Global Ship Lease Inc (GSL) 2010 Q4 法說會逐字稿

Good day everyone, and welcome to the Global Ship Lease quarter four 2010 conference call. Today's call is being recorded. Joining us on the call today are Ian Webber, Chief Executive Officer; and Susan Cook, Chief Financial Officer. We will conduct a Q&A session after the opening remarks. Instructions will follow at that time.

I will now turn the call over to Mr. Webber. Please go ahead, sir.

Thank you very much. Good morning, everybody and thank you for joining us again today. I hope you've had a chance to look at the earnings release that we issued earlier this morning and have been able to access, via our web site, the slides that accompany this call.

As normal, slides 1 and 2 reminds you that today's call may include forward-looking statements, that are based on current expectations and assumptions and are, by their nature, inherently uncertain and outside the Company's control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section of our annual report on form 20-F, which we filed on September 16, 2010 and which you can access via our web site or via the SECs. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. For reconciliations of the non-US GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with US GAAP, you should refer to the earnings release that we issued this morning, which is also available via our web site at www.globalshiplease.com.

I would like to start today by reviewing the fourth quarter and 2010 highlights. I'll then discuss our fleet and charter portfolio and make a few comments on the industry overall before turning the call over to Susan. To comment on our financials. After our prepared remarks, we'll open the call up for questions.

Turning to slide 3, this shows the Company's fourth quarter and full year 2010 highlights. The year was a year of significant progress for the Company. At first, we achieved utilization of almost 100% enabling the Company to post record revenue. And second, we've enhanced our financial flexibility which -- both of which we'll discuss later on the call. During the fourth quarter and the full year, our 17 vessel fleet continued to operate on long-term fixed rate time charter contracts. With only one day of off-time during the fourth quarter, we generated revenue of $40 million, a slight increase on revenue of $39.9 million for the equivalent period in 2009. For the full year, 2010, we reported record revenue, $158.8 million versus $148.7 million for 2007, which -- sorry, 2009, which represents a 7% increase. The increase in our revenue is primarily attributable to our high utilization through the year with only three days of off-hire in total, there were no dry dockings, and the effect of the addition of our 17th vessel, the CMA CGM Berlioz in August of 2009.

For the fourth quarter, we reported EBITDA of $26.4 million and for the full year, $108.9 million of EBITDA. After paying interest, and approximately $13.6 million relating to the conversion of the purchase obligations on the German ships into options, we paid down $55 million of bank debt. Normalized net earnings were $6.6 million for the quarter and this excludes $11.7 million of non-cash interest rate derivative mark to market gain and the $17.1 million impairment charge relating to the German ships. This compares with normalized net income in the prior period fourth quarter 2009 of $7.3 million which also excludes the non-cash mark to market gain of $5.1 million. On a GAAP basis, net income for the 3 months ended December 31, 2010, was $1.2 million compared to $12.3 million in the prior period.

In the full year, our normalized net earnings were $28.4 million, excluding $15.3 million of non-cash at mark to market losses and the $17.1 million impairment charge. This compares to normalized net earnings of $26.6 million for 2009, excluding mark to market gain of $17.9 million and $2.2 million of accelerated write-offs of deferred financing costs. Due to the non-cash $15.3 million mark to market loss and the $17.1 million impairment charge, we reported a GAAP net loss for 2010 of $4 million compared to net income on a GAAP basis of $42.4 million in the previous year which also benefited from $17.9 million of mark to market gain.

During the fourth quarter, as throughout the entire year, we continue to focus on controlling our operating costs whilst maintaining our vessels operating efficiency, which is critical to our customer. The fourth quarter marks the tenth consecutive quarter that we maintained vessel operating expenses under the cap which is set out in our ship management through obligations that we had to acquire two 4,250 TEU vessels in December 2010 from German interests into purchase options.We successfully negotiated to have the right but not the obligation to purchase these vessels a year later; one in December 2011 and the other in January 2012, for a further and final payment of $61.25 million per vessel. Thus, we have eliminated our capital overhang whilst retaining the option on a growth pipeline with an attractive return metrics in a vessel segment, the Panamax segment, which is underbuilt, and is currently seeing high demand. As I mentioned, we also paid down $55.4 million of bank debt during the year leaving our debt balance at the end of the year at $532.8 million.

