Capital Clean Energy Carriers Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 5 speakers on the call.

Operator

Thank you

Speaker 1

for standing by, and welcome to the Capital Product Partners Third Quarter 2023 Financial Results Conference Call. We have with us Mr. Jerry Kalagoratos, Chief Executive Officer Mr. Spyros Liossis, Chief Commercial Officer and Mr. Nikos Kala Posay Caracos, Chief Financial Officer of the company.

Speaker 1

At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. And wait for your name to be announced. I must advise you that this conference is being recorded today, November 13, 2023. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocation as well as our expectations regarding market fundamentals and the employment of our vessels, including redelivery dates and charter rates, may be forward looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

Speaker 1

These forward looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward looking statements whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume no responsibility for the accuracy and completeness of the forward looking statements. We make no prediction or statement about the performance of our common units. I would now like to hand the call over to your speaker today, Mr.

Speaker 1

Calle Goratos. Please go ahead, sir.

Speaker 2

Thank you, and thank you all for joining us today. As a reminder, we'll be referring to the supporting slides available on our website as we go through today's presentation. In addition to our quarterly earnings, we announced today an important strategic transaction for the partnership. In the interest of time, we will go through a shorter than usual presentation of our quarterly earnings, and we'll then move on to the transaction and what it all means for Capital Product Partners. Starting with Slide 3 and the partnership's financial performance.

Speaker 2

Net income for the Q3 of 'twenty three was 17,000,000 our Board of Directors has declared a cash distribution of $0.15 per common unit for the Q3 of 'twenty 3. The Q3 cash distribution will be paid today, November 13, to common unitholders of record on November 6. Finally, Following the Cape Agamemnon's delivery to her new owners last week, the partnership's current fleet charter coverage for both 2023 2024 Stands at 100% with the remaining charter duration corresponding to 6.5 years and contracted revenue backlog of more than 1,700,000,000 Now turning to Slide 4. Total revenue for the Q3 of 2023 was $95,500,000 Compared to $71,900,000 during the Q3 of 'twenty 2. The increase in revenue was primarily attributable to the revenue contributed by the 4 newbuilding vessels delivered to the partnership between the Q4 of 'twenty 2 and the Q2 of 'twenty 3, as well as the increase in the daily rate and by 2 of our LNG carriers since September 2022.

Speaker 2

Total expenses for the Q3 of 'twenty three were $51,000,000 compared to $40,400,000 in the Q3 of 'twenty two. Total vessel operating expenses during the Q3 of 'twenty three amounted to $22,300,000 compared to $17,000,000 during the Q3 of last year. The increase in vessel operating expenses was mainly due to the net increase in the average number of vessels in our fleet and costs incurred during the scheduled maintenance of certain of our ships. Total expenses for the Q3 of 'twenty three also include vessel depreciation and amortization of $21,900,000 compared to $16,200,000 in the Q3 of last year. The increase in depreciation and amortization during the Q3 of 'twenty three was mainly attributable the net increase in the average size of our fleet.

Speaker 2

General and administrative expenses for the Q3 of 'twenty 3 amounted to 2,600,000 compared to $2,800,000 in the Q3 of 2022. Interest expense and finance costs increased to $27,800,000 for the Q3 of 'twenty 3 compared to $14,900,000 for the Q3 of last year. The increase in interest expense and finance costs was mainly attributable to the increase in the partnership's average indebtedness and the increase in the weighted average interest rate to 6.5% from 4.4% in the Q3 of 'twenty two. The partnership recorded net income of $17,000,000 for the quarter compared to net income of 11.5 million that is excluding the gain on sale of vessels we recorded in the Q3 of last year. Net income per common unit for the quarter was $0.84 compared to 0 point 5 $0.07 per common unit in the Q3 of last year, once again excluding the gain on sale of vessels recorded a year ago.

