SFL Corporation Ltd (SFL) 2011 Q3 法說會逐字稿

Good day and welcome to the Ship Finance International quarter three results conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Ole Hjertaker, please go ahead.

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

My name is Ole Hjertaker and I'm the CEO of the 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 be please refer to Ship Finance's reports and filings with the Securities and Exchange commission.

The Board of Director has declared a cash dividend of $0.39 per share for the third quarter.

This represents $1.56 per share on an annualized basis or 14.6% dividend yield based on closing price yesterday.

This is of course after the dramatic market movement yesterday, so if we use the 30-day average of 14.185 instead the dividend yield would be 11%.

We have not declared dividends for 31 consecutive quarters and paid out more than $13 per share in total aggregate cash dividends per share.

Adjusted net income for the quarter was $31.4 million or $0.40 per share.

This is before a $2.4 million non-cash mark to market of interest-rate swaps and before a $1.6 million negative adjustment relating to the profit split in previous quarters.

The fixed great charter revenues in the quarter, including our 100% owned subsidiaries accounted for as investment and associate, was more than $200 million.

And the EBITDA equivalent cash flow in the quarter was approximately $170 million or $2.15 per share which was in line with the previous quarter.

We have now secured financing for all newbuildings and also a container ship 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 in the fourth quarter from these financings.

In August 2011 we took delivery of the 57,000 deadweight ton Supramax Bulger, SFL Kate, which is now on long-term charter to the Korean-based investment grade logistics company, Hyundai Glovis.

This was the fourth of a total of five vessels and the last vessel is scheduled for delivery in December this year.

We also took delivery of SFL Spey in August; this is the first of four 34,000 deadweight ton Handysize vessels chartered to the China-based Hong Xiang shipping which is a part of the privately owned conglomerate Beijing Jianlong Group, one of the largest steel producing companies in China.

The time charter period is five years and the second vessel, SFL Medway, was delivered in October.

The third and fourth of the vessels are scheduled for delivery in the fourth quarter this year and first quarter next year respectively.

We have agreed to sell a remaining three non-double hull VLCCs to an unrelated third party for a total net sales price of approximately $72.7 million.

Estimated delivery to the new owner will be in the first quarter 2012, the fourth quarter 2012 and the third quarter 2013 for Titan Orion, Titan Aries and Ticen Ocean respectively.

Net cash proceeds for Ship Finance after a compensation payment to Frontline will be approximately $46.5 million or approximately $15.5 million per vessel on average.

This is after compensation to Frontline of $26.2 million or approximately $8.7 million per vessel on average for the termination of the current charters.

The Company expects to record an average book again of approximately $3.2 million per vessel at the time of delivery of the vessels.

Also in October we sold a 1992 build combination carrier Front Striver and simultaneously terminated the charter to Frontline.

This is the third OBO sold this year and net proceeds from the sale was approximately $18.7 million including an $8.1 million compensation payment from Frontline.

We expect to record a book gain of approximately $2.3 million in the fourth quarter in connection with this sale.

We have a significant portfolio of long-term charters which gives us a very transparent and predictable cash flow.

Essentially older vessels are chartered out on a long-term basis and we still have close to 11 years weighted average charter coverage.

Full details on a vessel-by-vessel basis are available by contacting us at IR@ShipFinance.no.

We have around $6.7 billion of fixed rate order backlog or around $84 per share.

And the EBITDA equivalent backlog is $5.4 billion or around $68 per share.

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

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest with 43%, or around $2.9 billion of the backlog, while tankers, where the Company started, now represents approximately 33% of the backlog or around $2.2 billion.

It is worth noting that this also includes tankers chartered to Sinochem and North China Shipping.

Containers have recently increased to 16% through the acquisitions earlier this year while the dry bulk segment now stands at 8%.

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

We have recently added to both the container and offshore sectors and there could be opportunities for growth -- future growth across all four segments in light of recent market developments.

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

41% of the portfolio is with companies with a market capitalization in excess of $5 billion and if we include all listed companies the percentage is 84%.

In addition, a majority of the backlog in the private segment is with companies with a public rating.

This gives us and our investors and other stakeholders a very good access to information and also ability to monitor the quality of our backlog and to assess the counterparty risk.

And of course if we look at the counterparty risk it's worth noting that we own all these assets and they all have an alternative market, so the effective counterparty risk in theory should be limited to the excess charter hire, if any, above current market for the corresponding charter period.

