Global Ship Lease Inc (GSL) 2008 Q3 法說會逐字稿

Good day and well to the Global Ship Lease third quarter earnings call. Today's conference is being recorded. At this time I would like to turn the call over to Mr. Tyler Wilson. Please go ahead.

Actually, it will be Susan Cook who will say a few words on Safe Harbor.

Good morning, everyone, and thank you for joining us today. I would like to 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 of the Company's control. Actual results they differ materially from these forward-looking statements due to many factors including those described in the Risk Factors section of our registration statement on Form F-1 filed on September 23, 2008, which you can access on the SEC's website.

All of our statements are qualified by those 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 the call to the most directly comparable measures calculated and presented in accordance with GAAP you should refer to the press release that we issued this morning, which is available on our website at GlobalShipLease.com.

I will now turn the call over to Ian.

Thank you, Susan. Good morning, everybody. Thanks for joining the call. Susan and I are delighted to be addressing the investment community for our first conference call since we became a public company in the middle of August.

On today's call I want to talk about third-quarter highlights, our business model, and some industry fundamentals. I will also discuss our fleet and charter portfolio and financial flexibility. Susan will provide a commentary on the third quarter financials and after that we will be delighted to take your questions.

Let me start by commenting on the current state of the container shipping industry. Whilst the industry has benefited from strong global economic performance and world GDP growth over the past three years, there is no doubt that demand for container shipping services, and thus for container ships, is showing significant weakness. In terms of trade lanes at Asia Europe has slowed significantly in the past few weeks compounding the effects of a weakening trans-Pacific trade.

This is affecting the freight rates, obviously, particularly on those trade lanes and the spot market for ships in the solo purchase and spot charter market. But it is really important to note that neither of these factors affects Global Ship Lease directly as we don't carry cargo and all of our vessels are secured on long-term, that is an average of 10 years, time charters at fixed rates.

Notwithstanding the current slowdown in demand growth, we still expect overall growth of 6% to 7% for 2008 as a whole. So near-term demand is slowing. What about supply? Indications are that capacity will grow by 13%, 1-3 percent, next year and around the same for 2010. That is the order book to date. However, as orders are rescheduled or canceled, I believe that some of this capacity won't be delivered or will be deferred.

We have already seen this happening in other sectors of the marine industry, particularly in dry bulk. Going forward I am sure we will see more cancellations including in the container sector, particularly as financing won't be available for those guys ordering ships to meet their commitments.

This combined with layoffs, accelerated scrapping, and the continuing effects of slow steaming, despite reduced fuel prices, will I believe that lead to a sharper, potentially a sharper correction downwards in supply growth that might otherwise be expected. Here the credit crunch is actually helping the industry by limiting capital available for new buildings, but in the short-term globally supply is going to exceed demand and there will be weak this in operator performance.

Let's not forget, however, that the liner companies and certainly pretty much all of the top 20 including our principal customer, CMA CGM, have seen cycles before and have the corporate experience to successfully manage through a downturn. Nonetheless, this downturn will result in a challenging time for the industry for 12, 18 months, but I think there is potential for a positive correction towards the end of next year and 2010 may reflect some recovery.

Global Ship Lease itself is extremely well-positioned to withstand this near-term volatility. All our ships are committed on long-term fixed-rate time charters. Much of our cost base in the near- to medium-term is a fixed. Our principal customer is the third-largest container shipping company in the world; has been around for 30 years and has managed itself successfully through the cycles. It's investment-grade. We have in place finance to cover all of our outstanding commitments. We have no need to raise extra debt or extract equity.

Finally, in terms of industry comments, I believe that the industry shows good potential to return to growth over the medium to long term. Maybe not up to the level of the 10% compound and that we have seen historically, but there is no reason to suppose substantial growth rates won't return. In addition, right now world trade still needs to flow. Consumer products manufactured, semi-manufactured goods, chemicals, some commodities, all still need to be transported and there is an underlying demand for container shipping services, which remain an essential part of the logistic supply chain connecting global manufacturing with consumers.

