SFL Corporation Ltd (SFL) 2012 Q4 法說會逐字稿

Good day and welcome to the Q4 2012 Ship Finance International Ltd.

earnings conference call.

Just to advise, today's conference is being recorded and at this time, I would like to hand the conference over to Mr. Ole Hjertaker.

Please go ahead, sir.

Thank you and welcome, everyone, to Ship Finance International's fourth-quarter conference call.

My name is Ole Hjertaker and I am the CEO in Ship Finance management.

And with me here today, I also have the CFO, 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 $51 million, or $0.60 per share.

This number included a gain on sale of assets of approximately $21.5 million, or $0.27 per share.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $168 million.

The EBITDA equivalent cash flow in the quarter was $134 million, and last 12 months, the EBITDA equivalent was $585 million.

There was a full cash sweep effect on 22 out of 27 Frontline vessels or $12.1 million in the quarter.

Including the accumulated amount in the three previous quarters, the cash sweep for the year ended up at $52.2 million, or approximately $0.65 per share for 2012.

The Board of Directors declared a cash dividend of $0.39 per share for the fourth quarter already in November 2012 with payment before year-end.

The reason for the early declaration at payment of the dividend was the uncertainty relating to taxes and dividends for our US-based shareholders in 2013.

The $0.39 dividend represents $1.56 per share on an annualized basis, or 9.6% dividend yield based on closing price on Friday.

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

In the fourth quarter, and including all 100% owned assets, 50% of our charter revenues came from the offshore segment, nearly 30% from tankers and the remaining 20% split between our drybulk and container assets.

We announced the acquisition of two car carriers in the fourth quarter and took delivery of the vessels in October and November.

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

The vessels were immediately chartered out to Hyundai Glovis for a period of five years, adding $85 million to a charter backlog.

There will be a full cash flow effect from these vessels in the first quarter this year.

Over the last four months, we have raised more than $1 billion in the capital markets.

This includes equity, bonds, convertible notes and equity.

Our CFO will elaborate on these transactions, but we are, of course, very pleased to notice the positive reaction in the market with several of these transactions significantly oversubscribed.

Some of the newly raised capital has been used to refinance existing indebtedness, but a part of the capital will also be earmarked for additional growth.

Including a vessel to be delivered to the new owner at the end of this quarter, we will have sold and delivered seven older vessels during the fourth quarter 2012 and first quarter 2013.

This includes the two remaining single hull tankers, the four remaining combination carriers and one Suezmax tanker.

Vessels sold were the oldest in our fleet, built between 1991 and 1995.

The book gain in the fourth quarter was approximately $21.5 million and net cash proceeds after charter termination compensation and prepayment of associated debt was $31 million.

In the first quarter, and including the vessel due to be delivered at the end of the quarter, we expect there to be a book gain of nearly $18 million with net cash proceeds of approximately $37 million.

And the newbuilding program continues with five vessels still under construction.

One drybulk carrier is scheduled for delivery in March and will then go on a three-year charter to Western Bulk and four eco-design 4800 TEU container vessels are due for delivery between the third quarter of 2013 and the first quarter of 2014, and will then be employed on seven-year charter to Hamburg Sud from delivery.

We restructured the chartering agreement with Frontline in December 2011.

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

We used these proceeds to pre-pay on bank financing and have therefore reduced breakeven rates for these vessels to below the new reduced base rates.

While we had a net contribution per share of approximately $0.10 per share from these vessels before the restructuring, the cash sweep therefore represents the majority of the net contribution from these vessels currently.

The cash sweep effect for 2012 was $52.2 million, or approximately $0.16 per share per quarter on average.

Based on historic charter rates provided by Clarksons, there have been few quarters in 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 with an average threshold rate of approximately $16,400 per day and another for five VLCCs acquired in 2005 with higher threshold rates of approximately $24,500 per day.

Despite the weak tanker market in the third and fourth quarters, there was a full cash sweep effect from the vessels acquired in 2004 in both these quarters.

