Global Ship Lease, Inc. (GSL) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Global Ship Lease Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s presentation, Mr. Ian Webber, CEO of Global Ship Lease. Sir, please begin.

Thank you very much. Good morning everybody and thank you for joining us. I hope you've been able to look at the earnings release that we issued earlier today and to access the slides that accompany this call. As normal, the first couple of slides remind you that today's call may include forward-looking statements that are based on current expectations and assumptions and are by their nature inherently uncertain and outside the company's control. Actual results may differ materially from these forward looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the risk factor section of our most recent Annual Report on Form 20-F, which is for 2017 and was filed with the SEC on March 29 this year. You can obtain this via our Web site or via the SEC's Web site. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. For reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP, please refer to the earnings release that we issued this morning, which is also available on our Web site. We’ll follow our normal format for the call. I’ll give an overview of GSL and our strategy. Then Tom will provide a market update and review some financial highlights. After that, we’ll open the call to questions. Turning to Slide 3. The second quarter again represented full charter coverage and high utilization for our fleet resulting in stable financial performance with $35 million of revenue in the quarter generating $23.4 million of EBITDA. Additionally, we took delivery of the GSL Valerie, a 2005-built, 2,800 TEU containership with the vessel commencing a pre-agreed 12-month charter with CMA CGM from July 1 at a rate of $9,000 per day. We’re delighted to have expanded our fleet during a time when the supply/demand balance for mid-size and smaller containerships has meaningfully strengthened and this is a topic that Tom will return to in more detail later. On Slide 4, we have summarized GSL’s strategy. That’s a benefit from the strong fundamentals underlying the mid-size and smaller containership segment. Starting at the top, we seek to maintain consistent full fleet charter coverage and to maximize utilization through high-quality operations and prudent vessel maintenance. Our charter cover goes out on average 2.7 years on a weighted basis and represents some $419 million of contracted revenue. We maintain the strategic focus on the mid-size and smaller containership fleet segment that carries the majority of containerized trade. This segment, in addition to having a truly global deployment profile and a highly liquid charter market, has seen comparatively limited newbuilding investment for much of the last decade as limited capital has been deployed in building the very large containerships that give scale economies and unit cost efficiencies critical to the largest and longest trade lanes. In conjunction with consistently good demand growth in the non-mainlane and intermediate trade lanes where the mid-size and smaller fleets is predominately deployed, the limited newbuildings and elevated scrapping that was in recent years, although not in 2018 year-to-date due to improved market conditions, have resulted in increasing supply/demand tension, a very low idle fleet and charter rates and asset values that have risen meaningfully in 2018. On the back of these promising fundamentals asset values are up from their lows but still in our view hold attractive upside potential. We continue to look for opportunities to grow our fleet in a disciplined, highly selective manner that is in line with our charter attached acquisition strategy as with the GSL Valerie. Our strong balance sheet and cash flow profile put us in a good position to pursue additional growth at a time when much of the available capital in this space continues to be focused on strategic investments in the very largest vessels. Such charter attached growth with top tier counterparties then further supports our contracted cash flow and thus our ability to pursue additional attractive growth opportunities. Much of Slide 5 will be familiar as we have achieved consistent earnings and operational performance over the years. The standout point here on this slide though is the significant improvement in the time charter rate index which runs across the top of the page. And on the top right side of the slide, you’ve seen that it’s risen to levels not seen for some 10 years. Whilst on this slide, I’ll also note that GSL Valerie which commenced charter with CMA CGM on the 1st of July will contribute to revenue and EBITDA in and from the third quarter. On Slide 6 is our charter portfolio with the $419 million of contracted revenue I mentioned earlier spread out over the TEU weighted average duration of 2.7 years. Much of our fleet will continue to operate on fixed rate charters for some time with the highest rated charter of $47,200 per day for the CMA CGM Thalassa continuing through 2025. We do, however, have some charter expirations over the next 12 months or so. And I’d point out that all of these vessels, bar one OOCL Ningbo, are currently on charters at relatively low rates compared to current market rates, which means that we are in a good position to benefit from this exposure after the spot market on renewal always assuming current market conditions are maintained. Indeed, it is with this scenario in mind that we preferred in recent times to agree charters for relatively short periods maintaining full employment but reclaiming upside exposure to the improving market. Note on this slide that we’ve also got two vessels highlighted in light blue, the Kumasi and the Marie Delmas, for which we maintain annual options for the next couple of years which we can call providing downside rate coverage at $9,800 per day. These options run through as late as the end of 2020. Depending on our view of the market later this year, we can either take the option for 2019 to extend the charter to the end of that year at $9,800 per day or we can decline the option and increase our exposure to the spot market. On Slide 7, I’ll give a quick update on our main counterparty and largest shareholder, CMA CGM. The charters are now 17 of our 19 vessels, including GSL Valerie. We maintained a strong working relationship with CMA CGM, a leading liner company which consistently outperforms the industry. They’re heavily engaged with the charter market with just over three quarters of their 500 or so ship fleet being chartered in. Slide 8 recaps the core strategy that has served us well throughout the cycle. We maximize cash flow and stability by achieving high utilization on fixed rate multiyear charters to excellent counterparties with contract terms that limit the exposure we have to external variables. For example, our contracts do not expose us to fuel price as the bunker fuel is borne by a charter. We then look to grow our fleet in a disciplined opportunistic manner focusing on acquisitions of high-quality, medium sized and smaller tonnage. Finally, we maintain a strong balance sheet and proactively delever in order to ensure that we’re in a position to act decisively in taking advantage of growth opportunities that may arise in a largely capital constrained market environment. On that note, I’ll turn the call over to Tom for some additional insight into the industry.

