Chances are good that if you go to your closet and check the country-of-origin tag on your clothes, most will be foreign. Likewise, most of your electronics probably arrived from overseas. Foreign products need cost-effective ways to get to their final destination, and container ship providers are the means to this end.
Container ship companies have one purpose: purchase vessels and lease them out. Shipping in general came to a near collapse in 2009, but most have rebounded significantly off their lows as consumers have modestly picked up their spending habits. One company has seen more than its fair share of a rebound. Global Ship Lease
Things at Global Ship Lease aren't a total disaster. It owns 17 vessels, all leased out for the long term with contracts ranging from two to 15 years and another two vessels currently being financed. With these contracts in place, Global Ship can focus on growing its fleet since it theoretically has a fixed stream of cash flow. The bigger the fleet it can purchase, the lower its costs, which could give it a pricing advantage over competitors. However, this idealistic view has translated into a less than an ideal situation.
Global Ship reported 100% ship utilization rates last quarter and still managed to lose money while its derivative hedging instruments, which it uses to hedge its interest rate exposure, have cost the company $39 million in realized and unrealized losses so far in fiscal 2010. Top this off with the company having to tip-toe around a September debt payment because it didn't have the proper financing in place to purchase two new vessels, and you can see why I'm not convinced Global Ship is a winner. It has more than $600 million in debt and there's no guarantee it will be able to meet those obligations looking forward.
What's more precarious is all 17 ships serve one customer, CMA CGM, a private French shipping company. Although little information is publicly available on CMA CGM, it needed a $500 million cash infusion from a Turkish company just to stay afloat in November and is currently reworking $5 billion in debt. How secure is Global Ship's cash flow if CMA CGM goes bankrupt?
I admit to not being a huge fan of the shipping sector to start with, but with Diana Shipping
Do you disagree with my assessment or have an opinion on any of the companies mentioned above? Let's hear about it in the comments section below!
Fool contributor Sean Williams does not own shares in any companies mentioned in this article. His heart would indeed go on if Global Ship Lease went under. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool Options has recommended a write covered strangle position on Seaspan. The Fool owns shares of Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which is waterproof.