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Edited Transcript of GSL earnings conference call or presentation 6-Nov-19 3:30pm GMT

Full Year 2019 Global Ship Lease Inc Earnings Call

MAJURO Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Ship Lease Inc earnings conference call or presentation Wednesday, November 6, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anastasios Psaropoulos

Global Ship Lease, Inc. - CFO & Treasurer

* Georgios Giouroukos

Global Ship Lease, Inc. - Executive Chairman

* Ian J. Webber

Global Ship Lease, Inc. - CEO

* Thomas A. Lister

Global Ship Lease, Inc. - Chief Commercial Officer

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Conference Call Participants

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* Joseph Farricielli;Cantor Fitzgerald;Credit Analyst

* Ward Blum;UBS Financial Services Inc.;Senior Vice President - Wealth Management

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Presentation

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Operator [1]

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Welcome to the Global Ship Lease Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ian Webber, Chief Executive Officer of Global Ship Lease. Please go ahead, sir.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [2]

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Thank you very much. Hello, everybody. Welcome to our third quarter 2019 earnings conference call. The slides that accompany today's presentation are available on our website at www.GlobalShipLease.com.

As usual, slides 1 and 2 remind you that today's call may include forward-looking statements that are based on current expectations and assumptions and are, by their very nature, inherently uncertain and outside of 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 2018 and was filed with the SEC on March 29, 2019. You can obtain this via our website or via the SEC's.

All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We don't 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 website.

I'm joined today by our Executive Chairman, George Giouroukos; our Chief Financial Officer, Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will provide opening remarks about GSL and our strategy and then Tom, Tassos and I will take you through the quarterly results, financials and the market environment. After our prepared remarks, we'd be delighted to take your questions.

Turning now to slide 3, I'll pass the call to George.

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Georgios Giouroukos, Global Ship Lease, Inc. - Executive Chairman [3]

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Thank you, Ian. Good morning, ladies and gentlemen. I'm pleased to provide you with an update on Global Ship Lease and the extensive progress that we have made so far this year in unlocking our true value. Before we dive into the detail, allow me to very briefly introduce the company to anyone who may be joining us for the first time, following our recent highly-successful equity offering.

GSL owns a fleet of 41 container ships and has contracted to purchase another 2 which we have included in today's announcements. We lease out, or charter as we call it in our industry, our ships to operators who have a business to carry containerized cargo on behalf of importers and exporters. All of our ships are in the midsize and smaller classes, essentially from 2,000 to 11,000 TEU, or containers, as we call them, of capacity.

We do not own the smallest ships which are deployed on niche regional business or the biggest ships, which are essentially dependent on trade out of China, but focus on ships that service the trade lanes that carry over 70% of global container trade and which typically grow more reliably and more quickly than the big east-west trades which you tend to read about in the newspapers.

So our ships have negligible involvement in the trans-Pacific trade to the U.S., which incidentally continues to grow despite concerns over tariffs and trade wars. The supply of midsize and smaller vessels is now structurally short, following many years of minimal or zero new building orders. Investment has been focused mainly on the larger ships, now 23,000 TEU to achieve unit cost efficiencies but which, due to physical and trade limitations, cannot compete with their smaller cousins. The shortage of supply has led to substantial increases in daily rates. Tom will speak more about these dynamics later in the call.

Our ships are well-specified, mainly with best-in-class capacity to carry refrigerated containers which is premium rate of cargo, and thus they can command a charter rate premium. Our eco-fleet is substantially more fuel-efficient than the market average, an average that will only become more important to us and more importantly to our customers, in a post-IMO 2020 emissions controls world, effective January 1, 2020, when the vast majority of container ships will burn more expensive low-sulfur fuel to reduce emissions.

Incidentally, fuel cost is for the account of our customers, not us.

We have a portfolio of time charter contracts which provide $778 million of contracted revenue spread over an average of 2.6 years, providing downside protection and a staggered maturity profile that offers us measured exposure to a strengthening market.

The fact that the market is strengthening may surprise you, given prevailing sentiment on world trade. But it is all about supply and demand in our industry. Our customers are a well-diversified mix of the world's top liner companies such as Maersk, MSC and CMA SSM.