Thanks, Ian. Despite acknowledging the risk of trade tensions escalating, particularly between the U.S. and China, the IMF in its July update to the World Economic Outlook maintained its global GDP growth projections for 2018 and 2019 at 3.9% per annum, up from 3.7% in 2017. And while sentiment has understandably been a little shaken on the trans-Pacific container trade prompting liners to reexamine their service offerings on those routes, the first half of 2018 has seen the continued firming of charter market rates and asset values on the back of supportive industry fundamentals. We will provide our usual market analysis in the next few slides through which run a handful of recurring themes summarized at the top of Slide 10. Essentially, our thesis is that, one, the first half of 2018 saw a continuation of a fundamental driven recovery for the industry which began in early 2017. Two, the containership order book has been right-sizing over time as the industry adjusts to a combination of consolidation and reformed alliances, capital constraints and a new demand growth paradigm. Three, an improving supply/demand balance has supported earnings, charter rates that is, in the market and pushed up asset values. And four, and this is a point we’ve been focused on for some time and it goes to the heart of the GSL value proposition, we believe industry dynamics continue to be most attractive for mid-size and smaller ships which make up the GSL fleet and represent our focus for growth going forward. The charts on the lower half of this slide underline the points I’ve just made. On the left, you can see a comparison of demand growth, the dark bars, and supply growth, the pale bars. The jagged red line cutting through the chart is the short-term charter rate index, a barometer of health for the sector. You can see demand growth beginning to overhaul supply growth in 2016, a trend sustained in 2017. In 2018, overall supply for the global containership fleet is now forecast to marginally outgrow demand partly due to new vessel deliveries, the majority of which are very large containerships but also importantly because scrapping has significantly slowed as vessel earnings and asset values have continued to improve. Vessel earnings are reflected in the charter rate index, the red line, which as you can see has continued to respond positively. The lower right-hand chart shows how the global fleet has evolved since 2007. Most significantly you can see how the order book to fleet ratio, which was north of 60% in 2007 on the back of speculative orders largely out of the German KG market, had fallen to 12.6% by the end of 2017, although it has since risen a little to 12.9%. If you drill down further, as we will on a later slide, the order book to fleet ratio for sub-10,000 TEU ships for mid-size and smaller vessel segments is only 3%. And I would clarify further that the actual deliveries from that order book are spread across two to three years. Slide 11 focuses mainly on demand side fundamentals. The pie chart on top left shows the composition of global containerized trade in 2017. Almost 30% of volumes were carried in the mainlane trades by which I mean Asia-Europe, the trans-Pacific and the trans-Atlantic. More relevant to us, however, is the fact that in aggregate a little over 70% of global containerized trade volumes were carried in the non-mainlane, intermediate and intraregional trades of which the largest is Intra-Asia. As we shall demonstrate later, these are the trades served primarily by mid-size and smaller ships. They are also trades that have tended to show robust growth. Slide 12 looks at the supply side fundamentals. Top left, you can see the idle fleet capacity which although subject to usual seasonal variations is trending down. At its worst base in 2009, the idle fleet peaked at around 11%. By the end of the first half of 2018, it was below 1.5%. Scrapping, which is the focus of the charter top right, helped to reduce idle capacity through 2016 and 2017. However, as you can see, strengthening in the market with rising vessel earnings and asset values has meant that scrapping year-to-date 2018 has been minimal. So the continued compression of idle capacity which includes the full absorption of around 840,000 TEU of new capacity from the yards delivered during the first six months of 2018 has been driven by demand side growth. Bottom left is a chart showing the order book. Significant for the big ships, modest for the mid-size and smaller segments. To reiterate, the overall order book to fleet ratio at June 30 was 12.9%, so that was below 10,000 TEU, it was 3%. So existing capacity for mid-size and smaller tonnage has been reduced over the last couple of years by scrapping exceeding new deliveries. Further, the order book pipeline for replacement tonnage is limited and cargo demand has continued to grow. Slide 13 looks at vessel deployment patterns. The larger of the two charts chops global containerized trade into 20 or so trade groupings which are arranged along the horizontal