SFL Corporation Ltd (SFL) 2014 Q4 法說會逐字稿

Thank you and welcome, everyone, to Ship Finance International and our fourth-quarter conference call. With me here today I also have our CFO, Harald Gurvin.

Before we begin our presentation I would like to note that this conference call will contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations, and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include conditions in the shipping, offshore, and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

The Board has declared an increased dividend of $0.42 per share, up from the $0.41 per share dividend in the previous quarter. The dividend represents $1.68 per share on an annualized basis, or 11% dividend yield based on closing price yesterday. The Company has now paid in aggregate more than $18.00 per share since 2004.

Reported net income for the quarter was $25 million or $0.27 per share. But if you adjust for nonrecurring and non-cash items, the adjusted net income was approximately $0.39 per share.

Aggregate charter revenues recorded in the quarter, including 100%-owned subsidiaries accounted for as investment in associate, was $169 million. The EBITDA equivalent cash flow in the third quarter was approximately $149 million; and last 12 months the EBITDA equivalent has been approximately $553 million, a 16% decrease year-over-year.

In the fourth quarter and including all 100%-owned assets, just over 50% of our charter revenues came from the offshore segment, around 30% from tankers, and the remaining 20% split between our drybulk and container assets. This includes cash sweep and profit split contribution.

After the recent sale of the West Polaris and scheduled reduction in bareboat rate on West Taurus from late first quarter, the relative share from offshore will go down, while the liner segment's share will increase when we now have full cash effect from the new 8,700-TEU container vessels from the second quarter onwards. And we have significant capital available for new accretive investments.

All of the 8,700-TEU container vessels are now in service and have commenced their long-term time charters. There was some off-hire relating to one of the vessels in the fourth quarter due to repairs following an incident during docking at the port in Asia, but very limited impact on net cash flow in the quarter. The EBITDA contributions from the vessels is estimated at approximately $46 million per year, on average, during the charter period to Hamburg-Sued, giving us a very good return on our invested capital.

The tanker market improved from the third quarter, and the cash sweep increased to $11.3 million from $7.9 million last quarter. Aggregate cash sweep for the year was nearly $33 million, and this is payable in March. The market has remained strong into the first quarter, and there are good prospects for a cash sweep contribution also in the first quarter.

We also have exposure to the crude oil market through our two modern Suezmax tankers operated in a pool with sister vessels owned by Frontline 2012. The average TCE equivalent for the third quarter was approximately $32,400 per trading day in the fourth quarter, up from approximately $20,900 per day time charter equivalent in the third quarter.

In the fourth quarter, one of these Suezmaxes had a month in connection with a scheduled special survey and a major upgrade to improve fuel economy and thereby increasing earnings potential going forward. This has included modifications to the engine, propeller, and hull elements; and preliminary test results are promising. The vessel is now back in service, and the second vessel is due for a similar modification starting in late March.

In December, Seadrill exercised an option to acquire the deepwater drillship West Polaris, and we received $111 million in cash proceeds subsequent to quarter end, strengthening our liquidity position. We booked a profit of $6 million in connection with the transaction, and the intention is to reinvest the capital received in new accretive projects. The next purchase options for deepwater rigs are in late 2016.

In the first quarter, we have disposed of five feeder-size container vessels. These were the vessels originally acquired in 2006 and chartered to Horizon Lines, but the deal was restructured in 2012 when Horizon Lines had problems paying the charter hire.

We did originally not guarantee any of the financial obligations relating to these vessels. But as part of the deal in 2012, we agreed to charter the vessels in the market for a period and provided a $25 million charter backstop guarantee to the financing institutions. In exchange, we received $40 million in second-lien notes at the time in Horizon Lines and 9.25 million warrants in the Company.

In November Matson announced the acquisition of Horizon Lines, where Matson will pay $0.72 per share and assume all obligation in Horizon Lines, only subject to regulatory approval of a sale of Horizon Lines' Hawaii assets to The Pasha Group. This approval is still pending.

But if it does go through, the aggregate value of bonds and warrants will be close to $7 million after the bonds have accumulated, with a payment-in-kind structure from 2012. We have so far conservatively recorded the notes in Horizon Lines at 40% of par value. But there could of course be significantly more value there.