Let me now focus on Global Ship Lease. We will look at page three of the presentation where we summarize the third quarter and recent highlights. It was a momentous quarter for the Company. We achieved significant milestones that position ourselves well for the future. Specifically, we completed our merger with Marathon and listed on the New York Stock Exchange. We paid a starting dividend of $0.23 a share and we acquired two 4,250 newbuild container ships that are going to be delivered at the end of 2010 with charters in place for seven to eight years with the ZIM.

Complementing this significant corporate success in the quarter we also achieved strong operational results with no surprises based on our time charters strategy, generating $12 million in pro forma cash available for distribution. We have declared our first quarterly dividend of $0.23 a share expected to be paid on November 28 to Class A common shareholders and unitholders of record on November 21. As our cash flows of $12 million exceed the anticipated dividend of nearly $8 million, we have 1.5 times dividend coverage.

Turning to slide four. Since this is our first quarter as a public company and in light of the current economic environment, I thought I would briefly discuss our business model. Despite the current slowdown in container demand, we believe that the Company remains well-positioned over the long term to create value for both the liner companies, our customers, and our shareholders.

Firstly, as a preferred provider of chartered container ships to top tier liner companies, we intend to provide them with a competitive alternative to direct vessel ownership offering a cost-effective means to free up capital and management resources for other strategic needs. We believe this will role takes on an even greater significance during a challenging economic times, positioning the Company as an important long-term strategic partner.

Secondly, since our model is focused on chartering out vessels to liner companies and not operating them as cargo carriers ourselves, our business is unaffected by fuel costs as well as day-to-day volatility in price or volume. Specifically, as I have mentioned, all of our ships are secured on long-term charters. We have nearly 80% built-in revenue growth from the planned acquisition of seven ships over the next two years. That so in total we have some $1.8 billion of contracted revenue with an average 10-year charter term.

Moving on to slide five and complementing my earlier remarks on the industry, I would like to review certain industry dynamics as they affect us. From our perspective as a charter owner with all our vessels on long-term contracts with leading liner companies, as I have said we believe our business model mitigates the affect of near-term industry volatility. We are well placed to take advantage of the following two long-term industry fundamentals.

First, as the chart at the top left-hand corner of the slide indicates, we expect the trend of liner companies to outsource vessels, off-balance-sheet finance, if you want, to continue. Now in 2007 more than half of capacity was owned by owners compared to 15% in 1994. There is no reason why that trend won't continue.

Secondly, due to the highly fragmented nature of the industry and the fact that the US listed container ship owners have a small market share, bodes well for our potential long-term growth. Just to note, looking at that chart in difficult times such as '98/'99 economic crisis in Asia and 2000/2001 the recession over here in the US there is (technical difficulty) in the percentage of capacity in the hands of charter owners, as operators seek [turn into] their capital more actively.

Moving to slide six, I would like to discuss our fleet; 19 high-quality modern container ships. This slide illustrates the duration of the charter's average of 10 years. The current 12 ships we have have a duration, a remaining duration of about eight years. The seven ships that we are due to buy have charters in place averaging approximately 12. Note that our first two charter renewals on only two of the 19 ships aren't until the end of 2012, which is four years away.

CMA CGM is our principal customer. It's an investment-grade top three liner shipping company with some 400 vessels in its fleet, of which 300 are chartered. It has been around since the early '70s, growing successfully during that time; largely organically, but also with one significant acquisition. It's a significant shareholder in Global Ship Lease and as such, as I commented earlier, it has a vested interest in the Company's success.

Also a substantial portion of CMA CGM's charters are short-term. These are unrelated to Global Ship Lease and they expire over the next one to two years, which gives them substantial operational flexibility to either reduce capacity or reduce costs, or both, as they renew expiring charters in a weaker spot market.

In September we agreed to acquire two new buildings for delivery at the end of 2010 on seven- to eight-year time charters to ZIM, a top 20 Israeli global liner operator which has been around for over 60 years.

