SFL Corporation Ltd (SFL) 2012 Q3 法說會逐字稿

Good day and welcome to the quarter three 2012 Ship Finance International Ltd.

earnings conference call.

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you and welcome, everyone, to Ship Finance International and our third-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 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's reports and filings with the Securities and Exchange Commission.

Net income for the quarter was $34 million or $0.44 per share.

The aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries, accounted for as investment in associate was $179 million.

There was a full cash sweep effect on 22 out of 27 Frontline vessels in the quarter, but the number also includes negative adjustments of $2.8 million relating to five VLCCs.

The net contribution recognized in our accounts in the quarter was, therefore, $10.2 million on the cash sweep.

The EBITDA equivalent cash flow in the quarter was $145 million or $1.64 per share.

The Board of Directors 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 10% dividend yield based on the closing price yesterday.

In addition, the Board has also resolved to accelerate the dividend payment for the fourth quarter in light of the uncertainty relating to taxes on dividends for our US-based shareholders in 2013.

The Company will, therefore, pay an additional $0.39 per share in December, bringing the total payment up to $0.78 per share.

We will then have declared dividends for 36 consecutive quarters and paid out more than $14.50 per share since 2004.

If we look at where the charter revenues are generated, we see that more than 50% of the charter revenues in the quarter came from our offshore-related assets, 30% from tankers and the remaining 20% approximately split between our drybulk and container assets.

We have recently sold two older combination carriers or OBOs.

One vessel, Front Climber, was announced sold in August and delivered to the new owners in October this year, while another vessel, Front Driver, was announced sold in October and delivered to new owners in November.

The aggregate sales price for the two vessels was approximately $18.6 million, including approximately $1.1 million compensation from Frontline.

The book gain from the two transactions is estimated to $4.4 million in aggregate and will be recorded in the fourth quarter.

We have previously announced the sale of two non-double hull vessels in the fleet.

One of the vessels was delivered to its new owner in November, and the last vessel is scheduled to be delivered in the first quarter of 2013.

The net cash effect from these sales is estimated at approximately $30 million on aggregate.

In October we raised nearly $90 million in equity and $105 million in new senior unsecured notes.

Both transactions were fully underwritten by the investment banks, so there was no market exposure for us in the placement.

We issued 6 million new shares, and the equity proceeds is earmarked for new investments.

The $105 million five-year senior unsecured notes were placed in the Scandinavian market and it's Norwegian kroner denominated and with a floating rate of NIBOR plus 5%.

Full payments have been swapped the US dollar fixed, however, and the all-in interest rate for the Company is 6.06% per year.

The new bond loan will not increase the overall leverage in the Company and have been used to repay other indebtedness or reduce drawn amounts on revolving credit facilities.

We have also announced a new transaction recently.

Two car carriers were acquired in October and November and were immediately chartered out to an investment grade logistics company in Asia.

The vessels were built in 2005 and 2006 in Japan and have a capacity of 6500 car equivalent units.

We pay for the vessels in cash, but have secured a $53 million bank facility, which will be drawn down in December.

The charter period is for five years and adds approximately $85 million to our charter backlog with cash flow effect already in the fourth quarter this year with approximately 50% contribution in the quarter as the vessels were on average delivered midway into the quarter.

We finalized the restructuring of the agreements with Frontline in 2011, and this is the third quarter we see the economic effect of this on our profit and loss statement.

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 use these proceeds to prepay on bank financing and have, therefore, reduced breakeven rates for these vessels to the new reduced base rate.

While we had a net contribution per share of approximately $0.10 per share from these vessels per quarter before the restructuring, the cash sweep contribution, therefore, now represents the real net contribution coming from these assets.

Based on historic charter rates provided by Clarksons, there have been very few quarters the last 15 years where we wouldn't accumulate a cash sweep effect.

The cash sweep accrual is based on two separate calculations, one for 22 vessels acquired in 2004 and another for five VLCCs acquired in 2005, and with a higher threshold rate level.

Despite the weak market in the third quarter, it was actually a full cash sweep effect on these 22 -- on the 22 of the vessels, offset by our reversal of cash sweep relating to five of the vessels with higher pressure rates.

The net effect in the quarter was, therefore, $10.2 million, and the year-to-date accrual is $40 million only linked to the vessels originally acquired in 2004.

As two of the vessels were sold in the quarter, you know there will be 20 vessels acquired in 2004 going forward.

The soft tanker market seen in the third quarter continued into the fourth quarter, but there have been some positive signs of development in the VLCC market recently that may have some positive impact on the overall performance in the fourth quarter.

