SFL Corporation Ltd (SFL) 2009 Q4 法說會逐字稿

Good day, and welcome to the Ship Finance International Q4 2009 earnings release conference call.

For your information, today's conference is being recorded.

At this time, I would like to hand the conference over to Mr.

Ole Hjertaker.

Please go ahead, sir.

Thank you, and welcome to Ship Finance International and the fourth-quarter conference call.

My name is Ole Hjertaker, and I am the CEO in Ship Finance Management.

With me here today I also have Harald Gurvin, Senior Vice President, and Magnus Valeberg, Vice President.

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.

The Board of Directors has declared a cash dividend of $0.30 per share for the quarter.

This represents $1.20 per share on an annualized basis, or 7.7% dividend yield, based on closing price yesterday.

We have now declared dividends for 24 consecutive quarters and $11.08 per share in total aggregate cash dividends.

The net income for the quarter was $62.4 million, or $0.80 per share.

This is including a $24.7 million gain related to the Suezmax Glorycrown, which was delivered in November 2009, and where the charter has paid $40.5 million cash upfront.

The gross charter revenues, including subsidiaries, accounted for as investment in associate, was $203 million, or $2.60 per share, and the EBITDA equivalent cash flow was $184 million, or $2.35 per share.

We have seen an increased profit share contribution compared to the third quarter 2009.

The profit share has increased from $4.8 million in the third quarter to $5.7 million in the fourth quarter and a total of $33 million has accumulated in 2009.

On average, there has been $80 million of profit share, or $1.02 per share, annual average profit share since 2004.

The first of the two Suezmax tanker newbuildings chartered to North China Shipping was delivered from the shipyard in November 2009.

The second vessel is scheduled for delivery in the first quarter of 2010, and we expect it to be ready mid-March, so it is only a few weeks from now on.

That vessel will then also be chartered to North China Shipping on similar terms.

For each of the vessels, we will receive an upfront payment of $40.5 million net and the bareboat rate will be approximately $16,700 net per day.

At the end of the charter period, there is a purchase obligation of $40.7 million net per vessel.

North China will have annual purchase options, the first time one year after initiation of the charter.

The net purchase option prices are $51.2 million after year one, $49 million after year two, $46.6 million after year three and $44.1 million after year four.

Excluding upfront payments and the purchase obligation, the transaction represents a $61 million net increase in our charter backlog.

The single-hull VLCC Front Vanadis, which has been employed on a bareboat hire purchase scheme to an affiliate of Taiwan-based TMT for 2-1/2 years, has been sold to the charter pursuant to a preagreed purchase option in November 2009.

The option price was $11.7 million, and the transaction generated $1.2 million net cash in the fourth quarter, after repaying $10.5 million of associated debt.

This transaction did not have a material impact on the profit and loss statement.

The 1998-built VLCC Front Vista was sold to a subsidiary, Frontline, for net sales proceeds of $58.5 million in February 2010, including a compensation by Frontline for the termination of the charter.

Frontline has simultaneously agreed to sell the vessel to an undisclosed third party, with settlement by way of installments.

That transaction is linked to a 10-year time charter to a state-owned oil company.

Ship Finance will receive net proceeds of approximately $22 million, after prepayment of associated debt, and the sale is expected to result in a book gain on sale of assets in the first quarter of approximately $1.8 million.

One of the very important features with Ship Finance is our long-term charter portfolio that gives us a transparent, secure cash flow.

Ship Finance is in a different league than most other shipping and offshore companies, with more than 12 years' weighted-average charter coverage.

We had a total of $6.9 billion fixed rate order backlog at the end of 2009, which is equivalent to $89 per share.

The EBITDA equivalent backlog was $6.1 billion, or $77 per share.

And these numbers are before any profit sharing and does not include any re-chartering at the end of the current charters.

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

This is also demonstrated by the overwhelming response to the $675 million financing we are in the process of completing this quarter.

As we mentioned, Ship Finance generates very significant cash flow per quarter, and 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 was $178 million in the quarter and $184 million, or $2.35 per share, after profit share.