The rest will be covered by this deal.

And if you look at the average weighted charter tender, as indicated on the right side, it is quite unique with more than 70% of the portfolio in excess of 10 years and only 3% -- I'm sorry, around 4% 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 charters and we have already paid down more than $200 million per rig, or $600 million in aggregate, on the financing of these assets after only two and a half years of operation.

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

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 and that was all the vessels we owned.

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 assets and also diversified in other segments.

Frontline, on their side, have also grown significantly.

And based on information from the third-quarter reporting, they now have effectively as many vessels owned and chartered in from others as they have chartered in from us.

They announced yesterday that there is a significant risk that Frontline will need a financial restructuring if the weak tanker market seen in the third quarter continues.

This is due to their significant capital expenditures relating to new buildings combined with negative cash flow relating to the chartered in vessels including our vessels.

This is still at an early stage and while there have been some preliminary discussions with older stakeholders, including Ship Finance, it is too early to speculate on what the potential outcome could be.

If you look at our position, we have 28 vessels on charter to them with an average of 10 years remaining.

As security we have a $2 million cash deposit per vessel or $56 million in total effectively pledged in favor of us.

With our steep loan amortization we have already reduced the loans to less than 50% of the initial amounts going back from 2005-2006.

And if we continue with the scheduled amortization we would be down to effectively scrap values in less than three years.

Five of these vessels are employed in the dry bulk segment at rates significantly above the base rate and we also have a fixed-rate operating cost agreement which we believe is very attractive for us in the long term.

In the third quarter the EBITDA contribution from the Frontline vessels was approximately 25%.

To the extent a specific request will be made by Frontline, the Board will of course consider this with the objective of looking after the long-term interest of our shareholders and other stakeholders.

And that is all we can comment on relating to the Frontline situation at this stage.

And we will of course make appropriate disclosure to the market if there is any material development.

If you look at normalized contributions from -- or projects, and this of course includes vessels accounted for as investment in associates, the EBITDA, which includes charter hire, profit share and subtract outbacks and general administrative expenses, stood at $677 million for the last 12 months.

This is more than $8.50 per share and this is essentially without any profit split revenues in the period.

The net interest was $155 million or around $2 million 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 now have approximately $3.4 billion of net interest-bearing debt and we continue our scheduled steep loan amortization.

This amortization represents around eight-year profile to zero and this compares to a weighted average age of the vessels of less than five years.

So if we continue at this rate we will then effectively be debt-free when the vessels are on average just over 13 years old while estimated commercial life is 25 to 35 years depending on asset class.

The net contribution from our projects to last month's after this very aggressive debt repayment profile was $118 million or $1.49 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 third quarter.

Thank you, Ole.

On slide nine we've shown our pro forma illustration of the cash flows for the quarter and compared this to the second 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 third quarter 2011 the Company had an EBITDA including profit share of $169.7 million or $2.15 per share compared to $171 million or $2.16 per share for the second quarter 2011.

For the VLCC's and the Suezmax's the revenues were in line with the second quarter despite the zero profit share contribution from Frontline.

For the chemical tankers revenues were in line with second quarter and also for the container vessels they were in line with the second quarter showing revenues of $21.6 million compared to $21.2 million in the second quarter.

For the dry bulk vessels charter hire came in at $14.9 million compared to $16.1 million in the second quarter.

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

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

Now this reduction will be offset by the deliveries of two newbuilding dry bulk vessels in Q3, one Handysize vessel which is chartered to the Hong Xiang Shipping Group and one Supramax which is chartered to Glovis.

The Handysize vessel, SFL Spey was delivered early in August and the Supramax vessel SFL Kate was delivered toward the end of August.

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.

In addition we've taken delivery of another Handysize vessel subsequent to quarter end which will generate charter revenues of approximately $1.2 million per quarter going forwards.

On the offshore side charter revenues came in at $107.5 million compared to $109 million in the second quarter.

The variance is mainly due to the loss of revenue from the drilling rig West Prospero which was sold to Seadrill towards the end of the second quarter.

The vessel operating expenses were in line with the second quarter, but is expected to increase going forwards as we take delivery of further dry bulk newbuildings.

The profit share for the VLCCs was negative with $1.6 million compared to the $2.4 million as of second quarter.