Slide 4, which should be familiar to you, shows our 17 modern container ships and their charter durations. They have an average age of less than 7 years on a TEU weighted basis, out of an economic life of 30 years. The vessels are all on long-term fixed rate time charter contracts which gives contracted revenue, after an allowance of 3 days or 5 days a year, of approximately $155 million each year. With an average remaining term of over 5 years left on our time charters, our fleet represents a total contracted revenue stream of approximately $1.4 billion.

As we said before, the first charter renewals aren't until the end of next year, December 2012, and for only two of our ships. They're after 2016 where we see them as -- the next renewals. With strengthening industry fundamentals which we'll discuss later, charter rates in the short and medium term market have improved substantially over the last five quarters and we currently estimate that market rates for Panamax tonnage, the sorts of vessels that are renewing at the end of next year, are at or even slightly above our contracted rates. Additionally, the two 4,250 TEU vessels under auction currently are on fixed rate time charters at $28,000 a day, generating $20 million of revenue a year between the two of them, and EBITDA of around $15 million. At the time of our option to purchase these vessels, they will each have 6 years remaining on the time charters.

Now, to comment on CMA CGM, our customer largest shareholder and the third largest container shipping company in the world. In the fall of 2009, CMA CGM announced that it was exploring a financial restructuring with its lenders and that out triggered by the outrageous trading conditions that the entire industry was experiencing combined -- experiencing, combined with the banking crisis. In November 2010, CMA CGM announced that final agreement had been reached with the Yildirim Group in Turkey for that group to invest $500 million of fresh capital in CMA CGM. The receipt of this investment, which strengthens its balance sheet and secures its investment plans, was announced by CMA CGM at the end of January this year. Along with its capital raise, CMA CGM have recently reported a future improvement in its operating results. On March 1, 2011, they announced revenue for 2010 of $14.3 billion, up 36% from 2009. Including a 15% increase in volumes and improved freight rates. EBITDA for 2010 was $2.5 billion compared to an EBITDA loss of $667 million in the prior year.

Consistent with my comments in the third quarter and previously, charter hire is being paid regularly. Currently, we have one period of charter hire outstanding from March 1, 2011 amounting to approximately $6.4 million and we expect to receive this shortly. On the next two slides, I would like to review the current fundamentals of the container shipping industry.

Slide 5 shows supply and demand fundamentals from 2000, this is growth in supply, container ship supply, and growth in demand together with world GDP growth and overlaid an index of the time charter market. Not surprisingly, you can see that charter rates improve when supply is tight compared to demand as in the period 2001 to 2005. Charter rates fell back from peak 2005 levels as the large order book was delivered, reaching a floor in 2009 due to the financial and global economic crisis causing demand to contract by 9% and despite aggressive management of the order book such that nominal supply growth was only 5%. The line accompanist lost billions of dollars in this period and banks were no longer lending as they once were.

Charter rates firmed in 2010 as the industry showed a very strong recovery, somewhat unexpectedly with 12% demand growth and supply growth again, this is nominal so this data excludes the effect of slow steaming and also excludes the effect of idle capacity. Supply growth was lower than demand growth at only 8% due to the continuing effects of active management of the order book, and with almost no new orders having been placed in the previous 2 years. This dynamic provided excellent operating conditions for the line of companies which, based on results released to date, including those from CMA CGM, have returned to substantial profitability.

As time charter rates have improved, so, too, have asset values. Looking to the future, our forecast of demand growth for this year, 2011 and next year, 2012, are encouraging at around 9% to 10%, and importantly, as in 2010, a supply growth is expected to be lower than demand growth at 6% or 7% due to the significant contraction of the order book which we show on slide 6. With the new builds that have been delivered, some order cancellations and very little replacement ordering, the order book now stands at around 28% of standing capacity compared to a peak of 60% at the end of 2008. This slide also shows estimates of idle capacity which peaked at 12% on a volume basis at the end of 2009 and is now less than 2%. So, based on this evidence, conditions look very favorable for our customers, the line of companies, particularly when you incorporate the effects of slow steaming which also absorbs capacity. Incidentally, we cannot see that slow steaming will go away any time soon due to spiraling bunker prices further improving the cost efficiencies of slow steaming combined with the environmental benefits.