axis. Immediately below these you will see the number of vessels operated in each trade grouping. The largest number of vessels by quite some margin roughly 30% of the global fleet of a little over 5,000 ships is concentrated on the Intra-Asia trade. We’ll come back to that in a moment. The bars on the chart show the maximum vessel size deployed per trade grouping, the purple bars, and the average vessel size, the dark blue. Clearly, the really big shifts are key to a handful of trades driven by constant search for unit cost efficiency driven by relatively high volumes, decent port infrastructure and long trade lanes. Asia-Europe is the obvious example served by the largest ships on the water with a maximum size north of 22,000 TEU and with an average size around 14,000 TEU. On the flipside, mid-size and smaller ships are core to most other trade lanes returning to the largest single trade grouping, Intra-Asia. The breakout chart on the right shows that this trade is served by mid-size and smaller vessels, about three quarters of which are 2,000 TEU or smaller. Slides 14 and 15 make the same point of Slide 13 but more graphically. Slide 14 shows the sailings of the big ships, over 10,000 TEU during a 30-day period in the second quarter of 2018. As you can see, they’re primarily employed on the big East-West arterial trades. Contrast this, however, to Slide 15 where you can see the deployment of mid-size and smaller vessels during the same period. As you can see, they’re everywhere which underlines their commercial utility and operational flexibility. Slides 16 and 17 conclude this section. Slide 16 shows how vessel earnings, short-term charter rates and asset values have evolved over the long term, the left-hand chart, and since late 2016, the right-hand chart. As you can see, short-term charter rates have been under sustained downward pressure for the last few years until during the first quarter of 2017, they began to recover quite sharply. During the last 12 months, the spot market charter rate index has climbed by almost 50% with a 37% increase during the first half of 2018. As you would expect, asset values firmed significantly over the same period, up 43% and 18%, respectively. Nevertheless, as you can see from the chart on the left, they remain close to long-term cyclical lows and a well below age adjusted newbuilding price parity, suggesting a favorable risk reward backdrop for selective acquisitions, particularly in regards to existing on-the-water vessels. Slide 17 reemphasizes this last point, demonstrating the liquidity in the sale and purchase market for containerships in which 116 ships, mostly mid-size and smaller changed hands during the first six months of 2018. One of those vessels, the GSL Valerie, was purchased by us. The Valerie is a high-spec, high-reefer 2,800 TEU vessel built at the Hyundai Mipo yard in South Korea. We co-selected her with CMA CGM against their commitment to charter the vessel shortly after delivery adding about 3.3 million of contract coverage. We continue to be highly selective in the acquisitions that we pursue, but as you can see there are opportunities out there and we actively access them on a fairly continuous basis. So to wrap up the market section, although the sector will remain both cyclical and seasonal, first half 2018 has seen vessel earnings and asset values continue to firm as industry fundamentals, particularly for mid-size and smaller ships swing back into balance and we continue to believe that these vessel segments are especially attractive given their tighter supply, flexible deployment and commercial relevance to most trade lanes. So now let’s move on to the second quarter financials, starting on Slide 19. We generated revenue of 35 million during the second quarter and net income of 4 million. Year-over-year, reductions result primarily from vessels coming to the end of their original purchase and charter back contracts and being redeployed in the open market at lower albeit firming rates. We’ve continued to work hard on further compressing vessel operating expenses which totaled 10.2 million in the second quarter. Average operating cost per ownership day was $6,174, down 6.9% year-on-year. Interest expense in the quarter was 10.7 million. Slide 20 shows the balance sheet. As of June 30, we had 69.6 million of cash and total assets of 671.8 million, of which 595.3 million were vessels. Our total gross debt was 404.8 million comprising 360 million of senior secured notes plus 44.8 million under our super senior secured credit facility. The gross totals are adjusted presentationally for 13.9 million of original issue discount on the notes and deferred financing charges. Slide 21 shows our cash flows. There’s little to comment on here other than to observe the impact on net cash used in investing activities of the completion of our purchase of GSL Valerie during the quarter and that of our ongoing deleveraging on net cash used in financing activities. I'd now like to turn the call back to Ian for closing remarks.