Speaker 2

On Slide 5, you can see the details of our operating surplus calculations that determine the distributions to our unitholders compared to the previous quarter. Operating surplus is a non GAAP financial measure, which is defined fully in our press release. We have generated approximately $41,700,000 in cash from operations for the quarter before accounting for the capital reserve. We allocated $34,400,000 to the capital reserve, a decrease of $600,000 compared to the previous quarter due to the net decrease in the rate of amortization of our debt. After deducting the capital reserve, the adjusted operating surplus amounted to $7,200,000 On Slide 6, you can see the details of our balance sheet.

Speaker 2

As of the end of the Q3, the partner's capital amounted to $664,500,000 an increase of $26,100,000 compared to $638,400,000 as of the end of last year. The increase reflects net income for the 9 months ended September 30, other comprehensive income of $2,100,000 relating to the net effect of the cross currency swap agreement we designated as an accounting hedge And the amortization associated with the equity incentive plan of $2,800,000 partly offset by distributions declared and paid during the period in a total amount of $9,200,000 the cost of repurchasing our common units under our unit repurchase program for an aggregate amount of 4,100,000 Total debt increased by $303,100,000 to $1,600,000,000 compared to $1,300,000,000 as of year end 2022. The increase is attributable primarily to the drawdown of a total of $392,000,000 to finance new vessel acquisitions, partly offset by scheduled principal payments for the period of 64,000,000 and the early prepayment in full of 1 of our facilities for an amount of 23,400,000 total cash as of the end of the quarter amounted to $108,500,000 including restricted cash of 11,700,000 At this point, I would like to move to the second part of the presentation, and in particular, to Slide number 8.

Speaker 2

I'm very pleased to talk about today what we consider a milestone transaction for the partnership and one that I believe will propel Capital Product Partners to a new chapter after 16 years of public presence as an MLP. I would like to start with the decision of the Board to change the partnership's name. The new name, which we expect to take effect by year end is Capital New Energy Carriers LP, and it will come with a new ticker symbol, CNEC. I'm starting with this symbolic move as it signifies that what we're aiming to do here is more than an asset transaction. It is a transformation of the partnership to reflect our new focus primarily on LNG Shipping, but also the wider gas business related to the energy transition the intention as part of this transaction to move away from the MLP model and convert into a corporation.

Speaker 2

This strategic transformation will be underpinned by the acquisition of 11 latest generation 2 stroke LNG carriers in a $3,100,000,000 transaction with delivery starting from later this quarter and up to March 2027. The first five vessels delivering this and next year have medium to long term charters in place with revenue weighted average term period of 7.5 years to highly reputable counterparties with a total of over $1,400,000,000 in contracted revenues. Once all vessels have been delivered, we expect CPLP or CNEC, if you prefer, to transform to the largest U. S. Listed operator of 2 stroke LNG carriers compared to the current fleet of other U.

Speaker 2

S. Listed companies And one of the largest U. S. Listed shipping companies by enterprise value. Importantly, together with a focus on the LNG business, CPLP has committed to the opportunistic divestment from its container vessels, while it has secured the right of its refusal on 2 very large ammonia carriers 2 liquid CO2 carriers, which are expected to play significant role during the energy transition together with natural gas.

Speaker 2

Now turning to the next slide. You can see how we expect to fund this strategic acquisition. Total vessel acquisition cost is $3,100,000,000 which translates roughly into 8 0.4x full year EBITDA for the 11 new LNG carriers. This estimate is based on the employment secured for the 5 vessels on a full year basis an assumption of $100,000 per day for the remainder 6, in line with the current medium to long term period market. We believe the acquisition to be attractively priced In view of the uniqueness and size of this fleet comprising only latest generation mega LNG carriers, the tenure and the quality of the contracted cash flows, As well as the delivery dates of the vessels and in particular of the open vessels, which coincide very well with the next phase of significant liquefaction capacity coming online from 2026 onwards, as we will discuss later.

