SFL Corporation Ltd (SFL) 2010 Q1 法說會逐字稿

Good day and welcome to the Ship Finance International Q1 2010 earnings release conference call.

Today's conference is being recorded.

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

Ole Hjertaker, CEO.

Please go ahead, sir.

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

My name is Ole Hjertaker, and I am the CEO of Ship Finance management, and with me here today I also have Harald Gurvin, Senior Vice President, and Magnus Valeberg, who is the Vice President of the Company.

Before we begin our presentation today 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 an increased cash dividend of $0.33 per share.

This is a 10% decrease over last quarter on the back of successful delivery of two new building Suezmax tankers.

This represents $1.32 per share on an annualized basis or 7.3% dividend yield based on closing price yesterday.

We have no declared dividends for 25 consecutive quarters and $11.41 in total aggregate cash dividends per share.

The net income for the quarter was $57 million or $0.72 per share.

This includes a $26 million gain relating to the Suezmax new building Everbright where the charter is paid $40.4 million upfront.

It also includes a $1.8 million gain relating to the sale of Front Vista and a negative $12.8 million mark-to-market of derivatives relating to interest rate swaps.

Gross charter revenues including subsidiaries accounted for as investments in associate was $197 million or $2.49 per share in the quarter, and EBITDA equivalent cash flow was $184 million or $2.34 percent per share.

There has been an increased profit share contribution compared to the fourth quarter of 2009.

We are up from $5.7 million in the previous quarter to $11.3 million or $0.14 per share this quarter.

Since 2004 there has been $80 million or more than a $1.00 per share in annual average profit share contribution.

In the quarter we also completed a refinancing relating to 26 vessels on charter to Frontline.

The deal was upsized from $675 million to $725 million based on very strong demand in the banking market.

Most of the negative mark-to-market of derivatives relates to this refinancing, and we have also had extraordinary expenses of approximately $2 million relating to the refinancing, which has been expensed this quarter.

The 1998 build VLCC Front Vista was sold to a subsidiary of Frontline for net sales proceeds of $58.5 million in February 2010, including an approximately $0.4 million compensation for Frontline for the termination of the charter.

We prepaid $36.4 million of associated debt, and net proceeds was $22 million.

There is a $50 million interest bearing sellers credit related to this sale which will be settled in the second quarter.

The second of the two Suezmax tankers new building started to North China Shipping was delivered from the shipyard in China in February 2010.

For each of the vessels, we will receive an upfront payment of $40.4 million net and the bareboat rate is approximately 16,700 net per day.

At the end of the charter period, there are also purchase obligations of approximately $40.4 million net per vessel.

North China will have annual purchase options first time after one year.

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

Excluding upfront payments and the purchase obligations, the two charters represent a $61 million net increase in our charter backlog.

We also continue to reduce our single-hull exposure and the VLCC Golden River has been sold to an unrelated party for $12.6 million net and delivered in April 2010.

We have paid $2.8 million in chartered termination fee to Frontline and net of debt prepayments that will be approximately $4.7 million net cash proceeds.

There will be a marginally negative profit and loss effect in the second quarter of approximately $140,000 relating to this transaction.

We also have a single-hull vessel previously announced sold on higher purchase terms, and we are now discussing a potential early termination of this arrangement.

Some charter [IRS] accumulated, but we will be provided additional security until a final agreement is in place.

Remaining outstanding under this lease is approximately $23 million.

We have recently announced that we have switched most of our new building program from container ships to Handysize dry bulk vessels.

We are now happy to announce that three of the vessels have already been chartered out for three years following delivery at the net charter rate of approximately $12,900 per day.

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

Ship Finance is in a different league than most of the shipping and offshore companies with more than 12 years weighted average charter coverage.

We have a total of $6.8 billion of fixed-rate order backlog or more than $87 per share.

The EBITDA equivalent backlog is $6 billion or $76 per share.

These numbers are all before profit share and do not include any re-chartering after end of the current charter periods.

For charter backlog it is also very important for a financing bank in the current economic climate where access to capital is not as easily available as the previous few years.

This is also demonstrated by the very good response to the refinancing we recently completed.