Thanks, Tom. I’ll briefly summarize on Slide 23 before opening the call up to Q&A. We have substantial contracted cash flow with excellent counterparties going forward providing us with consistency and forward visibility to both grow our fleet and to delever. The focus on our fleet and of our growth efforts is to mid-size and smaller containership segment, workhorse vessels that are deployed around the world, particularly in the non-mainlane and intraregional trades which demonstrate consistent and robust growth. Whilst there is a concern around trade tensions and seasonality continues to be relevant, the market is responding to strong supply/demand fundamentals for the mid-size and smaller containership fleet. This is driven by a limited order book, elevated scrapping levels in prior years and continued demand growth. This, together, results in significant increases in charter rates and asset values in the year-to-date. At the same time, despite firming recently, asset values remain close to lows and we see exciting and accretive opportunities to grow our fleet in the way that we did through the acquisition of the GSL Valerie. The sale and purchase market remains quite liquid and whilst we will maintain strict discipline in assessing opportunities, we fully intend to be active and as a result of a strong balance sheet and solid industry relationships we’re well positioned to act decisively when we identify the right opportunities. With those comments, I’d now like to open the call up to any questions which you may have.

[Operator Instructions]. Our first question or comment comes from the line of Steve O’Hara from Sidoti. Your line is open. Stephen O’Hara: Hi. Good morning.

Hi, Steve. Stephen O’Hara: Hi. Just on the purchase and sale market if you could just talk about a little bit more if you’re – when you’re focused on growing, where do you expect that growth to come from? Is it more ones and twos or is your appetite a little bit larger for maybe a number of ships at once? And are you seeing those types of opportunities in the market and is that any different than it’s been more recently? I would think with activity picking up, maybe there is may be larger opportunities available as well?

Steve, thanks for the question. That’s a pretty broad subject. Let’s approach it from kind of the other direction which is our ability to grow. And we’ve talked on previous calls about our capacity to invest in growth. We’re constrained under the terms of our bonds to invest only $30 million of equity in growth and the GSL Valerie [indiscernible] absorbed around $11 million of that $30 million. But crucially we are allowed to lever acquisitions. And again we’ve talked on previous calls about looking for leverage to be able to increase our investment capacity. And if we can find debt capacity at say 70% loan to value, then our $30 million of equity becomes $100 million of levered investment capacity of which the GSL Valerie represents around 11. So we have up to around $80 million, $90 million if we can find leverage more to invest. Now whether that is a series of single ship transactions or multi-ship transactions or individually larger transactions remains to be seen. Stephen O’Hara: Okay. And then maybe just going back to the Valerie, because there’s no leverage on that ship right now, is that right and you expect to do that at some point in the future?

Correct. There is no leverage on her and we’re working hard to find leverage to support that acquisition and future acquisitions. Stephen O’Hara: Okay. And then maybe just a follow up on the activity in the market. Just wondering – are the sellers in the market more on the liner side or are they more on – are they changing hands between other charters?

Primarily I would say on the charter owner side and historically it has been quite a significant flow of sale opportunities out of the German market, and I would say that that is still the case. But whenever we look at a perspective acquisition, it has to fulfill a number of criteria. We have to like the vessel itself in terms of its specification. We have to have a clear view of its forward employment prospects. In other words, we need to have some forward chart cover. And we need to like the economics of the transaction. Now we managed to tick each of those boxes in the case of GSL Valerie and GSL Valerie is an excellent illustration of the sort of opportunity we look at. Stephen O’Hara: Okay. All right, thank you. I’ll jump back in queue.

