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Related Issuers
Rating Action:

Moody's assigns B2 CFR to Danaos; positive outlook

28 Jan 2021

Stockholm, January 28, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and a B2-PD profitability of default rating (PDR) to Danaos Corporation ("Danaos"). Concurrently, Moody's has also assigned a Caa1 rating to the proposed USD300 million senior unsecured notes to be issued by Danaos. The outlook on Danaos is positive.

RATINGS RATIONALE

RATIONALE FOR CFR

Danaos' B2 CFR is primarily constrained by (1) its fairly small size in a broader context of the shipping industry and the limited product diversification; (2) its exposure to a fairly fragmented and a highly competitive market for containership charter-owners, that is inherently cyclical and volatile; (3) a very high concentration in terms of customers -- the large liner companies, such as CMA CGM S.A. (B2, positive), its largest customer -- some of which have a relatively low credit quality and have experienced financial difficulties in the past; (4) a rechartering risk, albeit partially mitigated by a staggered lease maturity profile; and (5) an absence of a track record of the company sustainably operating with a capital structure and leverage, which Moody's would deem as commensurate with a higher rating, such as Moody's adjusted gross debt/EBITDA below 4.5x (4.9x for 12 months that ended September 2020), following a debt refinancing in 2018 driven by a breach of covenants.

Conversely, Danaos' B2 CFR is primarily supported by its (1) established position as one of the world's largest containership charter-owners, with a track record of good profitability slightly above its main competitors; (2) strategy to lease a significant part of its fleet under longer-term fixed-priced contracts, providing a good visibility to the company's revenues and EBITDA generation for the next 12-18 months; (3) track record of positive free cash flow (FCF) generation enabled by the good profitability and the discipline in capital spending; and (4) deleveraging potential, as majority of Danaos' FCF generation will be used for scheduled debt amortization. In addition, there is a potential to unlock value from various financial assets the company owns, including a roughly 10% stake in the carrier ZIM that is currently undergoing an IPO process.

Moody's views Danaos' liquidity as adequate, supported by the company's ability to generate positive FCF in excess of the scheduled amortization payments. The company will not have any revolving facility in place and there will be maintenance covenants, including a minimum cash and loan to value covenants, under which the agency expects Danaos to maintain ample capacity in the next 12-18 months.

RATIONALE FOR OUTLOOK

Danaos' ratings are currently strongly positioned, as expressed by the positive outlook on the company. This outlook reflects an increasing likelihood that the company will be able to operate with credit metrics commensurate with a B1 rating. However, such a track record still needs to be established, in particular with the regards to the maintenance of the financial discipline and sustained deleveraging.

The positive outlook is also supported by the agency's expectation that the market environment will remain benign over the next 12-18 months, considering a fairly low order book in the industry. However, in medium term Moody's expects the charter rates to remain volatile, depending also on the industry's discipline to keep the supply under control even if the demand remains robust.

RATIONALE FOR PDR AND INSTRUMENT RATING

The company's PDR of B2-PD, in line with the CFR, reflects the agency's standard assumption of 50% family recovery, as is customary for the structures with the combination of bond and bank financing. The Caa1 rating of the bond, two notches below the CFR, reflects its ranking behind a sizeable amount of financing secured by vessels and vessel-owning subsidiaries. The bond is senior unsecured and there is currently essentially no unencumbered fixed assets.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

The shipping sector is affected by the International Maritime Organization (IMO) regulation and the B2 CFR recognizes that Danaos has complied with the low-sulfur fuel regulations around IMO 2020 and already met IMO 2030 carbon intensity targets. The agency's ratings also reflect the company's solid performance amid the coronavirus pandemic, which Moody's view as a social risk. While Danaos is publicly listed, the agency notes that the manager of its fleet, Danaos Shipping, is a related party, albeit with a relationship on arm's length basis; a concept not uncommon in the industry. Moody's also notes a key man risk with regards to Danaos' CEO, Dr. John Coustas. If Dr. Coustas ceases to serve as CEO and a director of Danaos, lenders could require Danaos to repay the debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure could arise if Danaos built a track record of its Moody's adjusted debt/EBITDA sustainably well below 4.5x and its Moody's adjusted (funds from operations + interest)/interest sustainably well above 3x. The positive pressure could also arise if FCF remained visibly positive, the rechartering risks remained limited and the maturity profile manageable, with a maintenance of adequate liquidity. The agency is unlikely to upgrade Danaos before the current refinancing, which besides the senior unsecured bond also includes a sizeable senior secured facility, is fully concluded. The B2 CFR assumes that the facility agreement will be signed within six months after the bond issuance.

Conversely, the negative pressure could develop if the company's Moody's adjusted (funds from operations + interest)/interest falls below 2.5x, debt/EBITDA exceeds 5.5x or FCF weakens on a sustained basis. Downward pressure on the ratings could also result if Danaos experienced strained liquidity and difficulties in terms of the rechartering of vessels when contracts expire.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Shipping Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243200. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Incorporated in Marshall Islands and with an operational headquarters in Piraeus, Greece, Danaos is one of the world's largest containership charter-owners, with a fleet of 60 containerships and an aggregated capacity of roughly 370 thousand twenty-foot equivalent units (excluding its share in the Gemini Shipholdings Corporation joint venture, in which Danaos holds 49% share). Danaos is listed on the New York Stock Exchange and its largest shareholder is Coustas Family Trust with a share close to 40%. The company generated around USD450 million of revenues for 12 months that ended September 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniel Harlid
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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