DANAOS CORP, 6-K filed on 7/31/2012
Report of Foreign Issuer
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Document and Entity Information
 
Entity Registrant Name
Danaos Corp 
Entity Central Index Key
0001369241 
Document Type
6-K 
Document Period End Date
Jun. 30, 2012 
Amendment Flag
false 
Current Fiscal Year End Date
--12-31 
Document Fiscal Year Focus
2012 
Document Fiscal Period Focus
Q2 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 47,218 
$ 51,362 
Restricted cash
2,820 
2,909 
Accounts receivable, net
5,439 
4,176 
Inventories
16,587 
16,187 
Prepaid expenses
302 
1,311 
Due from related parties
 
9,128 
Other current assets
6,399 
8,218 
Total current assets
78,765 
93,291 
Fixed assets, net
4,192,651 
3,241,951 
Advances for vessels under construction
 
524,286 
Deferred charges, net
94,767 
99,711 
Restricted cash
430 
 
Other non-current assets
33,541 
28,865 
Total non-current assets
4,321,389 
3,894,813 
Total assets
4,400,154 
3,988,104 
CURRENT LIABILITIES
 
 
Accounts payable
19,251 
15,144 
Accrued liabilities
39,327 
36,117 
Current portion of long-term debt
70,461 
41,959 
Current portion of vendor financing
39,551 
10,857 
Due to related parties
28,869 
 
Unearned revenue
8,147 
6,993 
Other current liabilities
113,514 
120,623 
Total current liabilities
319,120 
231,693 
LONG-TERM LIABILITIES
 
 
Long-term debt, net of current portion
3,171,506 
2,960,288 
Vendor financing, net of current portion
150,449 
54,288 
Other long-term liabilities
265,048 
299,300 
Total long-term liabilities
3,587,003 
3,313,876 
Total liabilities
3,906,123 
3,545,569 
Commitments and Contingencies
   
   
STOCKHOLDERS' EQUITY
 
 
Preferred stock (par value $0.01, 100,000,000 preferred shares authorized and not issued as of June 30, 2012 and December 31, 2011)
   
   
Common stock (par value $0.01, 750,000,000 common shares authorized. 109,604,040 issued and outstanding as of June 30, 2012. 109,563,799 issued and outstanding as of December 31, 2011)
1,096 
1,096 
Additional paid-in capital
545,915 
545,884 
Accumulated other comprehensive loss
(422,948)
(456,105)
Retained earnings
369,968 
351,660 
Total stockholders' equity
494,031 
442,535 
Total liabilities and stockholders' equity
$ 4,400,154 
$ 3,988,104 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2012
Dec. 31, 2011
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
109,604,040 
109,563,799 
Common stock, shares outstanding
109,604,040 
109,563,799 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
OPERATING REVENUES
$ 146,657 
$ 114,764 
$ 280,894 
$ 213,753 
OPERATING EXPENSES
 
 
 
 
Voyage expenses
(3,366)
(2,057)
(6,256)
(4,275)
Vessel operating expenses
(31,392)
(29,325)
(61,487)
(55,927)
Depreciation
(35,226)
(26,005)
(66,907)
(48,441)
Amortization of deferred drydocking and special survey costs
(1,412)
(1,750)
(2,614)
(3,280)
General and administration expenses
(5,247)
(4,716)
(10,084)
(9,345)
Gain on sale of vessel
830 
 
830 
 
Income From Operations
70,844 
50,911 
134,376 
92,485 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest income
401 
293 
754 
646 
Interest expense
(21,460)
(12,963)
(39,850)
(24,811)
Other finance costs
(4,102)
(2,899)
(7,959)
(7,326)
Other income (expense), net
280 
(179)
476 
(2,099)
Unrealized and realized losses on derivatives
(36,997)
(35,394)
(69,489)
(53,683)
Total Other Income (Expenses), net
(61,878)
(51,142)
(116,068)
(87,273)
Net Income/(Loss)
8,966 
(231)
18,308 
5,212 
Other Comprehensive Income/(Loss)
 
 
 
 
Change in fair value of financial instruments
23,415 
(25,349)
40,536 
14,960 
Deferred realized losses on cash flow hedges amortized over the life of the newbuildings, net of amortization
(1,346)
(7,662)
(5,536)
(17,345)
Reclassification of unrealized losses to earnings
(318)
(4,478)
(1,843)
(12,222)
Total Other Comprehensive Income/(Loss)
21,751 
(37,489)
33,157 
(14,607)
Comprehensive Income/(Loss)
$ 30,717 
$ (37,720)
$ 51,465 
$ (9,395)
EARNINGS PER SHARE
 
 
 
 
Basic and diluted net income/(loss) per share (in dollars per share)
$ 0.08 
$ 0.00 
$ 0.17 
$ 0.05 
Basic and diluted weighted average number of common shares (in shares)
109,611 
108,975 
109,608 
108,794 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Cash Flows from Operating Activities
 
 
Net income
$ 18,308 
$ 5,212 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Depreciation
66,907 
48,441 
Amortization of deferred drydocking and special survey costs
2,614 
3,280 
Amortization of finance and other costs
6,630 
3,536 
Exit fee accrued on debt
913 
742 
Stock based compensation
31 
47 
Payments for drydocking/special survey
(4,158)
(7,050)
Gain on sale of vessel
(830)
 
Change in fair value of warrants
 
2,253 
Amortization of deferred realized losses on interest rate swaps
1,499 
587 
Unrealized (gain)/loss on derivatives
(4,556)
(7,066)
Realized losses on cash flow hedges deferred in Other Comprehensive Loss
(7,035)
(17,931)
(Increase)/Decrease in
 
 
Accounts receivable
(1,263)
(962)
Inventories
(400)
(2,300)
Prepaid expenses
1,009 
437 
Due from related parties
 
807 
Other assets, current and long-term
(3,287)
(9,809)
Increase/(Decrease) in
 
 
Accounts payable
4,107 
2,583 
Accrued liabilities
5,215 
(13,333)
Due to related parties
37,997 
 
