SFL Corporation Ltd (SFL) 2011 Q2 法說會逐字稿

Good day and welcome to the Ship Finance International Q2 2011 results presentation.

Today's conference is being recorded.

At this time, I would like to turn the call over to your host today Mr.

Ole Hjertaker, CEO.

Thank you and welcome to Ship Finance International and our second-quarter conference call.

My name is Ole Hjertaker and I am the CEO in Ship Finance management and with me here today, I also have the CFO, Eirik Eide and Vice President, Magnus Valeberg.

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 $0.39 per share.

This represents $1.56 per share on an annualized basis, or a 12% dividend yield based on closing price yesterday.

We have now declared dividends for 30 consecutive quarters and paid out more than $13 per share in total aggregate cash dividends.

Net income for the quarter was $41.5 million, or $0.42 per share.

Positive profit sharing was generated also this quarter, but marginal compared to previous quarters.

There was a $5.8 million gain on sale relating to two old combination carriers in the second quarter and also a $4.1 million gain on the sale of the jackup drilling rig, West Prospero.

The net cash effect of these transactions were $54 million.

The fixed-rate charter revenues in the quarter, including subsidiaries accounted for as investment in associate was $202 million before profit share contribution.

The EBITDA equivalent cash flow, including profit share, was $171 million, or $2.16 per share.

Despite a weak spot tanker market in 2011, $2.4 million of profit share has accumulated in the two first quarters.

Several of frontline vessels have been subchartered on profitable terms above our base rate and will provide a positive contribution to profit share calculation irrespective of the spot market.

The base rate for the VLCCs is approximately $26,000 per day.

The profit share calculation is based on contribution on a yearly basis, so we will not have the final number for 2011 until the end of the year.

In total, more than $500 million in profit share has accumulated since 2004 in addition to the base charter rates.

The final profit share will be calculated based on actual performance in the full year of 2011 and therefore also impacted by revenues generated by the vessels in the second half of the year.

We have now secured financing for all the new buildings and also a containership delivered in 2010.

As we have paid significant installments to the shipyards already, there will actually be a significant positive cash contribution for the Company from the newbuilding program in excess of $100 million in the second half of 2011 alone.

In March, we announced the acquisition of two 13,800 TEU container vessels from CMA-CGM in combination with long-term time charters [back].

[The net] acquisition price after seller's credit is $116 million per vessel, which is 30% lower than construction costs.

The vessels were delivered at the end of March and in the beginning of April and our equity investment is $25 million per vessel.

The vessels are financed through a French tax lease structure where title to each vessel has been transferred to a French company and Ship Finance's investment is effectively secured by junior mortgages.

The two container vessels are managed by an affiliate of CMA-CGM and the time charters include a compensation clause whereby Ship Finance will be compensated for any increase in operating expenses.

CMA-CGM has purchased options for the vessels first time in 2014 and we are earning a 15% return on our invested capital and potentially more based on a profit split arrangement if a purchase option is exercised.

In May 2011, Ship Finance contracted to acquire four newbuilding 4800 TEU container vessels at the state-owned shipyard in China with scheduled delivery in 2013.

The vessels are high-specification so-called wide-beam container vessels optimized for higher cargo intake, radically improved speed consumption economics compared to existing vessels of similar size.

The aggregate yard contract price is approximately $230 million with a majority of the payments due on delivery of the vessels.

The vessels will be employed by the European-based Hamburg Sud container line for seven years from delivery and the net time charter rate will be approximately $26,250 per day per vessel.

We have already sourced 80% financing on these vessels with very long maturities.

In the second quarter, we sold two 20-year-old combination carriers and Frontline had to pay a $14 million compensation to us for the termination of the contracts.

Net cash proceeds were $17 million after prepayment of associated financing and recorded a book gain of $5.8 million in the second quarter relating to these two vessels.

At the end of the second quarter, Seadrill exercised the preagreed purchase option for the jackup drilling rig, West Prospero.

We acquired the rig in 2007 and it was chartered to Seadrill on a long-term payable charter where Seadrill was granted certain purchase options first time in 2010.

The purchase option price was $133.1 million and the transaction was effected as the sale of the shares in the asset-owning subsidiary.

