Danaos’ CEO Dr. John Coustas commented:

We report our results for the third quarter of 2016 in the aftermath of the bankruptcy of Hanjin Shipping, one of Danaos’ large customers. As a result of the bankruptcy, we did not recognize any operating revenues for the vessels that had been chartered to Hanjin during the quarter. This reduced our operating revenues by $24.8 million and was the main contributor to the $21 million reduction in our adjusted net income to $22.8 million compared to an adjusted net income of $43.8 million in the third quarter of 2015.

Setting aside the significant effect of the Hanjin bankruptcy on our operating revenues and our bottom line, we have otherwise managed to improve our adjusted net income by $3.8 million, mainly due to a $10.2 million improvement in our net finance costs resulting from the continued de-leveraging of our balance sheet, interest rate swap expirations and a $1.3 million reduction in total operating expenses, partially offset by a $8 million reduction in operating revenues attributed to lower fleet utilization, the sale of the Federal during the first quarter and lower re-chartering rates for certain of our vessels in a softer charter market.

As a result of the Hanjin bankruptcy we also recorded a write-off of $15.8 million, representing the outstanding charter hire owed to us by Hanjin as of June 30, 2016. Additionally, principally as a result of the effects of the cancellation of the Hanjin charters, the Company was in breach of certain financial covenants as at September 30, 2016 for which we have obtained waivers until April 1, 2017. Because the waivers are for a period of less than 12 months, all of the debt has been classified as current on the September 30, 2016 financial statements. Notwithstanding the negative consequences of the Hanjin bankruptcy, the Company is currently in a position to fully service all of its operational and contractual financial obligations.

All the Hanjin vessels have been discharged and re-delivered to us. We have already re-chartered 5 x 3,400 TEU vessels at market rates while we are still in negotiations to charter the remaining 3 x 10,100 TEU vessels, which we expect to be deployed after the end of the first quarter of 2017.

During the third quarter we sold all the shares that the Company had received as compensation pursuant to the HMM restructuring for a consideration of $38.1 million. This constitutes a 98% recovery of the $39 million charter hire concession for which we were compensated with HMM shares. Despite the effective recovery at par on a cash basis, we recorded a non-cash accounting loss of $12.9 million on the sale of these shares, reflecting the difference between the book value and the sale price of the shares, which has been included within our adjusted net income calculation.

Danaos continues to have low near term exposure to the weak spot market compared to current operating revenues with 95% of charter cover in terms of third quarter operating revenues and 79% in terms of contracted operating days for the next 12 months. Additionally, our continued focus on cost containment has reduced our daily operating costs to $5,462 per day for the third quarter, a decline of nearly 4% versus the same period in the prior year. This clearly positions us as one of the most efficient operators in the industry, which is particularly beneficial in today’s environment.

Amidst this challenging economic environment we will remain singularly focused on preserving value, de-levering our balance sheet, managing our fleet efficiently and capitalizing on the resilience of our business model.

Three months ended September 30, 2016 compared to the three months ended September 30, 2015

During the three months ended September 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the three months ended September 30, 2015. Our fleet utilization decreased to 96.7% in the three months ended September 30, 2016 compared to 100.0% in the three months ended September 30, 2015.

Our adjusted net income amounted to $22.8 million, or $0.21 per share, for the three months ended September 30, 2016 compared to $43.8 million, or $0.40 per share, for the three months ended September 30, 2015. We have adjusted our net income in the three months ended September 30, 2016 mainly for bad debt expense of $15.8 million related to Hanjin Shipping, loss on sale of HMM securities of $12.9 million, unrealized gains on derivatives of $1.6 million and a non-cash amortization charge of $4.0 million for fees related to our comprehensive financing plan (comprised of non-cash, amortizing and accrued finance fees). Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The decrease of $21.0 million in adjusted net income for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 is attributable to a $32.8 million decrease in operating revenues, which were partially offset by $10.2 million decrease in net finance costs mainly due to lower debt balances and interest rate swap expirations, a $1.3 million decrease in total operating expenses and a $0.3 million decrease in loss on equity investments.

