SFL Corporation Ltd (SFL) 2012 Q1 法說會逐字稿

Good day and welcome to the Ship Finance Q1 2012 quarter results presentation conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Ole Hjertaker, CEO.

Please go ahead, sir.

Thank you very much, and welcome, everyone, to Ship Finance International and our first-quarter conference call.

As the operator has said, my name is Ole Hjertaker, and I am the CEO in Ship Finance management.

And with me here today, I also have our CFO Harald Gurvin and our Senior 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 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 an 11% dividend yield based on closing price yesterday.

We have now declared dividends for 33 consecutive quarters and paid out $13.36 per share or more than $1 billion in aggregate dividends since 2004.

The net income for the quarter was $39 million or $0.49 per share.

This includes the results was $2.2 million gain on sale of assets and a $2.9 million impairment on a financial investment made in a small container ship company five years ago.

The aggregate charter revenues recorded in the quarter, including 100% of owned subsidiaries, accounted for as investments in associates was $186 million.

This includes the $13.6 million of cash received from Frontline.

The EBITDA equivalent cash flow in the quarter was $154 million or $1.95 per share.

We did get full cash sweep effect on 23 out of 28 vessels, representing 80% of the vessels unchartered to Frontline and the contribution equal to $0.17 per share in the quarter.

In addition, there was also an accumulation of profit share in the quarter.

[Beyond] represented $1.4 million or $0.02 per share, but due to the $50 million prepayment of future profit shares that Frontline made in December 2011, we will not recognize profit share revenues in the profit and loss statement until accumulated profit share is in excess of that amount.

Net of the profit share accumulated in this quarter, the threshold is now reduced to $48.6 million.

And, as an illustration, the average profit split per quarter since 2004 has been $15.5 million or $0.20 per share.

Ship Finance took delivery of several newbuildings in the first quarter.

This includes the 57,000 deadweight ton SuperMax SFL Humber and the 34,000 deadweight ton Handysize vessels, vessel SFL Trent in January and the 34,000 deadweight ton SFL Kent and the 32,000 deadweight ton Western Australia later in the quarter.

All vessels chartered to Hyundai Glovis and Hong Xiang Shipping have then been delivered, and the two remaining drybulk newbuildings will be delivered to Western Bulk shipping in due course.

In March we delivered the 1992 build single-hull VLCC Titan Orion to its new owner.

This is the first of three non-double-hull VLCCs sold to an unrelated third party, and the next vessels are scheduled to be delivered in the fourth quarter this year and in the third-quarter 2013.

Net proceeds to Ship Finance for this vessel was $14.7 million, and we booked a gain of $2.2 million in the first quarter.

In April we announced the restructuring of the Horizon Lines chartering deal.

The vessels were built in Korea in 2006 and 2007 and had been chartered to Horizon Lines for five years.

But the US flag service they used then was discontinued.

As a US domestic Jones Act container line, they could not redeploy the vessels in the international markets without significant losses, and the vessels had, therefore, been in layup for four to five months.

As part of their financial restructuring efforts in 2011, there have been discussions on the potential termination of the chartering grant agreement, but they could not come to economic terms that we felt were beneficial to us and our shareholders at the time.

With the vessels in layup and the prospects of having to continue to pay the full charter hire plus layup costs without any revenues generating on the vessels, we had a better negotiation basis when we started up the discussions again this year and reached a deal we believe is beneficial for both Ship Finance and Horizon Lines.

We received a termination compensation of $40 million in second-lien bonds, plus warrants to subscribe for 10% of the Company.

In addition, they will pay for the reactivation of the vessels.

Before layup, the vessels had been drydocked at an estimated expense of $800,000 to $1 million per vessel, and as part of the deal with Horizon Lines, we also took over all the fuel on board the vessels and inventories, which also had significant values.

As the vessels are being chartered out, we will be compensated in cash for any fuel on board the vessel, and for the first of vessel alone, this represented a $500,000 value approximately.

The breakeven level on the vessels after financing and operating expenses is approximately $10,500 per day for the first 18 months and $14,500 per day the next five and a half years.

Horizon Lines pre-paid charter hire for essentially half the second quarter this year, and we are in the process of reactivating the vessels and have agreed short-term charters for two of the vessels already.