Ship Finance generates a very significant cash flow per quarter, and this overview includes all 100% owned vessels, including vessels classified as investments in associate based on US GAAP.

The EBITDA equivalent cash flow before profit share was $173 million in the quarter and after profit share $184 million or $2.34 per share.

From the fourth quarter of 2009 to the first quarter of 2010, we have a part defect by the sale of Front Vista in early February of 2010 of approximately $1 million.

And also, we have the full quarter of Glorycrown, the first of the new buildings Suezmax tankers, which was only partly included in the fourth quarter of 2009, but which was fully included in the first quarter.

The net effect of this transaction is about $900,000 in the quarter.

In addition, Front Vanadis was sold during the fourth quarter, and therefore, the full effect from a cash flow perspective came in the first quarter relating to this vessel.

In the first quarter, we also had two single-hull vessels that went on a lower charter rate, which is part of the agreement with Frontline where the vessels would go down to a lower rate on their anniversary date in 2010.

The net effect in the first quarter compared to the fourth quarter last year was approximately $1.8 million relating to this.

From the first quarter to the second quarter, we will have a full quarter with Everbright, the second Suezmax tanker recently constructed in China.

The net effect of that deal alone is approximately $1.5 million.

We will then also have a full quarter excluding Front Vista, which was sold in February, which will also have a negative effect in the quarter.

Front Edinburgh, which has been on charter -- sorry, which has been sub-chartered by Frontline and will be on the bareboat terms, and, therefore, this will also affect the vessel operating expenses where this vessel will then be excluded.

The charter rate for the two first years for Front Edinburgh is approximately $2000 per day.

The operating expenses will also be impacted by Front Vista when that -- with a full effect in the second quarter, and also we have seen that the general administrative expenses was lower in the fourth quarter than the first quarter -- sorry, was lower in the first quarter than the fourth quarter last year.

We do provide a full breakdown on charter hire per vessel, including accounting treatment, and this is available upon request to IR at shipfinance.no.

If you look at normalized contributions from our projects, this includes vessels accounted for as investment in associate, the EBITDA which is defined here as charter hire plus profit share less operating expenses in general and administrative expenses, was $2.34 per share in the quarter.

Net interest in the quarter was $43 million or $0.54 per share, and ordinary debt installments relating to the Company's projects was approximately $103 million or $1.30 per share.

Our net contribution from the projects in the quarter after the above significant repayment of debt was $39 million or $0.49 per share.

This is similar to the fourth-quarter net cash flow of $0.47 per share.

The declared dividend for the quarter was $0.33 per share, so there is a good buffer also after accelerated debt repayments.

In the profit and loss statement, a significant portion of charter hire is excluded from booked operating revenues.

This quarter repayment of investment in finance leases was unusually high due to a $40 million upfront payment by the charter relating to the Suezmax Everbright.

I would also highlight that as the few non-double-hull vessels remaining or charted to Frontline approach their anniversary date in 2010, there will be a change in accounting treatment.

These vessels have now been classified as finance leases, but from their anniversary date in 2010, the accounting treatment will be changed to operating lease.

This means that there will also be a depreciation element relating to these vessels from the respective dates onwards.

This is the structure that was adopted in 2003, and on average the depreciation effect will be approximately $2200 per day per vessel or approximately $1 million per quarter for all the five vessels.

In the first quarter, there was approximately $450,000 in added depreciation relating to this change in accounting treatment for these vessels.

The exact anniversary dates are for Front Edinburgh January 5, 2010; for the Golden River or ex Front Lord, the date was February 25, 2010, but this vessel has already been sold and delivered in April.

For the Front Duke, the anniversary date is May 29, 2010.

For the Front Lady, the date is June 4, 2010.

For the Front Highness, the date is July 30, 2010, and for the Front Ace, the date is September 27, 2010.

On the balance sheet, the vessels and equipment will have some impact also due to the reclassification of the single-hull vessels as they come off the higher rate, and they are reclassified as operating leases.

Therefore, in this overview there is only a very marginal increase in vessels and equipment due to even despite the depreciation element.

Also, we would like to highlight in the balance sheet that the three ultradeepwater drilling rigs and the one Panamax bulker, which are classified as investment in associate, they are not fully consolidated into our balance sheet.