Slide 7 sets out our financial strength, which we believe provides significant benefits in the challenging economic environment. It's important to note that we have an $800 million credit facility in place, an eight-year facility with which to fund our existing ships and also our seven-vessel acquisition program, which program doubles our capacity. Based on this facility and our existing equity structure, we have no need to access the capital markets or the debt markets to meet our obligations.

We continue to maintain a strong relationship in our ongoing dialogue with our banks, which consists of a diverse group of six experienced shipping banks including Citi, Fortis, HSH, SMBC, K&W, and DnB NOR.

Before returning the call over to Susan I would like to mention that based on our most recent vessel valuations we have no loan-to-value issues. Currently our loan-to-value is less than 50%. Despite a recent drop in vessel values, we see no threat whatsoever to our being able to complete the purchase of four ships next month as we fully expect to be within our borrowing base of 70% loan-to-value. Just to note, the next valuation of our current fleet is due early in the new year.

With that I would like to call from the call over to Susan.

Thanks, Ian. I would like to take a moment to mention that we have not included comparative financial information for 2007 because this information, under the previous SR accounting rules, relates to the operation of the vessels when they were owned by CMA CGM and when they were operated in CMA's business of earning revenue from carrying cargo. Global Ship Lease, which earns its revenue from time chartering out ships, commenced operations in December 2007 and the two business models are simply not comparable.

For the same reasons, financial information relating to operations for the nine months ended September 30, 2008, excludes the results of two vessels up to their acquisition date in January 2008, as until then they were operated by the predecessor. The unaudited interim combined financial statements differ from the information we discuss as they also reflect in 2008 two distinct reporting periods, being before and post the merger on August 14, when for example the capital structure of the Company changed significantly. For our full unaudited interim combined financial statements, please refer to this morning's press release.

With that said, turning to slide nine we present our financial results, which represent the time charter results of the Company. For the three and nine months period ended September 30, 2008, we recorded revenue of $23.9 million and $68.7 million, respectively.

During the three months ended September 30, we owned and operated 12 vessels. There were [18 offside days] including 14 unplanned drydocking days in July to repair bottom damage to a vessel following a grounding. Utilization then was 98.4%. For the nine months period there was there were 3,263 ownership days with 15 planned offside days for scheduled drydocking in the second quarter and 29 unplanned days. Fleet utilization for this period was 98.6%.

Vessel operating costs for the third quarter which includes crew costs, lubricating oil, spares, and insurance were just under $8 million or an average of $7,146 per ownership day. For the nine-month period ending September 30 the operating expenses were $21.9 million, representing $6,704 per ownership day. Vessel operating costs during the quarter and nine-month period were affected by increasing crew and lubricating oil costs and include regular ship operating costs, undisclosable ship leases, capped ship management agreements that is less than the capped amount.

Depreciation for the three month period was up $5.2 million and for the nine months just under $15 million. The depreciation costs for the three and nine-month periods reflect the addition of two ships in January 2008 and the impact of fair valuing the vessels from the merger. We incurred general and administrative costs in the three months ending September 30 of $1.5 million and $3.3 million for the nine-month period. The G&A costs during the quarter were affected by an increasing cost base post merger date as we operated an independent public company.

The interest expense for the three months was based on the Company's indebtedness of approximately $578 million from July 1, 2008, through the consummation of the merger with Marathon Acquisition Corporation in August 14, hence then borrowings of approximately $286 million post the merger. Approximately $292 million of debt was either canceled or repaid at the time of the merger. The interest charged until August 14 on this element of debt was approximately $1.6 million.

Interest expense in the nine months ended September 30, 2008, was $18.8 million based on borrowings of approximately $578 million pre-August 14 and $286 million after this date. Interest charge during the nine months from the debts canceled or repaid on August 14, 2008, was approximately $8.7 million. The dividend on $48 million of preferred shares also included in these figures from August 14, 2008.

We hedged the majority of our interest rate exposure by entering into derivatives that swapped most of our floating rate debt to fixed rate to provide long-term stability as well as predictability to our cash flows. As these hedges do not qualify for hedge accounting under US GAAP the outstanding hedges are mark-to-market each period end with any change in the fair value being booked to the income and expenditure account.

