Global Ship Lease, Inc. (NYSE:GSL) Q3 2022 Earnings Conference Call November 9, 2022 10:30 AM ET
Company Participants
Ian Webber – CEO
Georgios Youroukos – Executive Chairman
Anastasios Psaropoulos – CFO & Treasurer
Thomas Lister – Chief Commercial Officer
Conference Call Participants
Omar Nokta – Jefferies
Liam Burke – B. Riley Securities
Frode Morkedal – Clarksons Securities
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Global Ship Lease Q3 2022 Earnings Conference Call. I would now like to turn the call over to Ian Webber, CEO. Please go ahead.
Ian Webber
Thank you. Good morning, good afternoon, everybody, and welcome to the Global Ship Lease Third Quarter 2022 Earnings Conference Call. The slides that accompany today’s presentation are available on our website at www.globalshiplease.com.
Slides 2 and 3 remind you, as normal, that today’s call may include forward-looking statements that are based on current expectations and assumptions and are, by their nature, inherently uncertain and outside of the company’s control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the safe harbor section of the slide presentation. We also draw your attention to the Risk Factors section of our most recent annual report on Form 20-F, which is for 2021 and was filed with the SEC on March 24 this year 2022. And you can obtain these via our website or via the SEC’s. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements.
For reconciliations of the non-GAAP financial measures, to which we will refer during this call, to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning which is also available on our website.
As usual, I’m joined today by our Executive Chairman, Georgios Youroukos; our Chief Financial Officer, Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will begin the call with a high-level commentary on GSL and our industry. And Tassos, Tom and I will take you through our recent activity, quarterly results and financials and the current market environment. After that, we’ll be pleased to take your questions.
So turning now to Slide 4. I’ll pass the call over to George.
Georgios Youroukos
Thank you, Ian, and good afternoon or evening to all of you joining us today. As we have flagged in recent quarters, macro headwinds and negative economic sentiment have continued to assert pressure on consumer demand and thus in the container shipping industry, driving an ongoing normalization in the charter market, leading to downward pressure on charter rates and asset values from the historically high levels of the recent past.
Nevertheless, because we have secured extensive contract cover for a large portion of our fleet while the market remained very hot, including 10 forward fixtures of 5 years each, signed during the third quarter, to start in late ’22, ’23 and even 2024, GSL is well positioned to weather the challenges ahead and to capitalize on opportunities that may arise.
Quantitatively, we have added nearly $1 billion to our contracted revenue this year with $770 million added in the third quarter alone, giving over $2.2 billion of contracted revenue spread over just under 3 years.
As you can see on the right side of the slide here, our results for the quarter continue to demonstrate the heightened level of cash flow and earnings that we established through extensive chartering activity in recent years as well as a well-timed acquisition of vessels most last year on below market rates that we were able to reach charter at far higher rates in the market over the course of 2021 and ’22.
We have a robust balance sheet with no debt maturities before 2026 and an overall low cost of debt despite the global high interest rate environment, with all of our floating interest rates fully hedged, capping the floating rate at 75 basis points with a weighted average cost of debt of 4.53%.
We’re also continuing to pay our sustainable dividend of $1.50 per common share annualized and have opportunistically repurchased $20 million of our shares this year, of which $15 million was in the third quarter, having secured a $40 million buyback authorization during the second quarter of this year.
From this position of strength and prudence, we are focused on the long-term resilience of our business, looking to continue to generate sustainable value, preparing for decarbonization and further improving our competitiveness by investing in fuel performance optimization of our fleet in conjunction with our customers and supporting wider decarbonization initiatives. As and when attractive countercyclical opportunities arise that meet our strict criteria, we want to be ready to act decisively for the benefit of our shareholders.
With that, I will turn the call over to Ian.
Ian Webber
Thank you, George. Please turn to Slide 5. Here, we show the diversification of our charter base, which now includes over 10 of the top liner operators. In total, as of September 30, we had over $2.2 billion of contracted revenue spread over a TEU-weighted average of 2.9 years. We’re fully covered for this year, 2022, and 90% of our days are covered for next year, 2023.