Two of the vessels were on very profitable subcharters in the period, but those charters were terminated in December and going forward, the cash sweep will be more dependent on spot charter revenues.

Frontline's cash breakeven on these vessels is higher than our adjusted base rate as the actual OpEx is higher than the $6,500 per day we paid to them to manage the vessels.

For the year 2012, Frontline reported average operating expenses across the fleet of approximately $10,400 per day.

Frontline stated in their recent quarterly report that if the tanker market does not recover before 2015, and no additional equity can be raised or assets sold, there is a risk that Frontline will not have sufficient cash to repay its $225 million convertible bond loan at maturity in April 2015.

With 22 vessels still on long-term charters to Frontline, we will, of course, actively monitor this situation in order to try to minimize any potential negative effect for our Company.

We note that Frontline reported a cash position of $137 million at quarter-end, a reduction of $27 million compared to the previous quarter.

Of this, nearly 50% of the reduction in free cash was due to a $13 million installment in newbuildings.

The $52 million 2012 cash sweep amount is due to us in March.

In addition to the cash position in Frontline, they also own 6.3% of Frontline 2012 with a market value of approximately $67 million based on the closing price on Friday.

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 for Frontline last year, the profit share will not be recorded in the accounts until the accumulated amount is higher than $50 million in aggregate.

In light of the soft tanker market, we would again like to highlight the limited financial exposure relating to the vessels we have on charter to Frontline.

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

But after that, we have only reduced the number of vessels and we are now down to 22 vessels going forward after recent sales.

This has been through the sale of the oldest vessels in the fleet.

In just the last two quarters, the reduction has been seven vessels with aggregate net cash proceeds of nearly $70 million after debt prepayments and with aggregate book gains of approximately $40 million in the fourth quarter last year and the first quarter this year.

We are amortizing down the debt of these vessels very quickly and have reduced the financing amount by more than 60% over a period of almost four years.

Compared to reported scrap value levels, the financial leverage is moderate and the scheduled amortization continues with more than $70 million per year even with the reduced base rates.

The graph on the right side illustrates the difference between the loan amount over time and the scrap value of the fleet versus the current scrap price per ton of approximately $420 per long ton.

The next refinancing is in 2015, but limited to less than $220 million on a fleet of vessels, which was refinanced last time in 2010 at $725 million.

If Frontline should default on any payment obligations to us, we will, of course, then be able to trade the vessels in the market with a low cash breakeven rate and retain 100% of any chartering upside.

Ship Finance also expects, as part of the fleet renewal strategy, to continue selling older vessels and correspondingly reduce the counterparty exposure to Frontline over time.

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 more than 10 years weighted-average charter coverage.

Full details on a vessel-by-vessel basis is available by contacting us on e-mail at ir@shipfinance.no.

We have a $5.2 billion fixed-rate charter backlog or the equivalent of $61 per share.

The EBITDA equivalent backlog is $4.2 billion, or approximately $49 per share.

These numbers include only the reduced base rates from the Frontline vessels and do not include expectations for cash sweep or profit share.

Any rechartering after the end of the current charter are also excluded.

We have a total of 17 customers 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 only 3%.

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

Only one of our charterers is behind on their charter payments to us with respect to two Suezmax tankers sold on higher purchase terms.

We built the vessels at a cost price of $69 million per vessel in 2009 and 2010 and so far, the charter has paid us $58 million per vessel on average.

At year-end, the aggregate overdue amount was limited to $1.9 million and we would like to note that the charter-free value of the vessels are higher than the remaining charter payments plus the purchase obligation due in 2014/2015.

If you look at the average weighted charter tenor, as indicated on the right side, nearly two-thirds of the portfolio still remains in excess of 10 years and only 3% is shorter than five years.

If you turn to the asset market, we have seen that several of the segments have been under very significant pressure from a vessel value perspective.

This has been a combination of several factors, including banks putting increased pressure on weaker owners to sell assets.

We have typically seen in most of the segments a number of transactions relating to older vessels, either at the scrap levels or near scrap values.