The change in the fair value was a loss of $6.4 million in the three months ending September 30, reflecting movement in the forward curve for interest rate. The change in the fair value in the nine months ended September 30 was a $1.1 million loss. Mark-to-markets adjustments had no impact on operating performance or cash generation, and do not affect the Company's ability to make distributions to shareholders.

Including non-cash charges and actual interest, we reported net loss of $1.2 million for the third quarter and net income of $9.2 million for nine months ended September 30, 2008. Normalized pro forma net earnings, as if the Company has existed in its present form from the beginning of the period, was $6.4 million, or $0.19 per share, for the third quarter of 2008 and $17.9 million, or $0.54 per share, for the nine months ended September 30. This excludes the previously noted $6.4 million non-cash interest rate derivative mark-to-market charge for the third quarter and the $1.1 million charge for the nine-month period.

We believe that normalized pro forma net earnings is a useful measure with which to assess the Company's financial performance as it adjusts for the effects of non-cash and other items which do not affect the Company's ability to make distribution on common shares. Pro forma cash from operating activities for the third quarter was $12.1 million and $34.8 million for the nine-month period. This is pro forma net income adjusted for non-cash items such as the mark-to-markets and depreciation.

Turning to slide 10, we provide a balance sheet summary. Key items as of the 30th of September include the following. We had cash of $29.6 million, current assets of just over $35 million, and total assets worth just over $720 million, of which $522 million was vessels in operation.

The next slide, number 11, shows a breakdown of our pro forma cash available for distribution, which was $12.1 million in the third quarter. Notably, our cash flows exceed distributions for the third quarter with a strong distribution coverage of 1.5 times.

As shown on slide 12, for the third quarter our Board has declared a dividend of $0.23 per share. The dividend is expected to be paid on November 28, 2008, to all Class A common shareholders and unitholders of record as of November 21, 2008. We have now declared a dividend of $0.46 per share since our listing in August. Going forward we intend to continue to pay regular quarterly dividends. The declaration of payment of dividends is subject at all times to the discretion of a Global Ship Lease's board of directors.

However, the Company intends to distribute a portion of its cash flow to its shareholders, whilst retaining cash flow for reinvestment in its business. Retained cash flow may be used to fund vessel or fleet acquisitions, make debt repayments, and for other purposes as determined by our board of directors. With that, I will now turn the call back to Ian.

Thanks Susan. In our first quarter since going public there have been no surprises in our financial results consistent with our low-risk, stable, predictable business model with long-term contracted revenue and relatively fixed costs. We are not at all complacent about the future, but we do believe that our business model of securing long-term charter revenue will continue to serve us well through this challenging time, offering our shareholders stable cash flows and dividends going forward.

I would like now like to hand back to the operator who will explain the Q&A process.

(Operator Instructions) Jay Harris.

Good morning, Ian. I have got two questions. One, do you operate with sweeping cash into reducing long-term borrowings and then as you need cash write overdrafts to increase your debt? I was a little surprised by all that cash on the balance sheet.

I will answer that one. No, we don't do that. Whilst we could under our credit facility; it is a revolving credit facility, but we do not do on automatic sweep out of our cash balances every night. It is slightly higher than I would anticipate knowing that we are about to pay the dividend, but it's not something we would do. Then we also go -- do have to have a minimum cash balance as required under our credit facility of roughly $15 million.

If you take the $15 million restricted cash effectively and an $8 million dividend, we needed to have about $23 million on the balance sheet.

I understand. My other question concerns the operating rates of container ships going forward. I know that CMA CGM is a privately owned company. Have they been able to share with us what their going forward operating rate on the existing 400 ships looks like, or are there industry statistics that you have access to?

There is plenty of market commentary on charter rates. Most of the major -- our rate is published in little research pieces weekly or monthly; some of which are free, some of which you have to subscribe to. What is happening right now, because of the demand shock, if you want -- if you prefer, the reduction in the rates of growth -- the demand, in the reduced demand for container ships is that charter rates in the spot market, which is very different to what we do, but charter rates in the spot market have come off and have come off quite significantly.