Unearned revenue, current and long term
1,154 
(2,953)
Other liabilities, current and long-term
1,307 
91 
Net Cash provided by Operating Activities
126,162 
6,612 
Cash Flows from Investing Activities
 
 
Vessels under construction and vessels additions
(375,277)
(302,639)
Net proceeds from sale of vessel
5,636 
 
Net Cash used in Investing Activities
(369,641)
(302,639)
Cash Flows from Financing Activities
 
 
Proceeds from long-term debt
266,920 
227,686 
Payments of long-term debt
(27,144)
(34,559)
Deferred finance costs
(100)
(30,217)
Increase of restricted cash
(341)
(1)
Net Cash provided by Financing Activities
239,335 
162,909 
Net Decrease in Cash and Cash Equivalents
(4,144)
(133,118)
Cash and Cash Equivalents at beginning of period
51,362 
229,835 
Cash and Cash Equivalents at end of period
47,218 
96,717 
Supplementary Cash Flow information
 
 
Non-cash capitalized interest on vessels under construction
 
1,677 
Non-cash other predelivery expenses on vessels under construction
 
977 
Non-cash deferred financing fees
42 
56,476 
Final installment for delivered vessels financed under Vendor Financing arrangement
$ 124,855 
$ 65,145 
Basis of Presentation and General Information
Basis of Presentation and General Information

1       Basis of Presentation and General Information

 

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

 

Danaos Corporation (“Danaos”), formerly Danaos Holdings Limited, was formed on December 7, 1998 under the laws of Liberia and is presently the sole owner of all outstanding shares of the companies listed below. Danaos Holdings Limited was redomiciled in the Marshall Islands on October 7, 2005. In connection with the redomiciliation, the Company changed its name to Danaos Corporation. On October 14, 2005, the Company filed and the Marshall Islands accepted Amended and Restated Articles of Incorporation. The authorized capital stock of Danaos Corporation is 750,000,000 shares of common stock with a par value of $0.01 and 100,000,000 shares of preferred stock with a par value of $0.01. Refer to Note 13, Stockholders’ Equity.

 

In the opinion of management, the accompanying condensed consolidated financial statements (unaudited) of Danaos and subsidiaries contain all adjustments necessary to present fairly, in all material respects, the Company’s consolidated financial position as of June 30, 2012, the consolidated results of operations for the three and six months ended June 30, 2012 and 2011 and the consolidated cash flows for the six months ended June 30, 2012 and 2011. 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, 2011. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the results to be expected for the full year.

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2012, Danaos included the vessel owning (including vessels under contract and/or construction) companies (the “Danaos Subsidiaries”) listed below. All vessels are container vessels:

 

Company

 

Date of Incorporation

 

Vessel Name

 

Year
Built

 

TEU

Seasenator Shipping Ltd.

 

June 11, 1996

 

Honour

 

1989

 

3,908

Seacaravel Shipping Ltd.

 

June 11, 1996

 

Hope

 

1989

 

3,908

Appleton Navigation S.A.

 

May 12, 1998

 

Komodo

 

1991

 

2,917

Geoffrey Shipholding Ltd.

 

September 22, 1997

 

Kalamata

 

1991

 

2,917

Lacey Navigation Inc.

 

March 5, 1998

 

Elbe

 

1991

 

2,917

Saratoga Trading S.A.

 

May 8, 1998

 

SCI Pride

 

1988

 

3,129

Tyron Enterprises S.A.

 

January 26, 1999

 

Henry

 

1986

 

3,039

Independence Navigation Inc.

 

October 9, 2002

 

Independence

 

1986

 

3,045

Victory Shipholding Inc.

 

October 9, 2002

 

Lotus

 

1988

 

3,098

Duke Marine Inc.

 

April 14, 2003

 

Hyundai Duke

 

1992

 

4,651

Commodore Marine Inc.

 

April 14, 2003

 

Hyundai Commodore

 

1992

 

4,651

Containers Services Inc.

 

May 30, 2002

 

Deva

 

2004

 

4,253

Containers Lines Inc.

 

May 30, 2002

 

Derby D

 

2004

 

4,253

Oceanew Shipping Ltd.

 

January 14, 2002

 

CSCL Europe

 

2004

 

8,468

Oceanprize Navigation Ltd.

 

January 21, 2003

 

CSCL America

 

2004

 

8,468

Federal Marine Inc.

 

February 14, 2006

 

Hyundai Federal

 

1994

 

4,651

Karlita Shipping Co. Ltd.

 

February 27, 2003

 

CSCL Pusan

 

2006

 

9,580

Ramona Marine Co. Ltd.

 

February 27, 2003

 

CSCL Le Havre

 

2006

 

9,580

Boxcarrier (No. 6) Corp.

 

June 27, 2006

 

Marathonas

 

1991

 

4,814

Boxcarrier (No. 7) Corp.

 

June 27, 2006

 

Messologi

 

1991

 

4,814

Boxcarrier (No. 8) Corp.

 

November 16, 2006

 

Mytilini

 

1991

 

4,814

Auckland Marine Inc.

 

January 27, 2005

 

SNL Colombo

 

2004

 

4,300

Seacarriers Services Inc.

 

June 28, 2005

 

YM Seattle

 

2007

 

4,253

Speedcarrier (No. 1) Corp.

 

June 28, 2007

 

Hyundai Vladivostok

 

1997

 

2,200

Speedcarrier (No. 2) Corp.

 

June 28, 2007

 

Hyundai Advance

 

1997

 

2,200

Speedcarrier (No. 3) Corp.

 

June 28, 2007

 

Hyundai Stride

 

1997

 

2,200

Speedcarrier (No. 5) Corp.

 

June 28, 2007

 

Hyundai Future

 

1997

 

2,200

Speedcarrier (No. 4) Corp.

 

June 28, 2007

 

Hyundai Sprinter

 

1997

 

2,200

Wellington Marine Inc.

 

January 27, 2005

 

YM Singapore

 

2004

 

4,300

Seacarriers Lines Inc.

 

June 28, 2005

 

YM Vancouver

 

2007

 

4,253

Speedcarrier (No. 7) Corp.

 

December 6, 2007

 

Hyundai Highway

 

1998

 

2,200

Speedcarrier (No. 6) Corp.