Compared to the third quarter, the main difference relates to the Front Duchess, which was sold in the third quarter, but with full accounting effect in the fourth quarter.

In addition, Front Vanadis, as we mentioned earlier, was delivered to the new owner in November and had a net negative effect on the VLCC line of approximately $1.1 million.

On the Suezmax side, we took delivery of the Suezmax Glorycrown in late November, and we had a positive contribution from that vessel of approximately $600,000.

In addition, in the quarter, compared to the previous quarter, we had lower operating expenses, partly due to the sale and delivery of Front Duchess and also because we have lower general administrative costs in this quarter.

If you compare the fourth quarter to the first quarter 2010, we then expect to have a full quarter of revenues from the first Suezmax tanker, Glorycrown, which represents another $900,000, approximately, compared to the fourth quarter.

And in the second quarter, we also expect to have the second Suezmax tanker, Ever Bright in and that will have a contribution of about $1.5 million.

Also in the first quarter 2010, two of our single hulls will go on the preagreed lower rate, as they have reached their anniversary date in 2010, and we expect that to have a net effect of approximately $1.8 million in the first quarter compared to the fourth quarter 2009.

We provide a full breakdown on charter hire per vessel, including the accounting treatment, upon request to the e-mail address IR at ShipFinance.no.

If you look at normalized contribution from our projects, and when we then also include vessels accounted for as investment in associate, the EBITDA, which then is the charter hire plus profit share less operating expenses and G&A, as illustrated on the previous slide, was $2.35 per share in the quarter.

Net interest in the quarter was approximately $44 million, or $0.56 per share, while ordinary debt installments relating to the Company's projects was approximately $103 million in the quarter, or $1.32 per share.

This means that net contribution from our projects in the quarter, after the above very significant repayment of debt, was approximately $37 million, or $0.47 per share.

This is similar, but slightly higher, than the third-quarter contribution of approximately $0.44 per share.

And we have declared dividends for the quarter of $0.30 per share.

If you look at the profit and loss statement, I will only highlight some of the items that you should be aware of.

First of all, a lot of our vessels and a lot of the cash flow is in subsidiaries accounted for as investment in associate, and therefore, not included at the top of the profit and loss statement.

Instead, the net income in these subsidiaries are on the line called results in associates, which for the quarter was $18 million.

Also, as we have finance lease accounting for most of our assets, a very significant portion of the charter hire also for those vessels that are consolidated on our profit/loss statements is excluded from the total operating revenues.

In the quarter, those revenues, which are called repayment of investment and finance leases, amounted to $78.5 million.

This number is higher than the previous quarter mainly due to the $40 million upfront payment by the charter on the Suezmax tanker, Glorycrown.

In the balance sheet, the vessels and assets that are classified as investment in associate are not fully consolidated either.

We only have the equity in these subsidiaries on the line called investment in associate.

And at the end of the fourth quarter, that amounted to $444.4 million.

Also, I would like to highlight that in addition to the stockholders' equity of $749.3 million, we also have so-called deferred equity, which was $206.5 million at the end of the quarter.

This is an element that is carried over from the original transaction with Frontline, and is being amortized back to our equity over the life of the charters to Frontline.

On the cash flow statement, the repayment of investment in finance leases, as I mentioned in the P&L statement, is on the line under investing activities called repayment of an investment in finance leases.

Also, in the cash flow statement, the cash flow from the subsidiaries that are accounted for as investment in associated are also under investment activities on the line called cash received from or investment in associates, and that number was $18.7 million in the fourth quarter.

The preliminary accounts for each of the subsidiaries that are accounted for as investment in associated are provided separately on our webpage.

All these subsidiaries have finance lease accounting, and therefore, a significant portion of the revenues in those subsidiaries are classified as repayment of investment in finance leases.

The net income from these subsidiaries appears in the consolidated accounts as result in the associated companies, and from the balance sheet, if you look at the stockholders' equity, that is here, in the balance sheet, in our consolidated balance sheet, classified as investment in associate.