However, in some of the segments and particularly tankers and containers, we have seen a very limited amount of newer vessels being offered for sale.

In the drybulk segment, we have seen a higher number of transactions across the board also for newer vessels.

What we are also seeing is an increased cost pressure due to shipyards who want to fill up their production capacity.

If you look at the graph on the right -- down on the right side, we saw that, during -- from the early 2000s, we saw a very significant increase both in orders at the shipyards and also the newbuilding capacity.

And in some of these periods, the yards have gained a lot more orders than they had production capacity at the time with the ambition to build out yard facilities over time.

We have now been in a period of nearly five years with reducing ordering and we believe most of that surplus ordering capacity the yards have taken in have now already been delivered or will be delivered in the near term.

Therefore, the yards need to either price their newbuildings at a very competitive level or go out -- or they will have to go out of business.

We also see that many shipowners have limited access to capital and therefore are not in a position to take advantage of the current attractive pricing levels in most of the segments.

And with the reduced newbuilding prices, we see also expect there to be a significant gap between newbuilding prices and secondhand values as newer vessels are now built to new specifications where we see the yards no more willing to build vessels with more fuel-efficient designs and also, as we have always seen in the market over time, there is always a preference in the market for newer tonnage versus older tonnage.

We have, therefore, seen an increasing value gap between newbuildings and secondhand vessels.

That said, we are flexible in terms of where we want to invest our capital.

We have, of course, a preference for newer vessels, but, at the same time, we can also look at newbuildings or modern secondhand vessels in the market.

We are seeing an increasing number of opportunities across all our four core segments.

We did acquire two car carriers in the fourth quarter and are looking at the investment opportunities now in all our segments, but we will not give any specific guiding on where we believe our next investments will be, but we will, of course, report that in due course when we have decided where we want to deploy our capital.

As noted earlier, we have raised significant amounts of capital over the last few months and part of that capital is earmarked for growth and we hope to find interesting opportunities over the next few months.

If we then switch to our performance the last 12 months, the normalized contribution from our projects, including vessels accounted for in investment and associates, the EBITDA, which we define as charter hire plus profit share less operating expenses and general and administrative expenses, was $585 million last 12 months.

This is equivalent to more than $7 per share.

Net interest was $131 million or approximately $1.68 per share, but more importantly, when normalized, ordinary debt installments relating to the Company's project continue with the steep profile and over the last 12 months, the amount has been $319 million or nearly $4 per share.

This is excluding prepayments relating to sale of older assets and early refinancing of debt.

We had approximately $3 billion on net interest-bearing debt at year-end and we continue our scheduled steep loan amortization.

This amortization represents around a nine-year profile to zero and this compared to a 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 $136 million, or $1.69 per share.

Over the last eight years, aggregate net income has been more than $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 fourth quarter.

Thank you, Ole.

On this slide, we are showing our pro forma illustration of cash flows for the fourth quarter compared to the third 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 fourth quarter of 2012, total charter revenues were $155.9 million, or $1.84 per share, compared to $166.2 million, or $2.10 per share in the third quarter of 2012.

The per share data for the fourth quarter reflect the issuance of 6 million new shares in October 2012.

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

Our liners, which include container vessels and car carriers, achieved revenues of $80 million in the fourth quarter, up from $14.6 million in the previous quarter.

The increase is mainly due to the delivery of the two car carriers at the end of October and mid-November respectively.

The drybulk vessels achieved revenues of $40 million in the third quarter compared to $15.6 million in the previous quarter.

The reduction is mainly due to the sale of three OBOs during the fourth quarter, partly offset by the delivery of one Handysize drybulk carrier in mid-November 2012.

On the offshore side, charter hire came in at $81.9 million, down from $93.9 million in the previous quarter.

The reduction is due to a scheduled stepdown in the charter rates for the ultra-deepwater drillship, West Polaris, which is on a long-term bareboat charter to Seadrill.

It is important to note that the rate reduction is balanced by reduced interest in debt repayments on the related financing.