While the charter market currently is soft, this is also reflected in the compensation package from Horizon Lines, and we believe the market balance in the segment could create some interesting opportunities, and my colleague, Magnus Valeberg, will discuss this later in this presentation.

We finalize the restructuring of the agreements with Frontline in 2011, and this is the first quarter we see the economic effect of this on our profit and loss statements.

Frontline paid a cash compensation of $106 million to us in December 2011, which was equivalent to nearly two years reduction in base rates.

We used these proceeds to prepay on bank financing and have, therefore, reduced breakeven rates for these vessels, which is effectively equivalent to the new reduced base rate.

While we had a net contribution per share of approximately $0.10 per share per quarter from these vessels before the restructuring, the cash we now, therefore, represents effectively the net contribution going forward.

Based on historic charter rates provided by Clarkson's, there have been very few quarters the last 15 years as illustrated on the graph where we would not accumulate full cash sweep effect.

If Frontline generates market revenues in line with the previous base rates only, the cash sweep alone may give us a positive net effect of approximately $0.20 per share per quarter or double the previous net contribution from Frontline.

Actually due to the fact that many of these vessels have sub-charters at significantly higher level than the old base rates, we estimate that the cash sweep in 2012 will start accumulating from a level marginally above operating expenses for some of the vessels.

The cash sweep is based on two separate calculations, one for 23 vessels and another for five VLCCs.

The threshold level for the five VLCCs is higher than for the 23 other vessels, and depending on the market, there may be full cash sweep and profit split for the 23 vessels but no contribution on the five vessels.

It is worth noting that the cash sweep and the profit share is based on actual performance by the vessels in the period and may, therefore, not be exactly comparable to rates as quoted by market analysts.

The old profit share agreement had been improved from 20% to 25% and will be calculated from the old threshold level as before.

As mentioned previously, $1.4 million were accumulated in the quarter, but due to the $50 million prepayment by Frontline last year, the profit share will not be recorded in the accounts until it exceeds the pre-paid amounts.

We have a significant portfolio of long-term charters, which is the backbone of our business and gives us a very transparent and predictable cash flow.

Most of our vessels are charted 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 is available by contacting us on e-mail.

We have a $5.8 billion of fixed-rate order backlog, which is equivalent to approximately $73 per share, and the EBITDA equivalent backlog is $4.6 billion or approximately $58 per share.

These numbers are after excluding the Horizon Lines charters and include only the reduced base rates from the Frontline vessels.

And the expectations for cash sweep, profit share and re-chartering after end of current charters are, therefore, excluded.

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest with 46% or approximately $2.7 billion of the backlog, while tankers where the Company started now represents approximately 33% of the backlog or $1.9 billion.

It is worth noting that this is not only Frontline but also include tankers chartered to other customers.

Verizon lines represented approximately 2% of our charter backlog, so after the termination of those charters, containers have been reduced to 13% of the portfolio, while drybulk now stands at 8%.

We have a total of 14 customers, and more than 40% of the portfolio is with companies with a market cap in excess of $5 billion.

If you include all listed companies, the percentage is 83%.

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

And, of course, if you look at counterparty risk, it is worth noting that they own the asset, 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.

And the rest is effectively covered by the steel.

If you look at the average weighted charter tender, as indicated on the right side, we see that we have more than 70% of the portfolio in excess of 10 years and only 3% shorter than five years.

If you look at normalized contribution from the projects, including vessels accounted for as investment in associate, the EBITDA -- here defined as charter hire plus profit share -- sorry for cash sweep less OpEx in general and administrative expenses -- was $658 million last 12 months.

This is equivalent to approximately $8.30 per share.

Net interest was $142 million or approximately $1.80 per share in the corresponding period.

But, more importantly, our normalized, ordinary debt installments relating to the Company's projects was $380 million or nearly $5 per share.

This is excluding the prepayments relating to the Frontline vessels in 2011.

We had approximately $3.2 billion of net interest-bearing debt at quarter-end, and we continue our scheduled steep loan amortization.

The amortization represents around eight-year profile to zero, and this compares to our weighted average age of the vessels of approximately five years.

The net contribution from our projects the last 12 months after this aggressive debt repayment profile was $145 million or $1.83 per share.