Thank you.

Thank you. Our next question or comment comes from the line of Angus Rosborough from Park Vale. Your line is open.

Hi. Guys, a couple of quick questions for you. First off, is it fair – actually more broadly, where are you guys operating? You emphasized a quite a bit Intra-Asia but is that where most of the vessels indeed are?

Our ships, no they’re not actually. They’re global. We don’t control exactly where the ships are deployed. We obviously can’t allow them to be deployed in unsafe regions of the world either physically unsafe or politically unsafe. But otherwise deployment is down to the charter. A lot of our smaller ships are trading in the East African trades as an example. That’s not Intra-Asia.

There is a reason for my question is, is you spent a lot of time talking about how yes we are somewhat destabilized by the trade tensions that we’re seeing and that that’s particularly profound for say something – a line running from China to the U.S. But what is out there that is supportive of the drum that you guys beat consistently which is in – these smaller trade routes are strong? You cite World Bank forecast, so on and so forth, but is there anything else to suggest that these smaller routes are indeed insulated from the tensions that we’re seeing?

Well, it’s very typical to be definitive and it’s also very difficult to form any kind of a view on how trade tensions have actually affected in the real world cargo plays. But if you want to have a look at Slide 11 of the slide deck, this is a thesis that we’ve been maintaining for quite some time now. It might not look like it from the time series that we’re showing here. But if you go back further, you’ll see that the big trades, the main East-West trades, trans-Pacific and Asia-Europe, showed very sluggish growth if any at all. And the non-mainlane trades and the intraregional trades showed much stronger and more consistent growth. We’re not looking at growth rates of double digits which we saw in the early 2000s, but we’re looking at 3%, 4%, 5% increase in the demand for containership services in these non-mainlane trades. At a time when the fleet of mid-size and smaller ships is not growing, it is forecast to be pretty static over the next couple of years because the order book is relatively low and scrapping rates have been relatively high. So you’ve got a fixed fleet being deployed in a growing trade. And that’s we’ve contended like to cause an improvement in the charter market and in asset values. And the proof of the pudding is kind of in the eating because that’s exactly what we’ve seen in 2018 year-to-date, notwithstanding some geopolitical uncertainty.

You guys make the argument --

There’s no reason for that not to continue and we’ve always said there will be hiccups, but the fundamentals of an order book under control, a lot of scrapping in '15, '16, '17 and continuing reasonable demand growth should support our continuing strong fundamentals.

Okay. I think you guys make the supply argument very well. The demand argument is why these things will continue to grow at 3%, 4% and 5% I don’t hear as clearly, but – or maybe I’m just not seeing the argument. And by the way I’m not questioning it, because you can see that the rates are going up but it’s just – in terms as to why it will continue, it’s less clear. Moving on, on the last conference call you guys provided some very interesting data about what you were seeing in the market. I think Tom specifically stated renewal rates that he was seeing out there in the market. Given that you’ve got some ships coming up for renewal this year, can you give us some examples of what you’re seeing specifically? Basically some anecdotes for ships that are, say, 2,000 to 8,000 tonnage that one month it was X that we saw and then the following month it was Y to give us a sense of that progression in terms of time charters?

Sure. If you look at the sort of 22s to 28s, as you will recall, we fixed the GSL Valerie immediately prior to committing to purchase the vessel, which was back in March of this year, $9,000 a day for 12 months which at that time was the short-term market rate for such a vessel. Today, if you were to re-fix the same vessel, you would expect somewhere in the higher 11s to $12,000 a day area. So that gives you a sense of the extent and speed of increasing rates within the smaller vessel categories. As far as the 8s are concerned, rates have bounced around a little there to tell you the truth. Back in April or so, they were sort of high-teens, low 20s, up from sort of somewhere in the 12 region at the beginning of the year. However, the latest fixture we’ve seen and it’s down a little on that. And I would emphasize that during the usual summer seasonal low in the charter market, so I wouldn’t take too much away from this, but the most recent fixture we’ve seen which has been very short-term in nature has been just below $17,000 a day.

Okay. And when was it 12? Was it a year prior from earlier in the year? Were you doing sort of a year-over-year comparison?