For further comments on the tanker market, we would refer you to Frontline Ltd., who also reported their third-quarter results today.

As of the third quarter, there was no accumulation to the 25% profit split above the old base rates on a year-to-date basis.

Following the $50 million prepayment by Frontline last year, the profit share will not be recorded in the accounts until the accumulated amount is higher than $50 million relating to that part.

In light of the soft tanker market, there have been some questions from investors relating to our financial exposure on vessels unchartered to Frontline.

We would, therefore, like to take a moment and just give some background for that transaction and those vessels and also illustrate what the financial exposure is.

The original fleet of 47 vessels was acquired in 2004 and another five vessels added in 2005.

But after that, so for the last seven years, we've only reduced the number of vessels chartered to Frontline, and we are now down to 25 vessels after the recent sales.

This has been through the sale of the oldest vessels in the fleet, and we do expect this process to continue in an orderly fashion.

At the same time, we are amortizing down the debt relating to the vessels very quickly and have reduced the financing amount by 60% over a period of only four years.

Compared to reported scrap value levels, the financial leverage is now only marginally higher than the scrap value of the fleet, but the scheduled amortization continues with more than $70 million per year.

The graph on the right side illustrates the difference between the loan amount over time and the scrap value of the fleet with the basis of the current scrap price per ton.

The next refinancing we have relating to these vessels is in 2015.

But the refinancing amount is limited to $222 million on a fleet of vessels which was refinanced last time in 2010 at $725 million.

So by that time, $500 million will have been paid down on the loans relating to those vessels.

At the same time, we note that despite the poor market in the third quarter, Frontline reported a strong cash position of $165 million, which was only marginally lower than the $177 million reported at the end of the second quarter.

We still have a significant portfolio of long-term charters, which is the backbone of our business.

Most of our vessels are chartered out on a long-term basis, and we still have closed more than close to 10 years' weighted-average charter coverage on our fleet.

For full details on a vessel by vessel basis, the chartering overview is available by contacting us on e-mail at ir@shipfinance.no.

At quarter end, we had $5.4 billion of fixed rate order backlog, which represents approximately $63 per share after -- based on $85 million -- 85 million shares, which we have after the recent equity offering.

The EBITDA equivalent backlog is $4.3 billion or around $50 per share, and these numbers include only the reduced base rates from the Frontline vessels and do not include expectations for cash sweep, profit share or re-chartering after the end of the current charters that we have in the portfolio.

We have a total of 16 customers today, and more than 40% of the portfolio is with companies with a market cap in excess of $5 billion.

If we include all listed companies, the percentage is 83%, and in addition, a majority of the backlog in the private segment is with companies with a public rating and, therefore, where information is easily available, both for us but also for our investors so they can assess the quality of our backlog.

If we look at the average weighted charter tenor as indicated on the right side, we see that we have two-thirds of the portfolio still in excess of 10 years and only 2% of the backlog with charter shorter than five years.

We have seen over this last few years some very interesting developments, both with respect to the supply/demand balance, but also with respect to asset values.

We have seen after the financial crisis in 2008 we've seen significant volatility in the shipping segments, and we also see that the shipyards are getting increasingly under pressure to cover their production capacity.

If you look at the graph on the very -- on the right side of this slide, that graph is illustrating -- the line is illustrating the estimated building capacity for -- in the shipyards of the world, and the bar indicates the number of orders taken in in the different periods.

The interesting thing with this graph, there are two interesting things to look at.

One is, if you look at the period from 2003 to 2007, you will see that the shipyards were actually taking in a lot more orders than they really had building capacity.

So the building capacity -- so the orders taken in where on the basis of some quite aggressive expansion plans at some of the yards where they were building a boat and expected to build the yard facilities.

So when the financial crisis hit in 2008, many of these yards rearranged their investment plans and stretched, you can say, the orders taken in over a longer period.

So most of the yards have been quite active building vessels, and many of these vessels were ordered at the peak in 2007 and into 2008.

Now the picture has changed.

Now many of these vessels have been delivered, and the yards need to cover up their production capacity going forward.

And we, therefore, also and at the same time we have the financial squeeze many owners find themselves in with limited access to bank financing with many banks having exited the market and also maybe limited access to the public equity and bond market.

So you have a combination of shipyards who have a lot of capacity and spare capacity going forward for building vessels, and you have limitations on the owner side in actually taking on and committing capital for new orders.

So we've seen new building prices come down very significantly across the board in all segments to levels now where we see shipyards offering new building contracts at levels we believe is just marginally above their marginal production costs and basically not covering any overhead or G&A costs in the shipyards.

