Feb 22, 2017
Executives
John Coustas - CEO Evangelos Chatzis - CFO
Analysts
John Gandolfo - Clarksons Platou Securities Mark Suarez - McQuilling Holdings
Operator
Good day, and welcome to the Danaos Corporation Conference Call to discuss the financial results for the three months ended December 31, 2016. As a reminder, today's call is being recorded.
Hosting the call today is Dr. John Coustas, Chief Executive Officer of Danaos Corporation; and Mr.
Evangelos Chatzis, Chief Financial Officer of Danaos Corporation. Dr.
Coustas and Mr. Chatzis will be making some introductory comments and then we will open the call to a question-and-answer session.
Evangelos Chatzis
Thank you, operator, and good morning everyone. Before we begin, I quickly want to remind everyone that management's remarks this morning may contain certain forward-looking statements, and that actual results could differ materially from those projected today.
These forward-looking statements are made as of today and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review these detailed Safe Harbor and Risk Factor disclosures.
Please also note that where we feel appropriate, we will continue to refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA, and adjusted net income to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the accompanying materials.
With this, let me turn the call over to Dr. Coustas, who will provide the overview for the quarter.
John Coustas
Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the fourth quarter 2016.
Danaos' results for the fourth quarter of 2016 reflect the impact of the bankruptcy of Hanjin Shipping, which previously chartered eight of our vessels on long-term charter party agreements, representing approximately 20% of our fixed contracted revenue. These charter party agreements were terminated, and each of the chartered vessels were returned to us, as we have previously announced.
The $24.0 million decrease in our adjusted net income is primarily the result of a $23.3 million decrease in operating revenues resulting from the Hanjin bankruptcy. During the fourth quarter, our fleet utilization decreased to 90.4% after the Hanjin charter cancellations.
We have re-chartered the five 3,400 TEU vessels on short-term charters at market rates that reflect the prevailing weak chartering environment and managed to secure employment of up to 12 months starting from April 2017 for the remaining three 10,100 TEU vessels. Excluding the effect of these cancellations, our fleet utilization increased to 99.5% compared to 98.3% in the fourth quarter of 2015.
As a result of the decrease in our operating income and charter attached values, primarily caused by the Hanjin bankruptcy, as of December 31, 2016 we were in breach of certain financial covenants for which we have obtained waivers until April 1, 2017, and continue to engage in discussion with our lenders to address the matter. Because the waivers are for a period of less than 12 months after the balance sheet date, all of the debt has been classified as current in the December 31, 2016 financial statements.
Otherwise the Company is currently in position to service all its operational and contractual financial obligations. During 2016, we continued de-leveraging our balance sheet and reduced indebtedness by $251 million, although we expect the rate at which we reduce our leverage to decrease as a result of the cancellation of our Hanjin charters.
Additionally, in the context of prudently evaluating the assets on our balance sheet we've also recorded an impairment loss of $415 million in relation to the market value of certain of our vessels, primarily in relation to the Hanjin vessels as a result of the loss of their charter and the impairment of the Panamax asset class. Idle containership capacity currently sits at approximately 7% of the global fleet.
The charter rate environment has stabilized, albeit at levels at or below daily operating expenses. Also, very few long-term charters have been achieved in the market.
The order book remains large, at approximately 15% of the global fleet, and supply continues to exceed demand. The order book is predominantly comprised of larger vessels, which upon delivery will put further pressure on the market for smaller, less economical vessels.
As such, we do not expect the rates to meaningfully improve for another 18-24 months absent a significant increase in demand combined with increased scrapping activity. Following the Hanjin bankruptcy, our near-term exposure to the weak spot market has increased, with 92% of charter cover in terms of current operating revenues, and 74% in terms of contracted operating days for the next 12 months versus 88% for the same period in the prior year.
During this extended period of market weakness which has presented many challenges, we remain focused on taking necessary actions to preserve the value of our company by managing our fleet efficiently and taking prudent measures to manage and ultimately deleverage our balance sheet. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter.