It varies somewhat from ship size to ship size; smallish ships are still quite popular. Very small ships are in oversupply and charter rates have been damaged. Some of the larger post Panamax ships sort of 4,000 TEU to 5,000 TEU are also suffering a bit, but as a generalization rates in the spot market have weakened significantly.

I wasn't really referring to the rates. I was referring to the occupancy.

Oh, right. I am afraid I don't know what levels of utilization CMA CGM are experiencing. What I do know, overall, is that they are very comfortable with their financial performance right now. They are still generating cash and are optimistic for a good result for 2009 -- sorry, 2008.

Thank you.

John Race.

Good morning. Thank you for your time. I wanted to talk to you a little bit more about your stock price here. First of all, down at less than half of where it was when it went public. I mean, I understand that the whole industry is suffering; the perception that everybody is going to default, that vessels are going to sit in the harbor. Can you comment as to what is potentially available to you that you can do to improve your stock price other than just keep paying the dividend, which I admit is pretty positive?

John you are absolutely right on the three US-listed container ship owners. Ourselves, C-SPAN, and [Denous] have both tracked down broadly in parallel since, well, since we listed anyhow. We are all being damaged by the general down on shipping. Notwithstanding the fact that all of us follow the same business model of long-term secure revenue with, to a greater or lesser extent, short-term predictable costs.

You are right investors are concerned about companies' ability to and willingness to maintain a dividend in an environment where cash is king. Also, they are concerned where companies have unfinanced commitments. We are not in that position. We are fully financed. I guess that the investment community has been waiting for this announcement to see whether we were going to stand by the $0.23 dividend that we indicated that we would pay.

We have now declared that dividend. Although I can't guarantee it, because it's actually for the Board to review and conditions that prevail at the time, given our business model of stable revenue, stable costs, and therefore, stable cash flow, I see no reason why we shouldn't be able to maintain this current level of dividend.

Okay. With regards to the warrants the fact that they are so far out of the money, is there anything -- is your present plan, if things just say the same, is just to let them expire?

Yes, in a word. I mean, we keep all of the options under review for increasing shareholder value, including share buybacks and buyback for the warrants. We hope that over the next couple of years -- those warrants expire in August [2010]. We hope that the stock improves over those two years. We hope that the warrants become in the money and provide a source of equity capital for us, so that we can fuel further growth. Nevertheless, we keep all of the options under review with the Board.

And just one last question. I mean with regards to those newbuilds that you are contracted, that you have contracted for and that they have -- that are already leased out, could you back out of those obligations if you did not want to -- the market continues to be soft, could you back out of them or could the Albacore back out of them on the lease side?

No. There is nothing contractually that allows us, any of us, to escape from the transaction. Somebody would have to default or you would have to come to a negotiated settlement now that we keep everything under review. At the moment we are very happy to have contracted growth. In a couple of years time when the world is going to be very different, we expect -- we are diversifying our source of revenue away from totally reliance on CMA CGM and we are very pleased to have ZIM as a potential customer. But we will this keep this under review, John.

Thank you. Just one last thing, I mean, I know CMA CGM is private company. How often do you get to look at their books to know their creditworthiness?

We are -- under a confidentiality agreement we signed with them we see quarterly financial information, which is very helpful to give us comfort and some authority to what we say to you guys. Clearly, we can't share details of that with you. So we see financial information on a regular basis and we discuss with them regularly where they are and where they see the world to be. So we keep on top of it.

All right. They own a fair amount of you guys so for them to want to default on you is basically shooting themselves in the foot. Wouldn't you say that is true?

Well, exactly. They own 45% of the stock to date and that entitles them to a dividend floating, as I said earlier, of about $22 million a year which is substantial. Right now cash liquidity is so important, it's probably more important for them to have that cash flow than anything else.

It actually mitigates the cost of the charters, if you want to look at it on a cash basis. It reduces the effective rate of the 17 ships that they are chartering from us by about 15%.