This compares to the $1.47 in dividends declared for the corresponding period.

And, if you look at the longer period over the last eight years, aggregate net income has been nearly $20 per share, while aggregate dividends have been $13.36 per share, illustrating the conservative profile of the Company.

And, with that, I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take you through the numbers for the first quarter.

Thank you.

On this slide, we are showing our pro forma illustration of cash flows for the first quarter of 2012 compared to the fourth 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 first-quarter 2012, total charter revenues were $172.8 million or $2.18 per share compared to $192.9 million or $2.44 per share in the fourth quarter of 2011.

On the VLCCs and Suezmaxes, the reduced charter revenues are due to the temporary reduction in the base charter rate of $6500 per day for each of the vessels on charter to Frontline.

While for the chemical tankers and container vessels, revenues were in line with the previous quarter.

The drybulk vessels achieved revenues of [$16.9] million in the first quarter compared to $17 million in the previous quarter.

Despite the rate reduction of $6500 per day for each of the five remaining OBOs on charter to Frontline and the sale of one OBO in the fourth quarter of 2011, drybulk revenues were fairly stable due to the delivery of four new newbuildings during the quarter.

On the offshore side, charter hire came in at $92.2 million compared to $98.9 million in the fourth quarter of 2011.

The reduction is due to a scheduled step down in the charter rates for the ultra deepwater drilling rig, West Hercules, which is on a long-term bearer board charter to Seadrill.

It is important to note that the rate reduction is balanced by reduced interest and debt repayment on the related financing, so that the net cash flow for Ship Finance going forward will more or less be unchanged.

As mentioned previously, we also generated a cash sweep from Frontline of $13.6 million, which reflects the full cash sweep on 20 of the 28 vessels.

Our profit share of $1.4 million also accumulated in the first quarter, but as this is netted against the $50 million of profit share prepaid by Frontline, the number is not included in the table above.

Vessel operating expenses showed a slight increase compared to the fourth quarter.

This is due to the delivery of the four drybulk vessels during the first quarter, which are all implied on the time charters.

So overall this summarizes to an EBITDA of $154.1 million for the quarter or $1.95 per share.

The reduction compared to the previous quarter is mainly due to the reduced rate on the vessels, which, as mentioned, is balanced by reduced debt service on the relating financing.

We then move on to the profit and loss statement as reported under US GAAP.

As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company.

As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing.

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

If you wish to gain more understanding of our accounts, we also this quarter issued separate webcast, which explains the finance lease accounting and investments and associates in more detail.

This webcast can be viewed on our website at shipfinance.org.

Overall for the quarter, we reported total operating revenues, according to US GAAP, of $84 million.

Charter revenues from operating leases were up approximately $3 million compared to the previous quarter, mainly due to the delivery of the four newbuildings drybulk vessels.

The reduction in charter revenues from finance leases is due to the reduced rates on the Frontline vessels.

Further, the non-refundable cash compensation of $106 million from Frontline was booked as revenue in the fourth quarter of 2011 with a corresponding repayment of investment and finance lease for the same amount.

Hence, the revenue figure for the fourth quarter was $106 million higher than scheduled, but it has no effect on operating income.

A profit share of $1.4 million accumulated in the first quarter, which has been set off against the $50 million profit share prepaid by Frontline giving a zero net effect in the income statement.

The cash sweep income from Frontline was $13.6 million, and we also booked a gain of $2.2 million on the sale of the single-hull VLCCs Titan Orion in the first quarter.

Interest expenses in the quarter were down $1.6 million compared to the previous quarter, mainly due to the substantial reduction in debt relating to the Frontline vessels at the end of the fourth-quarter 2011.

We also made a $2.9 million impairment linked to the financial investment in a container owner and operator.

The investment was made five years ago, and the original investment of $10 million has previously been written down to $2.9 million.

We are now taking an impairment on the balance of that investment to be conservative.

The number of common shares outstanding increased by 100,000 shares during the quarter, following the exercise of options by employees.

So overall and according to US GAAP, the Company reported net income of $39 million or $0.49 per share for the quarter, up from $30 million in the previous quarter.

Moving on to the balance sheet, we showed $112 million of cash at the end of the quarter.

In addition, we have invested $24 million in short-term tradable securities as a short-term liquidity investment.

