SFL Corporation Ltd (SFL) 2009 Q2 法說會逐字稿

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  • Operator

  • Good day, and welcome to the Ship Finance International Q2 2009 Earnings Release Conference Call.

  • Today's conference is being recorded.

  • At this time I'd like to hand the conference over to Ole Hjertaker.

  • Please go ahead, sir.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Thank you, and welcome, everyone, to the Ship Finance International second quarter conference call.

  • Apologies for the delay in the startup for the call.

  • There was an error with the Website for the Webcast.

  • But that should be sorted out by now.

  • My name is Ole Hjertaker, and I am the Chief Executive Officer and Chief of Finance Management.

  • With me here today I also have [Harold Gervin], Senior Vice President, and Magnus Valeberg, who is Vice President in the Company.

  • Page 2.

  • Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

  • Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements.

  • These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements.

  • Important factors that could cause actual results to differ include conditions in the shipping, offshore, and credit markets.

  • For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

  • Furthermore, this presentation does not constitute an offer to sell or the solicitation of an offer to buy shares of the Company's securities.

  • Page 3.

  • The Board of Directors has declared a cash dividend of $0.30 per share this quarter, similar to the previous two quarters.

  • This represents $1.20 per share on an annualized basis, or 10% dividend yield based on the closing price yesterday.

  • We have now declared dividends for 22 consecutive quarters and more than $10 in total aggregate cash dividends.

  • The net income for the quarter was $53.5 million, or $0.72 per share.

  • This is including a $41-million gain on buyback of bonds and a $33.7-million asset impairment, predominantly relating to the remaining single-hull assets.

  • We will comment on these two items specifically.

  • The full effect of the cash flow from the new ultra-deepwater drilling rigs came in in the second quarter 2009.

  • The West Taurus was on location in Brazil in February 2009, and the full rate on the rig commenced at that time.

  • We now have close to $100 million in quarterly based bareboat charter revenues from these three ultra-deepwater rigs.

  • These are accounted for as investment in associate based on US GAAP, and, therefore, only the net income in these subsidiaries appear in our consolidated income statement.

  • We have a continued profit share contribution, despite a weaker tanker market.

  • We had $8 million profit share contribution in the first quarter and $22.5 million profit share accumulated the first six months.

  • On average, there's been $85 million, or approximately $1.15 per share, average profit share since 2004 on an annualized basis.

  • The expectations for the spot tanker market in the remainder of 2009 is soft, based on ship broker estimates and forward rates as quoted by Imarex.

  • However, Ship Frontline has sub-charted several vessels at high rates, and the breakeven level for vessels in the spot market for profit share purposes is therefore significantly lower than the base rates, which are $26,000, approximately, for the VLCCs.

  • Page 4.

  • At the end of the first quarter, there were $449 million of our 8.5% senior secured notes-- sorry-- senior notes due 2013 outstanding.

  • During the second quarter, we repurchased bonds with a face value of $148 million, and the net remaining outstanding under the bond loan is now $301 million.

  • The bonds were repurchased at the prevailing market price of 84.5%, representing a 15.5% discount to par value and an effective yield to worst return for those bonds of 13.3%.

  • The $125-million acquisition was financed by $90 million of bank loans at capital rates of $16.5 million and the remaining from the Company's cash reserves.

  • The repurchased bonds will be held as treasury bonds.

  • But, for US GAAP purposes, they will be treated as extinguished.

  • In our books as of June 30, we therefore have $301 million senior notes, plus the $90 million of new financing raised in connection with the repurchase.

  • This is, net, $58 million lower than the previous quarter.

  • The transaction resulted in total book gain of $41.7 million, including a $19-million mark-to-market gain relating to the old total return swap agreements that were settled.

  • In the quarter, we recognized a $26.7 million noncash impairment relating to our six single-hull tankers on charter to Frontline.

  • The impairment was triggered by the accounting effect of the sale of the Front Duchess, and we decided to revise the book values also for the other vessels.

