KBRA Upgrades Global Ship Lease's Issuer Rating to BB+ and Affirms Senior Secured Debt Facility Rating at BBB; Outlook Stable

KBRA upgrades the issuer rating to BB+ (from BB) of Global Ship Lease, Inc. (NYSE: GSL, or the “Company”), a containership lessor with administrative offices in Athens, Greece. KBRA also affirms the BBB rating of the senior secured debt facility issued by Knausen Holding LLC, a wholly owned subsidiary of GSL. The Outlook of the ratings is Stable.

Key Credit Considerations

The primary driver of the issuer rating upgrade is GSL’s continued deleveraging and its focus on maintaining a low leverage strategy; GSL has made significant progress in reducing its debt-to-equity ratio from 2.2x at year end-2019, to 0.6x as of March 31, 2024 (1Q24), and its debt-to-EBITDA ratio decreased from 5.8x at year end-2019 to 1.7x (on an LTM 1Q24 basis). KBRA understands that GSL expects to maintain leverage below 2x on a debt-to-EBITDA basis. In addition, the issuer rating upgrade reflects the Company’s strong historical performance and resilience during recent industry disruptions. The Company has demonstrated a strong earnings and cash flow profile through market cycles supported by a solid level of contracted revenue, high utilization rates and a conservative growth strategy with limited capex commitments. As of 1Q24, GSL has nearly $1.6 billion of gross contracted cash flows through time charters with an average remaining term of 1.9 years, providing a degree of revenue stability. GSL’s ratings also reflect the Company’s solid market position in containership leasing, particularly in the sub-10,000 TEU and high-reefer markets, its experienced management team, and strong equity capital base supported by its low leverage strategy and prudent shareholder distribution policy.

The ratings are constrained by the Company’s focus on secured debt funding with limited unencumbered assets as well as the historical cyclicality and high customer concentration inherent in the consolidated liner industry. However, GSL’s strong business risk management, characterized by longstanding partnerships with major liner companies, a focus on long-term time charters, staggered charter maturities, and a low leverage strategy, partially mitigates these risks. GSL maintains long-standing relationships with leading liner companies, seven of which control a vast majority of the container shipping market. This concentrated customer profile inherent in the industry provides GSL with stable revenue from world leading liner companies, but also highlights the importance of maintaining these relationships and elevates the potential risk of reliance on them.

The Stable Outlook reflects the Company’s low leverage, contracted revenue with staggered charter maturities and adequate liquidity to meet its near-term obligations. The Company had $183 million in available cash as of 1Q24 and its contracted cash flows sufficiently covers its debt service and capital expenditures, with no reliance on charter renewals. Moreover, favorable conditions in the containership market are expected to persist at least in the near-term which supports the Company’s cash flow and continued deleveraging.

Knausen Holding LLC is a wholly owned subsidiary of GSL. The BBB rating for the senior secured notes (“the Notes”) is based on GSL’s unconditional and irrevocable guarantee and is two notches higher than GSL’s issuer rating. The 2-notch uplift reflects a robust collateral package consisting of 20 vessels, which represent a significant portion out of GSL’s total fleet count of 68 and a diverse mix of vessels chartered to key liners. The assignment of charter agreements (with expiries over several years) provide additional collateral enhancement in the event of GSL’s insolvency. Additionally, the upward notching on the Notes rating from the issuer rating reflects the aggregate value of the collateral significantly exceeding the loan amount outstanding by more than two times. The Notes are relatively short term, due in July 2027, with a quarterly scheduled amortization totaling 15% per annum. The required amortization schedule, along with GSL's solid contracted cash flow base, reinforces the company's ability to cover debt payments and reduce debt over time. The rating also considers the structural features such as LTV and debt service coverage ratio (DSCR) triggers as additional protection in the event of any significant deterioration of asset performance. KBRA notes that the upgrade of the issuer rating is driven, in part, by the decline in GSL’s leverage which considers the low LTV on the notes. Furthermore, secured debt ratings may not move in tandem with issuer rating upgrades as secured debt notching may compress at higher issuer rating levels where KBRA focuses more on probability of default and less on loss severity.

Rating Sensitivities

The ratings have a Stable Outlook; therefore, an upgrade of the ratings in the near future is not expected. However, over time, prudent growth of the fleet and increased market share, demonstrated stability of earnings metrics, maintenance of low leverage levels, significant improvement in available liquidity and diversification of funding, and a significant increase in unencumbered assets, could lead to a ratings upgrade. A sustained downturn in global trade which leads to financial stress of a large customer without explicit government backing, decline in utilization rate or charter rates, such that earnings or leverage metrics materially deteriorate, or a decrease in unencumbered assets and liquidity could lead to a change in the Outlook to Negative or a ratings downgrade. A shift to a less conservative financial policy, including sustained leverage (debt/EBITDA) materially above 2x could also lead to consideration of a downgrade. While the senior secured notes rating is linked to the issuer rating of GSL, an upgrade of GSL’s issuer rating may provide upgrade momentum but may not directly lead to an upgrade of the senior secured debt facility. Separately, a deterioration of the value or the performance of the secured debt facility collateral, leading to increased LTV, could lead to a downgrade of the rating of the senior secured notes.

This press release has been updated on June 24, 2024 to remove confidential valuation number of the Notes collateral.

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