Amount due from related parties includes the $13.6 million cash sweep accumulated during the first quarter.

The final cash sweep is calculated on an annual basis and payable in March the following year.

Further, looking at vessels and equipment, the balance has increased due to delivery of the four vessels during the first quarter, while newbuildings and vessel deposits have decreased following the deliveries.

Under other long-term assets, this includes a $50 million investment in the two CMA CGM container vessels.

Since this transaction is structured as a loan, we have a mortgage securing our investments.

Stockholders equity stands at just over $1 billion, including the $161.8 million of deferred equity.

The book equity ratio, including deferred equity, was 33.8% at the end of this quarter.

Then looking at our liquidity and financing status, as mentioned, the Company had cash of $112 million at the end of the quarter, which excludes the $24 million of liquid securities we hold as a short-term liquidity placement.

On the debt side, we have $3.3 billion of total long-term debt outstanding at the end of the quarter, of which $1.9 billion is consolidated long-term debt and approximately $1.4 billion is long-term debt in our subsidiaries accounted for as investments in associates.

This figure includes the unsecured note bonds maturing in 2014, of which $77 million is net outstanding.

The $125 million of convertible bonds maturing in 2016 and the $274 million net outstanding of senior notes maturing in December 2013.

The convertible bonds can be repaid in shares in the Company's option as maturities.

We have arranged for long-term finance for all vessels under construction with the remaining total commitment of up to $220 million.

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

We also have limited refinancing needs in the next 12 months.

On upcoming debt maturities, the financing is relating to the three ultra deepwater units acquired from Seadrill in 2008, which mature during the second half of 2013.

The financings were for an original amount -- total amount of $2.1 billion, but restructured with a very frontloaded repayment structure, and we have already repaid close to $800 million on these facilities alone.

And we continue to pay down significant amounts before maturities.

The rigs will have 10 years left on the charters at Seadrill at the time of maturity and are structured with put options or purchased obligations at expiry of the charters, taking away the residual risk for us.

Although we have repaid substantial amounts of the debt, values have remained relatively stable, and the outlook for the offshore market is strong.

The 8.5% senior notes mature in December 2013.

The original amount of the senior notes was $580 million, but the current net outstanding is only $274 million or less than half of the original amount.

Our total unsecured debt now only stands at around 15% of our total debt.

The senior notes can be called at a par at any time, and there is still more than one and a half years left on the maturity.

We will address this in due course, and given the relatively small amount to be refinanced, we are very confident that the senior notes can be refinanced at attractive terms.

The next slide provides some more detail on our new building program and remaining payments to the shipyards.

Following the delivery of four drybulk vessels in the first quarter of 2012, we have two remaining drybulk vessels under construction with expected delivery in the third and fourth quarters of 2012.

Thus, four container vessel scheduled for delivery in 2013.

The graph shows the committed financing in the blue bars compared to the remaining shipyard installments in the yellow bars.

For the second quarter of 2012, we have scheduled yard installments of $16 million, while we may draw up to [$35] million on committed financing, giving a potential positive cash effect of $23 million for the quarter.

The reason the potential drawdowns are higher than the scheduled installments is that we have already paid a significant amount in cash to the yards.

For the third and fourth quarters, the yard installments and committed financing are at approximately equal levels.

For 2013 the scheduled yard payments totaled $172 million, while we can draw $138 million of related financing, resulting in a net cash investment of $34 million in that year.

If you look at the period overall from now until the end of December 2013, the overall net cash investment compared to the available financing is only $13 million.

We are in compliance with all financial covenants under our loan agreement.

Free cash was $112 million compared to the minimum requirement of $25 million.

Working capital was $185 million compared to the requirement of being positive, and the book equity ratio was 34% compared to minimum requirement of 20%.

And on the loan agreements where we have minimum value covenants, we were fully in compliance at the end of the quarter.

It is worth noting that Ship Finance has been in compliance with all financial covenants for each of the 33 quarters since the Company was established.

Given the financial turmoil and depressed shipping markets over the last year, this gives us a very strong standing in the banking market.

On that note, I will hand the word over to Senior Vice President, Mr. Magnus Valeberg, who will talk about the container markets.

Thank you, Harald.

