Danaos Corp’s dramatic debt reduction over past quarters has not gone unnoticed by finance industry professionals, with S&P Global Ratings (S&P) raising the company’s credit rating.
The global rating agency said in a statement on Friday it decided to lift the US-listed container ship owner’s rating by one notch to ‘BB+’ from ‘BB’.
That is just one scale shy of investment grade-rated securities in the S&P ratings universe.
John Coustas-led Danaos “has continued to reduce debt with excess cash flows, while maintaining a solid contracted revenue backlog,” the ratings agency said in a note published on 9 June.
“This will help to partly protect earnings from a sharp decline ... despite the significant drop in industry charter rates in late 2022,” S&P analyst Varvara Nikanorava wrote in the report.
TradeWinds has already reported how Danaos, a company hauled back from the brink of bankruptcy under a $2.2bn debt mountain in 2018, expects to have no net debt at all this year.
The owner of 68 boxships got into this enviable position after accumulating $1.6bn in net profit over the past two years and continuing to post nine-digit profit figures this year.
Soaring profitability was the result of supply chain woes in the wake of the pandemic and of the company’s stake in Israeli operator Zim.
In its report on Friday, S&P acknowledged that the container ship market had deteriorated since the pandemic, but not to an extent that would undermine Danaos or other tonnage providers.
“The correction in charter rates has been faster and steeper than we expected, but we still think average time charter rates will remain profitable,” Nikanorava said.
“We believe container liners (Danaos’ customers) will implement capacity-containing measures and manage excess supply with tested tools such as blank sailings, slow steaming, rerouting, swift capacity reallocation, and perhaps potential deferral of new vessel deliveries,” she explained.
One factor playing particularly into Danaos’ hands, S&P said, is the long-term, non-cancellable nature of the charter contracts the company managed to lock in during the market boom.
The rating agency, therefore, expects Danaos to post up to $705m of Ebitda this year, not far below a record posted in 2022.
The Danaos debt reduction went ahead even quicker than S&P expected, as the company also chose to keep discretionary spending, such as shareholder remuneration, at “modest” levels.
“We ... view Danaos’ prudent liquidity management as critical to the ‘BB+'’ rating,” the rating agency said, citing the Piraeus-based company’s $360m cash pile as of the end of March and a further $383m in untapped credit.
S&P’s credit rating effectively applies to $263m of outstanding unsecured Danaos debt notes that are due to expire in 2028.
