank—Piraeus Bank(3)

 

$

103.0

 

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

RBS(2)

 

$

89.9

 

The Hyundai Smart and the Hanjin Germany

ABN Amro Club Facility

 

$

29.3

 

The Hanjin Greece

Club Facility

 

$

71.9

 

The Hyundai Together and the Hyundai Tenacity

Citi-Eurobank

 

$

72.3

 

The Hyundai Ambition

Sinosure-CEXIM-Citi-ABN Amro

 

$

152.6

 

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

Vendor Financing

Hyundai Samho

 

$

93.1

 

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, 2014.

(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, 2014, 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, 2014.

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 Operations 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,
2014

 

Fair Value
December 31,
2013

 

RBS

 

03/09/2007

 

3/15/2010

 

3/15/2015

 

$

200,000

 

5.07

% p.a.

USD LIBOR 3M BBA

 

$

(6,934

)

$

(11,586

)

RBS

 

03/16/2007

 

3/20/2009

 

3/20/2014

 

$

200,000

 

4.922

% p.a.

USD LIBOR 3M BBA

 

 

(2,052

)

RBS

 

09/13/2007

 

9/15/2009

 

9/15/2014

 

$

200,000

 

4.9775

% p.a.

USD LIBOR 3M BBA

 

(2,030

)

(6,732

)

RBS

 

11/15/2007

 

11/19/2010

 

11/19/2015

 

$

100,000

 

5.12

% p.a.

USD LIBOR 3M BBA

 

(6,685

)

(8,919

)

RBS

 

11/16/2007

 

11/22/2010

 

11/22/2015

 

$

100,000

 

5.07

% p.a.

USD LIBOR 3M BBA

 

(6,661

)

(8,869

)

HSH Nordbank

 

12/06/2006

 

12/8/2009

 

12/8/2014

 

$

400,000

 

4.855

% p.a.

USD LIBOR 3M BBA

 

(8,259

)

(17,298

)

CITI

 

04/17/2007

 

4/17/2008

 

4/17/2015

 

$

200,000

 

5.124

% p.a.

USD LIBOR 3M BBA

 

(7,859

)

(12,520

)

CITI

 

04/20/2007

 

4/20/2010

 

4/20/2015

 

$

200,000

 

5.1775

% p.a.

USD LIBOR 3M BBA

 

(8,027

)

(12,738

)

CITI

 

10/23/2007

 

10/25/2009

 

10/27/2014

 

$

250,000

 

4.9975

% p.a.

USD LIBOR 3M BBA

 

(3,936

)

(9,797

)

CITI

 

11/02/2007

 

11/6/2010

 

11/6/2015

 

$

250,000

 

5.1

% p.a.

USD LIBOR 3M BBA

 

(16,228

)

(21,774

)

CITI

 

11/26/2007

 

11/29/2010

 

11/30/2015

 

$

100,000

 

4.98

% p.a.

USD LIBOR 3M BBA

 

(6,607

)

(8,754

)

CITI

 

02/07/2008

 

2/11/2011

 

2/11/2016

 

$

200,000

 

4.695

% p.a.

USD LIBOR 3M BBA

 

(13,940

)

(17,870

)

Eurobank

 

12/06/2007

 

12/10/2010

 

12/10/2015

 

$

200,000

 

4.8125

% p.a.

USD LIBOR 3M BBA

 

(12,942

)

(17,067

)

Eurobank

 

02/11/2008

 

5/31/2011

 

5/31/2015

 

$

200,000

 

4.755

% p.a.

USD LIBOR 3M BBA

 

(8,275

)

(12,532

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(108,383

)

$

(168,508

)

ABN Amro

 

06/06/2013

 

1/4/2016

 

12/31/2016

 

$

325,000

 

1.4975

% p.a.

USD LIBOR 3M BBA

 

$

(470

)

$

382

 

ABN Amro

 

05/31/2013

 

1/4/2016

 

12/31/2016

 

$

250,000

 

1.4125

% p.a.