The profit share for the year cannot be negative, but there's a risk that a part of the remaining amount may be reversed in the fourth quarter if we don't see an improvement in tanker market.

So that gives us an overall EBITDA of $169.7 million for the quarter overall.

Now moving on to the next slide, as we've described in previous earnings calls, our accounting statements are slightly different than those of a traditional 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 capital leasing.

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 lease, results in associates on long-term investments and interest income from associates.

If you wish 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 $73.3 million.

The profit share was negative with $1.6 million for the quarter as mentioned on the previous slide.

The accrued profit share for 2011 now stands at $0.8 million.

We had a negative non-cash mark to market of derivatives of $2.4 million in the quarter and most of our interest rate hedges qualified for hedge accounting which means that any mark to market movements are shown as movements of other comprehensive income under stockholders equity in the balance sheet rather than on the profit and loss statement.

However, a small portion of our hedges did not qualify for hedge accounting and this quarter we had a negative mark to market related to certain of these interest rate swaps.

So overall, and according to US GAAP, the Company showed reported net income of $27.5 million or $0.35 per share for the quarter.

Or if you exclude the negative non-cash mark to market of derivatives and the negative profit split, the adjusted net income was $31.4 million or $0.40 per share.

Now moving on to the balance sheet, we show $81 million of cash at the end of the quarter.

In addition to that we have invested $23 million in short-term tradable securities as a short-term liquidity placement.

Under the post newbuildings and vessel deposits, this has decreased from the second quarter since we've taken delivery of yet another two dry bulk newbuildings and this has hence also reflected in vessels and equipment which is increasing quarter on quarter.

The $50 million investment in the two CMA CGM vessels is booked on the other long-term assets since this transaction is structured as a loan and we have a mortgage securing our investment.

Stockholders' equity stands at just over $1 billion if we include the $169 million of deferred equity.

The book equity ratio including deferred equity was 32% at the end of the quarter.

So on to the cash flow statement, we show net cash flow from operating activities under US GAAP of $37.8 million in the third quarter.

Under investing activities the repayment of investment in finance lease of $24.1 million is part of the charter hire for those vessels that are subject to finance lease accounting in our consolidated subsidiaries.

Under investing activities we have paid in another $42.1 million of installments to the yards relating to our newbuilding program.

The remaining scheduled payments are detailed in a table in the press release for your information.

In addition, under financing activities we've drawn down on debt related to some of our newbuildings and one existing container vessel of $44.5 million in total for this quarter.

And then finally, we have purchased another $6.6 million of our bond maturing in 2013 and this was mentioned as a post-quarter event on the earnings call for Q2.

So as per today approximately $274 million of the bond maturing in 2013 is now outstanding, which is approximately 8% of our overall total outstanding long-term debt.

So as mentioned, the Company had cash of $81 million at the end of the quarter and this figure excludes approximately $23 million of liquid securities that we hold as a short-term liquidity placement.

On the debt side we had approximately $3.5 billion of total long-term debt of which $2 billion is consolidated long-term debt and approximately $1.5 billion is long-term debt in our subsidiaries which are accounted for as investments in associates.

This includes the $82 million of unsecured bonds maturing in 2014 and it includes the $125 million of convertible bonds maturing in 2016, and it also includes the $274 million of unsecured bonds maturing in 2013.

The convertible bonds can be repaid in shares in the Company's option at maturity.

As we have mentioned previously, we have now arranged long-term financing for all vessels under construction with total commitments of up to $388 million.

The leverage is in excess of 75% of contract price for each vessel with maturities between 10 and 12 years.

Now parts of these facilities have already then drawn subsequent to the quarter end and hence we have no refinancing needs in the near-term.

The next graph gives an update of the committed financing compared to the remaining shipyard installments for our newbuilding program.

For the fourth quarter 2011 we have $58 million of remaining scheduled payments on our newbuildings while we can draw down $120 million of related financing, which means a potential cash positive effect of $62 million.

In 2012 the payments are $78 million or we can draw $94 million of related financing.

And in 2013 we'll have total installments of $167 million with committed financing of $133 million.

So overall for the period until 2013 this gives a positive cash effect of $44 million in total.

And in addition to this we've drawn down $25 million of available long-term debt on an un-financed container vessel which puts the total positive liquidity effect to approximately $87 million in the fourth quarter of 2011.

As of the third quarter we're in compliance with all financial covenants under our loan agreements.