 

December 6, 2007

 

Hyundai Progress

 

1998

 

2,200

Speedcarrier (No. 8) Corp.

 

December 6, 2007

 

Hyundai Bridge

 

1998

 

2,200

Bayview Shipping Inc.

 

March 22, 2006

 

Zim Rio Grande

 

2008

 

4,253

Channelview Marine Inc.

 

March 22, 2006

 

Zim Sao Paolo

 

2008

 

4,253

Balticsea Marine Inc.

 

March 22, 2006

 

Zim Kingston

 

2008

 

4,253

Continent Marine Inc.

 

March 22, 2006

 

Zim Monaco

 

2009

 

4,253

Medsea Marine Inc.

 

May 8, 2006

 

Zim Dalian

 

2009

 

4,253

Blacksea Marine Inc.

 

May 8, 2006

 

Zim Luanda

 

2009

 

4,253

Boxcarrier (No. 1) Corp.

 

June 27, 2006

 

CMA CGM Moliere(1)

 

2009

 

6,500

Boxcarrier (No. 2) Corp.

 

June 27, 2006

 

CMA CGM Musset(1)

 

2010

 

6,500

Boxcarrier (No. 3) Corp.

 

June 27, 2006

 

CMA CGM Nerval(1)

 

2010

 

6,500

Boxcarrier (No. 4) Corp.

 

June 27, 2006

 

CMA CGM Rabelais(1)

 

2010

 

6,500

Boxcarrier (No. 5) Corp.

 

June 27, 2006

 

CMA CGM Racine(1)

 

2010

 

6,500

Expresscarrier (No. 1) Corp.

 

March 5, 2007

 

YM Mandate

 

2010

 

6,500

Expresscarrier (No. 2) Corp.

 

March 5, 2007

 

YM Maturity

 

2010

 

6,500

CellContainer (No. 1) Corp.

 

March 23, 2007

 

Hanjin Buenos Aires

 

2010

 

3,400

CellContainer (No. 2) Corp.

 

March 23, 2007

 

Hanjin Santos

 

2010

 

3,400

CellContainer (No. 3) Corp.

 

March 23, 2007

 

Hanjin Versailles

 

2010

 

3,400

CellContainer (No. 4) Corp.

 

March 23, 2007

 

Hanjin Algeciras

 

2011

 

3,400

CellContainer (No. 5) Corp.

 

March 23, 2007

 

Hanjin Constantza

 

2011

 

3,400

CellContainer (No. 6) Corp.

 

October 31, 2007

 

Hanjin Germany

 

2011

 

10,100

CellContainer (No. 7) Corp.

 

October 31, 2007

 

Hanjin Italy

 

2011

 

10,100

CellContainer (No. 8) Corp.

 

October 31, 2007

 

Hanjin Greece

 

2011

 

10,100

Teucarrier (No. 1) Corp.

 

January 31, 2007

 

CMA CGM Attila

 

2011

 

8,530

Teucarrier (No. 2) Corp.

 

January 31, 2007

 

CMA CGM Tancredi

 

2011

 

8,530

Teucarrier (No. 3) Corp.

 

January 31, 2007

 

CMA CGM Bianca

 

2011

 

8,530

 

Company

 

Date of Incorporation

 

Vessel Name

 

Year
Built

 

TEU

Teucarrier (No. 4) Corp.

 

January 31, 2007

 

CMA CGM Samson

 

2011

 

8,530

Teucarrier (No. 5) Corp.

 

September 17, 2007

 

CMA CGM Melisande

 

2012

 

8,530

Megacarrier (No. 1) Corp.

 

September 10, 2007

 

Hyundai Together

 

2012

 

13,100

Megacarrier (No. 2) Corp.

 

September 10, 2007

 

Hyundai Tenacity

 

2012

 

13,100

Megacarrier (No. 3) Corp.

 

September 10, 2007

 

Hyundai Smart

 

2012

 

13,100

Megacarrier (No. 4) Corp.

 

September 10, 2007

 

Hyundai Speed

 

2012

 

13,100

Megacarrier (No. 5) Corp.

 

September 10, 2007

 

Hyundai Ambition

 

2012

 

13,100

 

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

 

Significant Accounting Policies
Significant Accounting Policies

2                 Significant Accounting Policies

 

All accounting policies are as described in the Company’s Annual Report on Form 20-F for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 30, 2012.

 

Recent Accounting Pronouncements

 

Fair Value

 

In May 2011, the FASB issued new guidance for fair value measurements intended to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amended guidance provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The amended guidance was effective for the Company beginning January 1, 2012. The adoption of the new guidance for fair value measurements had no effect on the Company’s condensed consolidated financial statements.

 

Restricted Cash
Restricted Cash

3       Restricted Cash

 

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

 

 

 

As of June 30,
2012

 

As of December 31,
2011

 

Retention account

 

$

2,820

 

$

2,909

 

Restricted deposits

 

$

430

 

$

 

Total

 

$

3,250

 

$

2,909

 

 

The Company was required to maintain cash of $2.8 million and $2.9 million as of June 30, 2012 and December 31, 2011, 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, as of June 30, 2012, the Company recorded non-current restricted cash of $0.4 million in relation to one of its swap’s following the sale of the Montreal, which based on its Bank Agreement, any sale proceeds should be applied towards the repayment of the respective loan outstanding as well as cash collateral of the outstanding swaps with the respective bank (prorated based on market values).