We also generated a cash sweep from Frontline of $12.1 million in the quarter, which represents a full cash sweep on the 22 out of the 27 vessels trading in the quarter.

Vessel operating expenses and G&A was in line with the previous quarter and we had income of $2.3 million on financial investments during the fourth quarter, slightly up from the previous quarter.

So overall, this summarizes to an EBITDA of $134.4 million for the quarter, or $1.59 per share.

We then move onto 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 associates and long-term investments and interest income from associates.

If you wish to gain more understanding of our accounts, we also this quarter 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 shipfinance.org.

Overall, for the quarter, we reported total operating revenues according to US GAAP of $77.6 million.

Charter revenues from operating leases were up approximately $2 million compared to the previous quarter, mainly due to the delivery of the two car carriers end of October and mid-November with both commenced five-year time charters to Hyundai Glovis.

Charter revenues from finance leases was slightly down due to the sale of three OBOs during the quarter.

The cash sweep from Frontline had a net positive effect of $12.1 million, or $0.14 per share.

The aggregate cash sweep as per December 31, 2012 was $52.2 million, which is paid to us in March this year.

We also booked a gain of $21.5 million arising from the sale of the three OBOs and one single hull tanker during the quarter.

The number of common shares outstanding increased by 6 million during the quarter in connection with the equity issued in October 2012.

So overall, and according to US GAAP, the Company reported net income of $51.1 million, or $0.60 per share for the quarter.

Moving on to the balance sheet, we showed $61 million of cash at the end of the quarter.

In addition, we had $57 million available for drawdown on the revolving credit facilities.

Available-for-sale securities of $56 million includes $38 million invested in short-term tradable securities as a short-term liquidity placement.

In addition, the second lien notes in Horizon Lines are recorded under available-for-sale securities at $18 million or 40% of par value including accrued interest.

Amount due from related parties includes the final cash sweep of $52 million payable to us in March this year, as stockholder equity stands at over $1 billion, including the $151 million of deferred equity.

The book equity ratio, including deferred equity, was 37% at the end of the quarter.

Then looking at our liquidity and financing statements.

As mentioned, the Company had total available liquidity of $180 million at the end of the quarter, which includes this $1 million cash and $57 million available on the revolving credit lines.

It should be noted that the cash per quarter-end is net of the accelerated fourth-quarter dividend of approximately $33 million, which was paid in December 2012.

We also had $56 million in available-for-sale securities after quarter-end, as previously described.

On the debt side, we had approximately $3 billion of gross interest-bearing debt outstanding at the end of the quarter, of which $1.3 billion is consolidated bank loans and approximately $1.2 billion is bank loans in our subsidiaries accounted for as investments in associates.

In addition, we had approximately $600 million of senior unsecured notes outstanding as per December 31, 2012.

This figure includes the unsecured NOK500 million bonds maturing in 2014, of which $79 million is net outstanding.

The unsecured NOK600 million bonds maturing in 2018, of which $108 million is net outstanding and the $125 million of convertible notes maturing in 2016.

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

The number also includes $248 million net outstanding under our 8.5% Senior Notes maturing in December 2013, which will be refinanced by part of the proceeds from the $350 million convertible notes issued in January 2013.

We have raised more than $1 billion in equity bonds, convertible bond notes and bank debt since October 2012.

In October, we raised an estimated amount of $89 million in the public offering, issuing 6 million new shares.

The equity issue was earmarked for growth and we used part of the proceeds to acquire the two car carriers.

We also successfully placed a five-year senior unsecured bond in the Norwegian market with an 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 and the net proceeds were used to refinance other indebtedness.

Our premium access to the bank market was recently demonstrated through the refinancing of the two car carriers acquired during the fourth quarter of 2012 and the refinancing of the ultra-deepwater drillship, West Polaris.

On the two car carriers, we have several banks competing for the financing, 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 no minimum (inaudible) for the majority of the five-year charter period.