The bank financing in the asset-owning subsidiary continues after the sale, including a $20 million corporate guarantee from Ship Finance.

The loan amount is currently less than 50% of the charter free value of the rigs that is reported by brokers and the guarantee obligation will expire in 2013 at the latest.

We have full indemnity from Seadrill for this obligation and we will receive a 2% per annum fee for continuing to provide this guarantee.

Ship Finance received approximately $36.2 million in net cash proceeds from the sale and recorded a book gain of $4.1 million classified as gain on sale of associates.

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 other shipping and offshore companies with more than 11 years weighted average charter coverage.

We have nearly $7 billion of fixed-rate order backlog, or approximately $87 per share and the EBITDA equivalent backlog is approximately $5.5 billion or around $70 per share.

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

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest segment for us with 43%, or approximately $3 billion of the backlog, while tankers where the Company started now represents approximately 34% of the backlog.

Containers have recently increased to 16% through the new acquisitions and the drybulk segment is 8%.

Over time, we expect to balance these segments, but for us it is more important to do the right transactions than to focus on a specific percentage per segment.

We have recently added to both the container and offshore sectors, but we do see interesting opportunities for growth across all four segments.

One of the key strengths of the Company is the charter portfolio and our counterparties.

We have a total of 14 customers and all are current with their charter payments to us.

84% of our charter backlog is with public companies, which gives us and our investors and stakeholders a very good opportunity to monitor the quality of our backlog.

41% of the portfolio is with companies with a market capitalization in excess of $5 billion.

Also, the charter tenor, as indicated on the right side, is quite unique with more than 70% of the portfolio in excess of 10 years and only 3% shorter than five years.

Our two largest counterparties are Seadrill and Frontline.

Seadrill represents more than 40% of our backlog and the assets are state-of-the-art ultra-deepwater drilling rigs.

There are 12 years remaining under the charter and we have already paid down $200 million per rig, or $600 million in aggregate on the financing of these assets.

And this is after only 2.5 years of operation.

Due to the conservative structure of the transactions with frontloading of charter hire, which has quickly taken down our exposure to the asset, the offloading of interest rate risk and residual value risk, we have to account for these wholly-owned assets as investments in associates.

In 2004, Frontline was our only client and all the assets were employed in the tanker segment.

There was a mutual dependency as we effectively owned all the assets they operated.

While we have diversified across segments and with multiple counterparties, we have not done any new transactions with Frontline for more than six years.

In the meantime, we have enjoyed significant cash flows from the charters and more than $500 million of profit split.

But equally important, we have used a significant part of this cash flow to pay down on financing relating to the vessels.

Frontline, on their side, have also grown significantly and based on information from their first-quarter reporting, they now have more vessels owned and chartered in from others than they have chartered in from us.

In addition to the chartering obligation, which is fully guaranteed by the ultimate parent in Frontline, there is also a $2 million cash deposit per vessel in favor of us.

This is additional security for us and cannot be touched by Frontline.

Six of the vessels are employed in the drybulk segment now and we have a fixed-rate operating cost agreement, which we believe is very attractive for us.

If we look at normalized contribution from our projects, which includes vessels -- also includes vessels accounted for as investment in associate, the EBITDA, which includes charter hire and profit share less operating expenses and general and administrative expenses, was nearly $700 million last 12 months.

The net interest was $157 million, or approximately $2 per share, but more importantly our normalized ordinary debt installments relating to the Company's projects was more than $400 million, or approximately $5 per share.

We have approximately $3.5 billion of net interest-bearing debt if we also include the investment in associates and our steep loan amortization represents a less than nine year profile to zero.

This compares to our weighted average age of around five years in the fleet.

So if you continue paying down our debt at this rate, we will then effectively be debt-free when the vessels are on average 14 years while estimated commercial life is 25 to 35 years for these type of assets depending on asset class.

The net contribution from our projects last 12 months after this aggressive debt repayment profile was $127 million, or $1.61 per share.

And with that, I will leave the word over to Mr.

Eirik Eide, our Chief Financial Officer, who will take you through the numbers for the second quarter.

Thank you, Ole.

On this slide, we have shown our pro forma illustration of cash flows for the quarter and compared to the first quarter of 2011.