 

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, 2011

 

$

2,629,136

 

$

(355,653

)

$

2,273,483

 

Additions

 

1,074,646

 

(106,178

)

968,468

 

As of December 31, 2011

 

$

3,703,782

 

$

(461,831

)

$

3,241,951

 

Additions

 

1,022,412

 

(66,907

)

955,505

 

Disposal

 

(20,607

)

15,802

 

(4,805

)

As of June 30, 2012

 

$

4,705,587

 

$

(512,936

)

$

4,192,651

 

 

i.                             On February 16, 2012, the Company took delivery of the newbuilding 13,100 TEU vessel, the Hyundai Together, for a contract price of $168.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

ii.                          On February 28, 2012, the Company took delivery of the newbuilding 8,530 TEU vessel, the CMA CGM Melisande, for a contract price of $117.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

iii.                       On March 8, 2012, the Company took delivery of the newbuilding 13,100 TEU vessel, the Hyundai Tenacity, for a contract price of $168.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

iv.                      On May 3, 2012, the Company took delivery of the newbuilding 13,100 TEU vessel, the Hyundai Smart, for a contract price of $168.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

v.                         On June 7, 2012, the Company took delivery of the newbuilding 13,100 TEU vessel, the Hyundai Speed, for a contract price of $168.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

vi.                      On June 29, 2012, the Company took delivery of the newbuilding 13,100 TEU vessel, the Hyundai Ambition, for a contract price of $168.5 million. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

 

vii.                               On April 27, 2012, the Company sold and delivered the Montreal (ex Hanjin Montreal). The net sale consideration was $5.6 million and the Company recognized a gain on sale of $0.8 million during the six months ended June 30, 2012. Refer to Note 15, Sale of Vessel.

 

The residual value (estimated scrap value at the end of the vessels’ useful lives) of the fleet was estimated at $432.2 million as of June 30, 2012 and $361.5 million as of December 31, 2011. 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.

 

The contract price of each newbuilding vessel, as discussed above, excludes any items capitalized during the construction period, such as interest expense and other predelivery expenses, which increase the total cost of each vessel recorded upon delivery under “Fixed Assets, net” in the condensed Consolidated Balance Sheets.

 

Advances for Vessels under Construction
Advances for Vessels under Construction

5       Advances for Vessels under Construction

 

a)                                     Advances for vessels under construction were as follows (in thousands):

 

 

 

As of June 30,
 2012 

 

As of December 31,
 2011

 

Advance payments for vessels

 

$

 —

 

$

196,730

 

Progress payments for vessels

 

 

288,091

 

Capitalized interest

 

 

39,465

 

Total

 

$

 

 

$

524,286

 

 

As of June 30, 2012, the Company completed its extensive newbuilding program and has taken delivery of all of its vessels under construction.

 

b)                                     Advances for vessels under construction and transfers to vessels’ cost as of June 30, 2012 and December 31, 2011, were as follows (in thousands):

 

As of January 1, 2011

 

$

904,421

 

Additions

 

693,030

 

Transfer to vessels’ cost

 

(1,073,165

)

As of December 31, 2011

 

$

524,286

 

Additions

 

497,661

 

Transfer to vessels’ cost

 

(1,021,947

)

As of June 30, 2012

 

$

 

 

Deferred Charges, net
Deferred Charges, net

6       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, 2011

 

$

5,013

 

$

19,679

 

$

24,692

 

Additions

 

7,218

 

83,301

 

90,519

 

Amortization

 

(5,800

)

(9,700

)

(15,500

)

As of December 31, 2011

 

$

6,431

 

$

93,280

 

$

99,711

 

Additions

 

4,158

 

142

 

4,300

 

Amortization

 

(2,614

)

(6,630

)

(9,244

)

As of June 30, 2012

 

$

7,975

 

$

86,792

 

$

94,767

 

 

The Company follows the deferral method of accounting for drydocking and special survey costs in accordance with accounting for planned major maintenance activities, whereby actual costs incurred are deferred and amortized on a straight-line basis over the period until the next scheduled survey, which is two and a half years.  If special survey or drydocking is performed prior to the scheduled date, the remaining unamortized balances are immediately written off. Furthermore, when a vessel is drydocked for more than one reporting period, the respective costs are identified and recorded in the period in which they were incurred and not at the conclusion of the drydocking.

 

Other Non-current Assets
Other Non-current Assets

7       Other Non-current Assets

 

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

 

 

 

As of June 30,
 2012

 

As of December 31,
 2011

 

Fair value of swaps

 

$

3,534

 

$

3,964

 

Notes receivable from ZIM

 

28,627

 

23,538

 

Other non-current assets

 

1,380

 

1,363

 

Total

 

$

33,541

 

$

28,865

 

 

On October 30, 2009, the Company agreed with one of its charterers, Zim Integrated Shipping Services Ltd. (“ZIM”), to revisions to charterparties for six of its vessels in operation, which keep the original charter terms in place, reducing the cash settlement of each charter hire by 17.5% which becomes a subsequent payment. Each subsequent payment, which accumulates in any financial quarter, is satisfied by callable exchange notes (the “CENs”). CENs will be issued by ZIM once per financial quarter at a face value equal to the aggregate amount of such subsequent payments from that financial quarter plus a premium amount (being an amount calculated as if each such subsequent payment had accrued interest at the rate of 6% per annum from the date when it would have been due under the original charter party until the relevant issue date for the CENs). Unless previously converted at the holder’s option into ZIM’s common stock (only upon ZIM becoming a publicly listed company) or redeemed partially prior to or in full in cash, on July 1, 2016, ZIM will redeem the CENs at their remaining nominal amount together with the 6% interest accrued up to that date in cash only. In this respect, the Company recorded a note receivable from ZIM in “Other non-current assets” of $28.6 million and $23.5 million as of June 30, 2012 and December 31, 2011, respectively.

 

In respect of the fair value of swaps, refer to Note 11b, Financial Instruments — Fair Value Interest Rate Swap Hedges.

 

Accrued Liabilities
Accrued Liabilities

8       Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

As of June 30,
2012

 

As of December 31,
2011

 

Accrued payroll

 

$

1,162

 

$

1,109

 

Accrued interest

 

12,914

 

10,543

 

Accrued expenses

 

25,251

 

24,465

 

Total

 

$

39,327

 

$

36,117

 

 

Accrued expenses mainly consisted of accrued realized losses on cash flow interest rate swaps of $18.2 million and $18.5 million as of June 30, 2012 and December 31, 2011, respectively, as well as other accruals related to the operation of the Company’s fleet of $7.1 million and $6.0 million as of June 30, 2012 and December 31, 2011, respectively.