  • At the end of the first quarter, the average book values per vessels were, on average, approximately $20 million per single-hull tanker.

  • And, net of the write-down, we now, as of June 30, asset book value of approximately $15 million.

  • We have, so far, no indications that Frontline intends to redeliver the vessels to us on the IMO phase-out date in 2010, and Frontline has previously announced that two of the vessels have been sub-charted out until 2011, at least.

  • The aggregate value of the six single-hull vessels remaining on charter to Frontline is approximately $92 million now, and this represents less than 2% of our total book vessel value.

  • So the effect from these vessels are, in any case, marginal for the overall Company.

  • The other impairment is linked to a $10-million financial investment in a container vessel owner and operator, where the Company holds a 7% interest.

  • The impairment of $7.1 million was triggered by write-downs made by that company, and, according to US GAAP, we have reflected that in our own books.

  • The company in question has sufficient cash and other liquidity resources to sustain its operations for several years under currently depressed market conditions, so the write-down is not reflective of a view that the company has serious problems.

  • We have also, subsequent to quarter end, announced the sale of the jack-up drilling rig, West Ceres.

  • Seadrill exercised the pre-agreed, fixed-price purchase option, and the vessel was taken over in mid-July 2009.

  • The effect of the transaction is that we will-- We got net cash proceeds of approximately $40 million.

  • The effect the transaction will have for our P&L and also from our net cash earnings perspective will be approximately $0.015 per share per quarter.

  • We have also announced that we have agreed to sell the single-hull VLCC, Front Duchess.

  • And the delivery of the vessel is expected in early December 2009.

  • Net cash proceeds after termination fee to Frontline and repayment of associated debt is estimated to $2.5 million.

  • The effect on EPS of that transaction is estimated to approximately $0.5 per share per quarter, but that will only have a material effect until second quarter 2010 because, at that time, the vessel, as it is a single-hull tanker, would go on a very reduced rate to Frontline, where we would only earn a very marginal charter revenue.

  • Page 5.

  • With respect to the dividends, shareholders can elect to receive this in stock instead, similar to the dividend in the previous two quarters.

  • This is a non-dilutive way for existing shareholders to build buffer in investment capacity in the Company.

  • 55% of shareholders elected to take stock dividend with respect to the fourth quarter 2008 dividend, and 52% decided to take the stock dividend with respect of the first quarter 2009 dividend.

  • 3.1 million shares have been issued in a non-dilutive way for (inaudible) shareholders, and the average subscription price has been significantly lower than current market values.

  • So this has been a very good investment for those shareholders who elected to take this opportunity.

  • Companies indirectly controlled by Mr.

  • John Fredriksen have already notified us that they wish to take the stock dividend also for the second quarter 2009 dividend.

  • Page 6.

  • The Company filed an "at the market" equity program in December 2008 based on a total of up to 7 million shares.

  • This represented less than 10% of shares outstanding and was intended as a tool in the toolbox from a capital management perspective in the Company.

  • Unfortunately, this type of program seemed to have gained a negative perception in the investor community following massive equity sales undertaken by certain other companies.

  • We decided to use a portion of the program in the second quarter in connection with the acquisition of our own bonds and sold 1.4 million shares in the market at an average price of $12.24 per share.

  • Implied annualized dividend yield on the stock was approximately 10%, and we used the proceeds to acquire bonds with a yield to worst of approximately 13%.

  • The issuing was very cost efficient, with low fees and without negative price pressure sometimes created by large block sales and marketed offerings.

  • To avoid negative focus in the equity market relating to potential equity overhang from the remaining 5.6 million shares under the program, we have decided to discontinue this program.

  • The Company's access to capital market remains strong, and we have a significant liquidity also following the sale of the West Ceres subsequent to quarter end.

  • Following the issuance of the dividend stock in July 2009, the total number of shares outstanding currently is 77.3 million shares.

  • Page 7.

  • We have a unique order backlog, and all our chartering counterparts are performing.