Please note that this is only a guideline to assess the Company's performance and is not in accordance with US GAAP.

For the second quarter 2011, the Company had an EBITDA, including profit share, of $171 million, or $2.16 per share, compared to $168 million, or $2.12 per share for the first quarter 2011.

For the VLCCs and the Suezmaxes, the revenues were more or less in line with the first quarter despite a lower profit share contribution from Frontline.

The slight reduction on the VLCCs is due to the sale of the single-hull vessels, Front Ace and Front Highness, which were both delivered to their buyers during the first quarter.

For the chemical tankers, revenues were in line with the first quarter.

The container vessels showed revenues of $21.2 million compared to $11.5 million in the first quarter.

This increase is mainly due to the delivery of the two new CMA-CGM vessels, Corte Real and Magellan, which are both fixed on 15-year time charters to CMA-CGM.

As these vessels are financed through a French tax lease and title of the vessels have been passed onto a French company, Ship Finance has taken these vessels back on bareboat charter, which will be reflected in our operating expenses, together with the daily operating expenses for the vessels, which is passed on to CMA-CGM.

The time charter rate for the next four years is approximately $61,900 on average per day while the bareboat rate is approximately 46,800 per day.

Operating expenses for these vessels is estimated to $8,800 per day on average.

As we have stated earlier, these vessels are expected to contribute approximately $7 million per year in free cash flow or approximately $1.75 million per quarter on a $50 million investment.

For the drybulk vessels, charter hire came in at $16 million compared to $18 million in the first quarter.

The reduction is mainly due to the sale of the OBOs, Front Leader and Front Breaker, which both were sold during the second quarter.

Ship Finance received sales proceeds of $37.3 million and the net proceeds after repayment of debt and commissions was approximately $17.2 million.

The two OBOs generated approximately $1.7 million per quarter of charter revenues.

In addition two other OBOs, the Front Climber and the Front Driver, had a scheduled stepdown in their charter rate during the quarter, as per the agreed leasing schedule with Frontline.

Now offsetting this reduction in revenues are deliveries of two newbuilding drybulk vessels in the third quarter -- one Handysize vessel, which is chartered to the Hong Xiang Shipping group and one Supramax, which is chartered to Glovis.

These two vessels are expected to generate charter revenues of approximately $2.7 million per quarter in total with full earnings from the fourth quarter of 2011.

Both vessels were delivered during the month of August.

On the offshore side, charter hire increased to $109 million compared to $104 million in the first quarter as a result of a full quarter of earnings from the jackup drilling rig, Soehanah, in addition to stable revenues from our other offshore units.

In June, Seadrill exercised a preagreed purchase option on the jackup drilling rig, West Prospero, which was delivered to Seadrill on June 24.

The lost revenue from the West Prospero, which generated approximately $4.7 million in charter revenues per quarter, is offset by the revenue from the Soehanah, which is expected to generate approximately $6.5 million of charter hire per quarter.

The vessel operating expenses were $30.8 million compared to $23.5 million in the first quarter, which is partly due to the delivery of the new drybulk vessels and also the two containerships on charter to CMA-CGM, which I mentioned earlier.

The profit share for the VLCCs for the quarter was only $0.2 million compared to $2.3 million in the first quarter.

As the profit share is payable annually, and as we have not seen any improvement in the tanker market so far in the third quarter, we do not expect the profit share for the year to be significant.

As we have described in previous earnings calls, our accounting statements are slightly different than those of an ordinary shipping company due to the fact that our business strategy focuses on long-term charter contracts and as a result, a large part of our activities are classified as finance lease accounting.

Therefore, a significant portion of our charter revenue is excluded from our book operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associates and long-term investments and interest income from associates.

In order for analysts and investors to gain more understanding of our accounts, we have published a separate webcast, which explains the finance lease accounting and investments in associates in more detail.

This webcast can be viewed on our website, www.shipFinance.no.

So overall for the quarter, we reported total operating revenues, according to US GAAP, of $73.7 million.

Gain on sale of assets was $9.9 million in total, of which $5.8 million is the book gain related to the sale of the OBOs, Front Driver and Front Leader.

The book gain from the sale of the West Prospero of $4.1 million can be found in the line gain on sale of associates since the shares of the subsidiary were sold.