Evangelos Chatzis
Thank you, and good morning again. I will briefly review the results for the quarter, and then open up the call to Q&A.
During the fourth quarter of 2016, we had an average of 55 containerships compared to 56 containerships for the fourth quarter of 2015. Danaos also holds a 49% shareholding interest in Gemini Shipholdings Corp; an entity formed during the third quarter of 2015, and has acquired four container ships.
Our adjusted net income was $23.2 million or $0.21 per share for the quarter, compared to $47.2 million or $0.43 per share of adjusted net income for the fourth quarter of 2015. This $24 million decrease is mainly attributed to $23.3 million of lower operating revenues as a result of the Hanjin bankruptcy, while a further decline in revenues of $7.9 million for the quarter as a result of weaker charter market conditions was partially offset by a $5.2 million decrease in net finance costs due to lower debt balances and interest rate swap expirations, a $1.1 million decrease in total operating expenses, and a $0.9 million improvement in the operating performance of our equity investment in Gemini Shipholdings Corp.
We have adjusted our net income in the current quarter mainly for vessel-related impairment $437.4 million for 25 vessels in our fleet and four vessels in the Gemini fleet, and the $29.4 million impairment on Zim equity and debt instruments. The vessel impairment charges relate to a total impairment loss of $212.9 million recognized for five 3,400 TEU vessels formerly chartered to Hanjin, and was a result of the loss of the charters, and an impairment loss of $224.5 million recognized for 20 of our vessels, and four Gemini vessels, all between 2,200 and 6,500 TEU as a result of the continued weakness of the container ship market, and the other than temporary nature of the decline in the values of these assets, combined with the short-term profile of their employment arrangements.
Vessel operating expenses decreased by 6.5% or $1.8 million, to $25.9 million in the current quarter compared to $27.7 million for the fourth quarter of 2015, mainly as a result of the decrease in the daily operating cost per vessel to $5,303 per day this quarter, from $5,571 per day in the fourth quarter of 2015, which is an improvement of 4.8%. G&A expenses slightly increased by $300,000 to $6 million in the current quarter from $5.7 million in the fourth quarter of 2015.
Interest expense, excluding amortization of deferred finance costs increased by $1.3 million to $18.2 million in the current quarter compared to $16.9 million in the fourth quarter of 2015, mainly as a result of approximately half a percentage point of higher Libor rates between the two quarters. Libor averaged 0.87% in the current quarter versus 0.35% in the fourth quarter of 2015.
The increase in Libor rates was partially offset by our persistent efforts to de-lever our balance sheet as it was mentioned earlier during 2016, we reduced our indebtedness by $251 million. Realized losses on interest rate swaps decreased by $6.4 million to $1.9 million in the current quarter, a decrease of 77% when compared to losses of $8.3 million for the fourth quarter of 2015.
As of December 31, 2016, all of our interest rate swaps have expired. Finally, adjusted EBITDA decreased by 28.2% or $29.8 million, to $75.9 million in the current quarter from $105.7 million in the fourth quarter of 2015 for the reasons outlined earlier on this call.
With that, I would like to thank you for listening to the first part of our call. And we are now ready to open the call to Q&A.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] Our first question comes from John Gandolfo with Clarksons Platou Securities. Please go ahead.
John Gandolfo
Thanks guys for taking my questions. Just want to start off, it's [ph] good to see the employment has been secured on the 10,000 TEUs, especially given that the number of vessels laid up idling in the class range.
Was wondering if you can give some color on overall development in the short-term market for the class, and if you would be able to give some additional details on the structure of the employment for the three vessels that were chartered?
John Coustas
Well, the situation is that still the market is greatly oversupplied. We have managed to secure employment for our vessels to a significant extent because of our relationships and our performance with our charterers, but of course the rates are nowhere satisfactory.
But at least it keeps the vessels employed, at least the 10,000s above OpEx levels. And I think this is a good step, in any case this employment is for up to a year.
So we do not really -- we have not committed the vessels long-term. So we keep our options open for whatever future that is going to happen in the market, any kind of uptick.