Free cash was $81.2 million compared to a minimum requirement of $25 million.

Working capital was $184.3 million compared to the requirement of being positive and the book equity ratio was 32% compared to a minimum requirement of 20%.

Asset values in the tanker sector have dropped significantly since the second quarter, as certain of our credit facilities have minimum value clauses which regulates the amount available compared to the underlying charter free values on the assets.

We monitor the drawn amounts on these facilities accordingly.

As for the third quarter we have full access to all our credit facilities despite the recent reduction in tanker values.

Most of these facilities are structured as revolving credit facilities which means that if we choose to prepay as a result of uncertainty around values this may lead to lower or even zero net installments in future quarters if values stabilize.

Should values improve these credit facilities can then be redrawn.

And as Ole mentioned, the amortization schedule on our non-facilities related to the Frontline vessels is fairly steep where we repay more than $100 million on an annual basis on these vessels alone.

With the current scrap values the outstanding debt would be equivalent to the scrap value within the next two to three years based on this repayment profile.

And 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 14.6% based on the closing share price as of November 22.

The quarterly adjusted net income of $31.4 million or $0.40 per share and an aggregate EBITDA of $169.7 million or $2.15 per share.

We're taking delivery of newbuildings according to plan and we have arranged long-term financing for all vessels under construction.

In the current [conservative] markets we focus on portfolio management and close follow-up of our charters.

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

(Operator Instructions).

Martin Korsvold, Pareto Securities.

I was wondering if you could give us a number of -- a number on the exact debt on your Frontline vessels at the end of the third quarter.

The debt relating to the Frontline vessels at the end of the third quarter was approximately $750 million.

And also you were talking about $1 million clauses, we have seen some other companies reporting the season which have had to put up more liquidity to stay in compliance.

Some have also given a sensitivity on say another 10% downward movement in tanker values.

Do you have a similar number which you could share with us?

We have not made specific sensitivity calculations.

What we do have of course is a very steep amortization profile.

So these are not call it flat revolving credits, we have amortization -- quite significant amortization built into it.

And also as we mentioned in -- we have significant cash flow also coming out from the newbuilding program.

And as indicated in the press release, we intend in the near-term to use this freed up liquidity to reduce drawn amounts on revolving credit.

So we feel that we have an adequate buffer also for future drops in asset values.

Okay, last question.

Bank market, obviously difficult now with financing and assets (inaudible) coming off in several asset classes.

Can you talk a little bit about where you see growth opportunities for Ship Finance over the next year?

I share your view that the whole financing market is struggling and this is not within the ship -- not only within the shipping segment, I think it's across all sectors.

We see the financial turbulence particularly in Europe and that has an impact on all business development across the board.

I think if you look at our position, we are a relatively big player in the market, we are working with a number of the banks, we have seen from time to time that some banks are more active than other banks, and we believe that by our sheer size and our call it effectively distribution across the different banks, we think we have better information on accidents than most other companies to access funding for new projects.

We have seen that when we have discussed potential new deals with banks relatively recently that there is still significant interest on the banking sides, but I think the banks will probably focus their attention on their bigger clients and call it their core clients.

And I think it will be increasingly difficult for smaller players and typically standalone project financing without any significant sponsors to access the financing market at least in the foreseeable future.

This of course combined with a newbuilding order book where there is a good deal of funding that needs to take place could also over time lead to very interesting opportunities for us if we have better access to the capital.

Okay, thanks very much.

Justine Fisher, Goldman Sachs.

The first question that I have is just in terms of uses of capital on bond repurchases.

Obviously if you guys -- you're keeping cash on hand; maybe if you have to make some payments for LTV covenants in your bank loans.

But where do the bonds stand in terms of the priority in buying those back given their near-term maturity date?

Well, you know, the bond loan, just for information to other participants, the bond loan started at $580 million back in 2003; it was a 10-year bond so it matures in December 2013.

And it is now down to -- with a net outstanding of $274 million.

So we have repurchased a very significant amount of that loan already.

It's still more than two years until maturity; we can call the loan at any time at par if we like to from here until maturity.

And we have not made any specific plans for that; we still think that there is ample time to maneuver.

And also compared to our overall capital structure with $3.4 billion of net interest-bearing debt we believe that refinancing $274 million will be achievable also in a more difficult financing environment that we have seen recently.

We have purchased some bonds selectively, but it's not part of our fixed program or with any specific percentages.