We’re pleased to be recognized as a trusted partner to the liner companies, and we work closely with them to ensure that our vessels meet their long-term strategic needs, both by ensuring that they are reliable, well maintained and well operated, but also by jointly pursuing decarbonization and other vessel optimization investments, including for fuel efficiency that increased performance for our operators and charters and long-term asset value for ourselves.
Turning to Slide 6. These are the vessels that we owned prior to 2021. You can see in dark blue and in red the charters that we agreed during 2021 and 2022, respectively, that materially increased rates and in most cases, on a multiyear basis.
As George mentioned, we signed a further 10 forward fixtures during the third quarter of this year in each instance with a 5-year firm period. These long-term charters, which commenced on the expiry of existing arrangements in late 2022, late this year, through 2023 and into 2024 are reassuring in an otherwise uncertain environment.
Turning to Slide . These are the vessels that we acquired during 2021, again, with subsequent charters indicated in dark blue and in red. I’ll point out a couple of things. Firstly, as we’ve highlighted on the bottom of the slide, the combined impact of these accretive acquisitions and the rechartering of our vessels that came open in our pre-existing fleet almost doubled our first 9 months adjusted EBITDA in 2022 compared to the prior year period. This represents a major step change for GSL.
And secondly, some of the vessels which we acquired in 2021 had charters attached at the date of acquisition which were meaningfully below the then prevailing market rates. Consistent with our strategy of building forward cover, we were able to agree new charters as the market strengthened at rates that were even more accretive than those we modeled at the time of agreeing to the transaction. As regarding principal, we are risk averse and disciplined in acquisitions but will move decisively when there are opportunities to invest, where residual risk is low and potential upside is significant, as in these cases.
On the next slide, Slide 8. As in previous quarters, we show illustrative guidance across different rate scenarios. As always, I want to be very clear that this is not a forecast. We’re not forecasting charter rates for our earnings, but we’re rather illustrating the extent of our contracted revenues and our very limited stock market exposure through 2023. As I mentioned before, we fixed approximately 90% of our days with those few vessels set to come open into the market currently earning charter rates meaningfully below recent highs.
Moving on to Slide 9, where we show an overview of our dynamic and disciplined capital allocation strategy. As we mentioned, our contracted revenue is highly visible and provides us with full coverage of our operating needs and debt service, both interest and amortization.
We’ve also been able to return capital to shareholders, both by way of our sustainable dividend of $1.50 per year, $0.375 a quarter, and as discussed on previous earnings calls and as George mentioned, our share buybacks. We’ve now invested $30 million in buyback since the third quarter of last year and $15 million since our most recent earnings call for Q2 of this year. We still have some $20 million of our overall $40 million buyback authorization remaining.
We continue to delever the business to manage balance sheet risk and to build equity value. We’re investing by way of CapEx over and above routine maintenance spend, for example on regulatory drydockings, to enhance the commercial relevance and competitiveness of our fleet in an evolving regulatory and decarbonization environment. As noted, this includes working with charterers to install energy saving retrofits to vessels currently on the water.
As the cycle turns and the risk and return dynamic improves, we also keep an eye out for potential accretive growth and fleet renewal opportunities on our usual selective but highly disciplined basis. We also want to maintain strong cash liquidity both for resilience and in order to retain optionality in a cyclical and uncertain market. Through all of this, our ultimate focus is on generating long-term value for shareholders through a balanced approach.
With that, I’ll turn the call over to Tassos to talk you through our financials.
Anastasios Psaropoulos
Thank you, Ian. On Slide 10, we have summarized our financial highlights for the first 9 months of 2022. Revenue for the 9 months period was $408.6 million, up from $294.4 million in the prior year period. Similarly, adjusted EBITDA for the 9-month period was $298.4 million, almost double the $158.1 million the first 9 months of 2021. Our normalized income, which adjusts for one-off items, more than doubled from $104.6 million in the first 9 months of 2021 to $221 million in the same period for 2022.