Relating to the five vessels, the guarantee was effectively exhausted in early 2015. And following a discussion with the financing institutions in there we agreed to deliver the vessels back to these financing institutions, which also will mean that we are reducing effectively a lossmaking charter structure, where these vessels have negatively contributed approximately $5 million per quarter for us in 2014. We did record a book impairment in the fourth quarter of $11.8 million relating to the disposal of these five vessels, and this is mainly linked to reversal of interest rate swaps, when we know now that we already have redelivered these vessels to the new owners.

Most of our vessels are chartered out on a long-term basis, and we still have more than nine years weighted average charter coverage. Full details on a vessel-by-vessel basis is available by contacting us on email at IR@shipfinance.no.

We have nearly $4 billion of fixed rate order backlog, and the estimated EBITDA equivalent backlog is approximately $3.4 billion or around $36 per share. These numbers include only the reduced base rates from the Frontline vessels and do not include the cash flows from the two Suezmax vessels operated in the spot market, nor do they include revenues from our other vessels after the end of their current charters.

We now have a total of 15 customers across our four market segments. And with the exception of the jackup rig West Linus, we have not done any long-term charter deals with the related companies for more than six years.

As there has been a lot of focus on the offshore sector recently, in light of the reduction in oil price and a softening charter market for drilling rigs and offshore assets, we think it's worthwhile to take a quick look at our offshore assets and counterparties. In 2008 we acquired three ultra-deepwater drilling assets from Seadrill at a cost price of more than $2.5 billion. $2.1 billion was financed in the bank market; and these deals were all on the back of strong subcharters for the rigs and restructured it with front-heavy charter payments.

We have now amortized more than 60% of the loans, and Seadrill is currently enjoying significantly lower charter rates on the rigs compared to where we started. When West Taurus comes off its initial six-year charter to Petrobras in April, the average bareboat charter rate for the two deepwater units we have remaining to Seadrill is approximately $160,000 per day. One of the rigs still have subcharters of $500,000 per day for another two years.

In May last year, the harsh environment jackup drilling rig West Linus commenced its five-year subcharter to ConocoPhillips at a rate of $377,000 per day. Utilization has been very high for a newbuild drilling rig, and there is no termination right for ConocoPhillips in that charter as long as the rig performs on the charter. Seadrill has now replaced North Atlantic Drilling as charter guarantor for the rig.

As for the other Seadrill charters, our charter rate has accelerated the first five years, enabled us to amortize the debt from $475 million originally last year to $237.5 million over the five-year subcharter period. Thereafter, we will still have 10 years remaining charter to Seadrill, but then at a significantly lower rate, giving Seadrill a comfortably lower breakeven rate including OpEx. Seadrill has purchase options at certain intervals for this rig, first time in 2019.

We also have a jackup drilling rig on charter to Indonesia-based Apexindo. This is a standard 375-foot jackup drilling rig built 2007 in Singapore.

Our chartering counterparty is a Dutch subsidiary of Apexindo, but fully guaranteed by the parent; and the rig is operating in Indonesia, where it has been working on subcharters to Total since it was new. The current subcharter runs to third-quarter 2015.

We have more than three years remaining on the charter to Apexindo, and the cash flow is very strong with only limited financing attached. Apexindo has a purchase option in February 2018 at $70 million, where we also are entitled to a 25% profit split if the market value is higher at the time.

I just wanted to comment that the broker value was nearly $180 million at the end of the fourth quarter, but due to the weak market outlook for jackup drilling rig we expect negative pressure in valuation. But there is still a very significant difference between the broker valuations we see currently and where the purchase option price is three years down the road. Apexindo is listed in Jakarta with a market cap of approximately $700 million.

In addition, we have six anchor handlers and platform supply vessels to Deep Sea Supply. These were deals we did back in 2007, so we are now well into that charter duration and we only have approximately five-year remaining charter.

Four of these vessels are operated in Brazilian waters -- two vessels until late 2015, and two vessels into the first quarter of 2016 -- while two of these units are operated in the spot market. We have a full Deep Sea Supply guarantee for these charters. And Deep Sea Supply is listed on Oslo Stock Exchange with a market capitalization of approximately $140 million.