We have one of the best management teams in the business with a prudent philosophy and proven track record. This and our best-in-class ship management and commercial platform ensures that we can achieve consistent operational excellence at a low cost, efficiently execute innovative and value-accretive upgrades to our vessels, and move swiftly to seize vessel acquisition and chartering opportunities.

Complementing this has been our success in strengthening our balance sheet with debt refinancing, and most recently our successful equity raise.

In the upper right of the page you can see a breakdown of our shareholders' base, with the private equity firm Kelso holding the largest stake, a legacy of their investment in Poseidon Containers, with which GSL matched this time last year. And the board and management owning a combined 11.7%, aligning the board and management fully with shareholders.

The bottom right shows our updated capital structure following our recent equity offering. On the next slide, number four, we summarize the GSL investment proposition.

First, we are massively undervalued. Our stock trades at a significant discount, both to charter-attached net asset value and also based on the EV-to-EBITDA multiple where we trade approximately 2 turns less than the other public container ship leasing peers. Given that, there's a strong upside potential from even just a normalization of our market valuation.

Second, our fleet provides great earning potential as we are focused on the fleet segments that are those that benefit from the strongest long-term supply and demand fundamentals. The order book of new vessels in these segments represents only 2.6% of the current standing fleet. That growth from new buildings of only around 1% a year.

Furthermore, over 20% of 80% of GSL's fleet is in segments with no order book whatsoever. No order book, despite continued global demand growth which is forecast to be 2.5% in 2019 and 3.7% in 2020. Scrapping of existing ships is up, with scrapping in the year-to-date exceeding total scrapping in 2018. On top of that, the IMO 2020 emission control regulations are expected to reduce effective vessel supply as ships slow down to maximize fuel efficiency in order to use less of the compliant low-sulfur fuel, which is expected to cost significantly more than today's standard, higher-sulfur fuel.

In addition, our fleet has strong commercial advantages. A third consists of vessels with best-in-class specifications and capabilities. Half of our fleet have best-in-class capacity for carrying premium-rated refrigerated containers. Over 70% of our fleet is in the post-Panamax segments that have seen charter rates more than double from the levels in Q4 2018 a year ago.

We are well-positioned to provide our customers with highly competitive slot costs, the unit cost of transporting a single container being a function of fuel cost -- so fuel efficiency is key -- and charter rate.

Slot cost is the single most important metric for liner companies when selecting vessels, and our ships offer the lowest of that. We are in a position to benefit from the cascade where larger ships displace smaller ships in the perpetual quest for unit cost efficiency in a growing industry, rather than being a victim of it.

Third, while we offer great earnings potential, we are at the same time prudent. We picture a balanced contracting strategy, looking at extensive downside protection for the long term while also retaining the opportunity to renew some charters of higher rates in improving markets. Our $778 million of contracted revenue over an average remaining term of 2.6 years serves as a strong foundation and we're further capitalizing on our fleet of highly-marketable vessels in undersupplied classes.

Fourth, we manage our balance sheet conservatively and always look to optimize our capital structure. We continue to de-lever, having reduced our debt by more than $37 million during the first 9 months of the year, with a further $43 million U.S. dollars to be paid down by year-end.

Furthermore, we have recently successfully refinanced the vast majority of our medium-term debt to improve our forward visibility. Finally, we have received and completed an opportunistic equity offering providing net proceeds of approximately $51 million.

Fifth, we have strong and supporting sponsors, leading institutions in both finance and the container shipping industry, whose interests are directly aligned with our common shareholders.

Sixth, we have a proven platform for both opportunistic acquisitions of ships and larger-scale fleet acquisitions, having completed the transformative measure that more than doubled our fleet and tripled our net asset value just one year ago. And we maintain a disciplined approach to generating shareholder value.

In recent months we have grown the fleet by purchasing 5 ships in 2 highly-accretive transactions, the most recent of which announced today, we will cover shortly.

With that, I will hand over to Ian.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [4]

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George, thank you. Let's turn to slide 5 where you can see our charter portfolio. There's a lot of data on this slide so I'll highlight some of the key points.