We also entered into a $420 million facility with a refinancing of the ultra-deepwater drillship, West Polaris, in December 2012, which was drawn in January 2013.

There was significant interest from the banks and the facility was substantially oversubscribed.

The two financings demonstrate that, in the banking environment, there are many owners who have no access to attractive bank financing.

The banks focus on their core clients benefiting strong owners like Ship Finance.

The outstanding debt relating to the two remaining ultra-deepwater units matures in the fourth quarter of 2013 and will be refinanced in due course while we, in the meantime, enjoy the benefit of the attractive margin on existing financing.

In January 2013, we issued $350 million of convertible notes due 2018.

The notes had an annual coupon of 3.25% per annum and an initial strike price is just below $22.

The offering was significantly oversubscribed and the offering was upside from the originally targeted amount of $250 million to $350 million.

The net proceeds will be partly used to refinance the remaining $248 million net outstanding on our 8.5% Senior Notes due in December 2013 while the remaining amount is available for new investment.

The convertible notes may be settled in shares at our option at maturity in 2018.

Concurrently, with the convertible notes, we entered into a share lending agreement with one of the underwriters to facilitate hedging arrangements for investors in the convertible notes.

The share lending agreement is for up to approximately 6 million shares, but do not generate any cash proceeds to Ship Finance.

And the shares will be returned to us prior to maturity of the convertible notes.

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

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

As per December 31, we had one remaining drybulk carrier under construction, which is scheduled for delivery in March 2013, plus four container vessels scheduled for delivery from the third quarter 2013 and the first quarter 2014.

All vessels have medium to long-term charters attached.

We have arranged long-term bank financing for all vessels under construction with the remaining total commitments of up to $165 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 pre-delivery financing in order to reduce interest expenses during the construction period.

This means we may have a positive cash effect relating to the newbuilding program in the quarter when we fully utilize available financing.

If you look at the period overall from now until the first quarter 2013, the overall net cash investments compared to available financing is only $26 million.

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

The free cash was $180 million compared to the minimum requirement of $25 million.

This includes the $57 million available on the revolving credit facility.

The working capital was $203 million compared to the requirement of being positive.

And the book equity ratio was 37% compared to a 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 once again worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 36 quarters since the Company was established.

Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market as recently demonstrated on the refinancing of the ultra-deepwater drillship, West Polaris.

So then to summarize, net income for the quarter was $51.1 million, or $0.60 per share.

The total cash refund from clients for 2012 was $52.2 million which is payable to Ship Finance in March.

The aggregate EBITDA was $134 million, or $1.84, $0.59 per share.

The fourth-quarter dividend of $0.39 per share was prepaid in December 2012 and represents a dividend yield of 10% based on the closing share price as of February 22 on an annualized basis.

We have raised more than $1 billion in capital since October 2012 as a combination of equity, bonds, convertible notes and bank financing, reflecting our premium access to the capital market.

We see attractive investment opportunities in several segments and are well-positioned for selective growth.

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

(Operator Instructions).

Fotis Giannokoulis, Morgan Stanley.

Yes, good morning, gentlemen and thank you very much.

I want to ask about the containership sector and what is the situation right now with the four small containership vessels as we know there is a lot of stress in this particular category.

What are your thoughts about employment of these ships or if there are also thoughts of potentially disposing these vessels?

Yes, we have now six smaller container vessels and -- sorry -- seven smaller container vessels and all of them are currently trading.

The market is, as you know, fairly depressed and the rates are in the region, low $6000s to mid-$6,000 per day.

Our strategy will be to continue trading these vessels in the short-term market until rates pick up and we do not have any current plans of disposing these vessels.

Just adding to this question, since you are not planning to dispose, and given that there are a lot of reports of a lot of distressed sales of containerships, have you really seen any of the German banks willing to sell containership vessels and would you consider potentially acquiring these type of vessels at the current very low prices?

This is Ole.

I think if you want to, you can probably acquire as many containerships as you wish from the -- call it from the KG market.

The dilemma is how much debt is associated with the vessels and will you be able over time to service that debt.