Even though the short-term charter market is currently soft, we believe that the prospects for the feeder containing shipping market is promising.

The graph in the top left corner shows the fleet profile of the 2000 to 3000 TEU feeder vessels.

The current order book for these vessels is below 5% of the current fleet, and more than 25% of the vessels are older than 15 years.

According to industry sources, the number of vessels scrapped so far in 2012 has already surpassed the number of vessels scrapped last year, and the scrapping activity is expected to remain high for the rest of the year.

Therefore, we do not expect a net increase in the feeder vessels fleet in the next few years.

As you may see on the graph on the top right corner, the overall order book in the container shipping market is very skewed towards the largest vessels.

The fleet growth is to a large extent driven by the large pulled Panamax vessels from 5000 TEU and upwards.

The charter market for these vessels are more based on long-term charters, and the feeder container market is to a lesser extent impacted by the largest vessels.

The container liner companies normally have a fleet of vessels that they own themselves and vessels chartered in from tonnage providers.

Historically the German KG market and the Japanese owners have been very significant tonnage providers to the container liners.

As you may see from the graph down on the left side, from 2000 until 2009, German owners alone represented between 40% and 50% of the total investment in container vessels.

However, after the financial crisis that started in 2008, this market has experienced significant challenges, and we do not expect that the German KG market will we turn to previous levels.

We believe that these structural changes represent a good opportunity for a more balanced market going forward.

The last graph shows the historical short-term time charter rates for 2800 TEU vessels.

As you may see, the current rate environment is well below the historical average, which has been about $20,000 a day, and it is currently close to the bottom seen in 2009.

Ship Finance has a modern fleet of 15 container vessels ranging from feeder-sized vessels of 1700 TEU to very large vessels with nominal capacity of up to 13,800 TEU.

Eight of the vessels, including the four newbuildings, have been fixed out on long-term charters in accordance with SFL's main chartering strategy.

Seven of the feeder container vessels are currently spot or trading on short-term time charters.

The daily charter rates on these vessels are currently well below our long-term expectations, and we will continue to trade these vessels in the short-term market to be positioned for a rebound in charter rates.

Given the change profile of our container business, we are evaluating structural alternatives to maximize the value of this business.

One of the alternatives we are considering is to call out the container business in a separate entity.

Then to summarize for the first quarter, the Board of Directors declared a cash dividend of $0.30 per share, which represents a dividend yield of 11.3% based on yesterday's closing price.

Working net income was $39 million or $0.49 per share, and the Company generated an EBITDA of $154 million or $1.95 per share.

The spot tanker market has so far in 2012 been stronger than expected when we entered into the restructuring at Frontline, and thus SFL has experienced a strong contribution from the vessels chartered to Frontline.

In the first quarter, the cash sweep amount has been higher than the net contribution prior to the restructuring.

We expect a significant contribution in the second quarter as well.

Our new building program is progressing according to schedule, and this quarter we took delivery of four additional drybulk vessels.

All vessels are chartered out and contributed positively to the results in the first quarter.

As I mentioned on the previous slide, we are currently evaluating different alternatives to maximize the value of our container investments, and we will inform the market when this develops further.

This concludes this presentation, and with that, I give the word back to the operator who will open up the line for questions.

(Operator Instructions).

[David Meisel].

Yes, my question concerns the cash sweep.

Is the money kept in a segregated account?

Does it come to you?

What happens if in (technical difficulty)-- quarters there is no cash sweep or there is a problem with Frontline?

Can they claw the money back, or is it a cumulative cash sweep?

What are the actual particulars of how that works?

The way it works is that it is calculated every quarter, but it's a final -- it is always on a year-to-date basis with a final calculation at the end of December.

So that means that the first quarter we have just announced.

When we get to the second quarter, it will be year-to-date in June, minus what had been accounted for in the first quarter and so forth.

(multiple speakers) So, in other words, if there is an issue with Frontline at the end of the year, that whole cash sweep could disappear?

It could disappear, yes, in theory at least.

But we are relatively confident of the ability to generate cash sweep based on two things.

First of all, the cash sweep kicks in at a very low charter rate for many of the vessels.

As illustrated on one of the slides for 23 of the vessels, the cash sweep actually starts at just a little over effective, call it, technical management or operating expenses for the vessels.