The part in dark blue are those charters that we've agreed in 2019 year-to-date. As you can see, we've been very busy and we have a great deal to show for it in terms of downside protection and value locked in. This contributes to our extensive contract cover, $778 million, spread over on average as George says, 2.6 years.

This gives us an estimated 99% of our EBITDA for 2019 covered and 88% for 2020, with significant coverage thereafter. Many of our charters have multiple years remaining, particularly those charters with the highest day rates.

At the same time, we've deliberately kept some of our recent charter renewals short so that we have an opportunity to re-fix at higher rates in what we believe to be a rising market.

Moving on to slide 6, this shows details of our fleet. This includes our most recent additions. In the red box you can see the ships which fall into the Post-Panamax classes, which is the upper end of the midsize and smaller vessel class. These have been in particular high demand and day rates have more than doubled since late last year, late 2018, with many eco vessels that burn 20 to 30 tons of fuel less per day than their non-eco sisters, ships with best-in-class high reefer capacity and ships with onboard cranes to enable access to a wider range of ports around the world. Our fleet is flexible, highly-specified, fuel efficient and is able to offer low slot costs, low unit costs, to our customers.

Moving on to slide 7 for our Q3 2019 results, and recent commercial activity. For the third quarter our operating revenue was just shy of $66 million and net income was almost $10 million, and our adjusted EBITDA was almost $40 million, all up significantly from the prior-year periods due mainly to the strategic combination with Poseidon that we completed last November -- but also to vessel additions, continued success in chartering at improved rates, and in reducing operating costs through the year.

Our utilization for the quarter at 94.3% reflects 168 days of off-hire for the reefer upgrade and regular drydocking of 4 vessels that we talked about before, as well as for 2 regulatory dry dockings only.

Slide 8 looks at recent commercial activity. We have agreed to a number of extensions and attractive new charters in the quarter, taking advantage of the strong market for midsized post-Panamax vessels which brings our contracted revenue to the $778 million figure that we've mentioned, and our average TEU weighted forward charter cover of 2.6 years.

As George alluded to earlier, we announced today that we've agreed to purchase 2 6,650-TEU container ships. That's an aggregate price which represents only a small premium, approximately $1.5 million per vessel, to their scrap value, so low risk. They're both on charter, one to late Q1 next year and the other to mid-Q3 next year. These charters are expected to deliver an aggregate of approximately $2.8 million of adjusted EBITDA, broadly equivalent to the premium we're paying over scrap value.

In addition to this strong downside cover, we believe there is compelling upside value potential for these 2 ships and thus we are creating equity value which strengthens both our financing and bond refinancing alternates.

Importantly, these are low-slot-cost vessels in the highly in-demand post-Panamax segment which has seen charter rates more than double since the end of 2018.

On timing, we expect to receive one ship in December this year and the other in January next year. We expect the combination of supportive fundamentals, supply/demand, and IMO 2020 implementation to provide upside on both asset values and charter rates for these ships. This, along with central upside from enhancements to the vessels themselves we believe we can make to these ships for minimal CapEx, and the very limited downside to scrap value we believe will improve our position as we pursue a refinancing of our bond.

In addition to a busy period on the commercial front, as George mentioned, we've been very active in opportunistically strengthening our balance sheet. Slide 9 shows our progress in enhancing the balance sheet and lowering our cost of capital.

First with much improved forward visibility from new charters at attractive rates, our improved financial position has allowed us to successfully refinance $268 million of commercial bank debt, extending most of our maturities that otherwise fell due in late 2020 into late 2024 whilst reducing the cost of that debt from L plus 324 on average, to L plus 3. And we also released 3 vessels from the collateral package. They are now unencumbered, thus increasing our balance sheet flexibility.

Second, on the 1st of October, we completed the equity offering, the common equity offering raising net proceeds of approximately $51 million. The offering was upsized to the maximum, including full utilization of the Green Shoe, and the stock has consistently traded above the offering price.

In addition to the underwriters B. Riley taking a $15 million stake for their own account, GSL Management personally invested $1.2 million in the offering.