And another effect of that is that in these times, in order to be competitive, the yards need to offer new design and improved designs.

And that is the other thing we can read out of the graph.

If you look at the super cycle, which you can say was partly driven by the extreme growth in Asia, and particularly in China, we saw that many owners and some owners were more, call it, broker-driven, they were placing as many orders as they could, and for a shipyard who, of course, makes more money on building standard designs than developing designs, they were taking in orders, which was really more off-the-shelf designs.

In the early 2000s, the designs that the yards were producing and building was designed in the late 90s where you had fuel price maybe around $200 per ton and not $600 to $700 per ton, which is what we see now.

So we've seen a period where many yards have been building standard designs with very limited product developments gradually.

So now you see a situation where the yards have to adapt to something that should perhaps have happened gradually over 10 to 15 years.

We now see a concentrated effect on that.

And that has to do with the vessel designs, engine designs and other measures to improve the fuel efficiency.

Therefore, we also expect that to have an impact on secondhand values and have seen that in many segments where secondhand values have come down and for the very simple reason that a secondhand value, one thing is that it's older, but also a secondhand value is normally always less fuel-efficient than a new building, and then on top of that, you add the efforts taken now to reduce fuel consumption more.

So what we have seen and expect to see more is a price differential where you see that secondhand values will be priced more at a discount to the now relatively low -- and in some segments historically low -- new building prices for assets.

And that, we think, is a very interesting development.

We had originally anticipated this to take place back in 2009 on the back of the financial crisis at that time.

But we saw that many of the banks who have a lot of financial exposures to some of many of these assets that are, I would say, have too much leverage attached, they did not have to do anything because the market improved so quickly in 2010.

We believe now that when we now see more of the new vessels coming out at low prices, we believe that we will see an increasing number of transactions based on the low prices that we hope will trade very interesting investment opportunities also for secondhand values -- secondhand vessels.

And the two car carriers that we recently announced is an illustration of that where we acquired them at a level we believe is very, very attractive, not only compared to historical levels but also compared to new building prices adjusted for the age of the vessels.

So if we then switch to our performance the last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates, the EBITDA equivalent cash flow, which we define as charter hire plus cash sweep less OpEx and G&A, was $614 million last 12 months.

This is equivalent to nearly $8 per share.

Net interest was $137 million, or approximately $1.73 per share, but more importantly, our normalized ordinary debt installments related to the Company's projects was $344 million or $4.34 per share.

This is excluding the significant prepayments relating to the Frontline vessels mentioned earlier that took place in 2011.

We had approximately $3 billion of net interest bearing debt at quarter end, and we continue our scheduled steep low amortization.

The amortization on the last 12-month basis represents around eight and a half years profile to zero, and this compares to our weighted average age of the vessels of approximately five years.

The net contribution from our projects last 12 months after this aggressive debt repayment profile was $133 million or $1.68 per share.

Over the last eight years, aggregate net income has been approximately $21 per share, while aggregate dividends have been approximately $14 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 us through the numbers for the third quarter.

Thank you.

On this slide, we were showing our pro forma illustration of cash flows for the third quarter compared to the second quarter of 2012.

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 of 2012, total charter revenues were $166.2 million or $2.10 per share compared to $168.9 million or $2.13 per share in the second quarter of 2012.

On the VLCCs, Suezmaxes and chemical tankers, revenues were in line with the previous quarter.

The container vessels achieved revenues of $14.6 million in the third quarter compared to $17 million in the previous quarter.

The reduction is due to lower earnings on the five vessels previously chartered to Horizon Lines.

We have recently taken delivery of the two car carriers, which will have a positive effect on the fourth-quarter revenues with income on average for half the quarter.

The drybulk vessels achieved revenues of $15.6 million in the third quarter compared to $17.6 million in the previous quarter.

The reduction is due to the sale of one OBO during the third quarter and lower revenues for the four vessels previously chartered to Hong Xiang.

We have sold two additional OBOs in the fourth quarter, which is expected to reduce drybulk earnings going forward, partly offset by the delivery of one Handysize drybulk carrier in midyear November 2012.

On the offshore side, charter hire came in at $93.9 million, in line with the previous quarter.

We also generated cash sweep from Frontline of $13 million in the third quarter, in line with the second quarter.

Please note that these numbers exclude the $2.8 billion accumulated in the second quarter relating to five VLCCs, which was reversed in the third quarter.

Vessel operating expenses show a slight increase compared to the fourth quarter, and this is mainly due to more vessels being on time charter during the quarter.

In addition, we had income of $1.9 million on financial investments during the third quarter, in line with the previous quarter.