We had $84.2 million cash on the balance sheet at year end.

And we had loans -- consolidated loans of approximately $2.1 billion, including a bond loan facility.

In addition, there is approximately $1.9 billion of loans in subsidiaries that are accounted for as investment in associate.

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

And we only have a marginal remaining investment program compared to our fleet size, as we will illustrate a little bit later.

We are in the process of refinancing a $675 million facility relating to 26 oil tankers and OBOs one year before final maturity of that facility in February, 2011.

We expect to close the financing within the first quarter.

This facility has been significantly oversubscribed and also demonstrates our standing in the financial markets.

The loan margin level has increased somewhat, but the swap interest rates have declined, so net interest payable is expected to be at a similar level or marginally higher than the current structure.

With our portfolio of long-term charters, we think that a strategy with a significant portion of the financing effectively hedged is a good way to manage the risks.

Currently approximately 80% of our loans are hedged, and this is done through swaps, fixed interest or interest compensation clauses with our charters.

We only have a total of approximately $223 million gross capital commitments.

We think this is a very low number compared to our overall fleet size.

If we look at the lines, the tanker investment relates to the second Suezmax tanker, and it is actually expected to be $36 million cash positive after upfront payment by the charter and drawdown of the associated loan.

The net investment will then be $187 million.

The remaining vessels are primarily dry bulk vessels after we have changed contracts for four container vessels into Handysize dry bulk vessels instead.

We have signed contracts and all formalities in place for three of the bulkers, which are replacing two 1700-TEU container vessels.

And we have an agreement in principle for four bulkers replacing two 2500-TEU container vessels, but have not signed the formal contract yet.

And this is expected to take place within the next few weeks.

All in all, the exercise where we effectively are replacing container ships with bulkers, we are increasing the investment marginally at the shipyards, and we are investing approximately $30 million more in total.

We believe this will give our shareholders better value for money compared to building the container vessels in the current environment for containers, and instead build vessels that are priced based on the current market, but also where we see significantly better chartering opportunities in the near-term.

We also believe that the bulkers will be easier to source financing for than the container vessels when we go out to secure financing for these vessels.

Our two largest counterparts are Seadrill and Frontline.

For Seadrill, we have a full corporate guarantee from the ultimate parent in Seadrill for the full payment of the charter hire.

And all the deepwater units are sub-chartered to major oil companies, providing a very substantial cash flow.

We have also frontloaded the charter rates on the ultra-deepwater unit substantially, which also takes down the loan exposure relating to these vessels very quickly, and thereby also our exposure to the asset.

For the Frontline charters, we have agreed to make some amendments to the structure with Frontline, which we think is beneficial for Ship Finance.

Previously, these have not been guaranteed by Frontline, but our counterpart has been a subsidiary of Frontline, where there has been a cash deposit sitting as a buffer for potentially weak markets.

In the new structure, we will now have a full 100% Frontline Limited guarantee for the fulfillment of the charter hire.

We will then reduce the cash deposits from the current average of approximately $5.5 million to a fixed level of $2 million per vessel.

I would like to note that the $5.5 million cash buffer previously was a buffer that they could effectively dig into in weak markets, and therefore, from a security perspective for Ship Finance, we could not touch those deposits until they would have been much, much smaller.

Also, I would like to add that Frontline is a very different Company now compared to the original structure, when the structure was done in 2003.

Frontline now has effectively more vessels outside Ship Finance than they have chartered in vessels from Ship Finance, and they have a separate market cap of approximately $2.1 billion.

We think this structure both benefits Frontline, because they free up some capital; but at the same time, we also receive part of the freed-up capital as prepayment of charter hire for the next -- for part of the charter hire the next six months.

And thereby we can optimize our financing structures better, and we can utilize that capital in a more efficient way.

And Frontline will effectively really get the money released over a six-month period.

We have now had 24 quarters with profit share, and this has generated a lot of additional cash flow for Ship Finance.