Speaker 2

The acquisition will be funded by a rights offering of 500,000,000 Which is open to all our unitholders. In addition to commercial debt and an attractively priced $220,000,000 unsecured seller's credit provided by Capital Maritime to ensure that the transaction is fully capitalized even without the sale of any container assets. Turning to the next slide, we describe in more detail the $500,000,000 rights issue and the seller's credit. We chose the right issue path because we wanted to make sure that all existing unitholders have the right to participate in this transformative transaction. Capital Maritime is backstopping 100 percent of the transaction without any fee at an attractive price of a minimum of 14 point $0.25 which translates into a 9.6 premium to the last closing price.

Speaker 2

Holders of common units as of record date of November 24th will receive the right to acquire up to 1.7 units for each unit they hold. The closing of the rights offerings expect to take place on December 15th. As far as the seller's credit is concerned, it is attractively priced at 7.5% all in. It is unsecured and has a maturity in June 2027. We believe that the Capital Maritime support is an important part of this transaction and demonstrates Capital Maritime's continued alignment with the long term success of the partnership.

Speaker 2

The appendix on slide 24, you can find more details with regard to the deal structure and timing of payments. On the next slide, you will find 11 vessels together with a breakdown of total contracted revenues and average day rate for each year as well as their deliveries. These are all sister vessels built or under construction at Hyundai Sea Biotech in South Korea, the largest shipbuilder in the world. These truly very high specification vessels represent the latest generation of propulsion, containment system, reliquefaction plant Energy Saving Technologies in LNG Shipping. Importantly, the propulsion arrangement with mega low pressure engines and shaft generators ensures a reduction of methane slip by 50% even compared to 1st generation low pressure to stroke vessels and close to 90% compared to TFDE vessels.

Speaker 2

The first vessel, which was delivered from Hyundai to Capital Maritime at the end of October, is on a 3 year highly lucrative charter to Qatar Energy and Trading. The Axios II is expected to commence a bearable charter to bond and gas and trading in the Q1 of 'twenty five. And in the meantime, we expect here to be fixed for a 12 to 15 month time charter before year end. The ASOS, which delivers in May 24, is fixed on a 10 year charter to Tokyo Gas, a Japanese utility, similar to the Apostolos that follows thereafter, which is fixed to JERA. Finally, the Actuas will also enter into a 7 year bareboat charter in July of 'twenty four with BonneGas and Trading.

Speaker 2

The remaining 6 vessels are not yet committed and have highly attractive delivery dates as today, shipyards offer typically capacity in the second half 2020 7 onwards. Turning to the next slide, after the delivery of all 11 additional LNG carriers, Capital will have a very modern fleet of 18 2 stroke LNG vessels, the largest in the U. S. Public markets as of this point, with 6.5 years I will now hand over the floor to Spiroz Leuciz, our Chief Commercial Officer, who will talk about the prospects of the LNG market and especially from 2026 onwards, where we have the most exposure. Importantly, Spiroz will also explain why we believe that 2 stroke vessels like ours will gain even more traction and value going forward as environmental regulations and market based measures become more prevalent.

Operator

Thank you, Jerry, and good morning, everybody. This is indeed a very exciting introduction from where I'm sitting. As you know, and you can also on Slide 15, LNG is prevailing as the main supply source of natural gas as the ability to move natural gas in the form of LNG beyond the constraints of the pipeline not only gives producers and consumers more flexibility, but has become increasingly more important due to geopolitical issues. Ernst LNG Shipping is integral part of the value chain. And with this transaction, GPLP will become one of the largest owners worldwide of modern 2 stroke LNG vessels.

Operator

Turning to the next slide. The global liquefied natural gas market is expected to increase in the coming years by 70% by 2,030. The chart that you see on this slide refers to the global LNG production capacity, which is expected to exceed 750,000,000 tons annually in 2030, up from 465,000,000 tons in 2023. The increase in liquefaction involves projects under construction that have already received the final investment decision. A crucial element for the prospects of the LNG shipping market is that most of the new production will be installed in the U.

Operator

S. Gulf with the main buyers located in the Far East Europe, increasing the demand for LNG shipping due to higher ton miles. 2023 so far has been another very strong year in terms of FIDs for new liquefaction projects with NextDecade, Sempra and Vensu Global Projects Taking FID amounting to additional 50,000,000 tons per annum of LNG from 2026 and 'twenty seven onwards. We expect the trend for FIDs to continue as a number of projects in the U. S.