Frontline continues to perform on its obligation, and as we have mentioned before we have the interesting combination of a very low financial leverage, well below current scrap levels, and significant leverage to the market through the cash sweep arrangement with Frontline. We have amortized down the debt on these vessels very quickly and have reduced the loan amounts to nearly zero, as illustrated by the red line in the graph.

With this low leverage there is no net loan amortization required. And even with the scratch base rates from Frontline there is a significant free cash flow from the vessels. The threshold level for the cash sweep kicks in already at $17,675 for most of the VLCCs, and $13,200 per day for the Suezmaxes, and is capped at $6,500 per day per vessel in 2015.

This year will be the last year with a cash sweep structure. After we agreed to the cash sweep structure in 2012, it has given us a very significant additional cash flow over and above the base charter rates with Frontline.

Frontline enjoys a strong market currently and have commented in their release today that they are comfortable with their ability to repay or refinance their convertible loan when due in April this year. They raised significant new capital over the last quarters and have stated to the market that their target is to rebuild Frontline into being a leading tanker company, which is encouraging.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associate, the EBITDA -- which we define as charter hire plus profit share less operating expenses and general administrative expenses -- was more than $550 million in the period.

Net interest was $121 million or approximately $1.30 per share. Our normalized ordinary debt installments relating to the Company's projects was around $200 million. This is excluding prepayments relating to sale of other assets and without net amortization of Frontline vessels, given the very low leverage of these vessels, after significant prepayments of debt earlier.

In the corresponding period, we have declared dividends of $1.65 per share or approximately $154 million in aggregate. This is in line with our historic payout ratio of approximately 75% since 2004.

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 have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter. 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, total charter revenues before profit split and cash sweep were $162.6 million or $1.74 per share, in line with the previous quarter. Revenues from VLCCs was slightly down in the quarter due to the sale of three older VLCCs; while revenues from Suezmaxes were up due to the stronger earnings on the two Suezmaxes trading in the spot market, one of which was out of service for 29 days during the quarter in connection with a special survey and major upgrade to improve earnings efficiency.

Revenues for liners were up in the quarter due to delivery of the two first 8,700-TEU container newbuildings in end September and beginning of November 2014. Liner revenues are expected to increase further going forward, following delivery of the two remaining container newbuildings in January 2015, which will have a full cash flow effect in the second quarter.

Revenues from drybulk were also up in the quarter, mainly due to a full quarter of earnings for the two Kamsarmax drybulk carriers acquired in the third quarter. The decrease in offshore revenues is due to a scheduled stepdown in rates for West Hercules in November, which will reduce revenues by approximately $6 million per quarter going forward.

West Taurus will have a scheduled stepdown in the rate in the first quarter of 2015, which will reduce revenues by approximately $16 million per quarter going forward. It is important to note that the scheduled rate reductions are balanced by reduced interest and debt repayment on related financings; so the net effect on the distribution capacity is neutral.

The sale of West Polaris at year-end will reduce offshore revenues by approximately $16 million per quarter going forward, although the reduction in distribution capacity will only be approximately $3 million per quarter. The intention is to invest the $111 million sales proceeds from West Polaris in new accretive projects.

Vessel operating expenses and G&A were $28.6 million compared to $26.7 million in the previous quarter, mainly due to the addition of the two drybulk carriers and two container vessels in the third and fourth quarters. We recorded a cash sweep of $11.3 million from Frontline in the fourth quarter, up from $7.9 million in the third quarter, and also a profit share of approximately $150,000 relating to four Handysize drybulk carriers, in line with the previous quarter.

Overall this summarizes to an EBITDA of $149 million for the quarter or $1.59 per share, up from $146 million in the previous quarter.

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 book operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associate and long-term investments, and interest income from associates.

If you wish to gain more understanding of our accounts, we will also this quarter publish a separate webcast which explains the finance lease accounting and investment in associates in more details. This webcast can be viewed on our website, ShipFinance.org.

Overall for the quarter, we report total operating revenues according to US GAAP of $88.7 million, which includes $11.3 million in cash sweep from Frontline. We recorded a gain of $3.8 million in the quarter, which includes a gain of $5.2 million relating to a settlement for the early redelivery of four Handysize drybulk carriers in 2012 and a book loss of $1.4 million on the sale of three older VLCCs.

Total operating expenses were $63.2 million, including an impairment of $11.8 million relating to the divestment of five 2,800-TEU container vessels in the first quarter of 2015, given net operating income of $29.5 million.