 

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

9       Other Current and Long-term Liabilities

 

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

 

 

 

As of June 30,
2012

 

As of December 31,
2011

 

Fair value of swaps

 

$

113,149

 

$

120,623

 

Other current liabilities

 

365

 

 

Total

 

$

113,514

 

$

299,300

 

 

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

 

 

 

As of June 30,
2012

 

As of December 31,
2011

 

Fair value of swaps

 

$

256,593

 

$

291,829

 

Other long-term liabilities

 

8,455

 

7,471

 

Total

 

$

265,048

 

$

299,300

 

 

Other long-term liabilities mainly consist of $4.8 million and $4.7 million as June 30, 2012 and December 31, 2011, respectively, in relation to a deferred fee accrued pursuant to the Bank Agreement (refer to Note 10, Long-Term Debt), which will be cash settled on December 31, 2014 and is recorded at amortized cost.

 

In respect of the fair value of swaps, refer to Note 11a, Financial Instruments — Cash Flow Interest Rate Swap Hedges.

 

Long-Term Debt
Long-Term Debt

 

10     Long-Term Debt

 

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

 

Lender

 

As of
June 30,
2012

 

Current
portion

 

Long-term
portion

 

As of
December 31,
2011

 

Current
portion

 

Long-term
portion

 

The Royal Bank of Scotland

 

$

686,800

 

$

202

 

$

686,598

 

$

663,300

 

$

 

$

663,300

 

HSH Nordbank

 

35,000

 

2,038

 

32,962

 

35,000

 

 

35,000

 

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

 

44,495

 

10,369

 

34,126

 

49,679

 

10,369

 

39,310

 

The Export-Import Bank of Korea & ABN Amro

 

84,984

 

11,250

 

73,734

 

90,609

 

11,250

 

79,359

 

Deutsche Bank

 

180,000

 

1,053

 

178,947

 

180,000

 

 

180,000

 

Emporiki Bank of Greece

 

156,800

 

2,191

 

154,609

 

156,800

 

 

156,800

 

HSH Nordbank AG-Aegean Baltic Bank-Piraeus Bank

 

658,160

 

 

658,160

 

664,325

 

 

664,325

 

Credit Suisse

 

221,100

 

2,371

 

218,729

 

221,100

 

 

221,100

 

ABN Amro-Lloyds TSB-National Bank of Greece

 

253,200

 

2,334

 

250,866

 

253,200

 

 

253,200

 

Deutsche Schiffsbank-Credit Suisse-Emporiki Bank of Greece

 

298,500

 

4,117

 

294,383

 

298,500

 

 

298,500

 

The Royal Bank of Scotland (New Credit Facility)

 

100,000

 

1,911

 

98,089

 

57,200

 

 

57,200

 

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

 

123,750

 

7,207

 

116,543

 

70,250

 

 

70,250

 

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

 

37,100

 

2,800

 

34,300

 

37,100

 

 

37,100

 

Sinosure CEXIM-Citi-ABN Amro Credit Facility

 

193,230

 

20,340

 

172,890

 

203,400

 

20,340

 

183,060

 

Club Facility (New Credit Facility)

 

83,900

 

 

83,900

 

16,780

 

 

16,780

 

Citi-Eurobank (New Credit Facility)

 

80,000

 

2,278

 

77,722

 

 

 

 

Comprehensive Financing Plan exit fee accrued

 

2,505

 

 

2,505

 

1,592

 

 

1,592

 

Fair value hedged debt

 

2,443

 

 

2,443

 

3,412

 

 

3,412

 

Total long-term debt

 

$

3,241,967

 

$

70,461

 

$

3,171,506

 

$

3,002,247

 

$

41,959

 

$

2,960,288

 

Hyundai Samho Vendor Financing

 

$

190,000

 

$

39,551

 

$

150,449

 

$

65,145

 

$

10,857

 

$

54,288

 

 

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, 2012, are as follows (in thousands):

 

Payment due by period ended

 

Fixed

principal
repayments

 

Variable
principal
payments

 

Final Payment
due on
December 31, 2018*

 

Total
principal
payments

 

June 30, 2013

 

$

61,440

 

$

9,021

 

$

 

$

70,461

 

June 30, 2014

 

129,274

 

31,779

 

 

161,053

 

June 30, 2015

 

142,861

 

42,674

 

 

185,535

 

June 30, 2016

 

168,810

 

111,926

 

 

280,736

 

June 30, 2017

 

185,475

 

194,544

 

 

380,019

 

June 30, 2018 and thereafter

 

407,289

 

271,118

 

1,480,808

 

2,159,215

 

Total long-term debt

 

$

1,095,149

 

$

661,062

 

$

1,480,808

 

$

3,237,019

 

 

* The last payment due on December 31, 2018, includes the unamortized remaining principal debt balances, 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, 2012 are based on the terms of the Bank Agreement, under which the Company is not required to repay any outstanding principal amounts under its existing credit facilities, other than the KEXIM and KEXIM-ABN Amro credit facilities which are not covered by the Bank Agreement, until after May 15, 2013; thereafter until December 31, 2018 it will be 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 for such quarter (as defined below). 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, 2012, are as follows (in thousands):

 

Payment due by period ended

 

 

 

June 30, 2013

 

$

39,551

 

June 30, 2014

 

57,388

 

June 30, 2015

 

57,388

 

June 30, 2016

 

35,673

 

Total vendor financing

 

$

190,000

 

 

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

 

Bank Agreement

 

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

 

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

 

The Company is required to pay an amendment fee of $5.0 million on December 31, 2014. This amendment fee was accrued under the “Other long-term liabilities” in the consolidated balance sheet and is deferred and amortized over the life of the respective credit facilities with the effective interest method. In addition, the Company is required to pay a fee of $10.0 million if it does not repay at least $150.0 million in the aggregate under the New Credit Facilities with equity proceeds by December 31, 2013.