So overall this summarizes to an EBITDA of $145.2 million for the quarter or $1.83 per share.

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 at revenues classified as a repayment of investment in finance leases, results in associates and long-term investments, and interest income from associates.

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

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

Overall for the quarter, we reported total operating revenues, according to US GAAP, of $74 million.

Charter revenues from operating leases were down approximately $3 million compared to our previous quarter, mainly due to lower earnings on some of the container and drybulk vessels employed on our short-term time charters.

Charter revenues from finance leases were only marginally down due to the sale of one OBO during the quarter.

The cash sweep from Frontline had a net positive effect of $10.2 million or $0.13 per share, which includes a positive contribution of $30 million for 22 vessels less the $2.8 million negative adjustment relating to the remaining five vessels.

The aggregate cash sweep as per third of September was $40.1 million.

We also booked a gain of $1.9 million, arising from the sale of the 20-year-old OBO, Front Rider.

Mark-to-market of derivatives was positive $6.2 million in the third quarter.

The majority relates to some of our interest rate swaps, which previously had a negative effect on our results, but now qualify for hedge accounting whereby the cumulative cost was reversed.

So overall and according to US GAAP, the Company reported net income of $34.6 million or $0.44 per share for the quarter.

It should also be noted that subsequent to quarter end, we issued 6 million new shares through our public offering.

Moving on to the balance sheet, we show $67 million of cash at the end of the quarter.

Available for sale securities of $40 million includes $23 million invested in short-term tradeable securities as a short-term liquidity replacement.

In addition, the second lien notes in Horizon Lines with an initial face value of $40 million are recorded under available-for-sale securities at $17.3 million or 40% of par value, including accrued interest.

Amount due from related parties includes the $40.1 million cash sweep accumulated during the first three quarters of 2012.

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

Stockholders equity started over $1 billion, including the $156.9 million of deferred equity.

The book equity ratio, including deferred equity, was 35% at the end of the quarter.

Then looking at our liquidity and financing spaces.

As mentioned, the Company had cash of $67 million at the end of the quarter, which excludes the $40 million in available-for-sale securities.

On the debt side, we have $3.1 billion of gross interest-bearing debt outstanding at the end of the quarter, of which $1.4 billion is consolidated bank loans and approximately $1.3 billion is bank loans in our subsidiaries accounted for as investment in associates.

In addition, we had approximately $500 million of senior unsecured notes outstanding as per 30 September 2012.

This figure includes the unsecured note bonds maturing in 2014, of which $76 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 optional maturity.

Following quarter end, we raised a net amount of $89 million in a public offering issuing 6 million new shares.

We also successfully placed a five-year senior unsecured bond in the Scandinavian market with a interest of NIBOR plus 5% per annum.

The principal amount of the notes is NOK600 million, equivalent to $105 million.

All payments have been swapped to US dollars with a fixed interest rate of 6.06% per annum.

Our premium access to the bank market was recently demonstrated through the financing of the two car carriers acquired during the fourth-quarter 2012.

We have several banks competing for the financing and are offering higher leverage than requested.

But in line with our conservative profile, the financing is for 70% of the already attractive purchase price.

The financing terms are attractive, including a competitive margin and repayment profile and nominal value clause for the majority of the five-year charter period.

While not counting bank debt maturities, the two financings relating to the three ultra-deepwater units acquired from Seadrill in 2008 mature during the second half of 2013.

The financings were for an original total amount of $2.1 billion, but were structured with a very frontloaded repayment structure, and we have already repaid over $850 million on these facilities alone.

And we continue to pay down significant amounts before maturity with an average balloon payment per rig of approximately $360 million.

While we have repaid substantial amounts of the debt, charter free broker valuations have increased over the last quarters, and the current leverage on the unit is very comfortable.

The existing financings are very attractive, but to be prudent, we have recently commenced the refinancing of the first unit, West Polaris, well ahead of maturity.

Based on the current low leverage, banks indicated that we can increase the leverage on the unit, but we have chosen to keep the leverage at the current level, which is below 60% based on the latest broker valuation.

We have already received commitments from banks, and we expect to the refinancing to be fully committed within the next few weeks.

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

With an enterprise value of approximately $4.4 billion, the gross remaining new building commitments represents less than 5% of our enterprise value.

As per September 30, we had two remaining driver carriers under construction, of which one was delivered in November 2012, and the second is scheduled for delivery in the first quarter of 2013.

Plus, four container vessels scheduled for delivery in 2013.

All vessels have medium- to long-term charters attached.