And also Frontline, they have sub-chartered many of these vessels at the higher rate.

Frontline is reporting their numbers tomorrow, so we don't have access to the details.

But they have in previous quarters indicated that they have charters for instant on some of the OBO vessels, the oil/bulk/ore vessels at significantly higher rates than the base rates.

So that will, of course, give a positive contribution irrespective of where this bulk market is going.

And from an actual cash standard going forward, I was a little confused, for 2013 you are actually fronting the cash -- in other words, you are paying Frontline's portion of it in anticipation of getting it back at the end of the year if you went forward to 2013, correct?

Yes, you can have (multiple speakers) we received $106 million from Frontline in December, which was in a way you could say two years front paying of (multiple speakers) -- months.

(Operator Instructions).

Rasta Behrang, Jefferies.

Just to follow up on the potential carveout of your containerships, if that happens, would you include your containerships that have long-term contracts, or is it only going to include containerships with short-term contract?

Well, that has not been determined yet.

We are -- we are indicating in the press release and the presentation that this is something that we are evaluating now as we have the seven vessels effectively in the short-term market.

So I think that all depends on the specific situation and how we see call it more value for Ship Finance shareholders in the structure.

So more details on that, we will, of course, have to come back to when we have done some more work on this and call it that project has to progress somewhat more.

But I think from a structural perspective, the container vessels that are operating in the short-term market is, of course, a little bit on the side of the core business of Ship Finance, which is the long-term charters.

So those are, of course, the most natural vessels to focus on, but if that should also include some of the other vessels, it could be, but we have to get back to you.

Okay.

And the two containerships that you just fixed in the market, the short-term contracts, what is the rate on those vessels?

The market rate currently, as indicated by brokers, is in the range of $6500 to $7500 per day.

We don't give exact details on all charter rates per vessel, but that is -- they are fixed basically.

It is a relatively liquid market, and they are fixed at market.

And that is also, of course, the reason why we go short-term is that we believe that the market rates will improve and will firm up, and therefore, we are trying to charter these out on as short-term as we can and hopefully catching that upturn in the market.

That is helpful.

That is all for me.

Thank you.

C.J. Baldoni, Principal Global Investors.

I have two questions.

To follow-up on the last one, and I understand that it is early, but would you envision that whatever form such a spinoff may take would involve cash coming into the Company or would it just be shares?

Well, that is too early to determine.

So it all depends on the structure we would end up with.

Whether it has been spun off as a separate, call it, relisted or OTC traded company or if it stays more as a private equity type set-up with us as a significant investor.

And, of course, it also depends a lot on what kind of plans you make for that company in terms of future growth and how to build that business going from the starting block, which, of course, is the vessels that we have there on the water today.

Okay.

So you don't have any minimum requirement going into this that it would need to be cash accretive?

No, our principal objective is to try to maximize the value for the Ship Finance shareholders.

So if that is by injecting some more cash into it in terms to get more growth and create more upside potential and thereby getting a better valuation, that could be one way to get to that goal.

But, in the end, you have to evaluate the different factors against each other, and hopefully it will create an interesting opportunity, which is more a tailored to, call it, a shorter term charter angle than compared to our base model, which is long-term charters.

Okay.

And then lastly, has there been any indication regarding the [upward stopation] for the West Polaris that comes up I think it is later this year in August?

And if not, when will you get indication that that is going to be exercised?

Yes, the purchase option is in October, and I believe they have to give us notice to exercise it in mid-August approximately.

So I think when we report second quarter, we would probably have better information on whether or not they have told us that they will exercise that option.

I think I would mention two things.

First, they had a purchase option for an ultra deepwater drilling unit last year that they did not exercise, and we also note that Seadrill has ordered quite a few vessels and have a fairly sizable backlog of newbuildings that will come on stream, which I'm also sure they have some plans for to source the capital in an efficient way.

But we will just have to wait and see, and it is in their option.

If they do exercise such option, of course, we will get a lot of cash in our hands, and so then it is more a question of how can we if that happens redeploy that cash at a good rate, and do we get as good or maybe better, call it, the risk-adjusted return on those investments?

And at this point, it would be too early to say how that would redeploy -- be redeployed?

It would just depend on the market opportunities at that time, I would suspect?