On the balance sheet, during the third quarter, the major event was the completion of the U.S. private placement of $350 million of privately rated investment-grade debt price at a fixed rate of 5.69% used to fully redeem the more expensive 8% senior unsecured notes due 2024, the Hayfin credit facility due 2026 and the Hellenic facility due 2024. Taken together with our interest floating rate caps at 0.75% for all of our floating rate debt, we have reduced our average cost of debt to 4.53%. We have also 5 vessels unencumbered and extended maturities such that we have no refinancing through 2026.
We have a little over $260 million of cash on our balance sheet. Net of restricted cash and minimum liquidity covenants gives $97 million about, much of which is required for working capital. Altogether, we have comprehensively improved our overall financial position and flexibility.
Also, we have utilized $20 million of the $40 million share buyback authorization that we put in place in the second quarter. $15 million of these buybacks have taken place since our last earnings call. All of this is in addition to the $10 million of buybacks in 2021. Finally, and as Ian has mentioned, we are paying a quarterly dividend of $0.375 per share, $1.5 per share annualized.
On Slide 11 now is a summary of our key capital structure developments over time. In the upper left is our amortization schedule through the end of 2023. We aggressively amortize our debt as we think is prudent in this business, and we are focused on managing refinancing risk. Our d[indiscernible] schedule is in the appendix of this presentation on Slide 29.
On the upper right of Slide 11, you can see the margin and overall cost of our debt, both of which have come down markedly over time despite the overall high rate environment and being only slightly higher than the Federal Reserve’s benchmark interest rate.
Our average margin is now down to just over 3% from 4.6% at the beginning of this year. And as I mentioned, we have fully hedged our floating rate exposure with a 0.75% interest floating rate cap. On the lower left, you will see that the trading liquidity in our stock while somewhat reduced in recent months as the macro environment has shifted remains far in excess of levels as recently as the end of 2020 driven by a material increase in our public float.
With that, I will turn the call over to Tom.
Thomas Lister
Thanks, Tassos. As usual, and for the benefit of listeners who are new to GSL, Slide 12 is intended to highlight the ship sizes on which our business is focused, which will help put the subsequent slides in context. GSL is focused on midsized and smaller ships, which is shorthand for ships ranging from about 2,000 TEU up to about 10,000 TEU, which is effectively the liquid charter market.
The top map on this slide on the left shows the deployment of “our sizes of ship,” i.e., ships under 10,000 TEU and emphasizes their operational flexibility which is especially valuable in uncertain times. As you can see, they’re deployed everywhere. The bottom map on the other hand shows where the big ships, i.e. those larger than 10,000 TEU are deployed, which tends to be on the East-West Mainland or arterial trades, where the cargo volumes and shoreside infrastructure can support them. And it’s important to note that over 70%, that’s 7-0 percent of global containerized trade volumes are actually moved outside the main lanes in the north-south regional and intermediate trades served by ships such as ours.
In his opening remarks, George pointed to the increasingly challenging macro and geopolitical outlook that we’re all currently facing and the corresponding deterioration in consumer sentiment. Clearly, our crystal ball is no better than anyone else’s on how these factors will ultimately play out. So as usual, we prefer to focus on the supply side where we do have forward visibility and against which investors and others can set containerized trade or GDP growth projections as they feel appropriate.
Slide 13 shows the metrics that tend to be used as a measure of supply-side tension. The top chart shows idle capacity which, at quarter end, was around 1%, which is broadly where it’s been for about the last 2 years. The bottom chart tells a similar story. Containership recycling, scrapping was almost nonexistent for containerships in 2021 and fell to 0 for the first 9 months of 2022, although I would note that a small number of ships have subsequently been scrapped.
So as at September 30, supply-side tension was still positive, which means that the starting position from which the industry faces whatever challenges are coming down the pipe is one of supportive fundamentals at least from the supply side in the segments we are focused upon.
Slide 14 looks at the order book. Here, you can see on the left the composition of the order book by size segment, covering deliveries scheduled to take place all the way through 2025.