We have arranged long-term bank financing for all of the vessels under construction with the remaining total commitment of up to $192 million and maturities between 10 and 12 years from delivery of the vessels.

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

We have already paid significant amounts in cash to the yards, while we have chosen not to utilize all available predelivered financing in order to reduce the interest expenses during the construction period.

This means we may have a positive cash effect relating to the new building program in the quarter when we fully utilized available finances.

For the fourth-quarter 2012, we have total schedule yard installments of $34 million, while we may grow up to $36 million on committed financings, giving a net positive cash effect of approximately $2 million.

For 2013, the scheduled yard payments totaled $179 million, while we can grow up to $156 million operated financing resulting in a net cash investment of approximately $23 million in that year.

If you look at the period overall from now until the end of 2013, the overall net cash investment compared to available financing is only $21 million.

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

Free cash was $67 million compared to the minimum requirement of $25 million.

Working capital was $193 million compared to the requirement of being positive, and the book equity ratio was 35% compared to the 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 full compliance with all financial covenants for each of the 35 quarters since the Company was established.

Given the financial turmoil and depressed shipping market over the last years, this gives us a very strong standing in the banking market as recently demonstrated on the car carrier financing.

Now to summarize.

The Board has declared a quarterly cash dividend of $0.39 per share for the third-quarter 2012.

This represents a dividend yield of 10% based on the closing price as of November 28.

The Board has also declared an accelerated cash dividend of $0.39 per share for the fourth-quarter 2012, giving a $0.78 per share cash payment to shareholders in December 2012.

Net income for the quarter was $35 million or $0.44 per share, and aggregate EBITDA was $145 million or $1.83 per share.

We have demonstrated our premier access to capital through the recent equity offering, bond issue and bank financing, and we will continue to look for attractive investment opportunities while always maintaining our conservative profile.

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

(Operator Instructions).

Herman Hildan, RS Platou Markets.

Good evening, guys.

My first question relates to, call it, your main sponsor over the last couple of years, he created the Seadrill MLP procedural, Golar MLP for Golar LNG.

He is using Frontline 2012 to, call it, take advantage of the weakness in the commodity shipping market.

So my first question is really how does Ship Finance fit into, call it, his portfolio of companies, and are you getting the attention that -- that you should get from your main shareholder?

Well, I think we get the good support from our 40% shareholder, and we also hope we get good support from the other 60% shareholders we have.

Ship Finance has been in operation now for nearly nine years.

We have demonstrated over time that one, the Company has been able to produce positive results, have been able to pay dividends, and more importantly, have been able to go from a structure and position where we had only one type of vessels, only one client and a very close interdependence to a diversified portfolio where we now have more capital invested in the offshore sector than we have in the tanker and the other traditional sectors.

I think the fact that we have come through, first, the extreme financial turmoils in 2008 and then also in the market turmoil last year where we saw tanker values, for example, dropping almost 50% from 2008 to 2009, and then dropping another almost 50% from -- this is, again, from a super-peak in 2008, dropping another 50% or so, say, 18 to 12 months ago.

We came through that, no covenant issues, and we stood firmly on our own feet.

Mr. Fredriksen, of course, has many other investments, and we see that they do a lot of transactions.

We are very happy with the deals that we do have with them, but I think it is worth noting that we've not done any deals with what we call related companies, i.e.

companies where Mr. Fredriksen is also an influential shareholder, since 2008.

So everything we've done after that has been with totally unrelated third-party partners, and we think that we have a balanced portfolio, and we will look for growth opportunities going forward.

I think maybe one of the key benefits of having a very influential person like Mr. Fredriksen as a shareholder is that he has been in the business for 50 years.

He has seen a lot of crisis and a lot of downturns and the volatility in the shipping markets.

And, therefore, he is a very interesting person to discuss with and discuss potential expectations for where the market could go, given the circumstances that we see now.

And, also, I think if there is one thing that he has been guiding us for a period is that you have to be patient.

This market is coming to us.

There is no need to run out and spend your money right away because the fundamentals in the market is interesting with a supply demand ratio indicating an oversupply of assets in many some segments which would have a downward pressure.

You have banks who have both issues in their own portfolio, but also are shrinking the volume they do particularly to new clients who don't have access to capital markets, again, could lead to very interesting acquisition opportunities.

So we are, of course, very happy with having him there, and we are also very happy with doing business both with related parties but also with also the unrelated parties.

Thank you for that, for the very detailed answer.

Just one final question.

You recently did, as you mentioned, the car carrier transaction, which has been, I guess, somewhere between 10% to 20% below transactions done both for and after -- sorry, other transactions has been done 20% above the deal that you did both before and after the deal.

