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Global Ship Lease, Inc. Message Board

  • mario_luis_gomes mario_luis_gomes May 14, 2009 4:29 PM Flag

    You cant compare the fallen value of ships with fallen real estate values

    Because in the case of fallen real estate values, there is no such thing as LTV, banks cannot require mortage owners to give up 50% of their earnings, as is the case witrh GSL, so please stop making this comparisson.

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    • Mario -- there are a few issues here that are getting conflated. Let me address two of them.

      First of all, we have to distinguish between money that is going to the bank that is a principal repayment vs. money that is going to the bank that is an interest payment. At the risk of stating the obvious, when we pay down principal that is shareholder's equity to keep. This theoretically increases shareholder's market value (given that Enterprise Value = Equity + Debt - Excess Cash). If the enterprise value stays the same (i.e., EBITDA remains the same), then the extinguishment of debt simply raises the value of the equity. Rewriting the equation Equity = EV - Debt + Cash. Both reducing debt or increasing cash increase the value of the equity.

      GSL as a company earns mediocre returns on invested capital. The real value comes from their ability to lever the ships at low interest rates which in turn yields a decent (though not spectacular) return on equity. Agreeing to pay higher interest reduces ROE. Repaying principal also lowers ROE. However, reducing principal also holds the distinct advantage of being able to re-lever once things normalize whereas higher cost of debt is simply cash out the door and into the pocket of the banks.

    • GSL would be very well positioned now if they have done the same stock issuance when it was valued at $3.50, dont you agree?

    • OCNF? You must be kidding. The bank made them dump 80 million shares of stock at average price of $1.55. THey started with 14 million shares, and now will have 95 million.

    • They should have removed the covenants, period. Like OCNF and others have done. Now they have to go to the bank again for another round of negotiations and we dont know the end result of that.

    • It is called an analogy. But anyway, LTV covenants do exist in commercial real estate.

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