  • Ship Finance is in a different league than most other shipping and offshore companies, with more than 13 years' weighted average charter coverage.

  • We have $7.5 (sic - see Slide Presentation) billion fixed-rate order backlog, or approximately $95 per share.

  • And the EBITDA-equivalent backlog is $6.4 billion, or more than $83 per share.

  • These numbers are before profit share and on a fully diluted basis, and this does not include any re-chartering after end of the current charters.

  • Our charter backlog is, of course, also very important for our financing banks in the current economic climate, where access to capital is not as easily available as in the previous few years.

  • Page 8.

  • Ship Finance generates a very significant cash flow per quarter.

  • This overview includes all 100%-owned vessels, including vessels classified as investment in associate based on US GAAP.

  • The EBITDA-equivalent cash flow before profit share contribution was $190 million, which is up 5% compared to the previous quarter.

  • And the EBITDA-equivalent after accumulated profit share was $198 million, or $2.65 per share this quarter.

  • Compared to the first quarter, the second quarter has the full rate from all the ultra-deepwater drilling units in the quarter.

  • It's also partly, but to a much lesser degree, impacted by two VLCCs that were on charter to Frontline that we have chartered on a bareboat basis, and, therefore, the fixed-charter hire is slower but, then, corresponding operating expenses are lower.

  • And we've also re-chartered one small container vessel at a lower rate than previously.

  • From the second quarter to the third quarter, the West Ceres will be taken out as of mid-July, and the EBITDA effect of that can be estimated to approximately $4 million.

  • And the Front Duchess is expected to be delivered in early September, and the EBITDA effect of that is estimated to approximately $500,000.

  • Page 9.

  • If you look at normalized contribution from our projects, which, here again, includes vessels accounted for as investment in associate, net interest in the quarter was $47 million, or $0.63 per share, and ordinary debt installments from the Company's projects was approximately $106 million, or $1.42 per share.

  • The net effect of that is that the contribution from our projects in the quarter was then $45 million, approximately, or $0.60 per share, and the corresponding number in the first quarter was $0.73 per share.

  • These numbers compare, again, to the $0.30 per share dividend that we declared this quarter.

  • Page 10.

  • We will now briefly go through both the income statement, balance sheet, and cash flow statements, and we will here highlight some of the items that could be worth noting.

  • First of all here on page 10, if you look at the revenue line, as we have lease accounting for a very substantial part of our assets, a very substantial part of the charter revenues are excluded from the total operating revenues, as indicated in the presentation.

  • Ship operating expenses is stable quarter over quarter and as we have a very low exposure to operating expense risk through locked-in operating expense agreements with Frontline at $6,500 per day, including drydocking.

  • Frontline, who have not reported second quarter numbers yet, reported in the first quarter that the average operating expenses for the vessels in their fleet was $9,300 per day.

  • Furthermore, it's worth noting in our income statement that, as we have very substantial assets accounted for as investment in associate, only the net income from these subsidiaries are reflected in the income statement on the line called Results in Associate.

  • These represent the three ultra-deepwater rigs and also a Panamax bulker.

  • In the three months ended June 30, this number represented around $19 million.

  • Also in the income statement we have the mark-to-market effect of derivatives and also the gain on the bonds linked to the purchase of the $148-million face value of bonds and settlement of the related TRS agreements, which are specified here in the income statement as Mark to Market of Derivatives and Gain on Re-Purchase of Company Bonds.

  • Page 11.

  • In the balance sheet, we would like to highlight the line item called Investment in Associate.

  • As I mentioned, a very substantial asset base has this accounting treatment, and only the equity portion from these subsidiaries are recognized in our balance sheet under this line item.

  • Slide 12.

  • In the cash flow statement, we have highlighted the line where the part of the charter hire that is excluded from operating revenue-- where that is included-- including under Investing Activities called Repayment in Investment in Finance Lease.

  • Also, the net payments to or from the investment in associates are on the line called Investment in Associated Companies.

  • Page 13.