We recorded a negative mark-to-market of interest rate swaps of $8.4 million in the quarter, of which $6.3 million is non-cash, and also a gain of $6.1 million on the sale of the shares in West Polaris.

Overall and according to US GAAP, the Company reported net income of $25 million or $0.27 per share for the quarter. Adjusted for one-off and non-cash items, the net income was $36 million or $0.39 per share.

Moving on to the balance sheet, we showed $51 million of consolidated cash at the end of the quarter. In addition, we had approximately $162 million freely available for drawdown under revolving facilities.

Available-for-sale securities of $74 million include $50 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 only $24 million or 40% of par value including accrued interest.

Amounts due from related parties on the current assets includes the proceeds of $111 million on the sale of West Polaris, which were received in January, and the $32.7 million in cash sweep from Frontline receivable in March this year. The $119 million amortizing Frontline notes are included in amounts due from related parties under current and long-term assets. The notes are conservatively recorded on our balance sheet at 73% of par value on average at quarter end.

On the debt side we had approximately $1.7 billion of consolidated interest-bearing debt outstanding at quarter end. In addition, our 100%-owned subsidiaries, accounted for as investment in associate, had $1 billion in bank loans at quarter end, down from $1.4 billion in the previous quarter, following the sale of West Polaris. The debt in these subsidiaries is not included in the consolidated account.

Stockholders equity was approximately $1.24 billion, including $87 million of deferred equity. The book equity ratio including deferred equity was 39.6% at the end of the quarter.

Then looking at the liquidity and remaining CapEx, as mentioned the Company had total available liquidity of approximately $213 million at the end of the quarter, which includes $51 million in cash and approximately $162 million freely available on the revolving credit line. The available liquidity excludes the cash proceeds of $111 million received in January 2015 on the sale of West Polaris. We also had $74 million in available-for-sale securities at quarter end, as previously described.

On the CapEx side, two of the four state-of-the-art 8,700-TEU container vessels were still under construction at quarter end, both of which were delivered in January 2015 and immediately commenced their seven-year charters to Hamburg-Sued container line. The financing amount was higher than the remaining installments payable to the yard; and the total positive cash effect to Ship Finance upon delivery of the two vessels was approximately $43 million.

We are comfortably in compliance with all financial covenants under our loan agreements at quarter end, and we have very limited refinancing requirements over the next years. It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 44 quarters since the Company was established.

Given the financial turmoil and the depressed shipping markets over the last years, this gives us a very strong standing in the banking market, and we have recently secured new financing with both existing banks and new banks. We continue achieving excellent financing terms and have seen a significant reduction in loan margins over the last year, improving the cash flow from our projects.

Then to summarize. The Board has declared an increased quarterly cash dividend of $0.42 per share for the quarter. This represents a dividend yield of 11% based on the closing price of the shares as of February 25. Net income for the quarter was $25 million or $0.27 per share, while net income adjusted for one-off and non-cash items was $36 million or $0.39 per share. The aggregate EBITDA was $149 million or $1.59 per share.

We took successful delivery of the two remaining container newbuildings in January 2015, which immediately commenced their seven-year charters to Hamburg-Sued container line. We see investment opportunity in multiple segments and have capital available for new investments.

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

(Operator Instructions) Herman Hildan, Clarksons Platou Securities.

Good afternoon, gentlemen. My first question, I mean you briefly touched upon your market exposure; obviously, offshore is looking a bit like shipping a few years back. And your comment on there was business where NAD was replaced as a guarantor for Seadrill. Can you give some more color on that, why you did that? And if that really -- I mean obviously, if you looked at numbers reported this morning by the companies, it seems like Seadrill is a better counterpart.

That was really a request from Seadrill and North Atlantic, where they requested that Seadrill would step in as the charter guarantor. I understand they have also done this on the different loans they have in the North Atlantic Drilling. Of course, we also see it as a strengthening of the credit, as Seadrill is a more substantial counterpart than North Atlantic Drilling. So we (multiple speakers)

Yes, obviously that makes a lot of sense. Also, recently we've seen some contract terminations by Petrobras and Saudi Aramco, Pemex, etc. Have you been approached by any of your counterparties to discuss the charter terms for your offshore exposure?