You seem to be securing about 20% of current equity, and the other five-year deals obviously you're repaying the investments over from contracts.

Is this the kind of return level that we should expect going forward, for example, in the deals that you are going to do within the next four to six months?

We don't have specific guiding on return on the investments.

I think we are looking at the investments both from, of course, you look at absolute return, but also risk adjusted return.

So we think that investing in the low end of the cycle is generally more interesting than investing in the high-end.

But if and when you do invest in the high-end, you have to be very careful with, of course, the counterpart, and also that you are able to take down your exposure to the asset to more of a mid to low level type exposure.

That transaction, I think, is a good example of what we believe is our premium excess to deal flow.

It's a deal that was not sort of circulated in the market.

We got hold of it, and we thought it was a nice transaction.

We bought -- we did not buy vessels, the vessels with contract.

We bought the vessels from one party, and then we secured the charter on the other side and matched it together, which also I would call as a part of the value creation that we see opportunities and combined that.

So going forward, we will not give any indications on exactly which assets and how fast we necessarily will invest, but generally this is a much more interesting environment to invest in.

We are on the lookout for interesting opportunities.

Those car carriers is a good example.

And hopefully we will find other transactions down the road in not too many months.

Okay.

Thank you very much for that.

Fotis Giannakoulis, Morgan Stanley.

Yes, good morning, Harald and Ole.

I want to go back to Frontline.

You gave a detailed presentation, but I just want to make the assumption that the market returns back to where it was in the previous quarter and gives back the gains of the last few weeks.

Do you see the potential of a new restructuring with Frontline and if you consider any new restructuring would have any impact on your dividend?

Well, first, we did a restructuring in 2011.

We think that was an extensive exercise.

Not -- and, of course, there our larger shareholder was mentioned.

He put a lot of -- committed a lot of capital to make that transaction happen.

We got $106 million cash upfront, we prepaid a lot of debt, and we have a breakeven level on these vessels, which actually gives us a margin even at the very low reduced base rates.

We saw in the third quarter market was very soft, softer than we've seen for quite a long time.

But still Frontline, they had a cash position of $177 million at the end of the second quarter.

It was only reduced to $165 million in that market.

So the combination of a low cash breakeven level for Frontline and the fact that we can service our debt and continue our steep amortization at the lower rate is a comforting factor.

With respect of the cash sweep, there I say the volatility is our friend.

Because we have the cash sweep is average over a full calendar year and, of course, recognized on a quarter by quarter, which is the year-to-date number that is taken in.

And, of course, then if you see softness in one quarter, that will be balanced by the market with market recovers in the next quarter.

And as I illustrated on a graph on one of the slides there, there have been very few quarters over the last 15 years where we wouldn't have accumulated anything to the cash sweep.

And even if we correct away what we call the super cycle between 2003 and 2008, it is still a reasonably healthy level.

So we hope for continued volatility because in that market because we think that will benefit the cash sweep contribution.

I understand that this cash sweep mechanism gives you a way of an option to the tanker market, but how much of your dividend depends on this cash sweep mechanism?

Let's assume that you would decide the next few months to dispose all the vessels with Frontline.

Would that have any impact on your ability to pay your current dividend?

Of course, it's a very hypothetical question, and we have our contracts with Frontline which are standing there.

There is no termination option or purchase option for that matter for Frontline in the deal.

When the Board communicates the dividend level, it is not linked to any specific charter or any specific counterpart.

And part of the Board's deliberation when they do decide the dividend on a quarter by quarter basis is on the long-term what was long-term expectations for the Company.

We have a very significant charter portfolio, and Frontline going from being 100% of our backlog is now down to just around 25% or so.

So that means that we have a lot of cash flow coming from other sources.

We have a lot of cash flow coming from offshore assets.

We do have capital that we hope to also to reinvest and generate that will hopefully then also generate good cash flow.

So I don't think you necessarily should make a direct link between the cash sweep, the contribution in any quarter and the dividends that the Board decides on.

Okay.

Thank you.

I just want to go back to your recent offering and your potential future acquisitions.

If my estimates are correct, you have more than $250 million of liquid cash right now.

How much of this cash is available for new acquisitions and if you can give us an idea of when you see more attractive opportunities?

We saw an exotic transaction with two car carriers that generated very good returns.

Are there more transactions right now in the market that they can have so attractive cash flow yields?

Well, in terms of returns, that we will have to wait and see.

We try to be -- of course, we try to be risk focused and looking for a risk adjusted return, and of course, at the same time, we also tried to be greedy for our shareholders and take the return we can get out of deals.