 

Principal Payments

 

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

 

 

 

February 15,

 

May 15,

 

August 15,

 

November 15,

 

December 31,

 

Total

 

2013

 

 

19,481,395

 

21,167,103

 

21,482,169

 

 

62,130,667

 

2014

 

22,722,970

 

21,942,530

 

22,490,232

 

24,654,040

 

 

91,809,772

 

2015

 

26,736,647

 

27,021,750

 

25,541,180

 

34,059,102

 

 

113,358,679

 

2016

 

30,972,971

 

36,278,082

 

32,275,598

 

43,852,513

 

 

143,379,164

 

2017

 

44,938,592

 

36,690,791

 

35,338,304

 

31,872,109

 

 

148,839,796

 

2018

 

34,152,011

 

37,585,306

 

44,398,658

 

45,333,618

 

65,969,274

 

227,438,867

 

Total

 

 

 

 

 

 

 

 

 

 

 

786,956,945

 

 

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

 

Furthermore, an additional variable payment in such amount that, together with the fixed principal payment (as disclosed above), equals 92.5% of Actual Free Cash Flow 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 New Credit Facilities and after the New Credit Facilities are repaid, to the existing credit facilities. The last payment due on December 31, 2018, will also include the unamortized remaining principal debt balances, as such amount will be determinable following the fixed and variable amortization.

 

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

 

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

 

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

 

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

 

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

 

Covenants and Events of Default

 

On January 24, 2011, the Company entered into the Bank Agreement that superseded, amended and supplemented the terms of each of its existing credit facilities (other than its credit facilities with KEXIM and KEXIM-ABN Amro) and provided for, among other things, amended covenant levels under such existing credit facilities as described below, with which the Company was in compliance as of June 30, 2012.

 

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

 

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

 

·                                          maintain a minimum ratio of (i) the market value of the nine vessels (Hull Nos. S458, S459, S460, Hyundai Together, Hyundai Tenacity, Hanjin Greece, Hanjin Italy, Hanjin Germany and CMA CGM Rabelais) collateralizing the New Credit Facilities, calculated on a charter-free basis, plus the net realizable value of any additional collateral, to (ii) the Company’s aggregate debt outstanding under the New Credit Facilities of 100% from September 30, 2012 through September 30, 2018;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Collateral and Guarantees

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2012, $424.8 million was outstanding under the above New Credit Facilities and there were nil undrawn funds available.

 

Borrowings under each of the New Credit Facilities above, which were available for drawdown until the later of September 30, 2012 and delivery of the Company’s last contracted newbuilding vessel collateralizing such facility (so long as such delivery is no more than 240 days after the scheduled delivery date), 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 is not required to repay any outstanding principal amounts under its New Credit Facilities until after March 31, 2013 and thereafter it will be required to make quarterly principal payments in fixed amounts as specified in the Bank Agreement plus an additional quarterly variable amortization payment, all as described above under “—Bank Agreement—Principal Payments.”

 

Covenants, Events of Default and Other Terms

 

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

 

Collateral and Guarantees

 

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

 

In addition, Aegean Baltic—HSH Nordbank—Piraeus Bank also received a second lien on the Maersk Deva (ex Bunya Raya Tujuh), 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 Bunya Raya Tiga, CSCL America (ex MSC Baltic) and the CSCL Le Havre as collateral in respect of all borrrowings from RBS.

 

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

 

Sinosure-CEXIM-Citi-ABN Amro Credit Facility

 

On February 21, 2011, the Company entered into a bank agreement with Citibank, acting as agent, ABN Amro and the Export-Import Bank of China (“CEXIM”) for a senior secured credit facility (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, 2012, $193.2 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 requires the Company to:

 

·                                maintain a ratio of total net debt (defined as total liabilities less cash and cash equivalents) to adjusted total consolidated assets (total consolidated assets with market value of vessels replacing book value of vessels less cash and cash equivalents) of no more than 70%;

 

·                                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%;

 

·                                maintain minimum free consolidated unrestricted cash and cash equivalents, through February 21, 2014, of $30.0 million, and the higher of $30.0 million and 2% of consolidated total debt thereafter;

 

·                                ensure that the ratio of the Company’s (i) 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, financing payments, fees and commissions and capital losses on vessel cancellations and before any non-recurring items) for the last twelve months to (ii) interest expense (defined as the aggregate amount of interest, commission, fees and other finance charges (excluding capitalized interest)) exceeds 2.50:1; and

 

·                                maintain a consolidated market value adjusted net worth (defined as the Company’s total consolidated assets adjusted for the market value of the Company’s vessels less the Company’s total consolidated liabilities) 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 six 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.

 

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

 

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

 

Collateral

 

The Sinosure-CEXIM Credit Facility is secured by customary 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 being built by Hyundai Samho, Hyundai Smart, Hyundai Speed, Hyundai Ambition, Hyundai Together, Hyundai Tenacity, Hanjin Greece, Hanjin Italy and Hanjin Germany, in the form of delayed payment of a portion of the final installment for each such newbuilding.

 

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

 

Exit Fee

 

The Company will be required to pay an aggregate Exit Fee of $15.0 million payable on the common maturity date of the New Credit Facilities of December 31, 2018, or such earlier date when all of the New Credit Facilities are repaid in full, which will accrete in the condensed consolidated Statement of Income over the life of the respective facilities (with the effective interest method) and is reported under “Long-term debt, net of current portion” in the condensed consolidated Balance Sheet. The Company has recognized an amount of $2.5 million and $1.6 million as of June 30, 2012 and December 31, 2011, respectively.

 

Credit Facilities Summary Table

 

Lender

 

Outstanding
Principal
Amount
(in millions)(1)

 

Collateral Vessels

 

Previously Existing Credit Facilities

 

The Royal Bank of Scotland(2)

 

$

686.8

 

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

 

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

 

$

658.2

 

The Elbe, the Kalamata, the Komodo, the Henry, the Hyundai Commodore (ex APL Commodore), the Hyundai Duke (ex APL Duke), the Independence, the Marathonas, the Messologi, the Mytilini, the Hope, the Honour, the SCI Pride, the Lotus, the Hyundai Vladivostok, the Hyundai Advance, the Hyundai Stride, the Hyundai Future, the Hyundai Sprinter

 

Emporiki Bank of Greece S.A.