But the equity portion relating to these subsidiaries are reflected under long-term assets called investment in associate.

We have a deferred equity of $194 million.

This is effectively the part of the purchase price when we paid -- when we bought vessels from Frontline in 2003 and 2004, but which has not been fully recognized in the balance sheet, but is amortized to equity over time.

This deferred equity is, as I said, $194 million, and the adjusted book equity ratio, including this equity portion, is approximately 31%.

In the cash flow statement, I would like to highlight that under investing activities we can see the element of the charter hire that is reclassified as repayment of investment in finance leases, and this is for the consolidated assets only.

The $40.4 million upfront payment relating to the new building, Everbright, is included in this line in the cash flow statement.

The net payments to and from investments in associate, which are not fully consolidated, are on the line called "Cash Received from Associates" under Investing Activities.

In the quarter $15.6 million of net cash was transferred from these subsidiaries to the parent company.

We do provide full accounts for each of the subsidiaries separately on our webpage.

All the investment -- all the subsidiary classified as investment in associate also have finance lease accounting, and therefore, a part of the charter hire in these subsidiaries are classified as repayment of investment in finance lease.

Shareholders equity from these subsidiaries appear in the consolidated balance sheet as investment in associate.

We had $104 million in available liquidity at quarter-end.

The loan portfolio consists of a consolidated balance sheet or loans consolidated to the balance sheets of approximately $2 billion, and in addition, there is $1.8 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 (inaudible) program compared to our size.

We do continue to reduce our interest bearing debt and have reduced this by close to $200 million during the quarter and also replaced expensive funding with cheaper capital.

We, therefore, expect to see a positive impact on interest expenses in the second quarter.

The new $725 million loan facility was significantly oversubscribed, and this demonstrates our standing in the financing market.

The loan margin level has increased, but swap interest rates have declined.

So net interest payable relating to the refinancing is expected to be at a similar level as the previous structure.

In the quarter we also completed financing for the two Suezmax vessels on charter to North China Shipping.

The financings match the charters for the vessels and have approximately a five-year maturity.

With a portfolio of long-term charters, our strategy is to hedge a substantial portion of our interest exposure.

We used swaps, fixed interest, and also interest compensation through charters.

Currently close to 85% of our loan portfolio is effectively hedge.

We only have $162 million in gross capital commitments, which is a very low number compared to our overall fleet size.

$60 million of payments have been made to the yards, which have been funded from our cash position, and we have not yet secured financing for the vessels.

Depending on timing and amounts, a significant portion of the remaining investments may, therefore, be funded by bank debt.

The new buildings are primarily dry bulk vessels after we converted contracts for four container vessels into seven Handysize drive bulkers.

This was an opportunistic move from our side, and three of the bulker vessels have already been chartered out.

We believe that this will give our shareholders better value for money compared to building the container vessels as originally ordered three years ago.

If you look at our contracted cash flow, we have two very significant counterparts.

The largest is Seadrill where we have three ultradeepwater drilling units and a jack-up drilling rig on charter.

These are all backed by 100% Seadrill Limited guarantee, and all the deep water units are sub-chartered to oil majors at very high rates.

This has enabled us to frontload the charter rate and lower payments and have reduced the loan balance on these assets very significantly over the last one to one and a half years.

Also, for the Frontline charters, we now have 100% front unlimited guarantee after we made some adjustments to the agreements as we announced in the previous quarter.

There is also a cash deposit of $2 million per double-hull vessel relating to the charters we have with them.

And part of the fleet are double-hull OBOs, and these will now over time gradually be modified to carry dry bulk cargo only.

We expect this to enhance the earnings capacity for the vessels in the long-term, and the expenses for the conversions or the modifications will be carried by the charterer.

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, which also means that we have a lower profit share threshold.

In the first quarter, $11.3 million of profit share accumulated, and this profit share is payable in March 2011.

Over the last six years, on average $80 million have accumulated, and this has enabled the Company to fuel significant growth in this period.

Also, due to Frontline's sub-chartering of several of these vessels, the average breakeven on a TCE basis for the vessels operating in spot market are estimated to be below the base breakeven levels that we have in the chartering agreement with Frontline, and we will, therefore, expect to see a profit share contribution even when charter rates are below these base levels.