The regional charters were structured fairly low in the tanker cycle, and therefore, the profit share has a very low threshold.

On average, there has been $80 million incremental cash flow generated from the profit share, and over the six-year period, approximately $480 million has been generated for Ship Finance, which has enabled us to reinvest the capital in other segments, such as the ultra-deepwater segment, and effectively create a much more diversified Company than we were six years ago.

Therefore, the Frontline sub-charters, due to a significant charter coverage still, based on the sub-charters they have, we anticipate that they have a breakeven time charter level for the spot VLCCs owned by Ship Finance, but chartered out through Frontline, of approximately $14,000 per day in 2010, before they generate revenues for the profit share.

So then as a summary, we would like to highlight that we've had a strong charter from a cash earnings perspective, fueled by additional profit share contribution also this quarter and a nice gain on the first Suezmax newbuilding.

We continue our policy of paying dividends on the back of long-term charter with performing counterparts.

We have demonstrated access to the financing market, and we will look for transaction opportunities that may arise in the market as we see it.

But most importantly, for us, it is important to do the right deals, so we cannot give you specific guiding on the size or timing of these potential investments.

And then I would like to open up for questions.

(Operator Instructions) John Parker, Jefferies.

I just want to be clear, if I look at your cash flow statement and your repayment of financed leases, if I want to adjust that for the actual ships out on charter, I should subtract it by $45 million for the Glorycrown payment.

Is that correct?

Yes, that is correct.

Okay.

And could you talk a little bit about your decision to convert the container ships to Handymax bulkers?

Was the shipyards that you are working with, did you feel that was a good class of ship for them, or was it a market view?

What other options did you consider in terms of ship classes, and why did you end up coming up with the Handymaxes as the ship of choice?

We think Handymaxes are an interesting segment.

That's partly due to the balance of the order book.

In some of the other bulker segments, the order book is significantly higher relative to current sailing fleet.

And also, the age mix in this segment is much more favorable, with a lot of older vessels that we can expect to be phased out gradually.

The move to go to the shipyards and discuss to change these vessels, from our perspective, has been pure opportunistically.

We see that the container market is difficult currently, and we anticipate that it will continue to be difficult for the next few years.

So what we did, we went to the shipyards -- and remember, for the shipyards, their key focus is to build vessels, and not necessarily exactly what the type of vessel.

So for the shipyards, they then had to turn to their sub-suppliers and effectively renegotiate equipment that was intended to be built as container ships, and then get equipment suitable for bulkers instead.

At the same time, we have marginally increased our investments by approximately $30 million at these shipyards, which of course is a win-win situation for both them and us.

They increase their overall orders, and we get vessels that we think have better earnings characteristics over the next few years and also, we think, will be easier to secure financing for in the near term.

So in many ways, we see this as a win-win both for us and the shipyards, and we think this is a good benefit for our shareholders.

Yes, I would tend to agree.

That is a much better asset to be getting into.

Just on the single-hull tankers, we have all pretty much written down our assumptions in our models to close to zero on those.

Is there any chance for upside in terms of the single-hulls?

Any idea how this is all going to play out, or is it just you really don't know at this time?

For us, we have our single-hulls chartered out to Frontline for another three to four years.

The revenues from the single-hulls, as you point out, go down to a very low level when these vessels reach their anniversary date in 2010.

And the time charter rate is then reduced to $7,500 per day, whereas we pay Frontline $6,500 per day in operating expenses.

So it is a net of approximately $1000 per day.

Frontline has the option to deliver these vessels back to us on 30 days notice.

And you can say that, yes, currently, we have -- of course, we expect to get a very low cash flow from these vessels, as they effectively have been paid down over the last six years.

So for us in a way, you could say that it is almost -- it would almost be better for us if the vessels were scrapped, because then we would get the capital back now and we could redeploy that capital, instead of waiting time to receive that capital.

But this is all built into our cash flow and our assumption, so we just have to wait and see what Frontline might do.

They have already sub-chartered out three of these vessels on sub-charters that goes out into 2011 and 2012.