 

$

156.8

 

The CMA CGM Moliere and the CMA CGM Musset

 

Deutsche Bank

 

$

180.0

 

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

 

Credit Suisse

 

$

221.1

 

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

 

ABN Amro—Lloyds TSB—National Bank of Greece

 

$

253.2

 

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

 

Deutsche Schiffsbank—Credit Suisse—Emporiki Bank

 

$

298.5

 

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

 

HSH Nordbank

 

$

35.0

 

The Deva and the Derby D

 

KEXIM

 

$

44.5

 

The CSCL Europe and the CSCL America

 

KEXIM—ABN Amro

 

$

85.0

 

The CSCL Pusan and the CSCL Le Havre

 

New Credit Facilities

 

Aegean Baltic—HSH Nordbank—Piraeus Bank

 

$

123.8

 

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

 

RBS

 

$

100.0

 

The Hyundai Smart and the Hanjin Germany

 

ABN Amro Club Facility

 

$

37.1

 

The Hanjin Greece

 

Club Facility

 

$

83.9

 

The Hyundai Together and the Hyundai Tenacity

 

Citi-Eurobank

 

$

80.0

 

The Hyundai Ambition

 

Sinosure-CEXIM-Citi-ABN Amro

 

$

193.2

 

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

 

Hyundai Samho Vendor

 

$

190.0

 

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, 2012.

 

(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, 2012, 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, 2012.

 

Financial Instruments
Financial Instruments

11     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 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 expenses 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, since that time, only hedge ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item are recognized in the Company’s earnings. Assessment and measurement of prospective and retrospective effectiveness for these interest rate swaps are 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 is recognized initially in stockholders’ equity, and recognized to the Statement of Income in the periods when the hedged item affects profit or loss. If the forecasted transaction does not occur, the ineffective portion of the gain or loss on the hedging instrument is recognized in the Statement of Income 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,
2012

 

Fair Value
December 31,
2011

 

Interest rate swaps designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RBS

 

03/09/2007

 

3/15/2010

 

3/15/2015

 

$

200,000

 

5.07% p.a.

 

USD LIBOR 3M BBA

 

$

(24,462

)

$

(26,764

)

RBS

 

03/16/2007

 

3/20/2009

 

3/20/2014

 

$

200,000

 

4.922% p.a.

 

USD LIBOR 3M BBA

 

(15,290

)

(18,532

)

RBS

 

11/28/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.855% p.a.

 

USD LIBOR 3M BBA

 

(6,227

)

(7,923

)

RBS

 

11/28/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.875% p.a.

 

USD LIBOR 3M BBA

 

(6,256

)

(7,962

)

RBS

 

12/01/2006

 

11/28/2008

 

11/28/2013

 

$

100,000

 

4.78% p.a.

 

USD LIBOR 3M BBA

 

(6,119

)

(7,779

)

HSH Nordbank

 

12/06/2006

 

12/8/2009

 

12/8/2014

 

$

400,000

 

4.855% p.a.

 

USD LIBOR 3M BBA

 

(42,208

)

(47,139

)

CITI

 

04/17/2007

 

4/17/2008

 

4/17/2015

 

$

200,000

 

5.124% p.a.

 

USD LIBOR 3M BBA

 

(25,506

)

(27,730

)

CITI

 

04/20/2007

 

4/20/2010

 

4/20/2015

 

$

200,000

 

5.1775% p.a.

 

USD LIBOR 3M BBA

 

(25,878

)

(28,143

)

RBS

 

09/13/2007

 

10/31/2007

 

10/31/2012

 

$

500,000

 

4.745% p.a.

 

USD LIBOR 3M BBA

 

(7,361

)

(17,277

)

RBS

 

09/13/2007

 

9/15/2009

 

9/15/2014

 

$

200,000

 

4.9775% p.a.

 

USD LIBOR 3M BBA

 

(19,743

)

(22,604

)

RBS

 

11/16/2007

 

11/22/2010

 

11/22/2015

 

$

100,000

 

5.07% p.a.

 

USD LIBOR 3M BBA

 

(15,062

)

(15,664

)

RBS

 

11/15/2007

 

11/19/2010

 

11/19/2015

 

$

100,000

 

5.12% p.a.

 

USD LIBOR 3M BBA

 

(15,190

)

(15,826

)

Eurobank

 

12/06/2007

 

12/10/2010

 

12/10/2015

 

$

200,000

 

4.8125% p.a.

 

USD LIBOR 3M BBA

 

(28,713

)

(29,584

)

CITI

 

10/23/2007

 

10/25/2009

 

10/27/2014

 

$

250,000

 

4.9975% p.a.

 

USD LIBOR 3M BBA

 

(26,027

)

(29,468

)

CITI

 

11/02/2007

 

11/6/2010

 

11/6/2015

 

$

250,000

 

5.1% p.a.

 

USD LIBOR 3M BBA

 

(37,448

)

(39,092

)

CITI

 

11/26/2007

 

11/29/2010

 

11/30/2015

 

$

100,000

 

4.98% p.a.

 

USD LIBOR 3M BBA

 

(14,831

)

(15,370

)

Total fair value of swaps qualifying for hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(316,321

)

$

(356,857

)

Interest rate swaps not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CITI

 

02/07/2008

 

2/11/2011

 

2/11/2016

 

$

200,000

 

4.695% p.a.

 

USD LIBOR 3M BBA

 

(29,100

)

(29,579

)

Eurobank

 

02/11/2008

 

5/31/2011

 

5/31/2015

 

$

200,000

 

4.755% p.a.

 

USD LIBOR 3M BBA

 

(24,321

)

(26,016

)

Total fair value of swaps not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(53,421

)

$

(55,595

)

Total fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(369,742

)

$

(412,452

)

 

The Company recorded in the condensed consolidated statements of income hedge ineffectiveness gains of $1.8 million and $12.4 million for the six months ended June 30, 2012 and 2011, respectively, unrealized gains of $2.2 million and unrealized loss of $5.8 million in relation to fair value changes of interest rate swaps (not qualifying for hedge accounting) for the six months ended June 30, 2012 and 2011, respectively. Furthermore, deferred realized losses of nil and $0.2 million were reclassified from “Accumulated other comprehensive loss” in the condensed consolidated balance sheets to the condensed consolidated statements of income for the six months ended June 30, 2012 and 2011, respectively. The total fair value change of the interest rate swaps for the six months ended June 30, 2012 and 2011, amounted to $42.7 million and $9.2 million, respectively.