All of that said, as a note of caution, we did see what I described last time as perhaps normal seasonal weakening in Q4 continuing into Q1 2011 when freight rates, charter rates and asset softened a little. Therefore, the next couple of months after the return to production in Asia, particularly following the Chinese new year, will be key. Further, credit remains tight and some charter owners remain under pressure. A few banks have entered new financing, but generally accessing new debt continues to be challenging. The German KG market, which has historically been the largest source of external investment capital for the container sector, has barely survived given the recent financial turmoil, but it has survived. It is difficult to see that the German KGs will be a significant provider of new capital in the near term. And consequently, we would like to think that this provides opportunities for companies like Global Ship Lease, which have access to public capital markets, be they debt or equity, to capitalize on opportunities.

Against the backdrop of attractive asset prices, substantially improved counter-party risk, the recent strength of the US Capital Markets and the success we've had in eliminating our contractual commitments, we're committed to seeking opportunities to capitalize on what we see as currently strong industry fundamentals. At the same time, we remain focused on preserving the Company's financial strength over the medium to long-term.

Before turning the call over to Susan, I will briefly discuss our next loan to value test, which is scheduled for April 30, 2011. Under the terms of our credit facility amendment, loan to value needs to be at or below 75% for the Company to be able to resume the payment of a dividend. The process is that we're required to obtain formal evaluations on a charter free basis of our fleet from two approved brokers during the month of April 2011, and then that valuation in aggregate is compared to our bank debt as of the end of the month, April 30, 2011, to determine our loan to value ratio. Although asset values have undoubtedly firmed considerably over the last five quarters and the upward trend continues, at this point, we cannot be certain that we will be below the 75% threshold at the end of April 2011.

Whilst there's little that we can do about the market value of our fleet, you will have seen that we recently filed a shelf registration document which facilitates our access to a wide range of instruments in the Capital Markets. We're committed to taking appropriate steps for the benefit of all shareholders to make sure that loan to value is not a continuing issue and that we're able to return to growth, and to return to the ability to pay dividends. And on that subject, without preempting any decision the Board may make on future dividends, we understand the importance to shareholders of receiving income on their investments as well as capital appreciation. Once we're in a position to reinstate dividends, we'll provide with you more specifics about our future dividend policy.

I would now like to turn the call over to Susan.

Thank you, Ian.

Turning to slide 9, we present our financial results which relate to our time charter business only. For the quarter ended December 31, 2010, we achieved revenue of $40 million, up slightly from $39.9 million in the comparable period of 2009, owing to 16 days off-hire in the fourth quarter of 2009, for a planned dry docking. We've recorded revenue for the full year 2010 of $158.8 million, an increase of 7% on $148.7 million from the comparative period of 2009. The full year increase reflects revenue from CMA CGM Berlioz, the 17th vessel in the Company's fleet. This was purchased in August 2009, and high utilization rates from lower off-hire. During the fourth quarter of 2010, there were 1564 ownership days, which is the same as the comparable period of 2009. With only 1 unplanned off-hire day, we attained utilization of nearly 100% for the quarter. This compared to 16 planned off-hire days in the fourth quarter of 2009, representing utilization of 99%.

Ownership days for the full year were 6,205 in 2010 compared to 5,968 in 2009, an increase of 4%. During the period, we had just 3 off-hire days compared to 74 in the same period last year, of which 32 were planned off-hire days for dry docking. Full year period benefited from the additional vessel in the fleet.

Vessel operating expenses which include cost of crew, lubricating oil, spares, and insurance were $11.4 million for the 3 months ended December 31, 2010. The average cost per ownership day was $7,278 in the fourth quarter 2010 compared to $6,992 per day for the third quarter 2010, up $286 or 4%, due mainly to catch up with purchasing stores and supplies. For the year ended December 31, 2010, vessel operating expenses were $42.1 million, or an average cost of vessel per day of $6,780, compared to a total of $41.4 million, or an average of $6,932 in the previous year. Average cost in 2010 was 2% down on 2009 mainly due to lower lubricating oil consumption following the installation of electronically timed cylinder lubrication oil injection systems on 8 vessels. It is important to note that vessel operating expenses remain lower than the capped amounts specified in Global Ship Lease's ship management agreement.

Depreciation for the 3 months ended December 31, 2010, was $10.1 million. The same as the comparable period of 2009. For full year 2010, depreciation was $40.1 million versus $37.3 million in the same period of 2009. The full year includes the effect of the purchase of CMA CGM Berlioz in August of 2009.