So we think that in any case, it will be a gradual process, if and when they will redeliver some of these vessels to us early.

What would you estimate the approximate scrapping value of those ships is right now?

The vessels have an approximate lightweight of 33,000 tons.

So then you can effectively multiply that up with the scrap price that you think is applicable.

We have seen scrap being done in excess of $400 per ton, but of course, the exact number we don't know, as we have not tested that market and negotiated scrapping yet.

Okay.

It looks to me like you're improving your liquidity position here, and I guess I ask this frequently, but what is the pipeline looking like for new deals?

What types of deals have you seen that you are able to look at, and when do you think you will be doing new deals again?

We don't want to give specific comments on what kind of deals we want to do and the size and the timing, because for us, it is more important to the do the right deals than necessarily run out and do things.

I think the refinancing process that we are doing right now is a good demonstration that the banking market is certainly there for quality companies.

So we think that sourcing financing for new deals should be achievable.

We are looking, as we have done all the way through also in the weak markets last year, but we are looking at projects.

But if and when any of those will materialize, we will have to get back to you.

Okay.

And can you comment at all on the new bank loan?

It looks like it is oversubscribed, but I've seen new lines coming in with a LIBOR spread of 200 plus or minus.

Is that kind of in line with where you think this thing will price, or is it -- do you not care to comment on that?

Yes, that is in line with where we think this will price.

Remember, there has been a change in the banking environment, where effectively the banks also have higher funding costs than they had previously.

But at the same time, I must add that, as we have a strategy of swapping out most of our interest exposure, the swap rate level has of course come down significantly from where we were, relating to the financing that is being refinanced.

Therefore, on a net basis, we think the new facility will be at a similar level or only slightly higher and will not, on a combined basis, reflect the change in margin alone.

Okay.

That's all I have.

Thank you very much for your help.

Jon Chappell, JPMorgan.

Thanks.

Good afternoon.

Just a question about the new structure with the Frontline charters.

It is pretty simple to understand that if the rates went below the contracted rates, where Frontline could -- the money that Frontline could tap to pay you back.

With that lower level, can you just explain a little bit more what this quote, unquote guarantee is?

Are there assets outside of the Ship Finance structure that you would have, I guess, access to if we were into an extended decline in the market, where they couldn't earn the rates that they are required to pay you?

The guarantee from Frontline is a full corporate guarantee from the ultimate parent, the listed entity.

It is not a secured facility, so we don't have pledge over specific assets for this.

But we think that Frontline, with its standing in the capital markets, is a company that will have -- or should have access to the capital markets even in the weak market environment, if that was required.

We have, of course, access to the $2 million per vessel cash deposits, and it is important to stress here that this is an absolute minimum level.

The old structure with average $5.5 million was a buffer which they could tap into.

So in a worst-case scenario, where in a weak market, we would have to assume that cash buffer would have been smaller and smaller than the $2 million per vessel that we know as a minimum if and when we had to access that security.

So we think this is a true win-win both for us, but also for Frontline, as they can then utilize the capital that has been locked in there for years in a better way, and where they can earn a slightly better return on that capital.

Whereas we get better security, we get the guarantee from the ultimate parent.

And also, we have built in a feature where they pre-pay a part of the charter hire for the next six months, and thereby gives us the opportunity to optimize, call it, the interest income in this period.

Okay.

You laid out your views on the container market as why you canceled those container vessels.

You still have that one 1700-TEU ship coming on that is not contracted so far.

What is your plans with that?

I'm sure the secondhand market is pretty soft right now, so selling it at a loss may not be your top priority.

Are there contracts available to that?

Would you just operate it on the spot market, if there is a liquid spot market for containers at this point?

The change from container vessels to bulkers is an opportunistic move.

It doesn't mean that we have lost all confidence in the segment.

We think that the feeder-size container segment is quite interesting, also because of the market balance in that segment.

But we think that right now, it is better for us to build bulkers than the container vessels.

We don't have a specific charter lined up for that vessel right now.