No, we have not. I mean, of course we are in continuous dialog with the different charters. But we have not received any requests to amend a charter rate or terms for any of the assets in the offshore space.

And in light of what's happening in the offshore space, obviously it should be creating a lot of growth opportunities. But if I caught your comment right from the report, it sounds like your focus near-term is more on the shipping side in terms of growth rather than on the offshore side. Could you give some more color on that as well, and also if there is any change in terms whether you see that the yield potential has increased or growth in light of the challenges that the market is facing?

Yes, absolutely. We are -- as you know, we have a significant portfolio of offshore assets, but right now we are focusing more on the other segments. I would say particularly container is interesting now; we are also looking at tanker opportunities and actually also bulker, despite the bulker market being relatively weak. Our mindset is that when we are high up in a cycle, we will structure a deal very differently than if we feel that we are low in the cycle, where there could be more upside opportunities.

With respect to the offshore segment specifically, I think a lot of opportunities could present itself there. But it's a bit early for us. We think that there will still be a lot of noise in that market, and I think there is no rush to go out and do deals there in what we see, at least currently, as a market that still hasn't -- what do you say? -- that is still in a downward declining curve.

So we are, therefore, a bit careful in that segment. But of course we look at opportunities.

I would think generally if you look at the competitive landscape, what we've seen over the last, I would say, at least over the last six months is that some of the players who were very active up until half a year ago or so are not there anymore. This is particularly the bond market, which to a certain degree was a competitor for us in some segments, particularly when you looked at companies who looked at doing sale-leaseback deals as a more cost-of-capital arbitrage.

So with the bond market effectively more or less closed for shipping companies and also many of the, what can we say, the hot money funded by hedge fund and maybe it's a private equity, a lot of it US-based, that inflow of capital into the segment has slowed down. Which also, what can we say, creates more opportunities for us, because then hopefully we can get better returns on the deal we look at.

So we are screening a lot of deal opportunities, but we try as always to invest carefully and not rush into things. And that's also why we don't quantify how much we will invest from quarter to quarter.

But it's pretty clear we have a very significant investment capacity. We had more than $200 million available year-end. We received the proceeds from the Polaris right after year-end, so more than $100 million in there.

When we took delivery of the two container vessels we got another positive liquidity of $30-something-million. We expect to have cash sweep from Frontline very soon of more than $30 million. So it all adds up.

So for the time being, we are, what you say, reducing drawn amounts and revolving credits, etc., to reduce the negative carry. But we have investment capacity, but we try to invest carefully and hopefully with deals that will perform in the long run.

To my second question, in terms of, call it, deal yields, do you see pricing on potential deals going up or, call it, returns going up as result of what's happening? Or do you still see the same returns?

No, we see deals -- I would say as a consequence of both the bond market being virtually dead for the shipping and offshore space currently, and with some of the capital that came in, and we're very actively investing in the shipping space some time ago, that contributed to bring down the yields in the segment. We now see the opposite effect, where we see better yields. Or I would say you get more bang for the bucks.

So -- because a yield is only one part of the equation. You have to match that with implied risk in the deal. And not least, when you look at project returns, the easiest way to cheat on returns is to be overoptimistic on the residual value.

So we try to be careful there as well and hopefully invest wise over the cycles. But we have a very cyclical view, and we try to put money to work when we see more upside than downside, both in residuals, but also in terms of counterpart risk.

Yes, that sounds like a good strategy. A final question also. There's has been some talk about the lenders, traditional lenders being more muted. Do you see any signs of that from where you stand?

For us I would say it's the opposite. We have new banks approaching us.

I think it's a twofold. If you come with a standalone-type project, you will probably have a challenge sourcing capital. But Ship Finance now with its 11-year history, excellent performance in the banking market, went through, call it, the perfect storm -- in 2009 in the financial markets; the, call it, the sharp downturn in the tanker market 2011 -- without any issues on the banking side means that banks trust us. So if anything, we see margins coming down and bank appetite go up at the moment.

Okay. Thank you very much for that.

Fotis Giannakoulis, Morgan Stanley.

Yes, hi, Ole. I want to ask about the opportunities to deploy capital. You mentioned about the containerships. You have over $200 million of capital of liquidity right now; part of it is the equity that was released from the sale of a drillship.