The proceeds support our objective and next strategic ambition to refinance our expensive old GSL 9 7/8% senior secured notes. This is a clear strategic priority, as well as to support accretive acquisitions that we will only undertake if they enhance our refinancing prospects.

The offering more than tripled our public float and we've subsequently seen our average trading volume increased fourfold.

Our market cap has also increased to $129 million at yesterday's close or $225 million on a fully-converted basis.

I'll now ask Tom Lister, our Chief Commercial Officer, to provide an overview of the market environment.

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Thomas A. Lister, Global Ship Lease, Inc. - Chief Commercial Officer [5]

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Thanks, Ian. The big industry picture is captured on Slide 11. Essentially, point one, this is an industry in which demand has grown every year since it began about 60 years ago except one, 2009 during the depths of the global financial crisis. The general rule, containerized cargo volumes grow faster than GDP. You can see 20 or so years of demand growth and GDP growth in the chart at bottom left.

Two, paradoxically, negative sentiment and trade tensions have been a good thing, at least for the midsize and smaller container ship classes focused on by GSL, and I'll explain why later.

Three, this is really a supply story. Idle capacity is minimal. Scrapping of marginal ships is increasing and most importantly, the order book is under control. This is the chart at bottom right. Order book to fleet ratios are down from 60% back in 2007 to just 10.6% today.

Point four, things are about to get better with an industry-wide regulatory change, IMO 2020, which will be implemented from January 1 of next year. IMO 2020 is focused on reducing sulfur emissions and is expected to drive fuel costs up and operating speeds down, triggering a further reduction in effective supply. Just to illustrate, reducing the operating speed of the global fleet by just one knot, one nautical mile per hour, would reduce effective supply by approximately 6.7%.

Okay, slide 12. This slide looks at demand. The main takeaways are that supply growth is slowing while demand growth is firming. Demand is expected to grow by 2.5% in 2019 and 3.7% next year in 2020. The second point is that transpacific trade gets all the headlines thanks to the trade dispute between the U.S. and China, but China-U. S. trade actually makes up only 6.7% of the global volume pie.

More interestingly, cargo substitution -- in other words, cargo being imported by the U.S. from other Asian countries rather than from China -- has grown faster than cargo flows from China itself have shrunk. So although like everyone else we would be delighted by a constructive outcome between the U.S. and China, in the meantime trade tensions have actually stimulated trade and further stimulated demand for midsize and smaller ships.

But perhaps the most important takeaway from this slide is that 70% of global container volumes are on intermediate and intra-regional trades like intra-Asia. Collectively, we refer to all of these as the non-main-lane trades, where volume growth is strongest and where our ships tend to be deployed.

Slide 13 underlines this point. As you can see, most trades are served by 2,000- to 10,000-TEU ships, GSL-sized ships, in other words. And these are operationally flexible and liquid assets.

Slides 14 and 15 illustrate this point more graphically. Slide 14 shows where the big ships trade, namely the east-west arterial routes, while slide 15 shows where midsize and smaller ships trade which is pretty much everywhere else. Or indeed, pretty much everywhere.

Slide 16 really pushes home the supply-side story. Idle capacity is limited. It stood at 3.2% as at September 30, of which a significant proportion, perhaps half, is made up of ships being retrofitted for scrubbers. Scrapping activity has increased although this is tailing off a little bit as earnings in the sector are strengthening. And you can see from the bottom charts that fleet growth in GSL's focused-size classes has been minimal or even negative over the last few years, while the order book pipeline through to 2022 or so, is also tiny. Zero, in fact, as George mentioned, for the sizes representing over 80% of our fleet capacity.

Now, turning to slide 17 you can see that shipyard capacity is down and ordering discipline, which is driven by liner operator mega-alliances taking a joined-up approach to capacity management, is up. This is great news. It minimizes the risk of supply-side overshoot going forward. Add to this an overlay of negative sentiment and a degree of uncertainty on future propulsion technologies and fuels, and you get a very cautious approach to ordering new ships and speculative ordering which has been the bane of the industry in the past, is a non-starter.