So overall and according to US GAAP, the Company showed net income of $41.4 million, or $0.52 per share.

On the balance sheet, we show $88.5 million of cash at the end of the quarter.

In addition, we had available credit lines of $24 million and we have invested $17 million in short-term tradable securities as a short-term liquidity placement.

Newbuildings and vessel deposits have increased from the first quarter since we have paid the first installment on our four newbuilding container vessels that are scheduled for delivery in 2013 in addition to scheduled payments for the drybulk vessels under construction.

The $50 million investment in the two CMA-CGM vessels is booked under other long-term assets.

Long-term interest-bearing debt in the Company totals $3.5 billion of which $2 billion is consolidated long-term debt and $1.5 billion is long-term debt in our subsidiaries accounted for as investments in associates.

During the quarter, we have repaid approximately $102 million of debt as scheduled.

Stockholders' equity stands at just over $1 billion if we include $171 million of deferred equity mentioned in this footnote.

The booked equity ratio, including deferred equity, was 32.6% at the end of this quarter.

On the cash flow statement, we show net cash flow from operating activities under US GAAP of $23.4 million in the second quarter.

Under investing activities, you will note that the cash proceeds from the sale of the OBOs of $30.2 million and the cash arising from sale in associate of $37 million, which relates to the sale of the West Prospero.

The $37.8 million under other assets investments is mainly related to the investment in the second CMA-CGM vessels with $25 million and the remaining amount is investments in securities as a liquidity placement.

In addition, we have continued to repurchase more of our bond maturing in 2013 where we bought another $12.4 million in the second quarter.

As per today, approximately $274 million of the bond is outstanding, which is only about 8% of our total outstanding long-term debt.

Including undrawn credit lines, the Company had liquidity of $113 million at the end of the quarter where $24 million is related to undrawn credit lines.

On the debt side, we have $3.5 billion of long-term debt, as mentioned, of which $2 billion is consolidated long-term debt and $1.5 billion is long-term debt in our subsidiaries accounted for as investments in associates.

During the quarter, we have entered into several new financing agreements, which secures long-term financing for all our vessels under construction plus an existing vessel, which was delivered in the fourth quarter of 2010 and has previously not been financed.

The total commitments for two of these facilities are up to $388 million and finances between 75% and 80% of the vessels contract price.

The maturity will be 10 and 12 years from drawdown respectively.

In addition, we have agreed with some of our banks to extend the maturity of a facility relating to five VLCCs on charter to Frontline.

The facility now matures in the second quarter of 2018, which is an extension of six years compared to the previous maturity.

Hence, all our newbuildings are now financed long term and we have no refinancing needs in the near term.

In this graph, we have compared the total scheduled investments relating to our newbuilding program with the financing, which has recently been obtained.

In the second half of 2011, we have approximately $94 million of scheduled payments on our newbuildings while we can draw up to $174 million of related financing, which means a potential cash positive effect of about $80 million.

In 2012, we have about $83 million of investments, which is matched by about $81 million of financing and in 2013, we have $167 million of investments while we can draw approximately $133 million on loan facilities.

So in summary, from now until 2013, we have a positive cash effect of $44 million from the financing relating to our newbuilding program.

Wherein the second half of 2011, this cash effect is expected to be positive with approximately $80 million.

In addition to that, we have $26 million of available long-term debt on an on-financed container vessel, which, if drawn, would result in a total positive liquidity effect of more than $100 million in the second half of 2011.

We are in compliance with all covenants with healthy margins.

Free cash, including undrawn credit lines, was $113 million compared to the minimum requirements of $25 million.

Working capital was $195 million compared to the requirement of being positive and the book equity ratio was 33% compared to the minimum requirement of 20%.

During the financial turmoil in 2008, where several shipping segments saw a reduction in asset values of up to 50%, we had no issues with our covenants, no concessions or no waivers from our banks.

Then to summarize, for the first quarter 2011, the Board has declared a quarterly cash dividend of $0.39 per share.

This is a dividend yield of 12% based on the closing share price as of August 24, the quarterly net income of $41.5 million, or $0.52 per share, an aggregate EBITDA of $171 million, or $2.16 per share.