Just one last question, Ian. I apologize for monopolizing here, but with oil prices have fallen so precipitously I know you have a cost contract fixed. But who is getting the benefit of the lower oil prices in terms of transportation costs, etc.?

Well, it takes a while to feed through the system in terms of who actually gets the benefit. Right now, I would say it's the operators who are getting the benefit. The liner companies like CMA CGM who are simply paying less to move their ships around the world. Bunker fuel has dropped from about $650 a ton in the summer to about $250 a ton, so it's a substantial savings.

Down more than --

Eventually they have to pass on some or all of that their customers by way of reduced surcharges or lower freight rates. But right now it is likely to be mitigating deteriorating revenue from cargo (multiple speakers). We save a little bit of money because we, as you know, we have to pay for the lubricating oils that go in the engines and that is related to oil price as well. So we have a bit of a benefit.

Well, that is -- I mean, I imagine a big positive for CMA CGM, isn't it? I mean that they can -- that must be a big cost savings for them, because that is probably a big part of their expenses, isn't it?

Yes. It's not quite like they are an airline industry where two-thirds of the cost is fuel. But depending on what style of operator you are, it could easily be 20% of total cost.

Very good. Thank you.

[Joseph Berlin].

Could we discuss two of the covenant in the indenture? The net debt to total cap ratio and the EBITDA to debt service.

Yes, sure.

Could you just give me those numbers now, where you are in relationship to the covenants?

Well, we wouldn't disclose exactly where we are, but I can tell you that we are comfortably the right side of all of our technical financial covenants. We have no issues with any of our covenants and we don't foresee any issues with them either.

So I could compute those myself, but in terms of total capitalization could you help me there? What are you including in that?

That is the equity on the balance sheet, so that is [$330-odd million].

I'm sorry?

It is the equity on the balance sheet, so it's about [$330-odd million].

Okay, thank you.

We have got a lot of debt on as well to get to total cap, but it's all on the face of the balance sheet.

[Michael Gamare].

Good day, a couple of questions for you. You know some of these -- I think the market is concerned about a few different risks. You touched on this already, but I was wondering what is the ability of CMA CGM to renegotiate the charter terms. I know we have already established that it wouldn't really make sense rationally from their standpoint, but do they even have the ability to do that?

They have no legal right to. It's a fixed rate contract take or pay. If the ships are sailing full or half full, we still receive the contracted revenues for the contractual period. For any -- any renegotiation would have to be bilateral and consensual. Right now we would have no appetite for that, as you would expect, and there has been no indication at all that any renegotiation is on the cards.

Great, great.

They have, as I said, they have got -- their ship fleet is 400; 300 of those ships, around anyway, are chartered, of which own 17. They have charters from a whole range of owners, many of the German AGs. Our view, in addition to the fact that they are a significant financial investor, is that there is -- if they were seeking to renegotiate rather than just rely on the natural expiry of the charters, there is lower-hanging fruit that they would go after than us.

Okay, great. Then I just want to point out for some of the other shareholders on the call that Fitch does rate, I believe it's Fitch, rates CMA CGM's debt so there is information out there about them. On the service contract side, do you see opportunities for cost savings given that the market is kind of blackened a little bit?

I am not sure whether there will be cost savings as such overall, but I think the potential rate of increase in underlying costs will reduce. Let me explain that further. Apart from interest, which we largely swapped to a fixed-rate, I think the -- it's costs -- the daily operating cost of the ships, that is provision of crew, lubricating oil, routine spares and maintenance, all of that sort of stuff. And because the whole maritime sector has been under enormous growth for the last three or four years, pressure particularly on crew, our costs and also our lubricating oil costs because of what has happened to the price of oil has been enormous. Those costs have been increasing; crew costs are probably going up by 10% or 15% for the last year or so.

I think because of the slowdown there is likely to be a return to more normal, if you want, rates [in spite of the] cost increase. The underlying rates with cost increase for operating, ship operating costs is about 2% to 3% a year. So I think notwithstanding that everybody would prefer the sector to continue in good health. This market correction does give an opportunity for (inaudible) to catch up in terms of manning and address some of the cost issues which we have been facing.