We incurred general and administrative costs in the fourth quarter of $2.4 million which includes $0.1 million non-cash charge for stock based incentives compared to $2.2 million for the comparable period of 2009, which includes $0.4 million non-cash charge for stock base incentive. General and administrative costs for the 12 months ended December 31, 2010, were $8.3 million, which includes a $1 million non-cash charge for stock based incentives. This compares to $8.7 million for 2009, which included $2.5 million non-cash charge for stock based incentives.

Interest expense, excluding the effect of interest rate derivatives, which do not qualify for hedge accounting, for the 3 months ended December 31, 2010, was $6 million. Based on the Company's borrowings under the credit facility, this averaged $547.6 million during the third quarter and were $532.8 million as of December 31, 2010. Additionally, there were $48 million of preferred shares during the period, giving total average borrowings of $595.6 million. This compares with interest expense of $6.1 million in the fourth quarter of 2009. Average borrowings, including the preferred shares, were $641.8 million for the fourth quarter 2009. The 12 months ended December 31, 2010, interest expense, excluding the effect of interest rate derivatives, was $23.8 million. The Company's borrowings under its credit facility together with the preferred share averaged $615.7 million during the year.

Interest expense was $24.2 million in 2009, including $2.2 million for a non-recurring, accelerated write-off of deferred financing fees, and (inaudible) was based on average borrowings including preferred shares of $608.7 million in the period. Interest income for the fourth quarter of 2010 was not material. But the year ended December 31, 2010, interest income was $0.2 million, compared to $0.5 million in the fourth quarter of 2009.

The Company hedges its interest rate exposure by entering into derivatives that swap floating rate debt for fixed rate debt to provide long-term stability and predictability to cash flows. These hedges do not qualify for hedge accounting under US GAAP. The outstanding hedges are mark to market of each period end, with any change in the fair value being booked to the income and expenditure account. The Company's derivative hedging instruments gave a $7.4 million gain in the 3 months ended December 31, 2010, reflecting primarily movements in the forward curve for interest rates. Of this amount, $4.3 million was a realized loss for settlements of swaps in the period, and $11.7 million was an unrealized gain for revaluation of the balance sheet position. This compares to a $0.7 million gain in the 3 months ended December 31, 2009, of which $4.4 million was a realized loss and $5.1 million an unrealized gain. For the year ended December 31, 2010, the total loss from derivatives hedging instruments was $32 million, of which $16.7 million was realized and $15.3 million unrealized. Compared to a total gain in 2009 of $4.8 million, of which $13.1 million was a realized loss and $17.9 million an unrealized gain. As of December 31, 2010, the total mark to market unrealized loss recognized as a liability on the balance sheet was $44.4 million.

Net income for the 3 months ended December 31, 2010, was $1.2 million. Including an $11.7 million non-cash interest rate derivative mark to market gain, and a $17.1 million impairment charge recognized in connection with the termination of the Company's purchase obligations of two 4,250 TEU vessels. For the 3 months ended December 31, 2009, net income was $12.3 million, including $5.1 million non-cash interest rate derivative mark to market gain. For the year ended December 31, 2010, the net loss was $4 million, including a $15.3 million non-cash interest rate derivative mark to market loss and $17.1 million impairment charge. For the year ended December 31, 2009, net income was $42.4 million including a $17.9 million non-cash interest rate derivative mark to market gain, and $2.2 million of accelerated write-off of deferred financing fees.

Normalized net income was $6.6 million for the 3 months ended December 31, 2010, and $7.3 million for the 3 months ended December 31, 2009. For the full year, normalized net income was $28.4 million for the -- for 2010 and $26.6 million for 2009. We believe that normalized net earnings is a useful measure with which to assess the Company's financial performance as it just for the effects of non-cash and other items. In the fourth quarter of 2010, we generated EBITDA before the impairment charge of $17.1 million of $26.4 million versus $27.9 million in the 2009 period. We generated EBITDA of $108.9 million in the 12 months ended December 31, 2010. Which compares to $99 million in the same period in 2010. Given the amendments to our credit facility, no common dividends can be declared or paid until loan to value forwards to 75% or below. Once the Company is able to resume its ability to pay dividends to its shareholders, the Board of Directors will review its policy.

Slide 10 shows the balance sheet. Key items as of December 31, 2010, include cash at $28.4 million. Total assets of $981 million, of which $922.5 million is vessels in operation. The current portion of long-term debt is $44.5 million, and shareholders equity of $324.6 million. The balance sheet position of our interest rate swaps was a liability of $44.4 million.