  • We have for illustration purposes also given some summary numbers from the subsidiaries classified as investment in associate.

  • The preliminary counts for each of these subsidiaries are provided separately on our Webpage.

  • All these subsidiaries have finance lease accounting, and, therefore, all of these also have a substantial portion of the charter hire excluded from total operating revenues.

  • The net income from these subsidiaries appears in our consolidated accounts as Results in Associated Companies, and the shareholders' equity appears in the consolidated balance sheet as Investment in Associate.

  • Page 14.

  • We have a loan portfolio on a consolidated basis of approximately $2.4 billion, including the bond loan.

  • In addition, there are $2 billion of loans in subsidiaries that are accounted for as investment in associate.

  • With our portfolio of long-term charters, our strategy is to hedge a substantial portion of our interest rate exposure through swaps, fixed interest, and interest compensation through charters.

  • Currently, approximately 80% of our interest exposure is effectively hedged.

  • Most of the projects that we have added on over the last few years have limited recourse to our balance sheet.

  • And, as an example, the ultra-deepwater units, representing approximately $2 billion of bank loans, we only guarantee approximately $300 million of that from Ship Finance corporate.

  • And, on aggregate, approximately $1.8 million of the bank financing is guaranteed by the parent company.

  • We are in full compliance with bank covenants, and we have no near-term refinancing needs.

  • And as we can also illustrate it by the capital expenditure table, we only have a marginal remaining investment program compared to our fleet size.

  • At the quarter end, we had $61.6 million in available cash on our balance sheet.

  • Page 15.

  • We have two large counterparts, as illustrated by this graph.

  • And these are Seadrill and Frontline.

  • Seadrill charters are guaranteed 100% by the ultimate parent in the Seadrill structure, and all the ultra-deepwater units are sub-chartered to major oil companies.

  • And both the charter and corresponding loan package are very front-loaded, which effectively takes down our exposure very, very quickly.

  • On the vessels on charter to Frontline, they were based on very conservative base rates, as they were structured before the market increased substantially after 2004.

  • The 20% profit split has generated, on average, approximately of $85 million in incremental cash flow per year.

  • And there is a $216-million charter reserve as security for the fulfillment of the charter payments relating to the Frontline charters.

  • We do provide full details on an asset-by-asset basis and the full revenue backlog and also accounting treatment.

  • And this can be provided upon request if you e-mail us at IR@ShipFinance.no.

  • Page 16.

  • The profit share agreement with Frontline has generated a lot of additional cash flow for Ship Finance.

  • The original charters were structured fairly low in the tanker cycle and therefore have a lower profit share threshold.

  • As we mentioned previously, there has been, on average, an $85-million annual incremental cash flow, and this has generated more than $400 million of free cash flow over a period of 5.5 years, which has enabled the Company to fuel significant growth.

  • Based on Frontline's sub-charters, we believe that the average breakeven TC level for spot VLCC is significantly lower than the base rate of around $26,000 per day.

  • Page 17.

  • The quarter has proven to be a strong quarter from a cash earnings perspective, fueled by a profit share contribution also in this quarter.

  • And we recorded $0.72 per share of net income in the quarter.

  • We have increased fixed-rate charter revenues in the quarter, as all ultra-deepwater drilling rigs are now under full charter hire.

  • We will look for transaction opportunities that may arise in the financing environment we see currently, but our main focus is long-term interest for our shareholders.

  • And we continue our policy of paying a very handsome dividend on the back of long-term charters with performing counterparts.

  • And, with that, we open up for questions.

  • Operator

  • (Operator Instructions).

  • Justine Fisher, Goldman Sachs.

  • Justine Fisher - Analyst

  • I see that if the stock has a 10% dividend yield, then obviously the cost of your bank debt is lower than the bonds.

  • It makes sense to buy back more bonds.

  • But were you just doing that because of the economics?

  • And is there a plan to buy back more going forward?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • The bond was initially $580 million back in-- at the end of 2003.

  • Currently, net outstanding, net of what we have bought back, is just over $300 million.