So as I hinted at the outset, negative sentiment is in fact positive for forward supply fundamentals. And even if you did want to order a ship, the lead time to do so would be a couple of years.

Slides 18 through 21 provide benchmarking data that help put the quality and commercial positioning of the GSL fleet in context so let's turn to slide 18.

Very little capital has flowed into the sector for midsize and smaller ships since traditional funding sources, the German banks and private investors, dried up in the global financial crisis in 2008. So these size classes are old. They're under-invested. And they're under-supplied. And GSL ships, as you can see from the age profile charts on this slide, benchmark well.

Our ships are also built at quality shipyards which is a proxy for asset build quality and marketability. As a rule of thumb, ships built at mainland Chinese yards are considered to be poorer quality than their Korean, Japanese, Taiwanese or European peers. And as you can see from slide 19, none of GSL's vessels are built in China. All are built at quality yards.

Slide 20 looks at the capacity of our ships to carry refrigerated cargo, known as reefer cargo in the industry. Carriage of reefer cargo is lucrative for the liner operators and is also one of the fastest-growing cargo segments. So this means that ships with high reefer capacity are attractive to our client base. As you can see from the chart, GSL ships benchmark well on this front. In fact, a number of them are best-in-class in their respective size segments.

You will have heard discussion of high fuel efficiency or eco-tonnage in the industry, and indeed, 9 of our ships representing around 30% of our fleet by TEU capacity, are latest-generation eco ships. However, eco ships are the exception rather than the rule. As you can see from the chart on slide 21, non-eco or pre-eco ships are the norm for the midsize and smaller ship segments. This means 2 things. First, eco ships can earn a premium in the charter market which we've proven out with our own eco tonnage; and second, non-eco ships remain highly relevant in these sizes, particularly if they're towards the upper end of the midsize size spectrum -- post-Panamax ships, specifically. These are precisely low-unit-cost or low-slot-cost ships on which we're focused and have grown our fleet with our acquisitions this year.

Right, slide 22. This is really the proof of the pudding. We've explained the industry fundamentals affirming and that another positive catalyst will be coming in the shape of IMO 2020. On this slide, you can see what this is already doing to earnings. Charter rates for post-Panamax ships have more than doubled during 2019 so far, and as the larger vessel sizes are selling out, rate uplifts are beginning to filter down to the smaller ship size categories including Panamax.

So to recap, demand continues to grow. Idle capacity is minimal. Scrapping is increasing. Fleet growth in our segments has been negligible or negative. The order book through 2022 is tiny. IMO 2020 is an industry-wide step change and positive catalyst. And the GSL fleet benchmarks well against its peer group.

So with that, I'll now pass the call to Tassos, our CFO.

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Anastasios Psaropoulos, Global Ship Lease, Inc. - CFO & Treasurer [6]

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Thank you very much, Tom. Turning now to the financial section, on slides 24, 25 and 26, you will find the company's income statement, balance sheet and cash flow for the third quarter. Let me point out for you some key items for this quarter.

We generated revenue of $65.9 million and a net income for common shareholders of $9.9 million for the third quarter 2019, versus $35.9 million revenue and $3.9 million net income for the same quarter in 2018. The $30 million increase in revenue is mainly due to the addition of the 19 Poseidon vessels and the new-acquired vessel, GSL Eleni. In this quarter, there were 168 days of scheduled offhire for dry dockings, mainly for work to upgrade the reefer capacity of 5 vessels, although where possible we also undertook the regulatory work. 32 idle days as vessels transitioned between charters and 6 days of unscheduled of hire resulting in an overall utilization of 94.3%.

As mentioned earlier, this increased offhire in the quarter primarily reflects our decision to undertake enhancements of the reefer capacity of our ships in order to reinforce their best-in-class specifications that command premium rates in the market.

Finally of note, the average operating expenses per ownership day, which includes management fees, has reduced by 3.1% from $6,211 in the 9 months ended September 30, 2018 to $6,016 for the same period in 2019, as a result of the lower OpEx cost per day of the Poseidon fleet and the transition of the legacy GSL fleet to its new ship manager.