 

The variable-rate interest on specific borrowings was associated with vessels under construction and was capitalized as a cost of the specific vessels. In accordance with the accounting guidance on derivatives and hedging, the amounts in accumulated other comprehensive income/(loss) related to realized gains or losses on cash flow hedges that have been entered into and qualify for hedge accounting, in order to hedge the variability of that interest, were classified under other comprehensive income/(loss) and are reclassified into earnings over the depreciable life of the constructed asset, since that depreciable life coincides with the amortization period for the capitalized interest cost on the debt. Deferred realized losses on cash flow hedges of $7.0 million and $17.9 million were recorded in other comprehensive loss for the six months ended June 30, 2012 and 2011, respectively. In addition, an amount of $1.5 million and $0.6 million was reclassified into earnings for the six months ended June 30, 2012 and 2011, respectively, representing its amortization over the depreciable life of the vessels. Following the delivery of all of our vessels under construction, deferral of realized losses on cash flow hedges will be eliminated in the future.

 

 

 

Three months
ended
June 30,

 

Three months
ended
June 30,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Total realized losses

 

$

(40.4

)

$

(40.6

)

Realized losses deferred in Other Comprehensive Loss

 

2.2

 

8.0

 

Realized losses expensed in condensed consolidated Statements of Income

 

(38.2

)

(32.6

)

Amortization of deferred realized lossess

 

(0.8

)

(0.4

)

Unrealized gains/(losses)

 

1.3

 

(3.3

)

Unrealized and realized losses on cash flow interest rate swaps

 

$

(37.7

)

$

(36.3

)

 

 

 

Six months

ended
June 30,

 

Six months
ended
June 30,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Total realized losses

 

$

(80.4

)

$

(79.2

)

Realized losses deferred in Other Comprehensive Loss

 

7.0

 

17.9

 

Realized losses expensed in condensed consolidated Statements of Income

 

(73.4

)

(61.3

)

Amortization of deferred realized loss

 

(1.5

)

(0.6

)

Unrealized gains/(losses)

 

4.0

 

6.4

 

Unrealized and realized losses on cash flow interest rate swaps

 

$

(70.9

)

$

(55.5

)

 

The Company is in an over-hedged position under its cash flow interest rate swaps, which is due to deferred progress payments to shipyards and cancellation of three newbuildings in 2010, replacements of variable interest rate debt with a fixed interest rate seller’s financing and equity proceeds from the Company’s private placement in 2010, all of which reduced initial forecasted variable interest rate debt and resulted in notional cash flow interest rate swaps being above the variable interest rate debt eligible for hedging. Realized losses attributable to the over-hedging position were $12.6 million and $19.9 million for the six months ended June 30, 2012 and 2011, respectively. The over-hedged position described above will be gradually reduced and ultimately eliminated during the second half of 2012, following the delivery of all remaining newbuildings and the full drawdown of the debt.

 

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, since that time, hedge ineffectiveness amounts arising from the differences in the change in fair value of the hedging instrument and the hedged item are recognized in the Company’s earnings. The Company considers its strategic use of interest rate swaps to be a prudent method of managing interest rate sensitivity, as it prevents 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 are performed on a quarterly basis, on the financial statement and earnings reporting dates.

 

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,
2012

 

Fair Value
December 31,
2011

 

RBS

 

11/15/2004

 

12/15/2004

 

8/27/2016

 

$60,528

 

5.0125% p.a.

 

USD LIBOR 3M BBA + 0.835% p.a.

 

$1,699

 

$1,917

 

RBS

 

11/15/2004

 

11/17/2004

 

11/2/2016

 

$62,342

 

5.0125% p.a.

 

USD LIBOR 3M BBA + 0.855% p.a.

 

1,835

 

2,047

 

Total fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

$3,534

 

$3,964

 

 

The total fair value change of the interest rate swaps for the period from January 1, 2012 until June 30, 2012, amounted to $0.4 million loss, and is included in the condensed consolidated Statement of Income in “Unrealized and realized loss on derivatives”. The related asset of $3.5 million is shown under “Other non-current assets” in the condensed consolidated balance sheet. The total fair value change of the underlying hedged debt for the period from January 1, 2012 until June 30, 2012, was $0.9 million gain. The net ineffectiveness for the six months ended June 30, 2012, amounted to $0.5 million gain and is shown in the condensed consolidated Statement of Income in “Unrealized and realized loss on derivatives”.

 

 

 

Three months
ended
June 30,
2012

 

Three months
ended
June 30,
2011

 

 

 

(in millions)

 

Unrealized gains/(losses) on swap asset

 

$

(0.2

)

$

0.3

 

Unrealized gains/(losses) on fair value of hedged debt

 

0.3

 

(0.1

)

Amortization of fair value of hedged debt

 

0.2

 

0.2

 

Realized gains

 

0.4

 

0.5

 

Unrealized and realized losses on fair value interest rate swaps

 

$

0.7

 

$

0.9

 

 

 

 

Six months
ended
June 30,
2012

 

Six months
ended
June 30,
2011

 

 

 

(in millions)

 

Unrealized gains/(losses) on swap asset

 

$

(0.4

)

$

(0.3

)

Unrealized gains/(losses) on fair value of hedged debt

 

0.6

 

0.6

 

Amortization of fair value of hedged debt

 

0.3

 

0.4

 

Realized gains

 

0.9

 

1.1

 

Unrealized and realized losses on fair value interest rate swaps

 

$

1.4

 

$

1.8

 

 

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, 2012.

 

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, 2012

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

3,534

 

$

 

$

3,534

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

369,742

 

$

 

$

369,742

 

$

 

 

 

 

Fair Value Measurements as of December 31, 2011

 

 

 

Total

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

(in thousands of $)

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

3,964

 

$

 

$

3,964

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

412,452

 

$

 

$

412,452

 

$

 

 

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 11(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, 2012, 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, 2012

 

As of December 31, 2011

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

 

 

 

(in thousands of $)