No. When we fixed the GSL Tianjin, which was at the tail end of last year/beginning of this year which is unfortunately the very depths of the slow season, the rate was $11,900 a day.

Okay, good. Just wanted to clarify. I didn’t hear you the first time.

Fine, okay.

Okay, that’s great. So this is my last question before I jump back in the queue. Has the thesis here changed a bit? I think when you guys first did this high yield deal, I think what we were looking at was – we basically had a situation where we had asset coverage of the debt and it was an open question as to when we were going to start to see year-over-year improvements in EBITDA, because no one really wanted to stick their neck out to predict when time charter rates were going to go up and to what degree. Are you guys now in a position where your confidence has grown to a point where you can say, you know what, 2018 or 2019 is going to actually be a year where when the year is done we can look back and that year’s EBITDA will be greater than the years prior. Are you there yet?

That’s a really difficult question to answer. We’re not in the business of making forecast or projections here because we don’t control the market. Most of our tonnage is actually fixed on a charter for 2018. We’ve got very limited exposure to renewals at the tail end of the year. So this is not an accurate figure but 95% of our EBITDA is already fixed in that sense. And we would have to factor in the consequences of the charter rates that we had on the other 8,000 TEU vessels which at the time that we issued the bond were – all three were $24,500 a day. And as Tom said, the market rates this year have been in the sort of $15,000 to $20,000 per day range. So it’s quite a difficult question to answer. We’ve always had the thesis that the mid-size and smaller fleet segment should show recovery in charter rates and asset values when the supply/demand balance has been corrected. 2017 and 2016 were great years in correcting that supply/demand balance because of the high level of traffic as owners were under significant distress. And we’ve seen the benefits of that through 2018. Maybe in a couple of years time, we can turn around say, well, actually you were right. 2018 was the pivotal year. But I think it’s too early to say.

Okay. Thank you very much.

Thank you. [Operator Instructions]. Our next question or comment comes from the line of Piotr Ossowicz from Ironshield Capital. Your line is open.

Hello, gentlemen. Thank you for taking my questions. Just following up on the previous question, you have Ningbo renewal coming up. Can you please give us a bit more – out of the larger renewals this year, can you please give us a bit more color like how this is progressing and when should we expect the news?

The earliest expiration of the Ningbo charter is in September. You would expect the charterer to want to redeliver the vessel as early as possible because the rate they’re paying of $34,500 a day is above market. And that indeed is what’s happening. We’re expecting to get the vessel back of this charter at that time. We never talk about the status of discussions that we may or may not be having on acquisition vessels or re-chartering vessels, but in the ordinary course we would make an announcement once the vessel is re-fixed, which would likely be August-September time.

So in the next two months?

Yes, hopefully.

Okay. That is good. And how does this – please remind us how does this coincide with the slow period of the market during the summer? What can you do to avoid having to re-fix the vessel during the slow months?

Traditionally, there’s a bit of a pick up after the summer is over for a month or two and this could be quite good timing in that regard.

Okay. And just very quickly on the cash flow and the capital structure, I can see that you have repaid 10 million of credit facility. So can you please remind us what was that payment in regard to and also what further movement, if any, should we expect on the capital structure side?

We are committed – we are obliged to amortize debt at the amount of $40 million in the first three years or so of the life of the bond. The $20 million of that $40 million goes directly to reduce the credit facility and the $10 million that we’ve paid so far reduces that facility from $55 million to $45 million. There will be a further installment of $10 million in November which will reduce that credit facility further to $35 million. So the remaining $20 million and we are obliged to offer to bondholders to redeem bonds at a price of 102 and that offer will be made in November or so. Now if bondholders accept that offer, then we reduce bonds by $20 million from 360 to 340. If bondholders reject the offer because say the bond is trading at above 102, then we are obliged to use that 20 million to further reduce the credit facility. So at the end of this year that credit facility could be reduced from $55 million to $15 million. And the same again happens next year in 2019. Fixed amortization of $40 million, it goes $20 million to the credit facility to the extent that the credit facility is above 20 and the balance is offered to bondholders in November. And then the same in the following year, except more than likely the credit facility will be extinguished and so the vast majority of that amortization will go to the bond. And then similarly in years four and years five of the total amount is 35 million.

Okay. This is very helpful. And also in your cash flow statement you also reported the movement in accounts payable and other liabilities. So there was an outflow of 10 million. Can you please explain why did this happen? And should we expect this to unwind later in the year?