We have been -- and at the same time, we are, of course, very mindful of the technological shift we are seeing, eco-designs, where we are seeing a much more pronounced effect in the containership segment compared to many of the other segments.

That is partly due to the fact that the containerships have traditionally been operating at much higher speeds than they are currently trading at and therefore optimized for a different speed pattern and have therefore higher suboptimal consumption figures compared to where they are trading now.

Also, we have seen the effect of the new designs in the 5000 TEU range where vessels previously designed to go through the old Panama Canal, they will be difficult to trade we believe economically after the new canal opens because they have a very high fuel consumption and they need to carry around a lot of ballast water to be stable because they are designed to be very long and relatively narrow compared to a more optimal design if you design that container capacity from scratch.

I would say that we are, of course, looking at the opportunities in all sectors, including also the containership sector.

We have not made any investments there.

We invested in two car carriers, which are also liner vessels as we define them and we will see how that market develops and where we will find investment opportunities.

But, right now, we have not lined up any additional investments in the container space.

We have, of course, the four newbuildings coming for delivery later this year and early next year.

Thank you, Ole, for this answer.

I don't want to ask -- I know that you are not going to respond to what type of vessels you are thinking of getting into, but I would like if you can give us a little bit of a sense of the timing of these investments.

We have seen the last few quarters that you are reducing your fleet with consecutive disposals of Frontline vessels, but at the same time reducing your risk to Frontline.

But given the fact that you have a very significant amount of capital, you have very high availability to acquire vessels.

The concern is how long it is going to take you to deploy this capital given the fact that your Frontline fleet is likely going to continue to decline?

Yes, I think, for us, from a strategy perspective, I mean we are looking at investment opportunities in all the four core segments we are targeting.

Exact timing and details of that, of course, we cannot disclose before we do anything, but I think generally the environment is more attractive now than it has been say for the last 18 months or so.

And you are absolutely correct.

We have been disposing of all the vessels.

Typically, we have been selling off vessels that are sort of 18 to 22 years old at the end of their call it commercial life and we have also generated very nice both book gains relating to these sales of around $40 million just in the fourth quarter and expected this quarter and also the cash proceeds of nearly $70 million in those two periods combined.

We hope, of course, to deploy that capital again efficiently, but kind of fortunately not give you any more specific guiding on when that will take place.

Thank you, Ole.

I have one question for Harald.

You recently refinanced the West Polaris and I also saw in your statement that the debt of the ultra-deepwater -- the deepwater rig was also called as a short-term debt.

Can you explain what is the situation there and if you are in the process of refinancing this debt as well?

You are referring to the two remaining ultra-deepwater units.

No, these were, of course, done in November 2008 and we did a five-year loan, which then matures in November 2013.

The initial amount was $1.4 billion.

We are now down to around $800 million.

Both of vessels are on profitable subcharters.

The West Hercules has a new subcharter to Statoil for four years, which just commenced.

And the West Taurus is still on its initial subcharter to Petrobras.

We are discussing the refinancing there, but we have not started any sort of vindication process yet.

We are, of course, enjoying the nice margin we have on these -- on the existing loans and also based on the huge success of the West Polaris refinancing, we are not concerned about this refinancing.

So is it safe to assume a similar amount to what you got for the West Polaris vessel?

Yes, it will probably be in that region.

Okay, thank you very much for your time.

Herman Hildan, RS Platou Markets.

Good afternoon, guys.

I was just wondering how much of your $1 billion market transactions have you earmarked for growth?

When we raised the equity of $90 million, we communicated that that would be earmarked for growth.

We have invested approximately $25 million of equity in the car carriers.

So there is a chunk there left over.

Also, when we did the convertible loan, we went out with -- and planned to raise $250 million, which was a refinancing of the outstanding amount in the 2013 notes.

As you know, it was a great success.

We had more than $1 billion orders in that loan and we therefore decided to upsized that loan from $250 million to $350 million.

That leaves, of course, $100 million of call it surplus capacity for us.