I would now like to hand over to the Operator who will explain the Q&A process.

Certainly, thank you.

(Operator Instructions).

And, we'll now move to our first question today from John [Reese] of DRZed. Please go ahead.

Ian, Susan, thanks very much for your time. I wanted to talk a little bit about fuel prices. I know it is a pass-through for you guys other than lubricating oil. Is that the same for the industry? And, then can you comment on the further effects of slow steaming that you see ahead? Or, how much more of the world's fleet that we'll get of slow steaming?

Yes, hi, John. Fuel isn't even a pass-through for us. It doesn't touch us at all. The charter, under all time charter contracts is responsible for sourcing bunker fuel and for paying the suppliers directly. So, it doesn't go through our books at all. And, we have no responsibility for those costs other than, as you say, we are impacted by oil prices as a result of changes in the cost of lubricating oil which, as owner, we, we're obliged to apply.

And, we've all seen what's happened to oil prices recently given the problems in north Africa and that's rolled into bunker prices which, I don't have today's data, but at last week, we're above $600 a ton which is massive and is a huge cost for the line of companies both for, obviously, chartered vessels and their own fleet. And, that further reinforces, as I said, the economics of slow steaming which also have the effect of constraining supply because more ships are required to maintain a service interval. And, there are also green credentials with slow steaming because they're throwing out less pollutants. So, we feel that slow steaming is here to stay as a, more or less, a permanent feature of the container sector. What was your other question?

I was going to ask you, just one follow-up on that, Ian. Would you have any idea on the slow steaming, what it costs to ship goods, the delta, a difference between what it costs to ship goods on container versus say air, especially with fuel prices rising as they have been? This, I take it the advantage is widening even further, but do you have any idea, like, of spread on that?

No, I don't, I'm afraid. In my previous life, when I was CFO of a liner company, I could answer that question. But, I tell you -- that's five, six, seven years ago.

Yes. Okay.

The practicality is that there's very little stuff that can be shifted from sea transportation to air transportation. It tends to be smaller high value items and the bulk of world trade will continue to travel by sea.

Okay. With regard to the impairment charge, I take that, that is the difference between what the vessel -- the options on the two vessels that you have right now, purchase option relative and the value of that vessel as of December 31, 2010 versus, versus -- you know, what you had originally agreed to pay for it?Is that correct?

Yes, in terms of accounting, it is really a two-step process. And, the impairment charge recognizes the termination of the Company's obligations under the purchase contracts.

Okay.

And, it's the -- it will affect the release of the vessel deposit.

[Inaudible].

It is a fair value adjustment, if you want, as of th date of the purchase -- the conversion from the obligation to an option. So, that was early November last year.

Okay, now, if you elect to not purchase these vessels, would there be any other impairment charges going forward?

The amount that we're carrying in the balance sheet as the intangible asset would be impaired, as well, if we don't exercise purchase obligation.

So, it would have to be written off.

[Inaudible] that amount? And, what was that amount?

$13.6 million.

$13.6 million? Okay. And, then, the last -- on the shelf, you know, I saw C-SPAN did a preferred. Is that, are you -- I know you want to benefit all shareholders and, hopefully, especially the common shareholders who have been through a long ride here. But, do you think the -- what metrics would you be looking at? Would earnings dilution be one of them? Or, and then, of course, obviously, you've got a very low interest rate. I take it that part of the reason you would do this, this shelf, would be to reduce your bank exposure in some way and then possibly other reasonably to purchase of other vessels. But, would you see the -- would you be using a interest rate, probably, that's going to be a lot higher than what you got on your bank debts. Is that the conundrum?

Well, it is a bit of a conundrum. But, we look at all of the options. The capital markets in the US are very open at the moment. But, there are also, as you know, different ways of accessing capital. And, we -- as I'm sure you understand, we can't speculate on when or indeed whether we're going to raise capital and then what for. But, as I said in our prepared remarks, we're -- we are very focused on dealing with loan to value and unlocking the ability to pay a dividend and returning to growth.

So, that's great. That was my last question. Obviously, you do a deal that would comfortably put you under the loan to value which would allow you to pay a dividend which should be very positive for the common shareholders?That was a question.

Yes. That is an observation. I can't really comment.

All right. Thank you. I appreciate it. I'm all done.

Okay, thanks.