And it's something we always will evaluate on an opportunistic basis along with other investment opportunities.

Have you been -- have any shareholders approached you to buy back stock given the dividend yield difference between where the bonds are costing you?

Do you guys have a share repurchase program outstanding or no?

We don't have an active share repurchase program outstanding.

Okay.

And then just a question on Frontline.

I'm going to try it even though I know you said you couldn't make too many comments.

But I think that a lot of people who are looking at the impact to Ship Finance feel somewhat uncertain about what the potential range of outcomes could be.

Can you tell us what might even be on the table in terms of what you discussed with Frontline?

Would it be an adjustment of the rates, would it be an adjustment of cash costs, would it involve cash lump sum payments up front in order to make up the value of these charters?

I mean if it's even 25% of your EBITDA it sounds like it's $170 million or $180 million or so of cash flow, which is pretty significant.

So can you at least tell us what may even be on the table?

I'm sure there are many potential outcomes of this and, as Frontline stated, this is of course also, if the current weak market or the weak market we've seen in the third quarter persists.

I think it's worth noting from our side, we note that they did have around $190 million of cash as of the third quarter.

And we've also seen the spot market is recovering a little bit in the fourth quarter, but of course not in a major way.

What the potential outcome could be would be pure speculation.

I mean, we're an independent company, we have an independent Board, and we would evaluate the situation with a view to take care of the long-term interest of our shareholders and stakeholders.

And it's difficult to give any specific comments when it is still so early in the process on our part.

Is there anything that you would not accept given that you guys are coming at this from an independent standpoint?

Is there an offer that Frontline might have that may be very advantageous to Frontline, but that Ship Finance simply will not accept or go that low on the rates or anything like that?

Well, I think the agreement we have with Frontline is fixed.

We have long-term charters in place and they have no right to renegotiate anything.

So any adjustments, if anything, will of course be on a voluntary basis from Ship Finance and will be based on an evaluation by the Board if it comes to that where I'm sure they would look at the long-term opportunities also for the Company.

Frontline is a valued counterpart, we have enjoyed very significant cash flow from them over the years.

And on top of that we've also received $500 million of profit split.

Hopefully the markets will recover down the road and there could be potential for also for future profit splits coming in future years.

But you have I'm sure many moving parts in a situation like that, you have banks, you have shipyards and you have charters or vessel, call it, charters like us who have chartered vessels to Frontline.

And I'm sure everyone is looking for call it a whole or full solution to the situation and not necessarily a piecemeal solution.

I think one of the strengths I would say, and this is referring to the presentation by Frontline yesterday, there was also some statements by representatives of the main shareholder that there is support for Frontline going into -- going through these difficult times and I think that is something generally that is something that I think will distinguish, call it, stronger companies from weaker companies are the ones who've got proper backing by companies or individuals with call it significant wealth and those who have no backing like that.

Okay, and then, sorry, one last question if I may.

Can you just update us, please, on the Ship Finance situation?

I know they discontinued the service -- I'm sorry, the Horizon Lines situation.

I know they discontinued the service that there were operating using the vessels that are chartered from you guys.

And are they trying to return those vessels to you, what's the status of those ships?

Well, the status of those ships, they were chartered on 12-year charters and we are now approximately five years into those charters.

They announced a financial restructuring -- a significant financial restructuring which also provided a good liquidity contribution to the Company just two months ago.

And they've also decided that due to the poor market and weak performance in their transpacific service to discontinue that service.

So what's happened after that, they have drydocked our vessels, which is also coincidental with their five-year schedule, so timing for that was good.

And to our knowledge they are marketing those vessels for alternative charters.

And that is all -- really all we can say.

They are performing on the charters and that is the situation.

Can they put them back to you if they can't get charters that are good enough to cover what they owe you in terms of rates?

They have no right to return the vessels to us.

If so it would be a voluntary situation from our side.

I think we just want to highlight also that these vessels -- I mean we invested $70 million of equity into these vessels.

There was $210 million in debt.

They're all in non-recourse subsidiaries, so we have not provided any corporate guarantees related to these vessels.

And the contribution from these vessels have been approximately $11 million per year after debt installments and interest.

So you can say that well, of the $70 million we have invested we have call it effectively received around $55 million back on those.

Of course we do hope that they will -- that the Company will manage to recharter those vessels and continue their charter hire to us.