Operator

Are reaching maturity as government support around the world for new projects has been an important category. We expect the new players and their off takers to drive the demand for new vessels when our ships when our open ships will be delivering on their yard. On the next slide, Slide 15, we discuss the supply of LNG carriers. Here, you The LNG fleet on the water stands at 736 vessels and the order book is around 300 vessels. The order book to fleet ratio is slightly lower than the peak of 52% of last January as newbuilds deliver and ordering has slowed down.

Operator

From the total of about 300 new vessels, only 29 vessels currently are open between now and 2028, equivalent to 10% of the existing order book, plus the vast majority of orders are committed to projects like the Qatar expansion, LMT Canada and others. Worth noting that the capital open positions will represent around a 5th of the market for uncommitted vessels, positioned us well positioning us very well at a time when we expect demand for new vessels to accelerate. Modern vessels like the ones under the acquisition are larger and more economical, incorporating significant changes in propulsion technology and LNG tank construction. At the same time, as emissions regulations tighten with EXI, CII and other regulatory initiatives, Antares are placing an increased focus on ELG and specifically carbon dioxide emission equivalent. TIM and DSD vessels We'll become even less competitive going forward with 2 slow vessels commanding a significant premium, both in terms of charter rate and utilization.

Operator

The older, smaller steam turbine fleet is expected to be gradually phased out either through scrapping or repurposing in storage and the gasification project. We should point out that the new vessels are equipped with a mega propulsion arrangement, which allows for a low gas supply pressure And is better suited for use of volume gas as a fuel, while at the same time having lower capital expenditure, operational expenditure and NOx emissions non current generation engines. The key driver behind the popularity of the new arrangement is the exhaust recycling system, Which includes methane slip by up to 50%, as Jerry mentioned previously, when combined with salt generate. We'll discuss more on the benefits of the new vessels in the following slide, looking a bit more into the unit freight cost calculations and the relevant differential between the different type of vessels. As we mentioned above, the key drivers for the differential are more efficient propulsion with savings up to 100 tons per day of fuel, the largest size of vessel, 174,000 cubic meters West Ridge, 145,000 or 163,000 cubic meters, the improved containment system resulting into lower boil off of 0.03 versus 0.15 daily of operation of cargo the lower long term maintenance cost due to simpler proportional arrangement and from 2024, the tightening of emissions regulations with the monetization of carbon dioxide and methane.

Operator

On the first graph on the right, we have calculated the equivalent daily differential for a U. S.-Japan roundtrip voyage between a 2 sloped vessel and a steam ship for the DST. The main parameter is the commodity price and as we can see in a $10 per MMBTQ environment, the daily difference to a DFT exceeds $30,000 Today, while to a steam ship is more than doubled about exceeding $70,000 per day. Worth noting that today's LNG JKN price is around $17 per MMBtu. On the next graph, we have calculated the emission profile for each type of ship with the 2 stroke vessels having less than half of the emissions reducing significantly the EPS cost for the chapter.

Operator

For a US EU trade post 2026, 100% of the emissions will need to be accounted for with emissions with emission allowances, a steam fleet will have to incur an additional cost versus our vessels of around $17,000 per day, assuming an $80 per ton of CO2. Based on the unit freight cost and emission differential, We expect that new vessels will be in high demand for at least the next decade as fleet renewal processes, while at the same time, This is already apparent today as we have a clear 3 tiered market, but with a gradual increasing pressure on older vessels from EXI and importantly from ETS, We expect to see even larger premium to be captured by 2 sole persons like ours. The next slide provides us with a snapshot of the market outlook. The main two drivers for the healthy LNG freight market are the shipping capacity required to transfer the new LNG that will come online on the new fleet renewal. With a conservative assumption that only vessels above 30 years will help to scrap yet, the shipping balance for 2026 is in deficit by 7 vessels, while for 2027, this is up to 57 pesos in additional requirement.