USD LIBOR 3M BBA

 

(151

)

504

 

Total fair value of swap liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(109,004

)

$

(167,622

)

 

The Company recorded in the condensed consolidated statements of operations unrealized gains of $58.6 million and $76.0 million in relation to fair value changes of interest rate swaps for the six months ended June 30, 2014 and 2013, respectively. Furthermore, unrealized losses of $48.2 million and $58.8 million were reclassified from Accumulated Other Comprehensive Loss to earnings for the six months ended June 30, 2014 and 2013, respectively (following the hedge accounting discontinuance as of July 1, 2012). The Company expects to reclassify from Accumulated Other Comprehensive Loss to earnings within the next twelve months unrealized losses of $62.2 million.

 

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. An amount of $2.0 million was reclassified into earnings for the six months ended June 30, 2014 and 2013, respectively, representing its amortization over the depreciable life of the vessels.

 

 

 

Three months
ended
June 30,

 

Three months
ended
June 30,

 

 

 

2014

 

2013

 

 

 

(in millions)

 

Total realized losses

 

$

(31.0

)

$

(36.6

)

Amortization of deferred realized losses

 

(1.0

)

(1.0

)

Unrealized gains

 

4.6

 

12.6

 

Unrealized and realized losses on cash flow interest rate swaps

 

$

(27.4

)

$

(25.0

)

 

 

 

Six months
ended
June 30,

 

Six months
ended
June 30,

 

 

 

2014

 

2013

 

 

 

(in millions)

 

Total realized losses

 

$

(63.8

)

$

(72.5

)

Amortization of deferred realized losses

 

(2.0

)

(2.0

)

Unrealized gains

 

10.4

 

17.2

 

Unrealized and realized losses on cash flow interest rate swaps

 

$

(55.4

)

$

(57.3

)

 

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,
2014

 

Fair Value
December 31,
2013

 

RBS

 

11/15/2004

 

12/15/2004

 

8/27/2016

 

$

60,528

 

5.0125

% p.a.

USD LIBOR 3M BBA + 0.835% p.a.

 

$

511

 

$

747

 

RBS

 

11/15/2004

 

11/17/2004

 

11/2/2016

 

$

62,342

 

5.0125

% p.a.

USD LIBOR 3M BBA + 0.855% p.a.

 

587

 

839

 

Total fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,098

 

$

1,586

 

 

The total fair value change of the interest rate swaps for the period from January 1, 2014 until June 30, 2014, amounted to $0.5 million loss, and is included in the condensed consolidated statements of operations in “Unrealized and realized loss on derivatives”. The related asset of $1.1 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, 2014 (following the hedge accounting discontinuance as of July 1, 2012).

 

 

 

Three months
ended
June 30,
2014

 

Three months
ended
June 30,
2013

 

 

 

(in millions)

 

Unrealized losses on swap asset

 

$

(0.2

)

$

(0.4

)

Amortization of fair value of hedged debt

 

0.1

 

0.1

 

Realized gains

 

0.2

 

0.4

 

Unrealized and realized gains on fair value interest rate swaps

 

$

0.1

 

$

0.1

 

 

 

 

Six months
ended
June 30,
2014

 

Six months
ended
June 30,
2013

 

 

 

(in millions)

 

Unrealized losses on swap asset

 

$

(0.5

)

$

(0.8

)

Amortization of fair value of hedged debt

 

0.3

 

0.3

 

Realized gains

 

0.5

 

0.7

 

Unrealized and realized gains on fair value interest rate swaps

 

$

0.3

 

$

0.2

 

 

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, 2014.

 

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, 2014

 

 

 

Total

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

1,098

 

$

 

$

1,098

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

109,004

 

$

 

$

109,004

 

$

 

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

 

Total

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

2,472

 

$

 

$

2,472

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

168,508

 

$

 

$

168,508

 

$

 

 

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, 2014, 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, 2014

 

As of December 31, 2013

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

 

 

 

(in thousands of $)

 

Cash and cash equivalents

 

$

51,506

 

$

51,506

 

$

68,153

 

$

68,153

 

Restricted cash

 

$

58,401

 

$

58,401

 

$

14,717

 

$

14,717

 

Accounts receivable, net

 

$

8,743

 

$

8,743

 

$

8,038

 

$

8,038

 

Due from related parties

 

$

13,464

 