Great.

Thank you very much, I appreciate it.

(Inaudible), Jefferies & Co.

Most of my questions were asked, just one more question.

Are there any restrictions in your bond indenture or credit agreements that would preclude modifications in your contracts with Frontline?

No, not there -- there are no restrictions in the bond indenture to our knowledge.

How about the credit agreements?

No, we -- to our knowledge there are no such restrictions in the bond indenture.

Okay, thank you.

(Operator Instructions).

Pax World Funds, Phyllis Camara.

Just a couple questions if you don't mind.

You guys also have a contract and I guess it's in your investment in associates with the CMA CGM.

How is that transaction working?

Because CMA CGM is a separate company and yet you're not affiliated with them.

How does the vessel arrangement worked with them?

Well, I can answer that.

We've also published -- if you look at the accounting webcast I think we also touched upon that transaction in a bit more detail.

But overall the transaction is subject to a French tax lease.

We have granted a $25 million loan per vessel which is then invested from one of our subsidiaries and then that's secured by a third priority mortgage in each of the two container vessels.

And the effectively we are being paid an interest-rate overall per quarter.

And I think we've also said in previous statements that that transaction generates about $7 million of cash flow on an annual basis.

So we're looking at effectively a 15% yield on that investment on an annual basis.

Okay, and I assume that CMA CGM, they're having -- they're sort of in a distressed situation it seems like.

Are you having any talks with them about anything -- any kind of renegotiation of that contract or anything with -- going on with them?

No, we haven't.

And I think the reason for that is that this is also a fairly accretive transaction for CMA CGM.

So we don't think it's potentially -- that that would be something that we they would be looking at.

And overall if you look at the total exposure that we have outstanding against those vessels, if you aggregate our debt and the other senior secured debt on those vessels, I think the total exposure as of the year end is roughly $109 million per vessel, which is far below the charter free market value that we've seen recently.

So there's a fairly significant net present value benefit for the Company under the French tax lease and that's why we think they will stand.

So if something did happen to them you think if you needed to take back those vessels you wouldn't have any problems?

Yes, no, I don't think so.

Because if you look at the net outstanding of 108.0 -- or to $109 million as of the end of the year you could easily recharter that vessel or sell it; the market value is significantly above the $109 million.

Okay, excellent.

In dealing with the financing of your new vessels, your newbuilds, have you seen -- in talking to the banks have any of their terms changed or are they getting more restrictive on covenants that they're requiring or anything like that?

What we've seen when we have financed vessels is that banks and this goes back say a year or so when we also did the dry bulk vessels was that the terms -- the banks were offering I would say essentially similar type of terms in terms when we're looking at leverage, etc., but on much lower values.

So from a bank's perspective their relative exposure is also lower.

So if you finance 75% to 80% say for the bulker, the bulkers used to be $60 million in 2008 and we acquired them at a little over $30 million.

So the bank's financing on those assets of course at 80%, the bank exposure in our deal is of course much, much more comfortable from the bank side.

And if you look at also the other deals that we've done recently, the financing relating to the newbuildings, they are typically longer in maturity than we've seen in the past and they have covenant structure without minimum value clauses and other features and we think they will be good and long-term funding on those assets.

And then last question I guess, looking to follow up with some of what Justine was asking about with Frontline.

I hate to beat a dead horse, but what would you consider the worst case scenario?

Would that be if Frontline did fall for bankruptcy and put all their vessels back to you?

Do you have a worse case scenario?

And what -- like would you (multiple speakers)?

(Multiple speakers) speculate too much around that.

We own the assets, the assets -- although the market, the spot market is weak there's still a chartering market there that is available.

If you look at the Clarkson's reports and what they report now for tankers, they -- the period tank market is higher.

For instance for crude oil tankers, while the spot market may now be in say the mid-20s as they report, you also see a three-year market around those levels, and one-year market around $20,000 per day.

So you could say that well, if something like that should happen at least we own the assets, we can recharter them.

And there is also a cash deposit, as I mentioned, of $2 million per vessel that we of course -- that we have pledged to us and that of course we'll have access to.

But we do, of course, expect that Frontline will manage to navigate through this and that there will be a solution and also a long-term solution that is beneficial both for them and for their older stakeholders.

Okay.

Thanks so much.

Herman Hildan, RS Platou Markets.

I have a question to Ole.