We expect to take delivery of that vessel at the end of 2010.

And we intend then to either put it into the short-term market, awaiting improvement in the longer-term charter market, or we could put it straight on the long-term charter market, if that market has improved.

We don't have any plans as of current to sell that vessel.

And we think historically, the price we've ordered the vessel at has been at a decent level.

We didn't order the vessel at the peak.

So we think that over time, that investment will be decent for us.

The key reason for not also doing something with that vessel was that was already, call it, in production at the shipyard.

And therefore, when the -- due to the progress, it wasn't efficient for the yard to convert that to a bulker.

Okay, understood.

Final question is regarding future debt facilities and their expirations.

I think that this 2011 expiration was a concern of some investors, and your new facility, I think, will allay a lot of those concerns.

Can you just give us an update on the next big payment, whether that is 2012, 2013, when you may have to go and refinance the next facility?

Yes, I think the next refinancing that is coming up are relating to five vessels on charter to Frontline.

That is approximately $200 million, and that will happen in third quarter -- that has maturity in June 2012.

It is a relatively small amount, we think, compared to our Company size, and certainly compared to the kind of interest we've seen in the chartering market.

Thereafter, facilities that are coming due are the deepwater drilling units that have -- where there is a refinancing in 2013.

But there is one thing I would like to stress here, is that if you look at our financing, they are all amortizing financings with a fairly significant payment structure.

And therefore, when you look at it from the bank's perspective, we will have paid down a lot of those facilities when we get there.

So for the ultra-deepwater units, we would have paid down approximately half the loan over the first five years' period.

And therefore, the amount to be refinanced is at a much lower level than the initial amount.

And this should not be mixed with the structures as we have seen other companies have in the market, where they have so-called bullet loan facilities.

If you don't amortize loans in the shipping space, I think you may run into problems refinancing in the banking market.

But we think that the banks, if you have a decent structure, both on the loan and also that you manage to keep the business going in a sound way, I think the bank market will be there.

Okay, thanks a lot.

(Operator Instructions) Justine Fisher, Goldman Sachs.

Good morning, or afternoon for you.

I'm still trying to understand why you guys and Frontline changed the structure of the cash reserve.

Is there something that they needed to use that cash for?

I mean, I guess when there were deficiencies in the spot rates that they were chartering the vessels out versus what they owed you, I think they said this morning that they just dipped into their own cash balances as opposed to this restricted cash balance.

So it seems -- what is going to make up for the deficiencies in the future if that cash balance is reduced?

Well, first of all, I think, as you point out, it is a cash balance that they can dip into and it is a reserve.

And if you go back six years, when Ship Finance was set up, Frontline had no other assets than the vessels that they chartered in from Ship Finance.

And therefore, there was no other buffer in Frontline apart from this, call it, cash buffer in these subsidiaries.

Over the last six years, they have never, ever dipped into those cash buffers, even in weak market environments.

And it is of course a fairly inefficient use of capital to have that cash sitting there, earning a fairly low deposit rate, when it could be put to use in a better way.

So that is one.

So therefore, they came to us and asked us if we could be willing to look at a change in the structure.

And the change we have negotiated now includes a full corporate guarantee by Frontline Limited.

We did not have a corporate guarantee by Frontline Limited before.

We only had those cash buffers.

And as I think I mentioned a little bit earlier on the call, if we went into a very weak market environment, we would have to assume that those cash buffers would have been effectively eaten into with a minimum -- or call it a default level -- which would have been lower than the cash buffer we now have, which will stand there as an absolute minimum and cannot be utilized to subsidize rates elsewhere.

So we think from a structural point of view, we now have a full corporate guarantee and we have minimum cash sitting there.

And Frontline will effectively get most of that cash released over the next six months, which is also a benefit for us compared to getting all the money released immediately.

Right.

Well, but I guess from a bondholder perspective, there is still -- the corporate guarantee is good, but the cash before was sitting there in an escrow account that would go only directly to the bonds, right?

No, it wouldn't go to the bonds until there was a default.