$

13,464

 

$

14,459

 

$

14,459

 

Receivable from ZIM

 

$

25,765

 

$

25,765

 

$

25,765

 

$

25,765

 

Accounts payable

 

$

13,720

 

$

13,720

 

$

13,124

 

$

13,124

 

Accrued liabilities

 

$

29,203

 

$

29,203

 

$

30,911

 

$

30,911

 

Long-term debt, including current portion

 

$

3,036,068

 

$

3,038,280

 

$

3,112,103

 

$

3,114,101

 

Vendor financing, including current portion

 

$

93,061

 

$

93,438

 

$

121,755

 

$

121,552

 

 

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, 2014

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Receivable from ZIM(1)

 

$

25,765

 

$

 

$

25,765

 

$

 

Long-term debt, including current portion(2)

 

$

3,038,280

 

$

 

$

3,038,280

 

$

 

Vendor financing, including current portion(3)

 

$

93,438

 

$

 

$

93,438

 

$

 

Accrued liabilities(4)

 

$

29,203

 

$

 

$

29,203

 

$

 

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Receivable from ZIM(1)

 

$

25,765

 

$

 

$

25,765

 

$

 

Long-term debt, including current portion(2)

 

$

3,114,101

 

$

 

$

3,114,101

 

$

 

Vendor financing, including current portion(3)

 

$

121,552

 

$

 

$

121,552

 

$

 

Accrued liabilities(4)

 

$

30,911

 

$

 

$

30,911

 

$

 

 

(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. Furthermore, Israel Corporation Ltd., the parent company of ZIM Integrated Shipping Services Ltd. (“ZIM”), has announced that ZIM has reached an agreement in principle with its creditors, including the Company, for a restructuring of its obligations. Based on these anticipated terms, the Company written down the value of its long-term receivable from ZIM as of December 31, 2013 (refer to Note 6, Other Current and Non-current Assets). In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM’s restructuring (refer to Note 16, Subsequent Events).

 

(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 its 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 its creditworthiness.

 

(4)     The fair value of the Company’s accrued liabilities, which mainly consists of accrued interest on its credit facilities and accrued realized losses on its 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 its creditworthiness.

 

Commitments and Contingencies
Commitments and Contingencies

11                       Commitments and Contingencies

 

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. Furthermore, the Company does not have any commitments outstanding.

 

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, 2014, the Company had not granted any shares under the plan. During the six months ended June 30, 2014, the Company issued 16,066 new shares of common stock, which were distributed to the employees of the Manager in settlement of 2013 grant.

 

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. 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, 2014, none of the directors elected to receive in Company shares their compensation.

 

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, 2014

 

June 30, 2013

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

Net income

 

$

16,643

 

$

19,539

 

 

 

 

 

 

 

Denominator (number of shares):

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

109,669

 

109,653

 

 

 

 

Six months ended

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

Net income

 

$

25,050

 

$

32,971

 

 

 

 

 

 

 

Denominator (number of shares):

 

109,669

 

109,653

 

Basic and diluted weighted average common shares outstanding

 

 

 

 

 

 

The Warrants issued and outstanding as of June 30, 2014 and 2013, were excluded from the diluted Earnings per Share, because they were antidilutive.

Impairment Loss
Impairment Loss

14                       Impairment Loss

 

No impairment loss was recorded in 2014.

 

Israel Corporation Ltd., the parent company of ZIM Integrated Shipping Services Ltd. (“ZIM”), has announced that ZIM has reached an agreement in principle with its creditors, including the Company, for a restructuring of its obligations. This agreement includes a significant reduction in the charter rates payable by ZIM for the remaining life of its time charters, expiring in 2020 or 2021, for six of the Company’s vessels and the Company’s receipt of unsecured, interest bearing ZIM notes maturing in nine years and ZIM shares in exchange for such reductions and cancellation of ZIM’s other obligations to the Company. Based on these anticipated terms, the Company has written down the value of its long-term receivables from ZIM as of December 31, 2013 and recognized a $19.0 million impairment charge with respect thereto, resulting in an outstanding long-term receivable of $25.8 million as of December 31, 2013. In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM’s restructuring (refer to Note 16, Subsequent Events).