Thank you. I move to our next question now from Doug Garber from FBR Capital Markets. Please go ahead.

Good afternoon, guys.

Hello.

Hello.

How are you?

Hi. My first question is on fleet growth, assuming you guys get some more capital to grow the fleet and what you think is more attractive. Do you view secondhand vessels, or new builds as more attractive? And, for new build prices, are you expecting them to increase in value due to steel and labor inflation, or are you expecting new build prices to come down due to excess ship building capacity as other vessels, tankers, and bulkers, those orders decrease?

Yes, it is a good question. Thank you. Firstly, our preference would be for existing tonnage, if we were buying vessels. Because that immediately puts our capital to work and brings earnings in to the Company. We prefer not to wait for a couple of years to act cash flow and bear the financing risk for those two years as well. That said, we would assume the responsibility of looking at new buildings. In terms of new building prices, as a vessel owner, we would expect new building prices to come down as generally as ship guards run out of an order book, over the next two to three years.

Okay. Thank you. And, my other question is on diversification of the customer base. If, in fact, you do grow the fleet, should we expect it to be with your existing two counter-parties, or do you have other ones that you're talking to right now?

There are dozens of container ship operators. We wouldn't look at all of them because we're very well aware of credit risks. But, without being too precise about it, anybody in the top 20 is certainly worth a good look at. We're well aware of the value of diversifying our customer base to reduce counter-party risk and, like for like, we would prefer new customers rather than to add more revenue from existing customers. That said, every transaction that we look at is different and we assess it on its merits.

Okay. And, my last question is on acquisitions. Are you guys currently doing due diligence on any vessel acquisitions? Have you looked at them on paper? Have you visited them, or what can you say about that process at this time?

We keep a very firm eye on the market. We're frequently in contact with brokers to understand their perspective. And, we keep close to what's happening. But, I couldn't possibly comment on anything that we're -- that we may or may not be looking at.

Okay. Thank you, guys, for your time.

Thank you.

We'll now move to our next question from Michael Demaray from Elevated Capital. Please go ahead.

Hi, Ian and Susan.

Hello.

One quick question for you. One of your peers said that they're seeing 20% levered returns on -- for owners who have capital to put to work today with long-term charters. Are -- is that reflect what you're seeing in the market as well?

Well, good luck to them if they can get that. That sounds [Indiscernible]. Without knowing the specifics, I can't really comment.

Okay.

That sounds very high.

Okay. So, the original low double digit returns that you guys are speaking about, the hurdle hasn't changed and you don't -- do you see -- I would imagine you said that the market of capital constrained and that should be advantageous. I would imagine that we would at least see a few hundred basis points higher than that, for any new deal, if you were -- ?

We, we would hope so. It is very difficult to tell because there aren't, there aren't that many new long-term charter transactions being, being advertised if you want to put it that way. There have been a number of sale and lease-back transactions with the lease-back period being relatively short. And, as far as we can tell, the returns embedded in those transactions are consistent with those low double digit returns you refer to and that we've always held up as a metric for ourselves.

Okay. And, I guess -- I've heard a lot of your peers say that they believe the charter market is -- and no one, of course, can predict this, but is headed higher from here and so that's why they're taking the shorter term charters. Would you -- from your view of the supply and demand graph that you've laid out for us, is that -- would you think that's consistent?

Yes. Yes, we believe that the pressure is upward on charter rates in the short, medium term market. Particularly for Panamax vessels, and, and by extension, the pressure on asset values is also positive which is good to see. And, you're right, in those circumstances, owners will only fix for short periods because they're hoping to refix at higher prices later. And, operators, the line of companies are keen to fix for longer periods to lock in to cheaper charter rates and avoid having to renew at higher costs later on. So, it's a balance in the tension between the two.

And, I get one more question that occurred to me while we were speaking. Where have operating costs gone? I know that we're operating below the cap now. But, those, those agreements have to roll at some point. Would you -- do you see that the operating agreements will stay pretty much about the same, or do you think that they're below market currently?

No, they're not below market. They are market. We simply reimburse our ship manager with actual costs that they incur on our behalf.And, those costs are, by definition, market costs. There's nothing artificial about the pricing between us and our ship manager. The huge benefit that we've got is that some -- if there's excessive cost inflation, then all of the ship manager is hugely inefficient, which they are not, then there's an overall cap on our costs under the cap agreements.

Okay.