  • So I think we have demonstrated that we have in the course of this period, essentially, bought back half the bond.

  • We don't have a specific, stated policy with respect to a bond loan.

  • We will always treat investments in our bonds and we will evaluate it and compare it to other investment alternatives.

  • But we are, of course, happy that we were able to buy back these bonds at the very attractive price, as we have demonstrated also through our accounts.

  • Justine Fisher - Analyst

  • And were there restrictions in the bank agreements at all, restricting the repurchase of subordinated debt?

  • I mean, were there any to begin with?

  • And then, if there were, did this kind of fill up your ability to repurchase-- use additional bank debt to repurchase subordinated debt or no?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • No.

  • There are no restrictions in our financing relating to purchasing senior notes.

  • Justine Fisher - Analyst

  • Okay.

  • And then, as far as the West Ceres is concerned, I know that in the press release announcing the sale, I think you mentioned that you're going to get $135 million or so of proceeds from that.

  • But then, in the charts in your presentation when you talk about the asset sales that you expect, it's only-- I think, for the second half of this year, it's $109 million.

  • But then the proceeds from the West Ceres don't show up in the 2Q results.

  • So I'm just wondering where that will show up.

  • Is the $109 million-- That doesn't include the West Ceres?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • I think this is slide 14 in the presentation.

  • This is where we comment on our capital expenditure commitments.

  • The contracted sale of vessels here are contracted sale of vessels that are under construction.

  • So this table on page 14 does not reflect and include the sale of the West Ceres, which is, effectively, in addition to that.

  • So you will see that in our third quarter numbers when they will be released later in the year.

  • Justine Fisher - Analyst

  • Okay.

  • And, then, can you refresh the numbers for the amount of recourse debt versus non-recourse debt at Ship Finance and its subsidiaries, because I know that you guys had given numbers previously as to what percentage of the $2.4 billion of debt on the balance sheet is actually recourse.

  • Is there an updated number of that?

  • We can do this offline, too, if you need to.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • The total value-- Call it the total guarantee level of our financings is in the region of $1.7 billion to $1.8 billion out of a total of $4.4 billion.

  • I'm happy to go through that on a sort of item-by-item basis with you offline.

  • Justine Fisher - Analyst

  • Okay.

  • And, then, the last question is just about maturities.

  • Obviously, you guys have whittled away your CapEx forecast and, again, required expenditures.

  • But I guess 2011 is kind of a big maturity year, with almost $700 million.

  • Are you guys making any plans to deal with that?

  • And, then, the $2 billion of bank loans in your subsidiaries-- That may not be recourse in a bankruptcy, but are you responsible for maturities of that debt going forward as well?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Of course we have an active approach to our banks and the financings we have.

  • You are correct; there is one facility that is due for finance in 2011.

  • This is a financing which has been going on, which used to be more than $1.1 billion.

  • And it will be closer to $600 million at the time.

  • So we have paid down a very substantial amount of the debt there.

  • And it's also secured by a big proportion of the vessels that we have on charter to Frontline, and there is, as we see it, a significant-- more value supporting that than the loans.

  • So we are quite confident that we will be able to refinance that debt at attractive terms.

  • But we cannot comment specifically on timing or exactly how we will do that.

  • It's still more than one and a half years to maturity, so we believe we still have decent time.

  • Justine Fisher - Analyst

  • Okay.

  • And that doesn't include any of the potential maturities of the $2 billion of bank loans at the subsidiaries, right, because those are off balance sheet.

  • But is Ship Finance still responsible for any of those maturities?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • I mean, they are in 100%-owned subsidiaries of Ship Finance, and the Ship Finance guarantee-- When those facilities mature in 2013, Ship Finance will still guarantee $275 million of those loans.

  • And the balance at the time will be in the region of $1 billion or a little over.

  • And, of course, we will address that when we get there.

  • Again, these are loans linked to assets which have been paid down very substantially through the initial part of the life of those transactions.