 

Sale of Vessels
Sale of Vessels

15                       Sale of Vessels

 

On February 26, 2014, the Company sold and delivered the Marathonas. The gross sale consideration was $11.5 million. The Company realized a net gain on this sale of $0.5 million and net sale proceeds of $9.8 million. The Marathonas was 23 years old.

 

On April 25, 2014, the Company sold and delivered the Commodore. The gross sale consideration was $11.1 million. The Company realized a net gain on this sale of $1.0 million and net sale proceeds of $9.7 million. The Commodore was 22 years old.

 

On May 15, 2014, the Company sold and delivered the Duka. The gross sale consideration was $11.0 million. The Company realized a net gain on this sale of $0.1 million and net sale proceeds of $9.3 million. The Duka was 22 years old.

 

On May 15, 2014, the Company sold and delivered the Mytilini. The gross sale consideration was $12.0 million. The Company realized a net gain on this sale of $2.0 million and net sale proceeds of $10.9 million. The Mytilini was 23 years old.

 

On May 20, 2014, the Company sold and delivered the Messologi. The gross sale consideration was $12.1 million. The Company realized a net gain on this sale of $2.1 million and net sale proceeds of $10.9 million. The Messologi was 23 years old.

 

On February 13, 2013, the Company sold and delivered the Independence. The gross sale consideration was $7.0 million. The Company realized a net gain on this sale of $518 thousand and net sale proceeds of $6.0 million. The Independence was 26 years old.

 

On February 28, 2013, the Company sold and delivered the Henry. The gross sale consideration was $6.1 million. The Company realized a net gain on this sale of $138 thousand and net sale proceeds of $5.37 million. The Henry was 27 years old.

 

On March 25, 2013, the Company sold and delivered the Pride. The gross sale consideration was $6.5 million. The Company realized a net loss on this sale of $671 thousand and net sale proceeds of $5.48 million. The Pride was 25 years old.

 

On May 14, 2013, the Company sold and delivered the Honour. The gross sale consideration was $9.1 million. The Company realized a net gain on this sale of $112 thousand and net sale proceeds of $8.0 million. The Honour was 24 years old.

 

On June 13, 2013, the Company sold and delivered the Elbe. The gross sale consideration was $5.6 million. The Company realized a net gain on this sale of $59 thousand and net sale proceeds of $5.02 million. The Elbe was 22 years old.

 

Subsequent Events
Subsequent Events

16                       Subsequent Events

 

In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIM’s restructuring with its creditors on substantially the same terms as the agreement in principle previously announced by ZIM in January 2014. The terms of the restructuring include a reduction in the charter rates payable by ZIM under its time charters, expiring in 2020 or 2021, for six of our vessels, which had already been implemented beginning in January 2014. The terms also include our receipt of approximately $49.9 million aggregate principal amount of unsecured, interest bearing ZIM notes maturing in 2023 (consisting of $8.8 million of 3% Series 1 Notes due 2023 amortizing subject to available cash flow in accordance with a corporate cash sweep mechanism, and $41.1 million of 5% Series 2 Notes due 2023 non-amortizing (of the 5% interest rate, 3% is payable quarterly in cash and 2% is payable in kind, accrued quarterly with deferred cash payment on maturity)) and ZIM shares representing approximately 7.4% of the outstanding ZIM shares immediately after the restructuring, in exchange for such charter rate reductions and cancellation of ZIM’s other obligations to us which relate to the outstanding long term receivable as of December 31, 2013. ZIM’s charter-owner creditors have designated two of the nine members of ZIM’s initial Board of Directors following the restructuring, including one director nominated by us, Dimitris Chatzis, the father of our Chief Financial Officer. In connection with ZIM’s previous announcement of the agreement in principle with its creditors, the Company had recognized an impairment loss of $19.0 million as of December 31, 2013.

 

Basis of Presentation and General Information (Tables)
Schedule of the vessel owning companies (the Danaos Subsidiaries)

 

Company

 

Date of Incorporation

 

Vessel Name

 

Year
Built

 

TEU

 

Megacarrier (No. 1) Corp.

 

September 10, 2007

 

Hyundai Together

 

2012