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·        Potential for dividend yield to compress over time. Any way you slice it, a 32% dividend yield is too high. Either the dividend gets cut to bring the yield down or the stock goes up to bring the yield down. Take your pick. Our belief it that the latter will happen over the next few years and you are getting paid handsomely to wait. We believe this because we think that the company will continue to pay its dividend and as it does the perceived risk in the stock will fall and thus the shares will rise as more buyers become aware of attractive risk/reward that the stock represents. Why do you think the company is going to continue to pay its dividend?

·        Dividend is well-covered. Pro forma the 17-vessel fleet (which is scheduled to be in place by July 2009), the company should have distributable cash flow of approximately $67mln. Current total shares outstanding are 53.2mln and the per share dividend amount is $0.92 for an aggregate dividend of $48.9mln or a total dividend coverage ratio of 1.37x. Note that the total share count of 53.2mln includes 7.4mln Class B share. The right-to-dividends on these shares are non-cumulative and subordinated to the Class A shares until mid-2011. So, the real coverage ratio is closer to 1.6x. This is based on 45.8mln Class A and Class C shares (to be converted to Class A on 1/1/09). The dividend coverage improves if you include the two vessels that will be chartered to Zim Integrated which will join the fleet in Q4 2010. If you want to assume that the company is unable to acquire the 17^th-19^th vessels (will discuss below) then the distributable cash flow is closer to $61mln and the dividend coverage drops to 1.25x and 1.45x for all shares and Class A shares, respectively. But what if distributable cash flow falls.

·        Distributable cash flow is largely fixed (for a given fleet size over a multi-year period). Global Ship Lease, as I mentioned above, is a containership leasing company, not a shipping company. Basically, the company owns containerships and charters, or rents, those containerships out to liner companies under long-term contracts. The contract requires the company to provide a ship and a crew in return for a fixed day-rate. The average length of the company’s contracts is 10 years. The first contracts to roll off will happen in December 2012 – a full four years from now - are on two 4100 TEU vessels which represent 11% of the company’s total 19-ship fleet. The next contract expirations are on four 2300 TEU vessels but that won’t happen until December 2016; yes, that’s right, eight years from now. So what this means is that revenue is essentially fixed for the next four years. On the cost side, the company’s operating expenses are largely composed of amounts paid to its ship manager primarily for crewing, vessel maintenance, etc. The amounts paid to GSL’s ship manager are capped under contract for the next two to three years, depending on the vessel. Beyond operating expenses, the next largest expense is interest expense. The company hedged its interest rate exposure on all of the outstanding balance of its credit facility which by the end of 2008 will included the funding for 16 of the company’s vessels so amounts here are very predictable as well. Other cash expenses including SG&A, insurance, drydocking and preferred dividends are small and not overly variable.    Well, distributable cash flow is only fixed if the customer doesn’t default/try to renegotiate contracts.

·        Leverage Test. The primary risk to the story as we see it is the maximum leverage ratio test (aka LTV) in the credit agreement. This clause in the credit agreement restricts outstanding debt to no more than 75% of the market value of the company’s fleet. If the LTV is greater than 75% then a prepayment to reduce the LTV to below 75% is required. The market value of the vessels is calculated every six months starting with the delivery of the vessels. The most recent test was just done in December 2008 on the company’s 16-vessel fleet and that came in at approximately 60%. This test included a market value calculation done in July 08 on the first 12 vessels and December 2008 on the next 4 vessels. The next test date is in January 2009 and it will incorporate a January 2009 market value calculation on the first 12 vessels and the December 2008 valuation on the next 4 vessels. By our calculations, if the January 2009 market value calculation on the first 12 vessels is down more than 28% from the July 2008 calculation, then the company will likely fail the LTV test and either the company gets a waiver from the banks or a prepayment will be required.  The banks can’t act on the LTV test until a compliance certificate is delivered to them. Compliance certificates are due four months after every year-end and two months after the end of quarters 1-3 so the company will have until at least April 30, 2009 before the banks can take action. Finally, any action that the banks take must be approved by a 66 2/3% majority of the outstanding drawn and undrawn balance of the facility. So what happens if the company fails the LTV test? As we see it, there are a few possibilities: 1) the company could get a waiver from the banks at a cost which probably comes in the form of an increased interest rate margin, 2) the company could raise new capital via unsecured debt or equity or a hybrid, 3) the company could get a loan from CMA CGM, 4) the company could sell assets, 5) the company could file for protection from creditors. This is probably obvious, but if a solution isn’t worked out by April 30, 2009, then the banks could force the company to stop paying dividends for as long as the company is in default of the credit agreement. We think that option 1 is the most likely outcome especially given that the company is strong on the other tests in the credit agreement. In addition, the banks are experienced shipping lenders and thus they understand the cyclical nature of the business and the fact that the current market value of a fleet of ships that is only six years old with charters that aren’t expiring for as much as 12 years has little relevance. We think that option 2 is unlikely given the state of the capital markets. Option 3 is a possibility. Option 4 is also unlikely and probably wouldn’t really help that much. Finally, option 5 we view as also unlikely as it doesn’t really help anyone. We also do not believe that it is in the banks best interest to force the company to stop paying dividends simply because if they do they will imperil the company because its only customer is a large recipient of those dividends. If the company cuts its dividend then a renegotiation of the charters buy CMA CGM would likely happen which would only serve to reduce the true credit quality of the assets securing the credit facility.

·        Maximum drawdown amount. If the LTV is greater than 70%, but less than 75%, then the company cannot access their credit facility. This is an issue because the company has a contract to buy the 17^th vessel from CMA CGM in July 2009. The company has a financing out in the contract so they will not be forced to buy the ship but CMA CGM probably won’t be very happy if the company doesn’t take delivery of the vessel. In addition, since adding ships increases the company’s distributable cash flow, not adding the 17^th ship is a net negative.

·        Counterparty risk. CMA CGM is currently the company’s only customer. If CMA CGM runs into significant problems then it could decide to try to renegotiate its charters with GSL.

·        Weak environment. This is a function of the weak global economy, lack of credit and the large containership order book. The weak environment has an indirect negative impact on GSL.

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