We have secured financing of all vessels under construction with a substantial positive cash contribution from these new facilities.

We have ample headroom on our covenants and combined with a strong liquidity position, Ship Finance is positioned well for continued selective growth going forward.

The current backlog provides long-term stable revenues.

We have premium access to capital and no near-term debt maturities.

And with that, I give the word back to the operator who will open the line for any questions.

(Operator Instructions).

Brian Grad, DLS Capital Management.

Hi, guys.

A couple things.

Do you have intention to continue to buy back the 8.5s in the marketplace opportunistically?

We have, over time, bought back a significant portion of those bonds.

The bond was originally $580 million in late 2003 and now there is in the region of $270 million remaining outstanding in the market.

We, of course, we have done that opportunistically.

We treat those bonds -- we call it -- we do that on a relative basis and of course, whether we buy those bonds or whether we place our, call it, liquidity elsewhere is just a matter of, as you said, an opportunistic approach.

We have no specific plans, we have no specific targets or size for the volume that we may not buy back over time.

That bond -- it is callable on 30 days notice and from December this year, we can call the bond at par.

So of course, that is also something that can or may or may not be done.

But again, we will do that on an opportunistic basis.

And as Eirik also mentioned, the remaining amount, if you look at the overall balance sheet of Ship Finance, it is not a very significant amount in our view and we are not concerned with maturity in 2013.

Okay, the second question I had was with regards to something I was reading this week.

There was I think a mention in Tradewinds about the possibility that Frontline would be interested in renegotiating long-term charters.

How do you feel about the possibility that that could occur and are you seeing pressure from any of your other customers given that rates have fallen so far to renegotiate charters and what impact would that have on the Company?

Yes, the charter contracts are fixed, so there is no opening in the agreements to renegotiate charter rate and that goes for that specific client and it is the same thing with our other clients, unless there are preagreed purchase options, which is, of course, then disclosed in detail in our annual reports.

The report you are referring to, and we also noted that, was based on what we would call speculation by an analyst that the Frontline -- for Frontline's various actions and what they could do.

All we can say is that Frontline is and has been a client of ours for seven years.

They are current with their payments.

There was a positive profit share generated in the second quarter and over the course of these seven years, there has been more than $500 million of profit share contribution and when the profit split is 20% to Ship Finance and 80% to Frontline, we can do the math and you can see that there has been very significant cash flows for Frontline over that period of time.

So anything else would be a speculation.

We have, in the past, from time to time, of course, had requests if we would be willing to look at the charter rates, typically from smaller operators.

But so far, we have not entertained such discussions.

Okay, very good.

Thank you.

John Parker, Jefferies.

Hi, Eirik, you brought out an interesting point about the full-year profit share mechanism.

If you got into a point in the back half of the year where there was a calculated negative profit share, would you show a negative profit share on your income statement?

How would you account for that?

I mean I assume the full year can never go below zero, but how would you account for that on the back half of the year if it did get to that situation?

Yes, I mean, as we said in the statement, the profit share is calculated annually.

So potentially, there could be a clawback on what we've booked so far in the year.

But the impact for us -- so far, we have booked something like $2.4 million this year.

So I mean the potential negative impact for us is marginal.

But yes, you are correct in interpreting that agreement that way.

That it is only payable annual and you sort of do up-status on an annual basis.

I think to add to that, I think just want to maybe also clarify how the profit share mechanism works.

We have three separate profit-sharing pools and in each of those pools -- one pool are the VLCCs that were acquired in 2004, one pool are the Suezmaxes and OBOs in combination acquired in 2004 and one pool is for five VLCCs, which were acquired in 2005.

And there is a profit share mechanism for each of those three call it blocks of vessels.

So what you could see is, of course, that you have call it zero contribution from one or two of those packages and positive contribution for a third.

But as you pointed out, the profit share can never be negative.

Yes, these are all small numbers this year obviously, but from an accounting perspective, would you show a negative number on your income statement in the third and fourth quarter if that were the situation?

Yes, if that happened, there would be a negative impact.

Okay.

And then I just noticed on your balance sheet you had some available-for-sale securities.

Can you give us any more color?

Do you consider those to be fairly liquid and part of your warchest?