It is financing at an attractive coupon, but, of course, carries the dilution effect of being a convertible loan.

But we still feel that it is attractive for us if we can deploy that capital in an efficient manner.

We have also sold vessels in the fourth quarter and so far in the first quarter.

These are Frontline-related vessels generating very significant net cash amounts to us of approximately $70 million in total.

So between that, those amounts, there is clearly a good investment capacity.

I will not sort of be specific on exact amounts and how we will allocate that capital between the sectors, but I think we have a good standing for investing new capital and at the same time, of course, have a conservative profile on our remaining debt, and particularly relating to the Frontline vessels where there have been some increased attention lately, particularly after Frontline reported numbers on Friday.

Okay.

And also, I mean we saw that you got to about 20% return on equity to (inaudible) for five years.

Is this representative or should we assume a more conservative 15% return on equity for further growth?

What is your hurdle rate basically?

Well, call it the equity return will vary from segment to segment as a consequence of several factors.

It can have something to do with who the counterpart is, call it the security of the cash flow.

It has to do with where you invest and of course, if we acquire vessels where there are no purchase options, you will have to make certain assumptions for the residual value after the end of the chartering period.

Typically, when we have invested capital, we have invested the capital with returns between, I would say, on equity, between 13% and 22%, 23%.

Hopefully, we will have very nice equity returns also on new additional deals, but will caution you to sort of go out with call it specific percentages because there are always a lot of assumptions that will have to go into such returns, not least, as I mentioned, the residual value assumption.

Yes, obviously.

I mean it is more for call it getting a feel of how much you could potentially raise dividends with time and we have seen in the past that you raised dividends with growth.

I mean if you add up the numbers that you refer to, you should have at least $[150] million, which means that you could raise dividends by say 40%, 50% -- $0.40, $0.50.

Could you elaborate a bit, develop the communication with the Board in terms of the intention to increase dividends with growth or how should we think about that going forward?

Well, the Board has always been cautious with respect to guiding on dividends and the Board sets the dividends on a quarter-by-quarter basis.

We do, of course, hope that new investments will enable us to increase distribution capacity, but I can unfortunately not guide you with any specifics on how -- when and how that will take place.

But, of course, if you look at the Company and the business model, our business model is to build the Company and hopefully then with building the Company, we can also make that meaningful for investors by also potentially increasing dividends over time.

The Board, when you look at how the Board decides on dividends, the only guiding I can give is that the Board does not necessarily only look at the current quarter when they set a dividend.

I think they take a more long-term view and what they believe is a more long-term sustainable distribution level when they set the dividend.

Therefore, we can see -- and for instance, when -- in the past, when we had very significant profit splits from Frontline, we saw the dividend being relatively stable even though we got very high call it cash payments and part of those cash payments were then used to reinvest and continue building the Company in a more long-term stable fashion.

Okay, thank you.

And just finally, you had a comment where you said the environment is more attractive now than over the last 18 months.

I presume that you are referring to deal flow or could you elaborate a bit on that?

Well, we see the attractiveness both in terms of increased deal flow.

We see banks now putting more pressure on what we call weaker owners to do something on the asset side where we believe there could be attractive opportunities and we also see shipyards now quoting prices that are what we would say in modern time at all-time low levels, particularly if you adjust for inflation.

So from that perspective and the influence newbuilding prices have on secondhand values, we believe timing is interesting now, particularly if you have a view on inflation in the main vessel-producing countries such as Korea and China.

Okay.

So you are not worried that you won't be able to deploy your $350 million over the next 12 months?

No, I am not concerned over our ability to do that.

We could do that extremely quickly, but I think we take a cautious approach.

We try to make the right investments.

Of course, we will not know that until afterwards, but we hope that we, over time, can show that we make good long-term investments that will build on the distribution capacity.

Okay, thank you very much.

(Operator Instructions).

There are no more questions, gentlemen.

Thank you.

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

That will conclude today's conference call, ladies and gentlemen.

Thank you for your participation.

You may now disconnect.