When we talked a couple months back we presented you a solution with Frontline where you basically reshuffled the lease payments and give the right terms of the timing you would increase your dividend yield potential, though short-term.

Obviously the question is how you're going to bridge that if such a scenario is presented as a part of their restructuring of Frontline?

And I'm wondering, are you currently in discussion with banks in terms of amending this deep amortization profile on the debt that you have so that the net outcome for you would not be cash negative if you were to give Frontline some breathing space over the next couple of years?

Well, as I said, we are -- it's still at an early stage.

So far we've only had some initial discussions, we've not had any formal requests by Frontline.

And we've not made any request to the banks relating to these financings.

And also as I mentioned earlier, the financing has been taken down very significantly over the last five, six years and (inaudible) for the amortization, scheduled amortization that is in place there.

We're talking about two to three years until we're down at scrap levels.

But apart from that I cannot comment anything on what a potential -- what potential amendments could be if any.

Okay.

And also I was wondering, for example Seadrill has a couple or you are on a couple of the Seadrills rigs where they have call option on the vessels substantially below the market value.

And has there been any indications that Seadrill will buy back any of the rigs which effectively would give you more liquidity?

Are you looking at ways that you could increase your liquidity position to allow more buffer in terms of flexibility with Frontline?

We are very happy with Seadrill charters we have three deepwater rigs, they are generating very significant cash flow for us and effectively yielding around 15% annually on around $150 million per rig in equity investment.

They did have a purchase option for one of the rigs in October -- sorry in this November, but they did not exercise that.

The next option for one of the units is in October 2012, then there is one in November 2014 and one in February 2015.

So we are, as I said, we're very happy with those.

We've also pay down the charter -- paid on the loans relating to those assets very significantly.

So we believe we have a very comfortable call it asset exposure on those units.

Kind of as a last somewhat annoying or stupid question, obviously the current situation you are in with Frontline for anything to be voluntary for Ship Finance that would mean higher dividend capacity over time.

But will you allow dividends to be lower in the short term in exchange for longer-term higher dividends or can you give some indications on whether we -- how you think about that?

Well, the dividend -- as we've always communicated to the market, the dividend is set by the Board quarter by quarter.

What we have seen in the past is that the dividends typically have been staple or increasing.

But we as management cannot give any guiding on what the Board may view as appropriate dividends going forward.

So it's impossible for us to answer that question.

Okay, thank you.

That was all I had to ask about.

Adam France, 1492 Capital Management.

Could you maybe put out some more detail -- if I understand it looking at Frontline's documents, the 17 VLCCs that you have with them, 10 are on time charter.

Are those 10 what you refer to as the ships that have been rechartered at higher rates?

And are those charters running through 2012 so the issue is really seven ships in the spot market and then walk through the Suezmax's as well?

Well, we have chartered these vessels on a fixed-rate agreement to Frontline and we have and we do receive a profit split if and when the charter revenues -- and we're talking for the calendar year -- is above the base rates.

Over time -- and this is going back to 2004-2005, over time we have received more than $500 million in profit (inaudible).

We cannot direct Frontline to charter vessels specifically and we do not have necessarily direct access to their day-to-day chartering operations.

What we can read out of their press releases and their reports is that they have, for instance, a very high charter rate -- sort of high time charter coverage on the OBOs or combination carriers.

And we know that those vessels -- we own all the vessels they have in that segment.

And as they reported -- and for the fourth quarter they guided 95% utilization and 43,800 time charter rate.

If we look at the other assets, we do not know whether these -- whether those vessels are vessels they have chartered from us or vessels they own themselves or are chartering from others.

They have roughly as many vessels owned and chartered in from others as they have chartered in from Ship Finance.

Okay.

So you cannot isolate the 10 on time -- the 10 ships that you have that Frontline has on time charter?

Yes, I'm not aware of 10 vessels.

So -- but our relationship with Frontline is that we charter them to Frontline and then Frontline charters them -- those vessels in the market.

But you can't see their end charterers I guess?

Because historically every conference call you've spoken that a number of the ships that you've chartered to Frontline were rechartered at above market rates.

I'm just curious, have all those charters expired and that's adding to the problem or are those good through 2012 or what you're saying is you just can't see that?

Well, we can see that for the segments where they predominately have vessels chartered from us such as the OBOs or combination carriers where we see 95% time charter coverage in the fourth quarter and we see 56% coverage in 2012.