Yes, those are securities that are liquid and tradable and where there is a market and we do that, of course, when you have call it available liquidity.

We try to manage that in a sensible and conservative way, so we take a quite conservative approach to how we invest that capital, but when we see interesting opportunities and where we think the risk parameters are interesting for us or risk/reward parameters to be specific, we do invest smaller amounts and on a selective basis.

Okay.

And then, finally, it seems we could be headed toward a period -- I guess no two periods are alike -- but some similarity to what happened in 2009.

There is a lot of talk of credit getting more and more difficult for your client base, for your potential customers.

And I know in the last real steep downturn in shipping, you guys didn't really do many transactions.

I think you have told me that was a function of the fact that you thought asset values were still too high.

I am just wondering if there's any lessons you have learned from kind of what you went through in 2009 that you are prepared to deal with this potential go around.

And it sounds like you do have a fair amount of liquidity lined up and based on your press release, it sounds like you are looking at some interesting opportunities.

But anything you can tell us about how you think things could unfold differently this time for you.

First of all, of course, the financial crisis in 2008 and 2009 was, of course, very dramatic and at least for the banks who had the real issues with their own funding.

We haven't seen that certainly not yet and we don't have sort of immediate signals that that will happen.

If you look at call it on the asset side, you saw that -- we also saw and we, at the time, had thought that asset values could come down quicker than what happened.

And of course, one can speculate why that didn't happen and why there were not more opportunities available.

One of the factors could also be that there are many -- there were many shipping companies who had earned a lot of cash in the boom years of 2005, '06 and '07 and therefore, of course, had more caution in their own balance sheets before they had to do something.

And also who had ordered vessels and where installments due in shipyards had not been due yet.

Of course, now we are three years after that.

Some companies have had access to the capital markets, but that has predominately been in the offshore segment.

There has been relatively few players in the call it traditional shipping segments who have had access and who have done transactions in the call it public markets.

So from a call it market segment perspective, shipping, which has predominately been more of a private equity type of financed structure, there hasn't really been raised much public money over this period of years.

So if we then are in a period where we see some segments are suffering and where we see potentially negative call it cash flow contribution from operating the vessels, theoretically, more of the smaller operators could potentially come under pressure.

And that is, of course, situations that could be of interest for us.

But I think what we have always communicated is that we invest as conservatively as we see it.

We try to look for the best type of risk/reward opportunities and hope that we, over time, make good and sound investment decisions for our investors.

Okay, that's all I have.

Thank you very much.

(Operator Instructions).

Justine Fisher, Goldman Sachs.

Good morning.

I have just a follow-up question on the Frontline charters.

I know that you said you have not been approached by Frontline yet to renegotiate any of those charters and obviously there is $2 million per ship that is set aside for Ship Finance from those.

But you said that you were approached by other counterparties and you said no in response to that and my question is hypothetically if Frontline did approach you, would they be treated as a completely independent entity in terms of your response?

I mean would this be similar to the response that we have seen from other shipping companies for companies like COSCO where there is no relationship between the companies and so they have every incentive to say no?

Would Frontline be treated as an absolutely independent third party in the event that they did approach you guys?

Well, we are separate companies.

We have separate management teams.

I, myself and the rest of management have no incentives for Frontline or any other companies.

We have our own incentives for Ship Finance and also that is where our obligations and responsibility lie.

So that is, of course, our -- that is really where we are focused.

As I mentioned, we have had some requests from smaller players in the past where we have been requested to potentially amend the charters.

When you also mentioned the call it relationship aspect, I think it could be worth noting that, back in 2009 or late 2008, early 2009, we did have an agreement with Golden Ocean, which is also -- where we also have a large shareholder in common, where we had agreed to acquire two Capesize bulk carriers, which was entered into a year before that, but they were due for delivery at the end of 2008.

Of course, the market had turned and because Golden Ocean at the time could not fulfill the so-called conditions precedent that we had set in order to take delivery of the vessel, we, as Ship Finance, turned down the transaction and they had to -- and stopped the transaction because we felt that that was the right thing for our Company to do at the time.

So I think that is at least a demonstration of how we have acted in the past and we, as I said, we are an independent company and we have a separate management team, we have a separate Board and our obligation and the responsibility is to take care of Ship Finance's interests.