Frontline will report their first-quarter results tomorrow morning, and we can, therefore, not comment on any detail relating to the charter revenues per segments.

We continue our policy of paying dividends on the back of our long-term charter portfolio, and we are very happy to announce a 10% increase in dividends this quarter after the delivery and charter of two new building Suezmax tankers.

The performance in the quarter from a cash earnings perspective was good, fueled by a $11.3 million profit share contribution in the quarter.

We recorded gains in the quarter relating to the second new building Suezmax tanker and also a gain on the sale of Front Vista.

This was partly offset by a mark-to-market loss on interest rate swaps in connection with the recent refinancing.

The charter portfolio remains stable and transparent, and our $6.8 billion portfolio provides a very solid foundation for growth.

We have demonstrated our ability to access the financing market, and we will look for transaction opportunities that may arise in the market going forward.

The most important factor, however, is, of course, to do the right deals.

So we cannot give you any specific guiding on size and/or timing of these potential new investments.

And with that, I open up for questions.

(Operator Instructions).

John Chappell, JPMorgan.

So the dividend increase was a little bit of a surprise, and I understand the thought process there, the stronger results in the first quarter.

I'm assuming you would not do a dividend increase if it was not sustainable longer-term, though.

So just a question about the thought process and the strategy there.

Is this maybe a sign that projects are not as available as you would hope and that there is maybe a better use of cash in the near-term?

The dividend is, of course, set by the board every quarter.

So I cannot make any projections on the dividends going forward.

As we have communicated in the past, the board has generally had to focus on long-term sustainability when it comes to the dividends.

I also want to comment that we do see quite a few call it interesting investment opportunities.

And, of course, we are looking into some of those and some may materialize and some may not.

But I think the key for us and the management is really to build our distribution capacity over time.

And we do have a very significant charter backlog, and we do generate very significant cash flows.

So I'm sure the dividend increase can be attributed to what we have in our portfolio today and should not be seen as a single that we don't see any investment opportunities.

So we don't have anything to spend the capital on.

Okay.

On the OBO conversions, you mentioned that the cost is assumed by the charter.

First of all, is the charter in that case Frontline, or is it whoever Frontline sub-charters the ships to?

And then, second of all, even though you're not paying for the conversion, is there any off-hire time associated with these conversions that may help Ship Finance results while they are undergoing the conversion process?

No, there is no specific off-hire time relating to this.

This is something that will happen gradually over time and will be taken in connection with scheduled dry dockings.

It is not a conversion.

It is just really more a modification where some of the deck equipment is taken away, which facilitates a more efficient use as bulkers at the dry bulk terminals.

We also have to bear in mind that these vessels are now approaching an age where they as trading tankers would incur significant expenses and also more rigorous vetting procedures if they were trading in that market.

Instead, when we make these minor modifications really, we think that that will potentially enhance the long-term cash flows.

Of course, in the near term through the profit share with Frontline, but, of course, also these vessels have a trading life beyond the Frontline chartering period, and we think that these vessels have better cash flow potential as dry bulk vessels at that time.

And is Frontline ultimately paying for the modifications, or is it the sub-charters of the ships?

We have the chartering relationship with Frontline, and whether or not they get some of their sub charters to pay for part of it, I don't know.

I think I would add these are not very expensive modifications.

These are really just removal of some excess equipment on the deck.

So I don't think it will have any major cash flow impact from a cost perspective.

Okay.

And then finally, it sounds like the banking markets may be becoming a little bit easier to access credit, but it's still pretty tight relative to a few years back when you were doing the majority of your projects.

Obviously there has been a good reaction for your refinancing, so it seems that the availability is there for you.

But, as you think about future projects, do you think -- what do you think is the ideal debt to equity structure of projects, and how does that compare to the capital structure you used to take on call it in '07 or '08?

Yes, it is a very interesting question.

I think the way we have built up the different projects, if you can call it that in our portfolio, is that when you look across segments, the banks typically have different financing parameters in the offshore segment, say, compared to the tanker segment or bulker segment or container segment.

What we focus on is, of course, to optimize any investment opportunities in the specific segment.