Undeniably, the order book has expanded during the course of the last 18 months or so, reaching an overall order book-to-fleet ratio of 29.6% at the end of September. However, it continues to be heavily skewed towards the big ships, over 10,000 TEU, for which the ratio is 51.4%. Meanwhile, our focus segments of 2,000 to 10,000 TEU, which I highlighted in the red box, have a significantly lower ratio of a little over 15%, that’s 1-5 percent.
And there are two important points to keep in mind when assessing the order book. The first is that the midsize and smaller containership fleet is aging. As you can see from the chart on the right, if scrapping would continue to be deferred, by the end of 2025, a substantial slice of the sub-10,000 TEU capacity currently on the water, a little over 1.5 million TEUs worth, would be at least 25 years old and candidates for the recycling yards. Net this out against the total order book of sub-10,000 TEU vessels due to be delivered through the end of 2025, and you would get implied net growth in these sizes of just 5.9%, which itself would be spread out over the coming 3-plus years.
The second is that 2023, which is now only 2 months away, marks the implementation of new decarbonization regulations which, according to a growing industry consensus, is expected to cause a slowing down of the global fleet to reduce emissions, thus reducing effective supply. I’ll come back to this important point in a couple of slides’ time.
In the meantime, let’s look at Slide 15, the charter market. And as you can see from the chart, the charter market continued its spectacular rise through the first few months of 2022, plateaued through the second quarter and much of the third and then fell quite sharply. Furthermore, charter durations are currently shortening with recent fixtures of only a few months. And the forward fixture market currently is effectively on hold.
Having said all that, availability of ships in the charter market remains very limited as many of the ships that otherwise would have come into the market in recent months had already been forward fixed or extended before coming open. This means that data for vessels in the actual charter market is very thin, and the rates and terms shown are largely theoretical. Hence, the large red question mark on the chart. And this, let’s call it health warning, is particularly relevant to the indicative term charter rates shown to the right of this slide. They are very much theoretical and illustrative.
The sharp fall in charter rates in the charter market rate index seems at odds with the supply side fundamentals shown on the earlier slide. This apparent disconnect may be explained by overwhelmingly negative macro sentiment compounding the lack of liquidity in the charter market and is perhaps exaggerating the downward correction of rates in the near term, though this remains to be seen.
Logically, downward pressure on earnings and negative sentiment will put downward pressure on asset values. But if hard data on charter fixtures is thin, then hard data on sale and purchase transactions and thus value is currently even thinner.
Anyway, we will have better visibility in due course, although probably not until the new year and possibly not even until after Chinese New Year. But few would dispute that a normalization of charter market rates is currently in progress.
And that’s a neat segue to Slide 16, which provides an update on decarbonization, which is expected to actually have a favorable impact on supply side fundamentals over time. Working through the slide. In the top box is a snapshot of the evolving regulatory environment. This is by no means an exhaustive list but addresses the regulations which are most imminent and on which there is currently most clarity.
Let’s start with EEXI, which is The Energy Efficiency Existing Ship Index. This is tied to a ship’s technical characteristics and is binary in nature. So it’s parcel fail. A non-EEXI compliant ship will not be permitted to trade past its first annual IAPP survey, which is an air pollution survey, after January 1, 2023. Next is CII, the Carbon Intensity Indicator. This is an operating measure and is to be determined annually on a backward-looking basis by the ship’s actual operating performance. CII is calculated as a function of actual CO2 emissions divided by vessel deadweight times distance traveled, with some correction factors thrown in for good measure. The first assessments will be performed in 2024 based on 2023 data, with CII ratings ranging from A to E. E-rated ships, all those rated D for 3 years in a row, will require corrective action. And it’s worth noting that CII parameters will tighten progressively over time.
Next up is EU ETS, the European Union Emissions Trading System. This will attribute to cost to greenhouse gas emissions from ships trading to, from or within the EU. The mechanism and timing for the incorporation of shipping under EU ETS is still under review, but ratification and implementation is expected to be within the comparatively near term. So we will keep you posted on that front in due course.
In the next box, we have laid out some of the high-level implications of decarbonization regulations expected for the global containership fleet. These are, firstly, reduced operating speeds to reduce emissions. Vessel operating speed has a disproportionate impact on CO2 emissions as the relationship between speed and fuel consumption, and thus emissions, is close to logarithmic. An important byproduct of slowing the global fleet down is a reduction in effective supply.