For the third quarter itself, daily OpEx is down also 3.1% to below $6,000 per day at $5,966 from $6,154 in the same quarter in 2018. Also as on every quarter, please note that in the appendix we have included updated information on dry dockings and upgrade work to assist you in modeling capitalized expenses and offhire for the year together with our usual illustrative adjusted EBITDA calculator. The latter includes the 2 new vessels and can be used to see how different rate scenarios flow through our adjusted EBITDA. To assist, we have also provided 10-year and 15-year historic rates by vessel size.

For example, if we apply the 10-year historical average rates to the open days of 2020, deducting market standard of 5% for commissions, we would generate adjusted EBITDA of about $176 million. I should emphasize now that this is not a forecast.

I would now like to turn the call back to George for closing remarks.

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Georgios Giouroukos, Global Ship Lease, Inc. - Executive Chairman [7]

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Thank you, Tassos. To conclude, I'd like to summarize the strengths of our company. We're hugely undervalued. Our stock trades at a significant discount to both charter adjusted net asset value and also to the EV-to-EBITDA multiple of our peers. If we traded at the same approximate multiple of our peers which is around 8x, the stock would be around $19. This is a supply story. Our highly specified fleet positioned in a segment with little or no order book provides great earnings potential in the current supply-constrained environment which we expect will further tighten due to IMO 2020.

We are prudent, having locked in significant forward (inaudible) cover at elevated rates, $340 million of adjusted EBITDA is associated with the new targets we have put in place since the merger. To provide tangible shareholder value whilst also providing downside protection.

We manage our balance sheet conservatively and always look to optimize our capital structure and to further strengthen our credit profile which is an important part of our strategy as evidenced by our recent refinancing and equity raise.

We are delivering growth which is accretive to both earnings and our credit profile.

So that is what this all boils down to, is that we are at the point in the container cycle with great upsell potential and we have a great company to take advantage of it which is demonstrated by our significant accomplishments in the last 12 months. We remain 100% focused on seizing the value created opportunities still ahead of us.

With that, I would like to open our presentations to questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joseph Farricielli with Cantor Fitzgerald.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [2]

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Just a couple questions on the balance sheet, to make sure I understand what's happening. I see that the $38.5 million of the new junior loan, it was outstanding at 9/30. I thought I had recalled in a prior press release that it wasn't drawn down. Did you draw those 2 tranches at different times?

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Georgios Giouroukos, Global Ship Lease, Inc. - Executive Chairman [3]

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I will ask Tassos to answer the question.

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Anastasios Psaropoulos, Global Ship Lease, Inc. - CFO & Treasurer [4]

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Sure. The junior that we mentioned here is actually an amendment, as we have mentioned in the press release. What I mean is that we already had in place this junior loan in this facility, and we have just expanded in order to max -- which was actually the main change in this facility to max the new senior syndicate loan.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [5]

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It's a bit confusing. There are 2 figures of 268 here. There was a new facility of $268 million of which we drew down $230 million and refinanced $230 million. And the other $38 million of the new facility still remains undrawn. Separately, as Tassos has said, separately we renegotiated the terms of another $38 million loan pushing out its maturity. So total refinancing was something like $300 million of which $38 million we have not drawn.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [6]

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Okay. Because I'm looking on slide 28 and it showed outstanding balance at 9/30, and I guess that $38.5 million under the new junior loan at the bottom, that actually is undrawn.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [7]

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That's --

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Anastasios Psaropoulos, Global Ship Lease, Inc. - CFO & Treasurer [8]

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Correct. It's the note 2 -- it's not the $38.5 million that it has not been drawn. This has been drawn. If you see on the notes 2, you see that the new senior secured loan has 2 tranches, tranche A of $230 million that have been drawn and another $38 million which they have been committed but not drawn yet.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [9]

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Thank you. I didn't see the note. And then my next question is, just want to make sure I understand mechanics. After you make the mandatory optional redemption on the 9 7/8% notes, where -- let's just assume no one takes it. Let's face it, the bonds are trading above the 102 price. So I'm assuming no holder would tender into that. Where does the money go? Does it go to the Citi facility or that new term loan facility?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [10]