On a non-adjusted basis, we incurred a loss of $8.4 million, or $0.08 loss per share, for the three months ended September 30, 2016 compared to net income of $42.1 million, or $0.38 earnings per share, for the three months ended September 30, 2015.

Operating Revenues

Operating revenues decreased by 22.7%, or $32.8 million, to $111.8 million in the three months ended September 30, 2016 from $144.6 million in the three months ended September 30, 2015.

Operating revenues for the three months ended September 30, 2016 reflect:

• $24.8 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to loss of revenue from cancelled charters with Hanjin Shipping for eight of our vessels, for which we ceased recognizing revenue effective as of July 1, 2016. See “Recent news” below.
• $1.1 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the sale of the Federal on January 8, 2016.
• $4.5 million decrease in revenues in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the re-chartering of certain of our vessels at lower rates.
• $2.4 million decrease in revenues due to lower fleet utilization in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

Vessel Operating Expenses

Vessel operating expenses decreased by 5.7%, or $1.6 million, to $26.6 million in the three months ended September 30, 2016 from $28.2 million in the three months ended September 30, 2015. The decrease is attributable to a 3.7% decrease in the average daily operating cost per vessel while the average number of vessels in our fleet during the three months ended September 30, 2016 decreased by 1.8% compared to the three months ended September 30, 2015.

The average daily operating cost per vessel decreased to $5,462 per day for the three months ended September 30, 2016 from $5,669 per day for the three months ended September 30, 2015. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation & Amortization

Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation

Depreciation expense decreased by 2.1%, or $0.7 million, to $32.5 million in the three months ended September 30, 2016 from $33.2 million in the three months ended September 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the three months ended September 30, 2016 following the sale of the Federal on January 8, 2016.

Amortization of Deferred Dry-docking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs increased by $0.6 million, to $1.5 million in the three months ended September 30, 2016 from $0.9 million in the three months ended September 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last nine months.

General and Administrative Expenses

General and administrative expenses remained stable, amounting to $5.5 million both in the three months ended September 30, 2016 and in the three months ended September 30, 2015.

Other Operating Expenses

Other Operating Expenses include Voyage Expenses and Bad Debt Expense.

Voyage Expenses

Voyage expenses increased by $0.4 million, to $3.3 million in the three months ended September 30, 2016 from $2.9 million in the three months ended September 30, 2015.

Bad Debt Expense

Bad debt expense of $15.8 million in the three months ended September 30, 2016 compared to nil in the three months ended September 30, 2015 relates to receivables from Hanjin Shipping, which were written-off.

Interest Expense and Interest Income

Interest expense decreased by 0.5%, or $0.1 million, to $21.0 million in the three months ended September 30, 2016 from $21.1 million in the three months ended September 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively. The decrease in interest expense was mainly due to the decrease in our average debt by $243.0 million, to $2,632.0 million in the three months ended September 30, 2016, from $2,875.0 million in the three months ended September 30, 2015 and a $0.3 million decrease in the amortization of deferred finance costs, which were partially offset by an increase in average cost of debt due to the increase in US$ Libor.

The Company is deleveraging its balance sheet. As of September 30, 2016, the debt outstanding gross of deferred finance costs was $2,615.4 million compared to $2,860.1 million as of September 30, 2015. As a result principally of the cancellation of eight charters with Hanjin Shipping, we expect the rate at which we reduce our leverage to decline.

Interest income increased by $0.5 million to $1.4 million in the three months ended September 30, 2016 compared to $0.9 million in the three months ended September 30, 2015. The increase is mainly attributed to the interest income recognized on HMM notes receivable.

Other finance expenses

Other finance expenses decreased by $0.1 million, to $1.1 million in the three months ended September 30, 2016 from $1.2 million in the three months ended September 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively.