  • And our view has been for, basically, all our transactions to ensure that we are not depending on a high market level or to be high up in the market cycle to be able to finance that in a meaningful way.

  • So we are also quite confident that that is something we can deal with in a good way.

  • And that is something that, of course, will come up within the next four to five years.

  • Justine Fisher - Analyst

  • Super.

  • Thanks so much.

  • Operator

  • John Parker, Jefferies.

  • John Parker - Analyst

  • You guys haven't done any new projects recently, and we've been through a lot of turmoil.

  • But can you talk to us at all about the pipeline and what types of transactions you're looking at or considering in this environment?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • It's fair to say that we do have an active approach to looking at projects.

  • We have not done any projects.

  • We will, of course, make the appropriate notification if and when we do.

  • I think our view has been that we have been through some very significant turmoil in the financial markets.

  • We see that both in some segments but also with players that some players are struggling.

  • We think that we can play a role and that there will be very interesting opportunities for us.

  • But we don't see the need to necessarily rush out and do something right now.

  • We have a very substantial charter backlog on our books as it is.

  • And we believe that in order to take care of our shareholders' interest in the best way, we have so far felt it has been prudent to sit back and await, as we anticipate that there will be many, many opportunities going forward.

  • It's difficult to quantify exactly what kind of project we will do and in which segments.

  • We have a multiple-segment approach.

  • We do offshore, tankers, bulkers, container.

  • But I think our overall goal is to build on our charter backlog with strong charter counterparts and then build also our dividend capacity over time.

  • John Parker - Analyst

  • Okay.

  • That's all I have.

  • Thank you very much.

  • Operator

  • Jon Chappell, JPMorgan.

  • Jon Chappell - Analyst

  • Ole, can you give us a status update on the two Suezmaxes that are agreed to be sold in the second half of '09 and 2010?

  • There's been a lot of talk about shipyard delays on the tanker side, especially in the Suezmax market.

  • So I'm wondering if those ships are still going to be delivered on time.

  • And is there a loophole in your contract for the sale of vessels where the buyer could back out if there is a substantial delay?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • We have two Suezmax tankers contracted at a yard in China.

  • There have been delays as you hear.

  • So both vessels are delayed in excess of six months.

  • But we expect them still to be delivered within the time window that we have with the yard.

  • Also, if you look at the agreement we have with the buyer of those, as we have agreed to subsequent-- to resell the vessels when they are delivered from the shipyard, we have in the agreement there built in extra time so that we will not be in a situation where that buyer could walk away from us before we could walk away from the yard.

  • Based on the latest updates from our team at shipyard, we expect the first vessel to be delivered in the second quarter-- sorry-- in the fourth quarter and the second vessel to be delivered early second quarter next year.

  • And this is well within the canceling date for the buyer of these vessels.

  • I think I would add that the buyer has an active inspection crew at the shipyard.

  • They have paid their deposit as agreed.

  • And we expect them to honor the contract fully, of course.

  • Jon Chappell - Analyst

  • Okay.

  • Now asset prices have obviously fallen substantially since this agreement was first arranged.

  • And, although $33 million is a pretty material down-payment, I guess there's the chance that they could potentially walk away from it from economic reasons, despite what you just said.

  • Is there a contingency plan in place, just in case this $218 million of scheduled proceeds doesn't come into place, to meet the remainder of your capital commitments?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • We have not disclosed the name of the counterpart based on a confidentiality agreement.

  • But it is a company with substance.

  • You know, our counterparts are not, call it, empty, single-purpose companies.

  • We believe that there is asset behind the signature for those sales contracts.

  • We have-- We have not specifically arranged financing for these vessels.

  • This is something, first of all, we believe that we have good cash flow and we can take delivery without arranging financing, at least for the first one.

  • And, secondly, we believe that we can fairly easily-- And this is based on discussion with banks for other type of projects.

  • We believe that we fairly easily could arrange financing for these kind of assets if we wanted to.

  • Jon Chappell - Analyst

  • Okay.