Okay.

Thanks.

And then can you just remind us how many of the total Frontline vessels are chartered out by Frontline at rates that make the in-charter from you to Frontline at least cash positive from a Frontline perspective?

I mean how many of those is Frontline basically covered on so that they are not burning cash at the moment?

Yes, Frontline will report their second-quarter numbers tomorrow.

So we can only relate to the first-quarter report, which they published back in May.

And in 2011, they give call it charter coverage depending on vessel class.

And for the year or for the second half of the year, they indicated -- sorry -- for the three last quarters, second through fourth quarter 2011, they indicated that for double-hull VLCCs, they had average charter coverage of 12% with an average rate of 43,600.

And for the double-hull Suezmax, they had 6% [TC] coverage at an average rate of 38,500, while for the OBOs, which are owned by us and chartered to Frontline, they had 91% TC coverage at an average rate of $43,500 per day.

So based on those numbers, which obviously could change for the second quarter, based on those numbers, it seems like they would not have an incentive to even attempt to renegotiate anything on the OBOs because they would be making money on those at the current levels, but it does seem as though the charter coverage that they had as of the end of the first quarter would, if it did relate to the specific Ship Finance vessels, make them cash flow negative at present?

Well, we will not speculate in how they think or anything, but as we mentioned earlier, there is no opening for Frontline to renegotiate any of those charters.

They run -- some of those charters run all the way through 2026 and 2027.

So we are talking about long-term charter cover from our end.

Okay.

And can you remind us who the counterparties are for the new drybulk vessels that you have coming on delivery and this is just because this is obviously an issue in the drybulk industry now.

Can you remind us who the counterparties are for those vessels that you are taking delivery of over the next couple years?

Yes.

We have taken delivery now of four Supramax bulk carriers and we are -- there is a fifth vessel due for delivery in the fourth quarter.

They are all chartered to Hyundai Glovis, which is an investment grade Korean operator with a market cap in excess of $6 billion.

Then we have four Handysize vessels.

We have just recently took a delivery of the first and the other three vessels will deliver over the course of the next few months.

They are chartered on five-year charters to a company called Hong Xiang group.

That is a privately-owned Chinese operator, but they are part of a very significant Chinese conglomerate called Beijing Jianlong Group, which, among other things, they have a steel production of about 9 million tons and they own mines in different parts of the world and at least what we understand is that these vessels will be used to transport, at least partly used to transport their own cargos between mines and their other facilities.

And then we have three also Handysize bulkers where one vessel will deliver in the fourth quarter expected and the other two during 2012.

They are chartered to a smaller -- it is a Norwegian-based drybulk operator called Western Bulk Carriers and they are on a three-year contract.

Okay, thank you very much for that.

I have one more question, if you would be so kind as to give me the time for it.

The last question is just on the cash flow statement.

I know that, Eirik, you had mentioned in your explanation that the negative amounts relating to other assets and investments were payments that were made for the CMA-CGM vessels, but it did seem that, at least for the six months, this amount basically offset the positive inflow of cash from associates.

So I am wondering if that negative item will continue going forward because if it doesn't then you get a significant amount of cash from your financing for your newbuilds, which is positive.

I mean that $80 million is huge, plus the actual cash flow from associates, but if this negative item continues, should we expect it to offset some of the cash inflow for the second half?

No, it won't.

The $25 million -- basically the investment is posted under other assets because we have actually structured -- this is a very structured type of transaction and we have actually provided loans where we actually have junior mortgages on the vessels.

And that is why you see that cash coming in on other investments and not actually posted under associates.

So the income -- the revenue stream from those vessels is actually split in two.

So some is coming in as interest on that loan and some is coming in as a fee directly from the associates.

So you don't need to expect that that negative item is going to continue.

And as I said in my statement, those two ships will generate in excess of $7 million of net free cash flow per year, or $1.75 million per quarter.

Excellent.

Thank you so much for the time.

I appreciate it.

(Operator Instructions).

As we have no further questions, I would like to turn the call back over to you, sir, for any additional or closing remarks.

Thank you.

Then I would like to take the opportunity to thank everyone for participating on our second-quarter conference call and wish everyone a nice day.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.