Equity loss on investments

Equity loss on investments decreased by $0.3 million, to $0.7 million in the three months ended September 30, 2016 compared to a loss of $1.0 million in the three months ended September 30, 2015 and relates to the investment in Gemini Shipholdings Corporation (“Gemini”), acquired in August 2015, in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini.

Unrealized gain on derivatives

Unrealized gains on interest rate swaps amounted to $1.6 million in the three months ended September 30, 2016 compared to unrealized gains of $2.6 million in the three months ended September 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps.

Realized loss on derivatives

Realized loss on interest rate swaps decreased by $10.0 million, to $2.2 million in the three months ended September 30, 2016 from $12.2 million in the three months ended September 30, 2015. This decrease is attributable to a $375.0 million decrease in the average notional amount of swaps during the three months ended September 30, 2016 compared to the three months ended September 30, 2015 as a result of swap expirations.

Other income/(expenses),net

Other income/(expenses), net decreased by $12.9 million, to $12.8 million net expenses in the three months ended September 30, 2016 from $0.1 million net income in the three months ended September 30, 2015 due to a $12.9 million recognized loss on sale of HMM equity securities for cash proceeds of $38.1 million, which were acquired by Danaos in July 2016 as part of the charter restructuring agreement with HMM.

Adjusted EBITDA

Adjusted EBITDA decreased by 29.3%, or $31.3 million, to $75.5 million in the three months ended September 30, 2016 from $106.8 million in the three months ended September 30, 2015. As outlined earlier, this decrease is mainly attributed to a $32.8 million decrease in operating revenues, which were partially offset by a $0.3 million decrease in loss on equity investments and a $1.2 million decrease in voyage and vessel operating expenses. Adjusted EBITDA for the three months ended September 30, 2016 is adjusted mainly for bad debt expenses of $15.8 million, loss on sale of HMM securities of $12.9 million, unrealized gain on derivatives of $1.6 million and realized losses on derivatives of $1.2 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

During the nine months ended September 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the nine months ended September 30, 2015. Our fleet utilization decreased to 96.0% in the nine months ended September 30, 2016 compared to 99.2% in the nine months ended September 30, 2015.

Our adjusted net income amounted to $117.7 million, or $1.07 per share, for the nine months ended September 30, 2016 compared to $112.3 million, or $1.02 per share, for the nine months ended September 30, 2015. We have adjusted our net income in the nine months ended September 30, 2016 mainly for bad debt expense of $15.8 million related to Hanjin Shipping, loss on sale of HMM securities of $12.9 million, unrealized gains on derivatives of $3.7 million and a non-cash amortization charge of $12.3 million for fees related to our comprehensive financing plan (comprised of non-cash, amortizing and accrued finance fees). Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $5.4 million in adjusted net income for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is mainly attributable to a reduction of $42.4 million in net finance costs mainly due to lower debt balances and interest rate swap expirations, a $1.6 million decrease in total operating expenses, which were partially offset by a decrease of $38.4 million in operating revenues and a $0.6 million increase in loss on equity investments.

On a non-adjusted basis, our net income amounted to $80.4 million, or $0.73 per share, for the nine months ended September 30, 2016 compared to net income of $110.5 million, or $1.01 per share, for the nine months ended September 30, 2015.

Operating Revenues

Operating revenues decreased by 9.0%, or $38.4 million, to $386.2 million in the nine months ended September 30, 2016 from $424.6 million in the nine months ended September 30, 2015.