Operator

While we expect that part of this demand will be covered by new orders, the current CVR capacity in both Korea and China cannot support the acquired growth, leading the market short of vessels and adding significant value to our 2026 and 2027 open positions. Overall, we will aim to be opportunistic in our approach as to when we will fix these vessels, depending on what we see in terms of market dynamics. While in the past, we have fixed vessels only a few months after contracting them from the shipyard, the majority of the vessels have been fixed closer to delivery in order to capitalize on the scarcity value. In addition, in our chartering strategy, we will make sure that we keep staggered expirations This is all from me. I will now hand the floor over Jerry, I'll be happy to answer your questions later.

Speaker 2

Thank you, Spiro. Now turning to Slide number 18 and the pro form a impact of the 11 fleet acquisition. It is clear that this is a transformative transaction across all metrics. Importantly, the LNG fleet contracted revenues for the partnership increased by 127 percent to 2,500,000,000 providing strong cash flow visibility and secured income going forward. Take into account also our container fleet, total pro form a contracted revenues would amount to 3.1 Billian.

Speaker 2

Turning now to pro form a EBITDA, assuming for the 11 LNG carriers full year employment under the Affirmed charters and $100,000 per day for the 6 and fixed vessels in line with the current period market. The estimated annual pro form a EBITDA would increase by 153 percent to $614,000,000 when combined with the last 4 quarters EBITDA of the existing fleet. In the same manner, taking the last 4 quarters operating surplus of BSG CPLP Adapting the incremental EBITDA from the 11 LNG carriers on a full year basis, less debt amortization and interest cost, Generates a 2 0 6 percent increase in free cash flow generation of the partnership. And while we expect to have divested from a number of container vessels by the time our full LNG fleet delivers. These pro form a numbers give you a sense of magnitude with regard to the impact of the 11 LNG Carrier acquisition on our future cash flow generating capacity.

Speaker 2

Please also refer to the presentation appendix on Slide 26 for the assumptions behind these numbers. Finally, our LNG fleet age is expected to decrease to 3 point 2 years with assets that have 35 year useful life. Overall, we believe that this transaction builds further on our existing focus on long term cash flow visibility, That also provides attractive exposure to a strengthening LNG market with best in class modern vessels. Moving to the next slide. As we have discussed in previous calls, CPLP has been trading over the last few quarters at a large discount to NAV.

Speaker 2

Despite value creating transactions such as the Diamond S spin off and the very timely entry into the LNG market funded with no additional equity capital, this picture has not changed materially. We believe that moving away from a diversified fleet model and transforming the fleet into 1 of the largest, if not the largest pure play LNG and energy transition gas company in U. S. Public markets and by converting the partnership into a corporation with customary corporate governance and the capital allocation policy, we should be able over time to trade in line with our peers, which could translate substantial upside to our current unit price levels. This can be seen more clearly on the next slide, where we describe the pro form a NAV for the acquisition on a per unit base after the equity offering, assuming an issue price of $14.25

Operator

This is

Speaker 2

based on recent charter attached third party appraisals that received our existing fleet as well as debt, cash and working capital as of the end of the Q3 of 2023. Adjusted for the charter attached value of the 11 LNG carriers fleet in line with 3rd party appraisals on a fully delivered basis the estimated debt and cash adjustments required for their acquisitions. At the current unit price levels, CPLP is trading at 45% of its pro form a NAV compared to 100% of its closest peer, Flex LNG. As we execute against our newly set out business model over the next few quarters, we believe that we should be able to increasingly close this gap, benefiting all our unitholders. Turning to the next slide, the partnership has among others committed to divest from its remaining container vessels, whose charter attach latest fleet appraisal is close to 900,000,000 Which translates to an estimated net asset value north of $400,000,000 While we see the container charter market increasingly under pressure, Which has and this would also further affect asset values going forward.