And to illustrate, a reduction in average operating speed of the global fleet of just 1 knot, 1 nautical mile per hour, is estimated to reduce effective supply by around 6%. The 2 largest liner operators, MSC and Maersk, have recently reported — been reported as estimating that effective capacity, effective supply reductions could be of the order of 10% and between 5% and 15%, respectively.
Secondly, vessel operations will be optimized for the CII algorithm and ratings. In addition to slowing ships down, efforts will be made to improve their operational efficiency and to minimize unproductive times such as waiting for berths at terminals. So an overall smoothing of operations and increased incentive to utilize , fuel-efficient and well-maintained ships.
And thirdly, increasing investments will be made in energy-saving technologies and retrofits in developing green or, in the near term, greener fuels and propulsion and in carbon capture and mitigation technologies. So with all of that said, what are the actions that we are taking to maintain and hopefully improve the commercial positioning of the GSL fleet in a decarbonizing world? Clearly, our first priority is to ensure regulatory compliance. For EEXI, this is relatively straightforward. When needed, we’re installing engine power limiters, or EPLs, on our ships at a cost of under $100,000 per ship, which will ensure compliance.
CII, on the other hand, is a little more complex as it is determined not only by the efficiency of the underlying ship, but also, I would say actually, primarily, in fact, by how the ship is operated by the charterer. Consequently, we are applying technologies and protocols to enhance cooperation between owners and charterers to facilitate CII optimized vessel operations. Indeed, cooperation and partnership between owners and operators will be key to successful decarbonization. And we are well positioned in this respect as a partnership approach with our charterers has long underpinned the GSL business model and strategy.
Consistent with this approach, we’re also retrofitting Energy Saving Technologies or ESTs, to our ships, subject to commercial agreement and in cooperation with the charterers. These agreements are commercially sensitive, as you may imagine, and vary on a case-by-case basis. But the underlying rationale is that we will only invest in ESTs that will enhance the value and earnings of the corresponding ship.
That’s the crux of it. But for those of you who would like to know more, may I refer you to the Climate Strategy section of our latest ESG report, which is available on our corporate website.
And with that, I’ll turn the call back to George to wrap up. George?
Georgios Youroukos
Thank you, Tom. I will provide a brief summary, and then we would be happy to take your questions. With our recently signed long-term forward fixtures, we have excellent contract cover of over $2.2 billion over an average of 2.9 years, fully covering our debt service, CapEx and sustainable dividends through at least 2023, even before the impact of any further charter renewals.
We have built a very strong balance sheet, rated BB Stable and B minus 1 positive by Standard & Poor’s and Moody’s, respectively. We have proven diversified access to capital, most recently through a successful U.S. private placement and a very attractive cost of debt. We have a very high quality fleet of high-reefer, midsize Post-Panamax and smaller containerships which play a critical role for our liner customers. Idle capacity remains very low in the global fleet and scrapping has only just begun at the margins following a complete stop for an extended period, suggesting a backlog of aging vessels that would likely be scrapped in the down market.
Due to this and to the high concentration of ordering activity in the very largest vessels, we expect net fleet growth in our fleet sizes to actually be fairly negligible and perhaps negative on the effective basis from 2023. There’s no question that macro headwinds and negative sentiment are causing a normalization from the extraordinary conditions in recent quarters in terms of flight rates, charter rates and asset values.
That being said, given the extremely limited number of ships that are presently in the charter market, it remains to be seen whether the current steep declines are, in fact, broadly representative. It is worth noting that line operators are still forecasting full year ’22 to be extraordinarily profitable for them.
Finally, our capital allocation is focused on business resilience and on maximizing long-term value for shareholders. Through well-timed acquisitions and contracting on a long-term basis, we are well positioned to sustain the recent step change in our earnings. Our dividend is both attractive and sustainable. And we continue to build cash liquidity for resilience, optionality and to proactively address the challenges and opportunities of decarbonization.