  • That's a good lead-in to my last one too.

  • You didn't give the terms for the $90 million in new bank loans that you used to repurchase the notes.

  • I'm not asking you to if you don't want to, but I'm just wondering how receptive the banks are to potential new projects right now.

  • And what's the general type spread that we're talking about on new loans in the market today?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • It's very difficult to give sort of a general answer to that, and that is because the pricing is so depending on the project structure.

  • It has to do with the type of asset, with the kind of leverage you have on the asset, with who the counterpart is, and how the deal is tied up.

  • Of course, in general, the pricing has increased, and, of course, everyone's well aware of that.

  • So, for instance, a loan that you probably would have paid 1.25% margin on you may now look at a 2.5% spread.

  • But, that said, the base LIBOR has come down very substantially.

  • So I would say that the reduction in base LIBOR has more than offset the increase in spreads to the banks.

  • And, from a more general perspective, some may view that the shipping space has been almost subsidized by some banks through big competition.

  • And we have to fight for the capital alongside all other industries.

  • And this, call it, margin increase or spread increase-- it's not something that is-- that's only applicable for shipping.

  • It's all across the board.

  • So it has to do with the bank's risk premiums.

  • We all know that there is a very substantial capital requirement within the shipping space over the next few years.

  • But, at the same time, shipping is a relatively small segment from an overall perspective.

  • So I would think it's also a pricing issue for when that market effectively will clear.

  • Jon Chappell - Analyst

  • Okay.

  • Thank you, Ole.

  • Operator

  • (Operator Instructions).

  • David Shapiro, BGB Securities.

  • David Shapiro - Analyst

  • A question sort of regarding your profit share.

  • I got on the call late.

  • Not sure if you addressed it.

  • Do you guys sort of have a forecast for the rest of the year on the profit share based on current spot rates?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • No.

  • We don't prepare a profit share estimate for the year.

  • The profit share that we have at Frontline is-- aggregates on a quarterly basis.

  • But it's calculated annually in arrears and is payable in March the following year.

  • We do know that Frontline has a substantial sub-charter portfolio, which, of course, in a weak tanker market, supports the profit share calculation.

  • But we do not give estimates, unfortunately.

  • David Shapiro - Analyst

  • Do you know how long the duration is on some of those charters?

  • Did they book them at attractive rates versus where the spot is?

  • I'm sure.

  • How long is the majority of those sub-charters in place for before they start rolling off?

  • I'm just trying to assess here the likelihood of Frontline to cover their obligations.

  • I understand there are reserve accounts-- but the likelihood of covering their obligations without having to dip into those reserve accounts.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • I would have to refer to the Frontline's first quarter results, which were announced back in May.

  • They will announce their second quarter results next Friday, so then you will get updated numbers.

  • But in Frontline's presentation back in May, they indicated that, for 2009, 25% of their double-hull capacity was covered, while, for 2010, it was 7% at the net average bareboat TC rate of $50,000 per day.

  • For 2009, the single hulls had a coverage of 79%, whereas it would be around 61% in 2010.

  • If you look at the double-hull Suezmaxes, 24% in 2009 and 13% in 2010.

  • And the OBOs, which are combination vessels - oil/bulk/ore vessels, eight of them - had 100% coverage in 2009 and 98% coverage in 2010 at a high rate of $47,000.

  • I'm sure they will give an updated-- updated figures on this when they report their numbers next week.

  • David Shapiro - Analyst

  • Right.

  • On those VLCCs, I guess, they don't really split out, though, between what's Ship Finance vessels versus owned vessels.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • No, they don't.

  • But at least it gives an indication for the level where they are.

  • And, of course, although they don't give it specifically per vessel, you would assume that, as long as they have the financial exposure to charter in the vessels, you would assume that they would probably charter them out again on an even basis.

  • David Shapiro - Analyst

  • Right.

  • Okay.

  • Thank you.

  • Operator

  • C.J.

  • Baldoni, Evergreen Investments.