Speaker 2

A large part of our container fleet valuation is protected As all of our container vessels have medium to long term charters in place, with their value being underpinned by the cash flows of these charters. Hence, we will opportunistically evaluate the potential sale of its asset against its cash flow and our expectations with regard to residual value, Compared also to other opportunities in the LNG and wider gas markets. Finally, As we saw earlier, CPLP will have a significant cash flow generation potential after this transaction is completed. Despite the materially higher unit count After the rights issue is completed, the common unit distribution guidance of $0.15 per quarter remains unchanged. As the company over the next few months converts into a corporation, We intend to also communicate a new capital allocation strategy.

Speaker 2

Overall and subject to the final decision of the Board, Charter Markets, financing and refinancing opportunities, as well as the timing of the container sales and availability of other growth opportunities. The expectation is to move to a floating distribution or dividend policy going forward, which is expected to be defined as a percentage of the income and cash flow generation of the company. This is to be balanced with allocating capital to growth opportunities in the LNG and Energy Transition markets, as well as repaying debt. Overall, I should stress that I'm personally very pleased to announce today this transformative transaction, And I hope that our existing unitholders will take advantage of the rights issued to participate in this journey of taking the partnership to its next chapter with the aim of creating long term shareholder value. I'm confident that our exceptional LNG fleet, our high quality customer base, our contracted cash flows and our uniquely positioned LNG and energy transition shipping opportunities.

Speaker 2

We make capital new energy carriers a bellwether in the industry. And with that, I'm happy to answer any questions you may have.

Speaker 1

A confirmation us our first question comes from the line of Ben Nolan with Stifel. Please proceed with your question.

Speaker 3

Thanks. Jerry, first of all, congratulations. I know this is You guys have been trying to do something transformative

Operator

for a long time,

Speaker 3

and this obviously is that. So I have a couple of questions. First of all, I'm curious on how you came to the valuation of the assets. And I ask because I appreciate that there were there were 3rd party valuations, but it seems like relative to at least some of the market levels that we've seen for newbuilds, etcetera. It's a little elevated above that.

Speaker 3

Curious if you could just talk to that a little bit.

Speaker 2

Thank you. Thank you, Ben. The prices were And the valuation were, of course, negotiated on behalf of the partnership by the conference committee, which comprises only independent directors and were advised by Evercore and Fred Frank. The discussions and negotiations around the acquisition price were based on various metrics, but that includes 3rd party Charter Attach appraisals and of course cash flow multiples, cash flow valuation and other considerations and parameters around the transaction, but I think taking into account the contracted cash flows of the 5 vessels. The fact that 7 out of the 11 vessels are delivered ex yard, So CNBC is taking the carry cost of paying pre delivery installments and whatnot.

Speaker 2

I think you'll find that the valuation is quite fair. I think the best indication of that is that the EBITDA multiple is around 8.4x and that takes to account the locked in charters and the $100,000 market for the remaining 6 ships. Even if you think it's 95 or 105, Of course, this does not change materially, which I think as a multiple of cash flows, this is quite attractive, and we haven't seen many transactions Around these levels. So I think you have to take to get first of all take into account that these are charter attached valuations, many of the charters that are in place are highly lucrative. We cannot disclose the exact rates, but I think if you look at the revenues that we list on the relevant slide.

Speaker 2

You can understand that these are quite lucrative charters. You'll also see that 2 of them are bareboats, right? So they don't have OpEx. So looking at the cash flow, the fact that this that 7 out of the 11 vessels are being delivered ex yard, I think that should make a big difference. Today, if you go to a shipyard, they will quote you for a second half twenty twenty seven vessel $260,000,000 with probably 20% upfront And then 10% probably after 6 or 12 months.

Speaker 2

If you and then if you continue to look at The pre delivery installments cost plus the supervision cost, a delivery cost vessel in 2027, 2028 in the current interest rate environment, it's probably well north or close to $300,000,000

Speaker 3

Yes. And again, I sort of appreciate that. As it relates to the cash flow side, I think $100,000 as you said is certainly reasonable. How are you thinking about actually the timing of locking those in Both for the new builds and then there's the one that's has a little bit of a shorter contract. When do you anticipate being able to, again, have cash flow visibility or certainty associated with those charters?