And so the bondholders, if you look at those isolated, could not access that money until it was a situation.

And in such a situation, you would have to assume that they would have utilized all they could of that buffer.

And then the minimum level would actually be lower than the current level, as we have negotiated with Frontline.

Okay.

And then from the Frontline perspective, they are basically getting the 112 freed up, but they are paying you guys $74 million upfront for the next life of the charter.

What is the motivation for that agreement?

If they really wanted to free up their liquidity, why would they then turn around and pay back half of -- or pay back a little less than three quarters of it upfront?

It is not a permanent repayment.

This is -- the $73 million represents approximately $12 million per month over the next six months.

That means that we get the money now, and we can play with that money and get some returns on that money, instead of receiving the charter hire gradually over this period.

So this was just a part of the overall negotiated deal, and we think it is a benefit for Ship Finance to hold that money and optimize, of course, returns for our shareholders.

Does the fact that you guys have a preference for lump sum of cash upfront mean that there are opportunities either to pay dividends or to make acquisitions that are more imminent than before, which is why you want that cash now as opposed to over time?

Or we could get deposit direct in the bank, if we held it in cash.

Or if we reduced drawn amounts on revolving credits, we would have reduced borrowing costs.

But all in all, compared to receiving the $73 million gradually over the next six months, having it now has, in our view, a value for us in Ship Finance.

Okay, thanks.

I'll get back in the queue.

(Operator Instructions) Ole Stenhagen, SEB.

You've just answered my question, because it was whether this was a rolling $74 million buffer or whether it was just this one time, and you answered it, so thank you very much.

Justine Fisher, Goldman Sachs.

Sorry.

I didn't think the queue would be that short.

The question I have now is about just pricing of vessels at the yards.

I know on the call earlier, Frontline management was talking about how it will be interesting to see the cancellation rate at the yards for these vessels that were ordered at really high levels maybe a year or two ago, and then now they may be canceled because the orderers don't want to pay that price.

And on the flip side, we've seen in the news a lot of stories about how the yards have seen, obviously, a very low order rate, and so they are probably now trying to think about how they are going to sustain their building schedules with so few orders last year.

And I'm wondering, based on your conversations with the yards, especially given that you have just done this conversion deal for the Handymaxes, do you think that the yards would be more willing to renegotiate a lower price so as to fill the berth as opposed to say, well, no, we are only going to build a VLCC for $150 million or something like that, and if you can't pay that, then it is no go?

Do you think they would be amenable to change the price?

Well, I think, first of all, if you distinguish between existing orders, where deposits have been paid in, and you call it fresh orders at the yards, I think for the first, the yards will continue to build and certainly if they get paid yard installments.

What we have seen is that for some -- at some yards, banks have provided guarantees.

And even in settings where we would assume that the companies or the entities that have ordered them did not have capital, when yards are provided guarantees, the yards themselves get decent funding.

So so far, a lot of the cash flow has then effectively come from the banks.

And the yards continue building.

Of course, you can see that some players negotiate delivery position with the yards, and maybe some do the same exercises we've done, where we have discussed on a win-win basis with the yard for how to build vessels that are better for the buyer and where the yard can do what they do best, which is of course to optimize the production at the yards.

Whether or not the yards will build vessels and take orders where they lose money, is of course a question of whether they have the buffer and are willing to subsidize orders to keep the production going.

Or if they want to -- if they would then instead prefer to close down a whole or parts of the facility in order to mitigate losses.

So that is really more a question, will there be someone with a subsidy, call it component, that could effectively help mitigate the losses.

Because it is clear that the shipyards, they have their cost base.

They have to buy the steel, they have to buy the equipment, and they have to pay the workers.

And irrespective of movements in the shipping market and the state of the order book right now, where we have a fairly significant order book in most segments, for the shipyards to really start cutting down on prices, there is a limit to what they can do.

And also, if you look at the input factors at some of the yards, say, for instance in China, where they of course have benefited from low wages for some time, you have to assume that there is some price pressure also on the working force, while at the same time they can maybe work more efficiently and therefore mitigate some of that difference.