  • C.J. Baldoni - Analyst

  • Regarding the-- Why did you choose to unwind the total return swap now as opposed to maybe a few months ago?

  • Is it just because of the turmoil in the market?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • It was partly due to the turmoil in the market.

  • We felt that it was an interesting time to do it because we felt that the-- general, the market had moved, but the bond market hadn't moved as much, we felt at the time.

  • So then we negotiated with-- the financing structure with the banks, and we agreed on a structure to do that.

  • C.J. Baldoni - Analyst

  • And that financing was supplied by unaffiliated, third-party banks?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • C.J. Baldoni - Analyst

  • Does the maturity of that loan match the maturity of the bonds?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • No.

  • The maturity for-- This is a combination of two loans.

  • Maturity is shorter.

  • But we believe that they can be refinanced at time of maturity.

  • C.J. Baldoni - Analyst

  • Okay.

  • And then why--?

  • I guess I should know this.

  • But, to refresh my memory, the original $580 million is reduced to $449 million.

  • So that $130-odd million of bonds-- they've been retired.

  • Right?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • C.J. Baldoni - Analyst

  • And so then this next amount you're going to hold them as treasury bonds, which, I guess, if you wanted to you could sell them back out and bring in cash.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes, in theory.

  • C.J. Baldoni - Analyst

  • Right.

  • Why not retire them?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Well, I think, for US GAAP purposes, they are treated as extinguished when you buy back bonds.

  • From the time when we acquired the previous, call it, set of bonds and now, there's been legislation change in Bermuda.

  • Previously, a company could not own their own securities.

  • You had to cancel them [in full].

  • One and a half years ago, there was a change in the laws in Bermuda, where we are domiciled, where a company could hold their own securities.

  • And, therefore, we think it's prudent and also gives the Company more flexibility by holding them as treasury bonds.

  • C.J. Baldoni - Analyst

  • In case you wanted to reissue them?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Exactly.

  • C.J. Baldoni - Analyst

  • Okay.

  • And then you have like $400 million or so of short-term debt.

  • Could you talk a little bit about that?

  • Is it just a bunch of different things?

  • How are you going to refinance that or pay it off as it comes due?

  • And do you guys supply like a debt schedule or a cap table for investors?

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Well, we don't give a breakdown on facility by facility.

  • We have several loans relating to our different projects.

  • If you look at our debt schedule, there are a couple of facilities there that's worth noting.

  • For instance, as we have agreed to sell one jack-up drilling rig at $95 million.

  • So that is included there.

  • We also have $90 million of remaining seller credit relating to the two latest ultra-deepwater drilling rigs, which have mature-- much shorter maturity but, where there is, we believe significant flexibility in the final term based on our overall liquidity and so forth.

  • But, as we see it, we do have the means to take that out, of course, if we want to.

  • We also have very, very significant amortization on some of the loans; for instance, relating to the Frontline vessels, where we believe that, if we decided to refinance prior to the maturity date in 2011, we would have significantly lower amortization per quarter.

  • But, of course, it is included there in the schedule assets.

  • We also have, for instance, the full loan on the Front Duchess - $13.8 million falling due in-- that should have been there-- that now is classified as short term as debt, as it has been agreed sold, and it will go out and , also, some other smaller facilities that we expect to be rolled over.

  • So it's a mix of different facilities, but it's certainly no maturities here that we are concerned

  • C.J. Baldoni - Analyst

  • Right.

  • Okay.

  • Well, thank you for all your help.

  • Operator

  • (Operator Instructions).

  • As there are no further questions, I'd like to hand the call back over to your hosts for any additional closing remarks.

  • Ole Hjertaker - CEO and Chief of Finance Management

  • Yes.

  • Thank you.

  • And then I will thank all participants for listening in to the Ship Finance second quarter 2009 earnings call.

  • Thank you.

  • Operator

  • Thank you.

  • That will conclude today's conference call.

  • Thank you for your participation, ladies and gentlemen.

  • You may now disconnect.