Danaos' Optimistic Narrative Overlooks Critical Charter and Covenant Risks

What happened

A recent Seeking Alpha article praises Danaos as a disciplined capital allocator with a fortress balance sheet, despite a stock price run-up. However, the DeepValue master report reveals that while contracted cash flows provide earnings visibility through 2026, charter coverage plummets to 87% in 2027 and 64% in 2028, signaling a looming EBITDA reset. Filings explicitly warn that lower contracted charter rates are already impacting revenue, and collateral coverage covenants could restrict dividends if vessel values decline. New ventures into dry bulk and Alaska LNG add optionality but risk capital misallocation ahead of sensitive charter renewals. Investors must therefore look beyond the positive spin to assess the balance sheet's resilience against upcoming cyclical pressures.

Implication

The near-term cash flow visibility and low leverage are appealing, but the investment case weakens if charter rates reset lower, compressing EBITDA beyond 2026. Dividend payments are conditional on lender approvals tied to vessel collateral, making them vulnerable in a market downturn. The Alaska LNG partnership, while offering growth optionality, could divert capital from core operations during a critical period of fleet renewal. Management's ability to navigate the delivery wave without eroding lender headroom is essential for preserving equity value. Thus, maintaining exposure requires confidence that Danaos can fill open charter days at acceptable rates while avoiding covenant breaches.

Thesis delta

The Seeking Alpha article reinforces Danaos as a deep value play with strong capital allocation, but the DeepValue report cautions that the thesis hinges on managing the 2027-2028 charter roll without triggering balance sheet stress. Investors must adjust from viewing it as a perpetual cash flow story to one of cyclical navigation, where success depends on mitigating EBITDA fade and collateral risks.