Exactly.

Exactly.

I don't think -- and that also a principle we are working after.

I mean we focus on trying to do the right deals, and therefore, we never communicate how much we are going to invest in any specific segment within any specific timing.

So if we see the right type of investments, we focus on that and execute when we feel that it is right.

Justine Fisher, Goldman Sachs.

I just have one question, a follow-up on the spinoff of the container business.

I think probably C.J.'s question answered it.

I was going to ask why if the prospects were so good for the business, Ship Finance would want to spin the business off?

It seemed as though you had mentioned that the charter structure does not match Ship Finance's charter, preferred charter structure.

So the containers are on short-term charters, and you prefer long-term charters.

So that may be a strategic reason to spinoff the business.

But so a), is that correct?

And then b), does that imply that the smaller containership market will continue to remain a short-term market?

I mean I think the people looked to some shipping end markets and say, eventually when the markets improve, people will be more willing to enter into long-term charters as a sign of that improvement.

So do you expect the smaller containership market to remain a short-term market?

To start with the last part, what we have seen over time in the container space is that the container lines when they -- over time you can say that the balance has been that container lines made 50% of, call it, newbuildings had been made by the container lines and operators themselves, and 50% made by, call it, tonnage providers like Ship Finance who supplied the lines, container lines with assets.

Typically they tend to own the very big vessels themselves relatively more than smaller vessels, and as the smaller vessels are -- the more smaller vessels in the market, there is more of a short-term market for the container lines to have them remain on shorter term charters.

And you also have more lines.

So from an ownership perspective, you are not so exposed by owning those kind of assets because you know there are many charters you can charter them out to.

So the trend has typically been that for smaller container ships, you see generally more activity in the shorter term charter market, while for the very big container ships, you typically see longer more financial type deals to take care of the dynamic in that market.

For Ship Finance where we have, of course, a $5.8 billion charter backlog, our investors I'm sure look at the charter backlog when they assess, call it, the Company.

These vessels with shorter term charters are a little bit different.

You could at least in theory think that some investors would be maybe more interested in investing in a company with a more spot, call it, profile and thereby could catch upside volatility in the shorter term charter market as opposed to taking long term or fixed predictable revenues.

So from our side, this is now when we have seven vessels effectively, call it, trading in the short-term market, it is an opportunity for us to explore if we can generate more value for our shareholders by spinning this off into a separate entity, instead of keeping it under the Ship Finance umbrella.

Okay.

But the CMA CGM ships, would those go with the other container vessels as well?

Well, that is a bit premature.

I think the backbone to determine -- I mean the backbone of our focus here has been how can we get the vessels that are being traded in the relatively shorter term market, how can we generate more value around that, and whether we are limited to that or we also include some of the other containerships, we also have effectively eight other vessels, four vessels to be delivered, we have two CMA CGM big containerships, and also two 1700 TEU containerships on longer-term charters.

That remains to be seen.

And it is all, of course, also an evaluation of where do we get more value out of it by keeping it in Ship Finance or keeping it as this setup.

Okay.

And then the last question is just on the terms of the Horizon Line dons that $40 million.

Can you give us a little more detail on that?

I know some people involved with the Horizon Lines restructuring more may know the details, but I'm not -- I don't know all the details of those notes.

Yes, the notes are -- they are second-lien notes, and they are a part of -- or they are an extension of a note that was issued in October last year.

So they have maturity in October 2016.

The second-lien notes was $100 million and then was extended to $140 million with our notes.

Are you getting interest on those?

Yes, I mean we get -- the company, Horizon Lines, can choose between a cash interest of 13%, they can choose a 50-50 cash and a payment in kind of 14% or 15% if paid in kind.

And they have to tell us semiannually in advance what they choose, and for the next period until October, they have chosen the payment in kind where we then will get 15% in newly issued bonds.

These bonds are then junior to $225 million of first-lien notes, and this is with lien over effectively all of Horizon Lines assets.

(Operator Instructions).

As there are no further questions, that will conclude today's Q&A session.

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

Thank you.

Then I would like to thank everyone for participating in our first-quarter conference call and wish everyone a nice day.

Ladies and gentlemen, this will conclude today's conference call.

Thank you for your participation.

You may now disconnect.