Over the last couple of years, our costs have trended down. Partly, as Susan said, because of the benefits of, we have very sophisticated equipment that controls the amount of lubricating oil that the vessels consume. Plus, generally, after a couple of years of depressed industry conditions, supplies of components, spares, maintenance and crew, actually, there has been little cost inflation there although we've seen it more -- some returning recently as trading conditions improve.

Okay. Maybe I should ask this differently. When you renew those agreements, would you expect there to be a cap in those agreements as well? And, if so, do you see the cap staying where it currently is, moving down, or going up?

Well, we, we wouldn't comment on any commercial discussions we might be having with any supplier.

Okay. All right. Thank you very much.

Thank you. And, we move to our next question now from Adam Kinzer from Sunrise Securities. Please go ahead, sir.

Hi. What is your target debt to equity mix that you're looking for as a Company?

60/40.

60/40?

Yes.

All right, and -- .

On a long-term basis. We would, we would overlever if the circumstances were right at the time.

What are you doing about credit rating agencies for the future, possibly for debt issuance?

We know that if we're going to hit the high yield markets, we need a credit rating.

Are you talking to them currently?

I can't comment on that.

All right. Thank you.

Thank you.

(Operator Instructions).

We'll now move to our next question from Nathan [LeFoone] from Harbor Capital. Please go ahead.

Morning, Ian, Susan.

Hello, Nathan. How are you?

Morning.

Thank you for taking my questions. Just -- I have a couple of quick, larger picture questions. I don't know if other people see them as relevant, but the Maersk acquisition of their stated intention of acquiring those enormous 18K TEU ships, do you see that as any kind of -- I don't know, game changer, or anything like that in the container world where there's some kind of -- I don't know, positive effect maybe that dribbles down to people who operate more on the Panamax class? Or, did that -- does that purchase register with you guys at all?

Well, it certainly registers. It's spectacular. And, the industry has, ever since it emerged in the 1950s and 1960s, just every year or every five years, entered into building larger and larger container ships. Ten years ago, I'm guessing a bit, but the biggest container ships might have only been about 6,000 or 7,000 or 8,000 TEU and nobody could contemplate a 13,000 TEU vessel let alone 18,000, which is nominally what these are supposed to be. So, is it a game changer? Well, time will tell, but I really see it as evolutionary rather than revolutionary.

How many -- .

[Inaudible] cost efficiencies.

I'm sorry. How many -- .

They're huge.

Are there very many ports who can actually handle a vessel that size right now?

I wouldn't know, I'm afraid. But, they'll certainly be limited to the main trades.

Yes.

Asia, Europe, until a lesserate, well, probably Asia, Europe.

Okay. Finally, just a broad stroke question. We were formed, you were formed really as a drop down vehicle, as I understand it, for -- to compensate for changes in accounting rules and to make the acquisition of the vessels easier for the liner companies. Do you feel that, that concept, as we've come out of this traumatic period, do you still see that concept as valid and maybe even more so valid today than say in calls we might have had in the fall of 2008?

Yes. We were actually created by CMA CGM, as you say, as a drop-down vehicle, but, but less driven by accounting and more driven by their desire to monetize some of their fleet so that they could reinvest proceeds in modern tonnage which is, again, simply what the industry does. It moves older tonnage off its balance sheets and to create space for new tonnage. As to the future, I think it looks very positive for independent vessel owners. Who have diverse sorts of capital. We know that the industry -- and it is not just the container sector. It is also, you've got bulkers and tankers, and all the rest. It's capital restrained. Bank debt is very difficult to get hold of. As I said earlier in the prepared remarks, the German KG market, which is [Inaudible] perhaps the largest source of investment capital for container ships is moribund right now, and it may come back, but it's not going to come back any time soon. And, these assets, these vessels, still need to be financed which is the key thing. It's more about financing ability than, than accounting. And, liner companies will want to diversify their sources of financing and that would include looking to vessel owners such as ourselves to provide tonnage on a long-term lease basis. So, we're optimistic about the future.

Thank you. I appreciate it. And, we're happy campers up here. Nice job, you guys.

Good. Thanks very much.

Thank you. There are no further questions at this time, I'd like to turn the call back over to you, Mr. Webber, for any additional or closing remarks. Thank you.

Thank you. Thanks, everybody for listening. We look forward to talking to you about Q1 in due course. Thanks very much.

Thank you, sir. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.