And for us and also when we look at chartering opportunities, for us the key is that we have access to at least as competitive funding in the specific segment than the chartering counterpart that we have.

Because on that basis, we believe that we can provide a better cost of capital in that segment and, therefore, be competitive really throughout the cycles.

Because in the market we saw in early 2009 when the banks were very, very reluctant to do business, all players were facing this.

We were facing it to a certain extent, but the companies with the market presence in the specific segments were certainly feeling it.

So over time our aim is, of course, to maximize the package in the different segments.

With that said, for us what is really driving the equity returns are the equity we can invest in the projects.

Because then we -- of course, if you get the right return characteristics on the equity, that is something that can, of course, fuel future dividend increases.

So there is not a standard template for this.

What we see is that when bank funding is not as available for anyone as it was say two or three years ago, maybe this is a time where we can try to optimize this in a way.

Of course, always mindful of the risks/rewards in the different projects and in the specific segments.

So I hope that was explaining at least some of our thought process around it.

I can unfortunately not give you a specific percentage because we don't have one, a general percent.

Absolutely, very helpful.

John Parker, Jefferies.

It is a little loud here, and I missed a couple of things.

I apologize but did single-hull change to one of your contracts -- I think that was the Front Sabang you were talking about, can you give me the details again?

No, this is -- which one were you referring to?

Did you refer --?

You said there was some change in your contract or selling you had sold with a higher purchase agreement.

I thought --

Yes, we had higher purchase agreements for single-hull, in fact for two single-hull VLCCs.

We had the Front Vanadis, which was terminated early in the fourth quarter of 2009, and I was just making the comment that we were also discussing a potential earlier termination of the second single-hull VLCC.

But, of course, we will have to make sure that we get full settlement.

There is also early purchase options for the charter relating to these vessels.

So this is something that may happen over the next few months.

And what was the other ship?

Exactly.

So the first was Front Vanadis and the second was Front Sabang.

Okay.

Very good.

And that was the second ship, yes.

And again, I apologize because you went over this, but I could not quite hear it.

The ships converting to the operating lease were the Edinburgh and was there another one?

All of the single-hull vessels on charter to Frontline.

All of them?

Okay.

All of them will from their anniversary date in 2010 they will be from an accounting perspective treated as operating leases.

They have been finance leases all the way through from 2003 until now.

But now they have to change to operating leases.

Therefore, there will also be a depreciation element for each of these vessels, and the average depreciation per vessel across the five remaining vessels will be approximately $2200 per day per vessel for an effect of approximately $1 million.

So you see (multiple speakers) and then the operating lease rate, would that be kind of $1000 delta that you had in your old arrangement?

Exactly.

For the vessels that are chartered on time charter, it will be $7500 in revenues less $6500 in OpEx.

Three of these vessels have been sub-chartered by Frontline on bareboat basis, and therefore, under our arrangement we bareboat them directly out from Ship Finance.

So then they will generate -- most of them will generate $1000 per day.

The Front Edinburgh will generate approximately $2000 per day for the first two years of that sub-charter period.

Okay.

That is the part I did not quite follow.

And then you paid some debt at the rigs like you said in your press release.

How much debt did you repay, or what was the reason for repaying the debt?

I can look it up in your balance sheets.

No, I mean we have -- we are paying scheduled repayments of $103 million in the quarter relating to our projects.

And then in addition to that, we have also prepaid some additional debt from our surplus liquidity.

So we have not made any specific comments on repayments on any specific project as such.

Okay.

And then the dry bulk ships you disclosed that you have them on time charters, why did you do that as opposed to bareboat, which has been your habit recently?

From our perspective we are as happy to do time charters as we are to do bareboats.

It all depends on whether or not that we feel we are adequately compensated for taking the operating risk and also compensated for a potential volatility escalation in operating expenses going forward.

For very long-term charters, of course, this is expected to have a more significant impact theoretically than for shorter-term charters.

So when we agreed to charter these vessels out on a three-year time charter, we will then buy the technical management services for these vessels.

And that is something we could also easily do for vessels on longer-term charters.

But, as I said, we would do that, of course, only when we feel that we are adequately compensated for both the operating costs and also the potential cost escalation over time.

[Phyllis Palmer], [Banque].