We don't specifically communicate investment capacity as such, but what we have seen -- I mean we raised around $190 million, more than $190 million of capital last -- last month, month and a half.

The equity we raised is earmarked for new investments, definitely.

The bonds we raised was communicated to basically refinance and replace other debt financing and, therefore, wouldn't increase the absolute leverage in the Company.

That said, we also have a very steep repayment profile on one or many of our projects, so potentially there could also be some capacity there.

So we just have to wait and see, but I'm reluctant to communicate or commit to a specific number.

What we've seen before like in 2008 when we did the three deep water rigs in very quick succession, we did not have that much -- we had basically the same sort of, call it, cash amount on our balance sheet as we have currently.

I think also we demonstrated by through also both the bond rates and the equity rates that we can -- that we do have access to the market.

We know that we have premium access to the banking market to put down -- put together financings.

As Harald commented, we have significant competition for the car carrier deal, and we also see very good interest from the bank side on the refinancing, which is not so strange.

We tried to put together sound transactions, good assets.

We like cash flow, the banks like cash flow, and we typically have accelerated repayment profiles rather than, call it, bullet style repayment profile because we think that builds buffer -- the long-term buffer in the Company.

And jumping to the financing market, Harald, if you can comment, how do you see the chip financing market this quarter?

And if you can compare it with the previous quarters, if you see any changes, obviously you have a lot of banks competing for your deals.

But do you see that the situation is more difficult for more of your competitors?

And if you bring a deal today, what are the terms that you think they are feasible for a standard deal?

Just commenting on the banks directly, you see in some banks announcing that they will be leaving the market.

But, as we've said, for the car carriers, we have banks calling us wanting to finance them, and also for the rig financing, they are refinancing there.

There's over 10 banks actively looking at the deal.

But on the terms you get, we don't comment on margins.

Like I said, we have attractive margins.

And typically you get, depending on the contract you have in place, you get 60% to 80% leverage, and you get the attractive repayment profiles from 10 to 15 years.

Thank you for that, and my last question has to do with containership vessels and the four Handysize voters that are available right now for chartering.

What do you think about the deployment of these vessels?

Yes, for some of these -- five of the containerships were vessels that were previously chartered to Horizon Lines were renegotiated at transaction earlier this year where we took the vessels back in combination with a note and 10% of a $40 million note and 10% of the equity in Horizon Lines.

Those vessels have been traded in the spot market, and the container market is relatively poor.

One of the vessels is currently idle and looking for employment, and so it's definitely not the time to lock in long-term charters.

Typically what we see is that long-term charters very often is linked to shorter-term -- the short-term market.

So we expect to continue to trade those vessels in the short-term market until the longer-term market hopefully improves somewhere down the road.

That said, they are relatively -- in our portfolio, we see them as a relatively small exposure, and also from a cash flow perspective, it's really not there.

That's not really where the cash flow in our Company is coming from.

So we think that situation is definitely very manageable.

Thank you very much for your time.

[David Misell], private investor.

Two questions.

With the prepayment of the March 2013 dividend, is it safe to assume that there will be no other source for a dividend until June of 2013?

As a prominent shipowner once said, you have to support your shareholders.

We have noted and we have also had conversations with investors over the last couple of months where --

I didn't mean it in a negative way.

I'm just saying is there any other source would there be that you might be able to come in with a special dividend or something unusual outside of your normal dividend policy?

I wasn't being critical in any way about the prepayment.

So from the Company's perspective, we also communicated and the Board communicated that no additional dividend payment can be expected prior to the declaration of the first-quarter dividend in 2013.

And then a minor question, again my ignorance.

Your cash sweep with Frontline, is there a termination date on that?

It runs through 2015.

So they prepaid the first couple of years, and then is that correct, or have they prepaid the entire cash sweep?

Well, they prepaid.

The entire cash sweep in aggregate for the remaining vessels is in the region of $240 million to $250 million.

They prepaid $106 million.

So you can say that if we get full cash sweep for a period of two years out of the four years, we would be equally well off.

And if we get more cash sweep, it would be a net profit to us.

I see.

Thank you very much.

And, of course, it accumulates on a quarterly basis.

But the primary calculation is done at year-end for each year, and then it is payable in March.

Thank you, sir.

(Operator Instructions).

C.J. Baldoni, Principal Global Investors.

Hello.

The cash sweep, is that restricted cash at Frontline?

You would have to refer that to them.

We don't have the information on how they treat that in their accounts.

My impression is that the restricted cash in Frontline is more linked to the ITCL vessels, but you would have to refer to Frontline.