With that, we would be happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from the line of Amit Mahotra from Deutsche Bank.
Unidentified Analyst
This is Chris Robertson on for Amit. I just wanted to ask on — you mentioned the backlog of potential scrapping candidates. So do you have a sense of how much bottlenecking could be there in terms of the space that’s available at the breaker yards? I’m just trying to get a sense of how much of that scrap capacity could actually be absorbed by the yards at any given point in time?
Thomas Lister
Yes, that’s a good question, Chris. I would say that at least for us, it’s a comparatively academic one, fortunately, because even our older ships are contracted on charters by and large. But you raise a very reasonable point.
I think the other thing that we have to keep in mind is that with the decarbonization regulations which are going to tighten over time, I think both we and the industry as a whole are expecting the fleet to slow down. So it’s quite difficult to know how much “excess capacity” is need to be scrapped out in any case. So sorry, I can’t give you a clearer steer than that.
Unidentified Analyst
No problem. My second question is just looking at the current share price, how are you guys thinking about valuation in the context of the remaining share repurchase authorization program? And when it comes to kind of the current market sentiment, are you taking more of a cautious approach in building cash on the balance sheet? Or what’s the appetite for secondhand acquisitions in this countercyclical market?
Georgios Youroukos
Yes. I’ll try to answer that, Chris, and Ian can jump in. First of all, we are taking a cautious approach always. That’s why we have not purchased any ships for a long time as prices, we felt, were not making a lot of sense for us.
Now yes, prices are coming down, opportunities will arise. We’re not in any hurry to grab them. We want to see where the market will stabilize and settle. But it is very important for a company entering in a market like this to have a lot of cash on the side for all sorts and purposes. So we are building our cash position naturally, which is the right thing to do for any company. And we are sitting still and observing the market and the opportunities.
Now with respect to buyback, it’s still in our book as it has been. We have done buybacks last quarter, and we have still the authorization open and we’re looking at it as well.
Operator
Your next question comes from the line of Omar Nokta from Jefferies.
Omar Nokta
Wanted to ask broadly just about the market. And then Tom, I think you outlined things very well, especially in terms of what’s going on in the charter markets. We’ve obviously seen a slowdown here over the past few months. And even as things were slowing down, you were able to secure some, I guess, 10, 11 forward contracts at good rates. But just in general, how would you characterize the actual conversations you’re having with your liner customers? Are they still interested in discussing contracting ecoships and maybe they’re just taking a step back from older tonnage? How would you frame the market just in general in terms of your customers and how they’re viewing the different types of assets out there?
Thomas Lister
Sure. Omar, thanks for the question. I’ll try and answer this, and I’m sure George will have some views as well. But I think what’s going on at the moment is that, tactically, the lines are taking a little bit of a wait-and-see approach. So no one’s rushing in to fix ships, be they ECO or existing tonnage. And part of that is that there’s very little liquidity. There are very few ships coming open in the market at the moment. So it’s going to be, I think — I’m sorry for deflecting the question, I would say it’s going to be really only in 2 or 3 months’ time that we’ll have a little bit more clarity on how the market is shaping up and where the demand for vessels lies. And one of the principal considerations there is the decarbonization regulation. Everyone has tried to model out what the implications of that are going to be, but I think the proof is always ultimately in the pudding. So we’ll have to see how that has an impact early next year.
So at the moment, tactical, wait and see, taking ships on comparatively short terms. And I would say that broadly characterizes it. George, would you agree?
Georgios Youroukos
Yes. And I would just add to that, that line of companies being businessmen, they want to take the best deal for them. And when they see that the market is softening and softening fast, actually what we have seen was quite a substantial drop very quickly. No one is willing to commit until they see where the market is going to set because they might — whatever you charter today, tomorrow might be expensive. So they want to see where the demand-supply will balance and then they will come into the market.
And this has happened recently. I mean there’s an increase of fixtures in the last 5 weeks. We had in the first 3 weeks less fixtures and now have a bit more fixtures. So liner companies are coming into the market seeing that the rates have bottomed out in a way so that they’re going to take their needs.