Could you let us know if any -- if you have any exposure to the Gulf of Mexico or if Seadrill or Frontline do?

To my knowledge, none of our assets are operated in the Gulf of Mexico in terms of if you talk about the offshore-related assets.

Of course, we have sub-chartered these assets to our chartering counterparts who operate them in the market.

Whether or not Frontline has vessels that go to and from the US Gulf, I am sure they do that from time to time.

We do not have the specific schedule for when the vessels are trading there.

These vessels also, of course, have insurance coverage for potential oil spill liability.

Okay.

Okay.

So basically you would get paid through the insurance company if they were not able to get into a port or something like that or were not able to travel through the Gulf of Mexico?

Yes, and I would also add that the vessels -- the offshore assets we have are all on bareboat charters where our chartering counterparty is paying for these insurance coverages.

So they in case something happened they will have -- they will, of course, have to take out the proper insurances, and then if something should happen, they will then be refunded by their respective insurance companies.

Okay.

Now the drilling rigs that you have leased to Seadrill, I mean do you foresee because of the Gulf of Mexico spill, do you foresee any added costs associated with that going forward that may either reduce your profitability of any sort on the rigs?

We do not currently anticipate any impact on our behalf.

There could, of course, be impact on the cost of operating these rigs, but then again Frontline -- sorry, Seadrill -- is charting these rigs from us on bareboat basis.

So they will have to cover these additional costs if any.

To my knowledge, there are also differences from region to region as to what kind of security measures are taken and also the whole planning process relating to the drilling of oil wells.

But I think I will have to ask you to direct those questions to Seadrill who, of course, operate in that market and, of course, is experiencing this from day to day also in the interaction with oil companies.

Okay.

Great.

Thank you.

And it looks one other thing and I apologize if you have gone over this earlier.

The single-hull that you now have with Frontline, when are they going to be -- how long do you think they will still continue to use those?

Do they use them in areas where they are still allowed to carry fuel in different regions that allow single-hulls, or can you explain that, why they are still in use?

Yes.

We have currently five vessels that are not double-hull.

Those are four what we call single-hull vessels and one vessel with double size.

Of these five vessels, three of them have been sub-chartered out by Frontline on bareboat basis, and these charters go beyond the vessel anniversary date in 2010.

We don't have any knowledge as such as to what Frontline may or may not do with these vessels.

We have them on charter to Frontline until 2014 on average.

Frontline can re-deliver these vessels to us on basically a 30 days notice.

From Ship Finance's respect, we have a very low charter rate than these vessels from 2010 onwards.

So, of course, if any of these vessels were re-delivered to us, we would then be able to sell the vessels potentially for recycling or potentially find alternative employment such as storage or conversion to other uses.

So and we will, of course, notify the market if any of these vessels will or are intended to be re-delivered to us.

But so far Frontline has kept these vessels they have remaining.

(Operator Instructions).

Justine Fisher, Goldman Sachs.

So the first question that I had was about the dividend again.

Can you just remind me when -- I know you guys had the option that you could pay the dividend in stock as opposed to cash.

Can you remind me when that option ended or expired?

Because again to echo John's comment, it seems like a quick about-face from paying some of your dividend and stock in order to preserve cash to increasing the amount of the cash dividend.

Yes, we offered shareholders to receive stock instead of cash for four quarters.

For the last two quarters, i.e.

the third-quarter 2009 -- sorry, the fourth-quarter 2009 and now the first-quarter 2010, we are not offering shareholders to take stock.

Of course, shareholders may reinvest their dividends, and we have a stock reinvestment program set up through Mellon, and there is a link to that directly from our website where individual investors can reinvest their dividends.

Okay.

And then just to put you back on Phyllis' questions about the single-hull, so can you talk about what the rates are for storage?

I mean I guess they would -- they would be somewhat along the lines of lower market tanker rates.

But if you, let's say, the rates for those vessels that you're getting from Frontline are $7500, so if you -- if those were re-delivered and you used those for storage, how much would you make per day on storage?

It is difficult to be specific because we have not been in direct negotiations for such contracts.

I mean these vessels are on charter to Frontline basically through 2014.

So unless they tender some of these for delivery to us, it is not something that we really can have a clear view on.