John Gandolfo
Got, thanks. Really is there any way to be able to disclose a little bit more details on the rate issued, or is above OpEx where we should be looking at from OEM [ph] or around OpEx?
Excuse me.
John Coustas
Yes, I mean, these rates it's low teens rates.
John Gandolfo
Okay, got it. Thank you for that.
And now securing employment for these vessels, has it better positioned Danaos in its ongoing covenant negotiations?
John Coustas
Sorry, could you please repeat that?
John Gandolfo
Sorry. I said, has securing employment for the vessels redelivered from Hanjin better positioned Danaos in current covenant negotiations?
John Coustas
On which negotiations?
John Gandolfo
On the -- basically the breach of covenant, has it better positioned you in your discussions with the banks…
John Coustas
Yes, well I don't know. I think that really the banks were expecting that we would be able to charter the vessels.
I don't think really that makes, to be honest, any difference, especially because it's not a groundbreaking rate.
John Gandolfo
Okay.
John Coustas
No, I don't really think it makes any difference. I mean, that was expected, and we had already said that we would be able to secure some type of employment.
John Gandolfo
Got it. Thank you very much for the time, that's all for me.
John Coustas
Thank you.
Operator
Our next question comes from Mark Suarez with McQuilling Holdings. Please go ahead.
Mark Suarez
Hi, good morning guys. Thanks for taking my question here.
Just…
John Coustas
Hi, Mark.
Mark Suarez
And by the way, I appreciate the color, as always, on your initial comments. When you talk about indebtedness, I'm wondering what are you looking for in terms of repayment schedule now that the Hanjin situation -- you have some more clarity as to the charters and such, and I'm wondering what your repayment schedule looks like now in terms of debt for 2017 and '18.
Do you have a sense of what that's going to look like?
Evangelos Chatzis
Mark, you can use as decent guidance what we have disclosed in our annual report as our contractual amortization payments. That I think is a good guideline of amortization for the foreseeable future.
Mark Suarez
Got you. And then just maybe on the macro for a second, we have seen talks now of rate increases.
Obviously the alliances are helping a bit at the margins. But again, you still have this oversupply issue that I think needs to be resolved over the next 24 months, in my opinion.
Scrapping has accelerated as of late. Do you see -- do you have a sense of what sort of scrapping levels do you need to see or contracting levels, especially on the post-Panamax segment before you can maybe more confidently say there will be an inflection on the supply and demand balance over the next 24 months?
Evangelos Chatzis
Mark, we are not optimistic for the medium-term which is how we define the next 24 months. For the imbalance to be corrected only on the back of scrapping, I don't think this can work.
You need demand to meaningfully resume. And we do not see this -- we do not see any visible signs of such a spike in demand, especially with the latest developments and with the Trump approach to the trade alliances and all these things, things are not pointing to a direction where one can be optimistic about increasing demand for the transfer of boxes.
Mark Suarez
Got it, okay. And on the contracting side, and I guess you guys have very good relationships with some of the shipyards, we're beginning to see a meaningful deceleration of that contracting trend, as I alluded to before, do you see the same thing and do you expect this to remain so for the next, I would say, 2017-18 kind of range?
John Coustas
You mean contracting for new buildings?
Mark Suarez
Yes, for the post-Panamax, especially the post-Panamax. So, anything about…
John Coustas
There hasn't been no ordering for quite sometime, and we do not expect it to resume. The liners are, you know -- seem to be content with using assets from the market to satisfy their needs.
Mark Suarez
Okay, great. Well, I appreciate the details as always, guys.
Thanks for your time.
John Coustas
Thanks, Mark.
Evangelos Chatzis
Thank you.
Operator
[Operator Instructions] It appears that we have no further questions at this time. I would like to turn the call back over to Dr.
Coustas for any further comments or closing remarks.
John Coustas
Thank you all for joining this conference call and for your continued interest in our story. Look forward to hosting you on our next earnings call.
Thank you.
Operator
Thank you all for joining this conference call, and your continued interest in our story. We look forward to hosting you on our next earnings call.
Have a nice day.