I mean they do need ships. There’s no doubt. They continuously need ships. It’s just an opportunistic, I think, approach that the liner companies have taken with the opportunity of concluding — contracting ships at lower rates if they wait a bit. It always happens. The same happens on the way up. Liner companies are out there to take ships and owners shy away from doing this. So that in the anticipation that the rates are going up, so you charter a ship tomorrow, it’s better than what you’ve chartered today. So it’s the same thing.
Omar Nokta
Got it. And just as a follow-up, you were fairly acquisitive in the early stages of the cycle, buying ships fairly cheaply I’d say. And then you’ve been harvesting the cash since. We’ve got a nice cash position, low leverage and a pretty sizable backlog. When it’s time to start focusing on acquiring tonnage again, how do you think about that in terms of what you actually buy? Are you agnostic to whether they’re ECO vessels or older ships? Tom, you mentioned in your opening remarks, it’s really just about the residual value. Does that hold in this context of looking at newer ships versus older ships?
Georgios Youroukos
In containers, it’s more than new or younger. The specifications of the ships versus the containerships have very different specifications between them. We always focus on the highest level of commercial characteristics of ships. So we prefer the ships that are the first choice of charters, whether these fall within the Eco type or the classic type. And let’s not forget that the container fleet, it’s 80% almost noneco-type. So it’s not like a fleet 50-50 or so.
What is important for charter is really, it’s the commercial [indiscernible] to the ship. Let’s say, for example, if the ship has a very high reefer capacity, that’s a very positive. If the ships can take a lot of loaded cargo, they have a high loading capacity, homogeneous loading, what we call it in our industry. So the stability of the ship is high, so it can take a lot of loaded and stuff like that.
Thomas Lister
And just to add to that, Omar, I would just like to clarify that we’re not looking at new buildings. So we will continue to focus upon existing ships that would be immediately accretive acquisitions were we to make such acquisitions. And we would be focusing upon midlife ships and, as George said, in the segments upon which we are focused because it’s a set of segments that have been underinvested structurally over a number of years.
The proportion of “ecoships” in the midsize and smaller segments is rather limited anyway. So that’s — it’s not as important, let’s say, as it would be if one were to focus upon bigger ships. And there, we always like deals that have visibility on cash flows, can be written down to modest residuals with upside optionality thereafter. So we’re not changing the recipe for our cooking.
Operator
[Operator Instructions]. Our next question comes from the line of Liam Burke from B. Riley.
Liam Burke
Interesting, if you lay out your operating revenues and break it down between the amortization of charter agreements, it really highlights your growth in TCE revenues. How long is it going to take for that amortization to run through the income statement?
Thomas Lister
I think that’s Ian coughing about to say.
Liam Burke
Sorry, Ian, I apologize for that.
Ian Webber
SP3 Now your question was just so fantastic, Liam. In fact, so fantastic, could you repeat it?
Liam Burke
Anyway, the amortization of the charter agreements that have been running through the income statement for a few years now beginning to run down. But I mean, if you look at it on a year-over-year basis, you really muted the growth of your TCE revenues on an apples-to-apples basis. How long is it going to take for this amortization to run its course?
Ian Webber
The honest answer is I’m not sure. Tassos may know. I mean it’s noncash as well. And we adjust for that when we come up with EBITDA, adjusted EBITDA. But you’re right, over time, those — that credit, the amortization of the liability does deteriorate. And the charters associated with acquisitions that we made in 2021, most of those charters I’m thinking out here were relatively short. So I would imagine that in the not-too-distant future, that item will disappear.
Liam Burke
Okay. And getting back to acquisitions. Scrapping, as Tom laid out, is fairly nonexistent. Are there any — is there any crossover between potential scrap vessels when you start looking at acquisitions again and how you are able to squeeze additional economic value out of those older assets?
Thomas Lister
Well, I’ll have a crack at answering that. I mean this ties in, again, Liam, we’re trying to work very closely with our charterers to enhance existing ships that are on charters to them, including older ships where the specifications are attractive enough, in such a way as to ensure that those ships remain sticky, let’s say, on those charters and get renewed with those charters.