Operating revenues for the nine months ended September 30, 2016 reflect:

• $24.8 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to loss of revenue from cancelled charters with Hanjin Shipping for eight of our vessels, for which we ceased recognizing revenue effective as of July 1, 2016. See “Recent news” below.
• $2.3 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the sale of the Federal on January 8, 2016.
• $7.1 million decrease in revenues in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the re-chartering of certain of our vessels at lower rates.
• $4.2 million decrease in revenues due to lower fleet utilization in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

Vessel Operating Expenses

Vessel operating expenses decreased by 1.8%, or $1.5 million, to $83.6 million in the nine months ended September 30, 2016, from $85.1 million in the nine months ended September 30, 2015. The decrease is due to a decrease in average number of vessels in our fleet by 1.8% and due to a 0.4% decrease in the average daily operating cost per vessel during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

The average daily operating cost per vessel decreased to $5,749 per day for the nine months ended September 30, 2016 from $5,770 per day for the nine months ended September 30, 2015. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation & Amortization

Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation

Depreciation expense decreased by 2.0%, or $2.0 million, to $96.6 million in the nine months ended September 30, 2016 from $98.6 million in the nine months ended September 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the nine months ended September 30, 2016 following the sale of the Federal on January 8, 2016.

Amortization of Deferred Dry-docking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs increased by $1.1 million, to $4.0 million in the nine months ended September 30, 2016 from $2.9 million in the nine months ended September 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last nine months.

General and Administrative Expenses

General and administrative expenses remained stable, amounting to $16.1 million both in the nine months ended September 30, 2016 and in the nine months ended September 30, 2015.

Other Operating Expenses

Other Operating Expenses include Voyage Expenses and Bad Debt Expense

Voyage Expenses

Voyage expenses increased by $0.8 million, to $10.0 million in the nine months ended September 30, 2016 from $9.2 million in the nine months ended September 30, 2015. The increase is mainly due to increased bunkering expenses.

Bad Debt Expense

Bad debt expense of $15.8 million in the nine months ended September 30, 2016 compared to nil in the nine months ended September 30, 2015 relates to receivables from Hanjin Shipping, which were written-off.

Interest Expense and Interest Income

Interest expense decreased by 3.7%, or $2.4 million, to $61.8 million in the nine months ended September 30, 2016 from $64.2 million in the nine months ended September 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $9.7 million and $10.7 million, respectively. The change in interest expense was mainly due to the decrease in our average debt by $240.5 million, to $2,685.5 million in the nine months ended September 30, 2016, from $2,926.0 million in the nine months ended September 30, 2015 and due to a $1.0 million decrease in the amortization of deferred finance costs, which were partially offset by an increase in average cost of debt due to the increase in US$ Libor.

The Company is deleveraging its balance sheet. As of September 30, 2016, the debt outstanding gross of deferred finance costs was $2,615.4 million compared to $2,860.1 million as of September 30, 2015. As a result principally of the cancellation of eight charters with Hanjin Shipping, we expect the rate at which we reduce our leverage to decline.

Interest income increased by $0.7 million to $3.2 million in the nine months ended September 30, 2016 compared to $2.5 million in the nine months ended September 30, 2015. The increase is mainly attributed to the interest income recognized on HMM notes receivable.

Other finance expenses

Other finance expenses decreased by $0.2 million, to $3.3 million in the nine months ended September 30, 2016 from $3.5 million in the nine months ended September 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $9.7 million and $10.7 million, respectively.

Equity loss on investments

Equity loss on investments of $1.6 million in the nine months ended September 30, 2016 compared to a loss of $1.0 million in the nine months ended September 30, 2015 relate to the investment in Gemini Shipholdings Corporation (“Gemini”), acquired in August 2015, in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini.

Unrealized gain on derivatives

Unrealized gains on interest rate swaps amounted to $3.7 million in the nine months ended September 30, 2016 compared to unrealized gains of $11.6 million in the nine months ended September 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings due to the discontinuation of hedge accounting since July 1, 2012.

Realized loss on derivatives

Realized loss on interest rate swaps decreased by $40.3 million, to $7.5 million in the nine months ended September 30, 2016 from $47.8 million in the nine months ended September 30, 2015. This decrease is attributable to a $675.8 million decrease in the average notional amount of swaps during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 as a result of swap expirations.