Speaker 2

Spiro, would you like to take this one?

Operator

Sure. Yes. Hi, Ben. Well, I think currently, we have discussion with charters regarding our vessels on a regular basis. I mean, We see there are many there are few tenders out there, which will have this paid.

Operator

But I think as we mentioned earlier in the slides, I think the important part of our strategy so far has been to capitalize on the capacity, let's say, of supply of vessels. And I think that's what we aim to do, to do this. We think that these vessels are highly desirable vessels On the delivered blades lineup for a very favorable LNGC market, aligning with the new project starter. And as we said previously, I think there are 2 prospective charters. The one is the new projects and the offtake that we need to be coupled with new vessels, but we are also focusing on big replacement projects, where effectively the big shutters out there who have a fleet of steam turbine vessels.

Operator

And with the new EPS Regulation coming into play. I think there will be a huge drive for replacing those vessels going forward.

Speaker 3

Okay. And then lastly for me, just as it relates to financing and maybe broadly speaking, assuming the debt that you lay out here, it would seem as though the company At this point, soon to be no longer a partnership with the company. To me, it looks like it's relatively highly elaborate. Obviously, To the extent that there's a healthy component of equity in the container shipping business and that can be monetized to delever the balance sheet and it gets there. But how are you thinking about leverage?

Speaker 3

Or How are you thinking maybe about the timing of the sale of the container shipping fleet in order to reduce some of that debt?

Speaker 2

So in terms of financing, we are at various stages of commitment, Especially for the vessels that deliver next year and overall at fairly attractive terms, I mean you should expect somewhere between 70 75% of the acquisition price to be financed with a margin well below 200 basis points, probably closer to 190 basis points. Some of it might have fixed some fixed debt components as we are looking at certain financing arrangements like Chalkos. But I think we have a pretty good idea as to how we will finance these vessels. Most of them have either very advanced term sheets or commitments. And overall, I think as we have shown in the past, we have a long track record of using diversified sources of financing over the years, I mean, from European commercial debt, Chinese and Japanese resource, the Jocos, Asia Pacific Bank.

Speaker 2

So I think we will make sure that we will take advantage of these long tenure charters to push down cost of debt as much as possible. And there is also the attractive component for the financing, which is the $220,000,000 Credit facility, which is effectively, if you want, an insurance provided by Capital Maritime to make sure that even But coming back to your point with regard to leverage, there is we have 9 unlevered containerships Sitting on balance sheet and we are going to look at the market to start divesting from these assets. I think we're going to be opportunistic. We have a very good track record in the S and P market overall. And one does not want to rush this, but the fact that we also have Mostly medium to long term charters on these containerships means that that value is partly locked in.

Speaker 2

So I think it will be we will opportunistically approach the market. There is no hurry. I think hurried exit Since shipping typically do not bode well and we will compare what we can get in The S and P market compared to that cash flow and of course other opportunities or the opportunity cost for that cash in other segments And we will take those decisions. But we have, I think both in terms of LTV. Today, our LTV stands just sort of net LTV is just sort of 50%.

Speaker 2

We have quite a bit of room as not only our containerships are underlevered, but also a lot of the original LNG carriers have quite a bit of low levels of debt.

Speaker 3

All right. Well, I appreciate you taking my questions up. I'll turn it over. Thank you. Thank you, Ben.

Speaker 1

Thank you. Our next question comes from the line of Omar McCotta with Jefferies. Please proceed with your question.

Speaker 4

Thank you. Hey, guys. Good afternoon. Hi, Omar. Hi, Jerry.

Speaker 4

Not much really for me. I think it was pretty much You spelled it out pretty clearly, I think, in the release and the presentation and just now in the Q and A with Ben. Maybe just a couple of follow ups, maybe perhaps on the sale of the container ships.