So I think there is going to be a shaking out potentially of the fleet, depending upon the degree to which the global fleet has to slow down, which we think is going to be significant. And any excess vessels that are no longer needed to the global fleet in there. There will be a differentiation, I think, between those vessels that are well specified and enhanced for more efficient operation and those that are less so. I don’t know if that addresses your…
Liam Burke
No, that’s fine.
Operator
Your final question comes from the line of Frode Morkedal from Clarksons Securities.
Frode Morkedal
You mentioned the opportunities. What kind of opportunities are you looking for or hoping for? Are you looking at like distressed opportunities? Or are these, let’s call it more normal sale leaseback transactions that are, let’s say, more reasonably priced?
Georgios Youroukos
Yes, I’ll tell you what. In this market, I wouldn’t expect many distressed by the real meaning of it as owners have been making money in the last couple of years.
There are two types of opportunities out there. They are either sale and leasebacks, which is something we have been always doing throughout the years. And these are not market-related, really, this is just a transaction where it’s cash flow and residual value at the end. And then there are the market deals, where, say, some owner is willing to sell a fleet or a single ship or a couple of ships at where the values of the ships are.
Now we do have a lot of inside deals, we always had, that don’t come into the market and what we call the market deals. And we buy those ships when we feel that the level of acquisition of the ship makes sense for us and the downside risk is minimal when the upside optionality is substantial. We have done a lot of these deals. They all work perfectly. Sometimes they give you a very high return. Sometimes they give you a more reasonable good return. It very much depends on how the market moves away from the point of acquisition onwards. But this is the type of deal that you always do in shipping as long as the entry point, the entry price, is right.
Frode Morkedal
Yes Sure. Final question I had is, there’s a lot of question on, let’s call it, counterparty risk. How should investors think about that in relation to, let’s say, the resilience of the backlog?
Georgios Youroukos
Well, I will let Ian also talk about that because he has been having this question over the years. But I would say that the counterparties in container shipping, all the liner companies, they are in the better — in the best shape they have ever been historically financially. And actually more than that. So they’re all, I would probably say, net debt 0 and lots of cash in addition to that on the side.
So we’re not worried about our counterparties because we also have only first-class names in our portfolio. But Ian, you can also add what your experience has been even in the difficult years when things [indiscernible]
Ian Webber
Yes. Not a great deal to add, George. Further, we have industry standard charter contracts, they’re noncancelable. We only deal with the really good names. We’ve never had a bad debt in GSL. It kind of doesn’t happen in our industry by and large, anyway. Liner companies are desperate for these ships. They need the charter fleet to run their scheduled services. Without the ships, they don’t have services. So it’s in their own interest to behave properly. And as George said, they’re in the best financial shape they’ve probably ever been in. So we’re not at all complacent about it, but we’re — it doesn’t keep us awake at night. And the last point I’ll make is that we’ve got very strong relationships with all of our customers as well. So we’re very careful with whom we contract.
Operator
Your final question comes from the line of from Deutsche Bank.
Unidentified Analyst
I just had one final follow-up question, this is Chris again. On Slide 23, you guys did a good job laying out the survey drydocking CapEx as well as ballast water treatment systems and upgrade. Can you comment as to what the other CapEx category is, the $4.6 million and $4.7 million in ’22 and ’23, respectively? And does that add to the depreciable value of the assets?
Anastasios Psaropoulos
Usually, we have expenses that are related with some upgrades that have to do with commercial. And it’s been reflected, all these upgrades and the other CapEx, mainly to the charter rates that we are taking. Or there are some upgrades on a smaller scale which are regulatory to have. I don’t know if that’s okay with you and you are covered.
Operator
That does conclude today’s questions. I would now like to turn the call over to Ian Webber, CEO.
Ian Webber
Thank you very much. Thank you all for listening. Thank you for your questions. We look forward to providing you with a further update on GSL and the container shipping market for the fourth quarter earnings, which will be next year in 2023. Thanks very much.
Operator
Thank you, ladies and gentlemen. This does conclude today’s call. Thank you for your participation. You may now disconnect.
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