Interest on our bond is paid every six months, so our liability for interest which is roughly 10% on $360 million of bond, so it’s $3 million a month. So we accumulate a payable over a six-month period of $18 million. And then suddenly that disappears as we pay down the interest and that’s what happened in Q2. So at the end of Q1 there was a significant payable accrual for interest and at the end of Q2, it was much smaller. And the same thing will happen in Q3 and Q4.

So basically this is an interest payment.

I hoped you weren’t going to ask that. I think it’s April and October.

Okay.

It is April and October.

All right. Thank you very much.

Thank you.

Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Ian Webber for any closing remarks. I’m sorry, we have a follow-up question from Angus Rosborough from Park Vale. Your line is open.

Hi. Just a quick question for you guys. Probably a little bit tiresome as a question, but one of the things about your – you speak a lot about your counterparty CMA and how good it is, so on and so forth. And one of the things that you show quite well is that the margins for CMA as well as the industry are, for lack of a better phrase going into a bit of a nose dive, and one of the things that we find on our side of the market is that there is not enough separation or distinguishing between what you guys do as ship-owners and what CMA largely does. And it leads to confusion misgrouping, so on and so forth. I was wondering if you could talk a little bit about why CMA or the industry that CMA is in, why the margins are going down? And secondly to extrapolate a little bit and tell us why their pressurized margins will not result in pressure on you guys?

We’re all in container shipping, as you implied, Angus, we’re in very different parts of it. We have a slide in our main investor presentation which sets out the differences between liner operators, CMA CGM and the others and vessel owners like us. Just looking at GSL, we in the last 10 years or so have had very stable, very predictable, very reliable earnings because we’ve had long-term fixed rate charters which our customers have honored and that generated significant amounts of cash, which has supported our balance sheet and our growth plans. We’re moving into an area where we have more of our vessels exposed to the spot market conveniently at a time when that spot market is increasing, which is really good news. CMA CGM and all the other liner companies are much more exposed to short-term market conditions whether they be the commodities markets, fuel price where fuel price is – as the bunker prices have gone up significantly recently and that’s been an added cost pressure on all of the liner companies’ results or they’re exposed to the freight markets. And whilst they can lock in freight rates on a proportion of their volume through annual contracts, quite a lot of what they do is spot and will depend on what the freight market is doing from China to North America or from China to Europe or from Europe to the U.S. West Coast or East Coast or wherever. And although the fundamentals are the same, the demand for container shipping services and the supply of ships and space on those ships for container shipping services at the margins, the drivers are a little different particularly when you get into the individual trade lanes. The biggest trade lane in the world, the Asia-Europe trade lane and we mentioned this on the last call, doesn’t use chartered ships or if it does not very many of them. Most of the vessels that are deployed on that trade lane are owned ships on liner companies’ balance sheets or are under off-balance sheet financing arrangements. So there’s no chartered ships in that trade lane and that’s the trade lane that you see lots of commentary on, on trade rates and volumes and utilization levels, et cetera, et cetera, et cetera. And people tend to extrapolate that to – the liner to the owner section of the charter market and you can’t because it’s not driven by the same fundamentals. But generally you will see freight rates and charter rates moving in the same direction over time. Occasionally, they go the other way but that’s not often.

And is --

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A little bit. And the depths that we’re seeing the margins are falling to, they’re not quite the lows but looking at the lines that you have on your slide, it looks like we might get close. What’s their motivation not to pressure – to take some of the pressure that they are feeling and turn it around to you guys?

Well, the history is that that liner companies never had. If you’re suggesting a renegotiation of charter rates, then that’s never happened certainly in our 10 years of history throughout the worst and most extended downturn of the liner sectors as we have experienced. We have not suffered from any renegotiation of rates and there’s no indication as to why that would happen again.

Okay, that’s good. And I guess last one is, is just a housekeeping one. You guys have hired a financial advisor I think to explore strategic opportunities. What’s the status of that?

We can’t comment as you’d appreciate on the detail. The project is still live, is still running. And if there is news, we will let you know.

Okay. Thank you very much.

Thank you. At this time, I would like to turn the conference back over to Mr. Ian Webber for any closing remarks.

Thank you all for listening. Thank you for your questions. And we look forward to giving a further update in three months time on the third quarter. Thank you.