So if the world changes dramatically between now and March when they are supposed to pay it and March comes around and they can't pay it, what's your recourse?

Well, we own the vessels.

So we can then take the vessels away from them if they don't perform on their charters and on their obligations.

So that could be the first step.

And then, of course, we would have a significant claim with the company if something like that happened.

But what we've seen, we've seen in the third quarter being a very poor market.

We saw that they still have $165 million free cash, not restricted cash, and that was only down $12 million or so from the previous quarter.

So even in a very depressed market, they are not really burning that much cash apparently looking at their accounts.

Is that guaranteed by Frontline?

Yes, this is guaranteed by Frontline, absolutely.

Then if you could just shed a little bit more light on -- I mean I'm sure just comes down to a financial calculation, so maybe the question is moot.

But as far as the OBOs are concerned, if I remember correctly, those vessels have been generating good cash flow above the contracted rates for you.

I'm just curious as to why sell them now?

Well, the OBOs that have been sold, and we have sold the six out of originally eight OBOs, all of those vessels have been sold after the contracts had ended.

And the OBOs, when we acquired them, they were all trading in the oil market because they can go both with oil and drybulk.

But in the late -- in the last few years, they have been switched into drybulk and haven't been operated in the drybulk market.

And in that market, the charter rates in that market has been relatively poor.

So that, of course, has an impact also on Frontline's willingness to compensate us for terminating the charters.

We, on our side, even if those vessels are now 20-years-old, we don't typically the tankers and bulkers are scrapped when they are somewhere between, I would say, 22 and 27 years?

So we see that also as sort of an opportunity to sell those assets and reduce leverage and take the cash out of that and reinvest that in other assets.

(multiple speakers)

I didn't realize the contracts were at their expiration.

The subcontracts -- our charters to Frontline, they run until 2015.

So the contract with Frontline was still valid, which -- okay.

And then did you say that the rate on the car carrier bank loan was the same as the rate on the deal that you did in the Norwegian bond market, or did you not -- what's the rate there?

Well, the interest rate in the Norwegian bond market is on a swap to dollar fixed basis is 6.06%, while the bank loan interest rate on the car carriers will be based on a floating LIBOR plus a margin.

We may or may not swap that out.

We see five-year interest rates now hovering about 70 or in the high 70 -- around 80 basis points.

So we see a very interesting interest rate curve there.

So that's based on LIBOR plus a margin.

Yes, exactly.

And there's no reason to think that that margin is much different than the margin that you have on your other debt, right?

Exactly.

Exactly.

I think we have competitive margins in the bank market.

And then as far as the -- can you just touch, again, on the rig refinance?

Did you say that you're looking at just refinancing one of them now, and you're not going to take out any incremental debt, although you could?

Well, if you look at the first one, the one that we are financing now is the West Polaris.

And that financed by one facility, maturing in the early second half next year.

You know, we recently launched that transaction.

That current outstanding is around $400 million, just above that, and we are refinancing approximately the same amount, just a slight increase.

But still, a leverage below 60%.

So close to the market values here are quite good in the option market.

So it is basically a straight refinancing of that loan.

Okay.

And what about the second one?

Why are you staggering it?

(multiple speakers)

We have two more rigs in one facility.

Those don't mature until mid-November next year.

And, of course, the financings we have today because they were done back in 2008, they are extremely attractive with a very, very low margin.

So we want to hang onto those as long as possible to save interest costs.

But at the same time, of course, do that in a very prudent manner.

So we are -- we have actually been asked by some of the banks why on earth are you doing this so early because they were expecting us to sit out and wait until final maturity just because of that.

But, of course, it's always a matter of making sure that you are not in a squeeze in any way in terms of timing, and that's also how we can get the best terms out of the market, including out of the banks who are financing that.

And then lastly real quick, in some of your charts in the press release and in the presentation, so when you go back and revise the prior period, like for example on the first page, the charter revenues and EBITDA are different, is that because you're adjusting it for sales and purchases?

No, I think that adjustment, that's also noted in the notes.

In order to make the periods comparable, the only adjustment made there is that the cash sweep accrual on five of the Frontline vessels, there was an accrual of $2.8 million that was in the second-quarter numbers.

As we see now on a year-to-date basis, it's zero.

In the P&L, the cash sweep contribution is reduced to $10 million.

But in order to make the numbers more comparable, we have also then removed that contribution in the second-quarter numbers for comparison purposes.

Okay.

All right.

Thank you.

(Operator Instructions).

We have no questions in the queue at this time.

Thank you.

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

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.