So I'm afraid I cannot give you specifics to your answer.

But then if you were to reemploy those vessels or even to scrap them, would you have to do it via another counterparty, or would it be Ship Finance's decision?

Because it seems as though you guys are never the ones that make the ultimate employment decisions for the vessels; you just lease them out to other companies.

So would you guys end up making the decision on unemployment for that ship, or would you find someone else to charter it for storage or something like that?

For as long as the vessels are chartered out, of course, our chartering counterparts make the commercial decisions for the specific charters.

They will take on.

If vessels are redelivered to us, of course, we make those decisions.

And one example is the small 1700 TEU container vessels, which we are treading in the shorter-term charting market, which, of course, are decisions made by us.

So if Frontline should redeliver one of these vessels to us, that will be for our comp and our decision only.

And does that change the longer-term business strategy of the Company?

I mean I think some investors may want to own Ship Finance because it is a leasing company, not necessarily because of the ship managers.

So how do you go about dividing up the fleet between the fleet that is just a passive lease fleet versus an actively managed fleet?

I think if you look at our overall portfolio, we have I would say in the market an extremely high level of charter coverage with a weighted average charter coverage of more than 12 years.

We have from time to time taken some smaller positions in the market such as ordering the two Suezmax tankers where we did not have a charter lineup but where we think we ended up with a very, very nice deal and have made a very good profit on those vessels so far.

Of course, it is a balancing act, and we don't want to compromise the long-term predictability and the sustainability of the Company.

But that said, we also want to enhance the returns for our shareholders, and if we then from time to time charter vessels in the short-term market, it is because we think there are greater opportunities by doing that compared to just locking it in long-term.

So -- (multiple speakers)

So should investors think to themselves that if certain of your vessels -- for example, even these dry bulk vessels that are delivered a couple of years from now -- that if those vessels are put on the market for the short-term, that the ultimate goal is to lease them out over the long term.

But either the rates were not attractive at that point or you thought you could make more money in the short-term chartering them out, but that really the strategy is to put those on long-term charters?

Yes, I think the overall strategy of the Company is to keep a portfolio of long-term assets.

But at the same time, I would also hope that investors believe we will try to spice up the returns and hopefully increase the distributable cash flow over time by also making some market calls depending on where we think we are in the cycle relative to the different segments.

Typically, if in a single segment, if we believe we are high up in a cycle, we would tend to go very long and cover and to ensure that we end up with residual value on these assets at the end of the charter period, which is at a conservative depreciated level.

Of course, in segments where we think the market has been down and we think there are good recoverability opportunities, of course, in those segments it could be very opportunistic for us to do shorter charters and try to capture that upside and potentially lock these vessels in at higher rates at some point in the future.

So from our side, it is a combination of predominantly a very long-term charter coverage, spiced up with hopefully some added returns by taking some market positions from time to time.

Okay.

And then my last question -- and maybe this is a stupid question, but I have been looking -- you guys have been chartering most of your fleet out for so long I cannot remember.

Does Ship Finance have a chartering desk?

Do you guys have a chartering business, or who does that chartering if you chartered them out yourself?

We have a commercial director who is located in Singapore who is taking care of the chartering for us and is, of course, in close dialogue with ship brokers and also both in connection with project opportunities but also relating to chartering if that is required.

(Operator Instructions).

Justine Fisher, Goldman Sachs.

Sorry, one more question.

The recent downgrade of Horizon Lines by Moody's so they are now rated CCC by both rating agencies.

Does that have any ramifications on your charter relationship with them in terms of even them potentially posting some collateral, or are you guys -- how are you monitoring that situation?

There is no direct link between our chartering relation to them and the rating they have.

They are, as all of us, are charterers.

So, of course, we had to pay the charter rate, and we, of course, own the assets.

So if something very negative should happen and if they did not pay their charter rates, of course, it would be an option for us to take back the vessels as we can with all of our chartering counterparts.

We have had no such incidents with Horizon Lines.

We had a very good working relationship.

So the recent downgrade does not have a direct impact on us.

There are no further questions.

Then I would like to thank everyone for participating in this conference call, and we look forward to reporting the second-quarter numbers in August 2010.

Thank you.

That concludes today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.