Operator

I did want to ask

Speaker 4

you, Ted, you'll take your time. There's no rush, which I agree with. We've seen in the past rush deals don't We work out, or perhaps should be money on the table. When you think about the opportunity to sell the containers, how can you envision that as in Do you see could this

Operator

be sort of like an could it

Speaker 4

be an M and A style transaction? Is there interest, do you think, on the part of, say, other container ship owners looking to acquire this type of fleet that comes with contracted cash flow. So could you see

Speaker 3

an M and A deal evolving?

Speaker 2

Or is

Speaker 4

it more you think just a sort of a jiffy sale and purchase market style series of sales?

Speaker 2

I think we will definitely be open to all kinds of transactions. It could be vessel by vessel as we know very well-to-do or it could be a bigger transaction involving not just cash. We will definitely be open, but we will of course look at every transaction in its merits. Overall, what you See that both liner companies as well as container ship owning companies have done obviously very well over the last a couple of years and as such there is additional liquidity. Our assets are very attractive assets.

Speaker 2

I mean, our 15,000 TEU containers today, if you wanted to build them, probably the value would be closer to $560,000,000 So there is the replacement cost of really latest generation ships with 10 year charters two very good names, our 5,000 wide beam ships are very much in demand, our 10,000 TEU ships, which again have long term charters. We have recently modified their bow And installed scrubbers and they have good cash flow. So there is quite a lot of quite attractive assets And we think there are out a number of different players with different motives that might want to invest in those type of assets. But to your question, absolutely open as to how we will do it and when we will do it.

Speaker 4

Okay. Thank you. And then maybe just a follow-up on the LNG contract market. And Spirost went over plans on being able to fix out and obviously good shifts. But just wanted to ask kind of in terms of liquidity in the term market as it is now, then you saw plenty of time until the delivery of

Operator

these shifts. Just kind of if

Speaker 4

you can give a sense of what does the liquidity look like right now in the term charter market for LNG vessels, especially new buildings. It does sound like perhaps a year ago, there was

Operator

a good amount of activity. Things perhaps got slow, but just wanted

Speaker 4

to get your sense on what does the liquidity look like right now in the term market?

Speaker 2

Spiro, you want to take that? Yes. So

Operator

I think last year, we saw liquidity on the back of a number of open vessels that were hitting the market at the same time. Now I think the number of those open vessels, it's going down. And We are probably talking 2,627. I think up to now, we're still competing against the project ships, meaning vessels that were placed in order specifically for the project I will be shipping. I think going forward, we would We expect to see increased liquidity.

Operator

As I said, the main driver for that will probably be replacement fleet replacement projects. A lot of charters, especially in the Far East, which have their fleet is consistent is going to consist from older generationships. And I think these are probably the guys that would create a lot of demand for new vessels. The liquidity in the market in terms of supply, as we mentioned, there are not a lot of ships that will that are there I think there will be we'll probably have a spillover in the DFTs. So I think the 2 stroke market taking into, let's say, pushing a bit the DSD market as well upward.

Speaker 4

Okay. Thank you. I'll that's it for me, sir. And Gerry, thank you, and congrats on the transaction. Thank you, Omar.

Speaker 1

Thank you. Our next question comes from the line of Liam Burke with B. Riley Securities.

Speaker 3

Gerry, how much do you anticipate any significant hurdles on converting from an MLP to a traditional corporate structure?

Speaker 2

Not really. I think it's only a question of Capital Maritime, the GP and the Special Committee of the Board now down to negotiate the terms and the form that the corporate governance we'll take going forward. Both sides have committed to do this within 6 months and personally I think this is going to be an important step in this process as we will leave the MLP Mantel behind us, if you want.

Speaker 3

Fair enough. Does it affect any of your debt agreements When you make that conversion from an MLP to a corporate?

Speaker 2

While we'll examine all this in more detail over the coming months, We do not expect to have any triggers, but of course, this will be part of the analysis going forward. Great. Thank you, Jerry. Thank you, Glenn.

Speaker 1

Thank you. Mr. Calogoratos, I don't see any other questions at this time. I'll turn the floor back to you for final comments.

Speaker 2

Thank you all for joining us today on this slightly longer call than usual. We are always available

Speaker 1

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Capital Clean Energy Carriers Q3 2023
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