Great. Let's see, some of the cancellations -- I was to ask you, what is your visibility on the cancellations for ships going forward that you are seeing? Are they on the larger ships? I know that you said some of the oversupply right now is in the smaller ships but I was hearing that some of the larger ships were on the order books. Are those the ones getting canceled or is the cancellations, are they happening --?

There is little cancellation or there hasn't been any that I know of in the container sector recently. It's drybulk where there have been some cancellations. I would expect most of the capacity that is ordered for delivery in 2009 to be delivered, in part because the ships have actually already commenced construction, in part because they are probably fully financed. I think the opportunities, if you are looking at it from that perspective, of reduction in supply growth in 2010/2011 where the yards haven't started building and there is a lack of finance in place for a significant portion of the fleet.

As to whether they are going to be big ships or small ships, I have no view other than obviously if you cancel one big ship then you are saving significantly more capital.

Right. And if the cancellations happened in 2010, when do you start renegotiating those 2012 expirations in the contracts?

Three months before. It can be a very close to the expiry. It depends exactly what is happening in the market conditions at the time and how we want -- if CMA CGM wants to renew the charter, then we may start negotiations early. If they decide they don't want the ship, then we will have to find a new charter and further diversify our customer base.

Okay, great. Then one last question and this is just something that I have heard here and there, but I have heard of potentially some of the California courts requiring environmental controls on ships coming in with bunker fuel. I don't know if you have heard that as well, but I was wondering who would be responsible for bearing the cost of that or how would that work?

Yes, there is quite a lot of pressure on both the airline industry and the maritime sector to get a little bit more green and California leads the way. There are various initiatives that are being tried out there. It would be down to the owner to bear the costs of any capital spend that is required by regulation to clean up the ships.

However, in our case, rather uniquely we have a clause in our charter contracts which provides that if we have to invest, I think, it's more than $100,000 -- it might be $150,000 -- in improving the ship in direct response to regulatory requirements, then we increase the charter rate commensurate with that investment. So if we do have to spend $1 million on adapting ships that call California then we recover the cost of that investment through charter hire.

Great. That is great to know. Thank you very much.

Mickey Schleien.

Hi, it's Mickey Schleien from Ladenburg. How are you? Ian, most of the big picture questions have been asked so my questions are going to be a little more mundane, except I wanted to review a comment you made at the beginning of the call. You gave some indication on CMA's fleet. They have 400 ships, of which I think you said 300 are chartered. Then you said of those 300 a portion are on short-term charters. I think you said one to two years, but I didn't catch the proportion that was on a short-term charter. Can you give that?

It's upward of 100 ships.

Pardon me?

It's over 100 ships now to the 300 that are on short-term charters.

Short term meaning one to two years?

Yes.

With respect to the third quarter, the one -- which ship was damaged and in dry dock unexpectedly?

The Julie Delmas. It's one of our 2,200 TEU geared ships that trades along with three others in to West Africa.

What was the opportunity costs on the revenue side for that?

It was [offside] for 19 days I think, so it was 19 times $18,500.

Okay, and what was the cost of the dry dock for that ship?

$900,000. That is all deductible, covered by insurance so we fall on our $150,000 insurance deductible and when we did our modeling and completed pro formas in the prospectus, the public material we included an allowance for insurance deductibles.

Okay. And was the Matisse in dry dock as well during the third quarter?

No.

So when will that go into drydock?

Some time next year, I think. I will have to check, Mickey.

Okay. Is the Utrillo supposed to go into drydock soon also?

Both the Matisse and Utrillo go into drydock next year, as has been planned.

Okay. Just the last couple of questions, I was curious why you are calculating earnings per share on the Class A -- you are dividing your net income by the Class A number of shares outstanding and not including the B and C shares.

Our Class A shares are the only ones that are inclined for the dividend at the moment.

Okay. Likewise on diluted shares, your warrants are out of the money so why are you showing a higher diluted share count?

Because of the Class C shares which converts to Class A on January 1.

Okay. That was it. Thanks for your time.

You are welcome.

[David Mills].