And those levels are significantly above the base rates.

Okay.

And then just doing some quick math here, as I calculate it Mr.

Fredriksen's stake in your Company is now worth about 4.5 times his stake in Frontline.

So hold your ground, fellas, I think you're in a good negotiating spot here.

Thank you.

Thank you.

[Dan Worth], JPMorgan.

You mentioned there was $750 million of debt against the Frontline vessels.

What interest rate is that?

And what is the actual amortization schedule per year for the next couple of years, please?

Yes, average interest rate for those vessels, and this is including interest rate swaps that we have attached to several of them, I would say are probably around 4% approximately.

The amortization schedule is quite steep, as we mentioned.

We have more than $100 million loan amortization relating to those assets per year.

And is there anything in the documentation -- is there any recourse back on those loans to anything else within the Company whether it be the rig data or whether it be at the corporate level, or they have a nonrecourse for the rest of the Company?

Call it the tanker -- the Frontline assets are you could say a part of the original structure in Frontline -- I'm sorry, in Ship Finance.

So the tanker loans are all effectively guaranteed from Ship Finance International Limited.

There is no specific recourse to any of the other assets linked to the -- there is no recourse from these financings to other assets in our portfolio.

The $56 million cash deposit -- cash collateral you hold, does that sit on your balance sheet or on Frontline's balance sheet?

That sits on Frontline's balance sheet and most of that has been call it pledged to us and we have pledged it on to our banks.

It's not something that they can eat into.

If you remember we did change the structure with Frontline one and a half years ago where we changed that from a deposit which they could use actively if there was a shortfall in the market to a fixed deposit that cannot be reduced.

If the value of the Frontline vessels, if their charter free, are they in your view in access up the $750 million debt -- (multiple speakers) against them?

There was a good excess as of the third quarter, which is the latest valuations we have.

When you say good excess is that kind of 10%-20% or --?

(Inaudible) more than that.

Thank you very much, gentlemen.

Paul [Sage], individual investor.

My question was answered already.

Thank you.

[Robert Sevira], [R.E.

Sevira Associates].

I appreciate very much your aggressive amortization of debt.

I'm kind of curious why with Europe hanging in the balance on its debt issues, its sovereign debt issues and what that would do to general business levels, etc., why the Board doesn't say, okay, let's take a holiday on the dividend and pay down the debt even more aggressively to put you in a stronger position yet for the longer haul, which is what we're really interested in as investors is your long haul survival, etc.

Absolutely.

I'm sure the Board in their deliberations are also very focused on the long-term sustainability of course of the Company.

I think the strength we're having right now is of course that through the financing of the newbuilding program, because we had paid in so much cash already, there is a very significant call it net cash contribution to us when we now have secured financing, as indicated around $90 million in the fourth quarter alone.

And as indicated also in the press release, in the near term the plan is to use those amounts to effectively reduce drawn amounts and create call it an extra buffer -- this is of course also based on the call it higher market volatility you can call it in the current market and uncertainty compared to previous periods.

The dividend is also in line with the adjusted result for the quarter.

And all our charterers are performing as of current.

So the Board felt it was appropriate to pay that dividend when we had this extra call it also -- when we also had this extra liquidity cushion.

How many shares outstanding are there for Ship Finance that you're putting out on the $0.39 a share?

It's around 79 million shares.

That's a good chunk of cash that's going out the door then.

And you feel (multiple speakers).

But we also have a very significant cash flow in the Company after the debt amortization.

Okay, well I definitely appreciate the dividend.

I just want to see the long-term survival increased.

Thank you very much.

(Operator Instructions).

[Ole Gerard], [Insight Investment].

Just a quick one on your cash collateral.

You said it sits in Frontline balance sheet.

In the event of a bankruptcy how does that rank, please?

Unsecured, is that correct?

Well, the deposit -- as I mentioned, most of the deposit has been pledged to us and is in a blocked account.

Yes, but is it secured?

What do you mean by secured?

Well, is it a secured pledge?

Yes, the cash is sitting in the account and we have a pledge over the cash in that account, so that is secured.

So you have a senior secured claim on that cash?

Yes.

Okay, thank you.

Thank you.

As there are no further questions in the queue that will conclude today's question-and-answer session.

I would now like to turn the call back for any additional or closing remarks.

Thank you.

I would then like to take the opportunity to thank everyone for participating in our third-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.