But it is really down to the cost factors on the input components in the building process.

And I don't think that we will see the yards building vessels with losses for a long period.

I think then they will instead convert the facilities to build other industrial goods instead.

Okay.

And then -- thank you for that.

That was a very interesting answer.

And then the last question is just on the new Suezmax contracts, you guys are getting $40 million -- or $40.5 million upfront for that contract.

How did you negotiate that?

Why would a counterparty ever do that?

Yes, we think it is a nice deal.

I think the history there is that we originally had a deal where we were to sell those vessels to that charterer.

And then in the fourth quarter last year, we renegotiated the deal, where then they will pay $40.5 million up front and then a bareboat charter rate, and with a purchase obligation in the end.

So the reason for this phenomenally good deal for us is that we had a deal originally that was renegotiated.

Okay.

Excellent.

Thanks so much.

I appreciate it.

[George Berman], Glen Allen Financial.

Good morning, good afternoon, gentlemen.

Congratulations.

You are definitely making progress in this marketplace.

The upcoming refinancing, would you foresee this to be done at more or less advantageous interest rates than you currently have?

Well, if you look at our hedging strategy, where we effectively hedge most of our interest exposure, I think the combination of the swap rates and the margin will be at a similar or slightly higher level.

And that is because in general, the banks' margins have increased somewhat due to higher costs for the banks for their own funding, while the swap market has come down.

So for us, we expect that to be relatively neutral.

Okay.

And overall, do you see opportunities for you to purchase ships on distressed type of sales in the upcoming, say, 12 months?

Do you see the industry going now fullbore lower with shipping rates or up with the new deliveries coming in?

And are you prepared to make any new investments in your fleet?

Oh yes, we are definitely looking at new investments, and we have done that actually all along and also through 2009.

We made very significant investments in 2009, so, of course, a key focus for us was last year to ensure that they were taken well care of and that we had no issues in our portfolio.

And I'm very happy to report that there haven't been.

But we all along have looked at potential projects.

But the exact timing and size of those projects is not something that we will comment on specifically.

It is much more important for us to do the right deals than necessarily rush out and do the first deal available.

I would comment, however, that we see more project opportunities right now, I think, than we have for some time.

And also, with the financing market being more active, as demonstrated by the very strong interest in the refinancing that we are in the process of completing, we think this gives us a good confidence that we could both find projects and financing if we wanted to go ahead.

So hopefully, we can come back and report new investments, but I will not give any guiding on exact timing.

Okay.

And then last question, the drill ships that you have on the contract with Seadrill, I think Seadrill last year opted to acquire or buy one of those leases out.

And I think reading that for the existing drill ships, they also have options to just buy the thing from you, right?

Exactly.

So there are purchase options on the ultra-deepwater drilling units and also on the (multiple speakers) drilling rig.

So when they exercised that option last year, that was a preagreed option that we also disclosed when we entered into the deal.

So you will find full information on those purchase options on our website under Investor Relations, and you look up the announcement for the different investments.

And if those options -- one of the other options was going to be exercised by the party, you would then take the funds received, pay off the debt, and you would have large financial flexibility to redeploy the funds somewhere else, correct?

Exactly.

Okay, good.

Thank you very much.

Thank you.

If there are no further questions, I would like to hand the call back over to Mr.

Hjertaker for any additional or closing remarks.

Thank you for attending this conference call and also for the questions.

I think 2009 has been a very good year.

It has been a very challenging financing environment, but I think Ship Finance has come through that in a strengthened state, and we now have a very robust base to build on.

I would also like to thank all of the employees of Ship Finance, who have done a phenomenal job over the last year and really put a lot of effort into making this -- and restructuring the newbuildings in a way that is an optimization as we see it for Ship Finance.

So with that, I would like to say thank you and I hope to come back to you and report further progress next quarter.

Thank you.

That will conclude today's conference call.

Thanks you for your participation, ladies and gentlemen.

You may now disconnect.