Other income/(expenses),net

Other income/(expenses), net decreased by $12.5 million, to $12.4 million net expenses in the nine months ended September 30, 2016 from $0.1 million net income in the nine months ended September 30, 2015 mainly due to a $12.9 million recognized loss on sale of HMM equity securities for cash proceeds of $38.1 million, which were acquired by Danaos in July 2016 as part of the charter restructuring agreement with HMM.

Adjusted EBITDA

Adjusted EBITDA decreased by 12.1%, or $37.9 million, to $274.7 million in the nine months ended September 30, 2016 from $312.6 million in the nine months ended September 30, 2015. As outlined earlier, this decrease is mainly attributed to a $38.4 million decrease in operating revenues and a $0.6 million increased loss on equity investments, which were partially offset by a $0.7 million decrease in voyage and vessel operating expenses. Adjusted EBITDA for the nine months ended September 30, 2016 is adjusted mainly for bad debt expenses of $15.8 million, loss on sale of HMM securities of $12.9 million, unrealized gain on derivatives of $3.7 million and realized losses on derivatives of $4.5 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Recent news

Hanjin Shipping

On September 1, 2016, Hanjin Shipping, a charterer of eight of our vessels under long term, fixed rate charter party agreements, referred to the Bankruptcy Court of Seoul in South Korea, which issued an order to commence the rehabilitation proceedings of Hanjin Shipping. Hanjin Shipping has cancelled all eight of its charter party agreements with us, which represented approximately $560 million of our $2.8 billion of contracted revenue as of June 30, 2016, and returned each of the vessels to us. We have rechartered five 3,400 TEU vessels on short-term charters at market rates and are seeking chartering opportunities for the other three vessels in the prevailing weak containership charter market. As a result of these events, we ceased recognizing revenue from Hanjin Shipping effective from July 1, 2016 onwards and recognized a bad debt expense amounting to $15.8 million relating to unpaid charter hire recorded as accounts receivable as of June 30, 2016 in our condensed consolidated statements of income for the nine month period ended September 30, 2016. We have an unsecured claim for unpaid charter hire, charges, expenses and loss of profit against Hanjin Shipping totaling $597.9 million submitted to the Bankruptcy Court of Seoul.

As a result of a decrease in our operating income and charter-attached market value of certain of our vessels caused mainly by the cancellation of our eight charters with Hanjin Shipping, we were in breach of the minimum security cover, consolidated net leverage and consolidated net worth financial covenants contained in our Bank Agreement and our other credit facilities as of September 30, 2016. We have obtained waivers of the breaches of these financial covenants covering the period until April 1, 2017. As these waivers were obtained for a period of less than the next 12 months, and in accordance with the guidance related to the classification of obligations that are callable by the lenders, we have classified our long-term debt, net of deferred finance costs as current. Notwithstanding the negative consequences of the Hanjin bankruptcy, the Company is currently in a position to fully service all of its operational and contractual financial obligations.

HMM

In July 2016, we entered into a charter restructuring agreement with HMM as part of the agreements it reached with its creditors and owners of its chartered-in fleet in connection with the restructuring of its obligations. The charter restructuring agreement provides for a 20% reduction, for the period until December 31, 2019 (or earlier charter expiration in the case of eight vessels), in the charter hire rates payable for thirteen of our vessels currently employed with HMM. In exchange, under the charter restructuring agreement we received (i) $32.8 million principal amount of senior, unsecured loan notes, amortizing subject to available cash flows, which accrue interest at 3% per annum payable on maturity in July 2024, (ii) $6.2 million principal amount of senior, unsecured, non-amortizing loan notes, which accrue interest at 3% per annum payable on maturity in December 2022 and (iii) 4,637,558 HMM shares issued on July 23, 2016, which were sold for cash proceeds of $38.1 million on September 1, 2016.