My question has been answered. Thank you.

[David Denzel].

Hi, I had two questions. You were referring to spot rates earlier and I forget how you characterized you said collapse or much lower currently. I am a little confused. Is that rates for coming up for renewal for long-term or just spot rates and how does that translate if it's not the longer-term rates? Is that a good predictor? I mean, how do you measure what is going to happen with your renewal rates by what is going on in the spot market?

Yes, let me clarify. I am sorry if it wasn't clear. I was referring to the spot market for ships that are coming up for renewal or are already looking for employment. At the moment, we are looking in the spot market at charter terms of six to maybe 12 months only. It's a fact that when there is an excess of supply charters are only renewed for short periods of time. So it totally does not affect Global Ship Lease today, and it has little bearing on the long-term charter rates that one negotiates with a customer to finance a ship.

The long-term rates that we have and that we took over effectively with the ZIM ships for delivery in 2010 are much more based on financial calculations factoring in expected operating costs to achieve a desired rate of return. So it's true lease financing, if you want. And if given the price of the ship and the charter rate that the charter is prepared to pay, the numbers don't work as an owner, we just don't do the deal. So that is for buying new ships into the fleet.

But then for renewals you are still going to be subject to the whim or the urge for shorter-term?

We are indeed and that is why we were so careful to make sure when we negotiated the composition of the fleet that we were going to acquire from CMA to have a staggered expiration of charters on the 17 ships, ranging from 2012 through 2025. Five through to 17-year charters with no significant elements of our revenue up for renewal at any one particular period of time, because we wanted to avoid re-chartering risk.

We are not going to be able to escape it completely. By the law of averages some of our ships are going to renew when the spot market is weaker, but on a converse side a proportion of the fleet will renew when the spot market is strong. And on average, we expect to achieve historic rates on renewal. And that is what we factor into all of our investment appraisal.

Where are these spot rates now, either on a percentage basis or dollar-to-dollar compared to your daily contracts now?

Well, they are probably a little below where our rates are. Long-term rates are traditionally lower than the average spot market. It's difficult to get data today, because there isn't that much activity in the rechartering market. But if I have to guesstimate, I would say the spot rates are maybe 10% lower than where we are on our current charters, maybe more. But it very much depends on the ship size, the ships characteristics, how fuel-efficient it is, where the ship is, and what the demand for that particular type of ship is. So it's actually pretty volatile even today.

Okay. Switching gears for a second one, one of the covenants is loan-to-value on your ship portfolio. How is that value measured?

It's the charter free market value determined by independent brokers, two brokers and averaged.

So what do they go out and bid on a ship and say this is what it costs to replace it? How does that physically -- do you hire an independent --

It's like real estate. In normal times there is a very active real estate market and real estate agents have got a very good feel for what a particular type of property with a particular number of bathrooms and bedrooms would sell for. Ship brokers' day-to-day business is buying and selling ships. They have got a very firm handle on what a 4,350 TEU, five-year-old, Korean-built container ship is worth in the secondhand market based on transactions.

So how much are they down peak to trough?

Well, right now there aren't that many transactions. In fact, there were no sale and purchase transactions in October. Brokers are finding it difficult to establish values and those values or valuations that we get we can't rely on.

So how does that factor into your -- meeting your covenants then? If you can't value them properly and one of your covenants is loan-to-value, I think they must come up with some number and I'm just curious what that number is.

We are able to get valuations. We are able to combine comply with the requirements of the credit facility and our expectation based on recent discussions with brokers, as I say, is that we will have no loan-to-value issues certainly for the drawdown that we need to make, to purchase the ships in December. And that we will end up the year well below the 70% borrowing base requirement let alone any other measure.

Okay, thank you.

But I should say, you know, that because of the extreme volatility in ship values, we don't know what is going to happen. And that is why we are so pleased to have a bank group that understands this sector and is supportive of us on a relationship basis. I mean, hypothetically, if there was a meltdown in ship values, then we would need to go, as I said, need to go talk to the bank group.

Okay, thank you.

We have no further questions at this time. This concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.