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No. It goes to the Citi facility. It goes to the Citi facility. So if you're right, and bond holders do not accept the $20 million, then we use I think it's $14.8 million to fully repay the Citi facility, which is the amount that will be outstanding at the end. Well, it is outstanding because we've just paid down another $10 million of scheduled amortization on that. The schedule, page 28, shows $25 million outstanding less than scheduled $10 million gives you $15 million. So we would -- which is accurately $14.8 million. So we would use $14.8 million of the $20 million to pay down Citi and the balance of $5.2 billion goes to bond holders mandatorily.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [11]

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Okay. So that $5.2 million, bondholders don't have an option. Is it pro rata that you apply it?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [12]

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Yes. Yes.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [13]

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Okay, great. And then sticking on the 9 7/8% as you can imagine, a lot of people are focused on it. And as we've discussed on prior calls, it's expensive debt. What are your thoughts, what needs to happen, so that you're in a position to take those out?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [14]

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Well, we're working on it as we said in the prepared remarks. And we've made no secret of it when we've met with investors, buy-side, sell-side, credit, equity -- that it is our near-term priority to refinance this instrument which is legacy GSL. It was the only debt that was available to us in 2014 and then renewed in 2017 with a replacement issue. Now, we have a broader range of debt financing available to us as we're 3x the size. We need to fit together bits of the jigsaw puzzle. We obviously want to get on with it because we think that we can save a significant amount of interest costs, and time is money. But we want to get it right. So this is more than likely a 2020 happening, although we're working on it with all priority.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [15]

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Okay, great. And I guess my point was, there's no -- no credit facilities prevent the refinancing, I think is what I'm hearing.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [16]

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Correct.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [17]

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And then -- thank you. And then final, final question is on the dividend. Once the Citi and the 9 7/8% are removed, is that when you will be able to start paying a dividend again?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [18]

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Well, technically, we can pay a dividend today. We've just raised $50 million of equity under the terms of the indenture. That immediately creates $50 million of dividend capacity. But we wouldn't raise $50 million from common equity and then pay it back.

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Joseph Farricielli;Cantor Fitzgerald;Credit Analyst, [19]

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Right.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [20]

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We look to achieve the refinancing of the bond that will create incremental cash flow. It'll push out the maturity of our debt, we would anticipate. And recognizing the importance of the dividend on the common, and we do want to access the common equity markets in due course to provide further growth capital and to be able to develop the business. A dividend is a priority for us but we'll only introduce one when we believe it's sustainable.

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Operator [21]

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(Operator Instructions) Our next question comes from Ward Blum with UBS.

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Ward Blum;UBS Financial Services Inc.;Senior Vice President - Wealth Management, [22]

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In the press release, you highlight that in September you entered into an agreement with certain affiliates of Kelso & Company whereby they agreed to amend their option to convert their C preferred into Class A common. Could you give us more specifics about that amendment?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [23]

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Sure, but this was in response to some investors wanting clarity on exactly what would happen to the Series C preferred when the bond was repaid. Prior to this amendment, Kelso had an option to convert the C preferred into common. After this amendment, they have an obligation to convert the C preferred into common when the indenture -- when the bond is repaid. It's as simple as that. What was an option is now an obligation.

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Ward Blum;UBS Financial Services Inc.;Senior Vice President - Wealth Management, [24]

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Thank you. Do you know if the shares are being distributed at Kelso to the limited partners or are they being held by Kelso in the fund?

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Ian J. Webber, Global Ship Lease, Inc. - CEO [25]

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Well, the C preferred shares are held by 2 Kelso affiliates which I think is part of their public disclosure. Beyond that, we can't comment. We don't know.

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Operator [26]

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Thank you. I'm not showing any further questions at this time. I will now turn the call over to Ian Webber for any closing remarks.

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Ian J. Webber, Global Ship Lease, Inc. - CEO [27]

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; Thank you very much. Thank you for listening to us. Thank you for your questions. We look forward to providing you with an update on the company from Q4 which will be in 2020. Thank you.

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Operator [28]

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Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.