What are these opportunities? What kind of deals in the containership space are you looking?

Today we saw the announcement of a potential acquisition from Navios Partners, a long-term transaction. Can you give us a little bit more color?

Absolutely. I would say in the container space our main focus is on the bigger containerships, 9,000-plus container ships, and preferably assets built now. Because there's been a technology change in the container space; and for the container lines who, what can you say, structurally is very similar to the airline industry, it's all about the slot cost, as cost per produced seat for airlines.

So that's why the focus is on the newer, bigger units where they have economy of scale. So you have a lot of focus on the 18,000- to 20,000-TEU type vessels, 40-meter length, 59-meter beam; but you also have focus the 9,000 to 11,000, which is basically 4-meter beam but 300- or 330-meter length, but relatively similar type of vessels.

Everything below 9,000, typically the liner companies communicate that they see a lot of volume in the, what can we say, and availability in the short-term charter market and therefore are not so focused on -- or they don't see the requirement to lock, to do long-term charters, to do those kind of deals.

But of course, we are opportunistic. Last year we acquired nine containerships out of the German market. These were containerships acquired at a very high price.

The KGs who owned them went into insolvency. We picked them up, some of the vessels we bought, practically at scrap value; and then we charter them out for five to six years.

We have a structure where, if they are only worth scrap value at the end of the charter, it's a great deal for us. And if there is more in the residual there, it's a phenomenal deal.

So it's all about being, what can you say, we focus on the bigger vessels; but of course, we wouldn't close our eyes on opportunities for other vessels if the economics are good. But I think we are very careful with the residual value assumptions for containerships, because of the technological change that has taken place in that segment, which is, what can you say, more profound in that segment compared to many other segments.

Okay. Can you give us an idea of what kind of deals -- as we mentioned, the vessel after the charter, especially after the long-term charter runs the risk of becoming obsolete. So I assume as we said, you want to amortize the investment.

But after this amortization of the debt or your investment, what kind of cash-on-cash yield are you expecting from these deals? And how does this yield compare with a cash flow that was generated by the West Polaris that was recently sold?

Yes, I would think -- without being too specific, because it's all from deal-to-deal related; it has to do with the counterparty and the risk assessment and quantification we do when we do the deal. Some counterparties are easier to source finance for at very attractive terms, and others you have to structure the capital differently. So it's a bit of comparing apples and pears.

But I would just note that on the West Polaris, the rig that we -- that was where Seadrill acquired their purchase option, that was the rig where we probably had the lowest cash yield, if you know, on a [laddered] basis among those rigs. So I'm very confident that we will be able to invest the capital there at a higher yield than we had for the West Polaris.

But I'm hesitant to be too specific because it's all down to trying to do the right deals. And of course, we are greedy and we try to grab as much as we can, and hopefully over time that will build the distribution capacity further.

Thank you. One more about the other two sectors that you briefly touched earlier at your presentation. You said that you might be looking at acquisitions even for drybulker or tankers. These are two sectors that they are mainly spot-oriented, and we haven't seen so many long-term charters like the ones that you have in your current fleet.

How would you approach these kind of acquisitions? And given the different state of these two different markets -- the drybulk is really suffering right now; the tanker market is performing very well -- where do you think there are more opportunities between these two sectors?

You're absolutely correct. Both are very volatile segments, as we've seen over the last few years. So in both those segments it's very important to deal with the right counterparties.

What we've seen, if you look at it more structurally, we've seen that particularly in the drybulk segment we have seen more counterparty issues, if you look at it over time. In the segment as a whole there are more counterparty issues on the dry side then there is on the tanker side.

Maybe that has to do with the relatively lower threshold to become a player in the drybulk segment, where you basically only need to buy a vessel and you can go out and charter it in the market. On the tanker side, you have vetting and you have your more, call it, system requirements to trade the vessels. And also the value of the cargo relative to, call it, the transportation cost is much, much higher on the tanker side even after the drop in oil price than it is for -- on the drybulk side.

So we have seen very few counterparty defaults even in weak markets on the tanker side compared to the dry side. But of course, we could look at the dry side if we have the right counterparty.

But then of course we have to be careful so we deal with the people we believe can withstand of the volatility in the market. Because we have to face it: when we charter out any vessel or rig for a long-term charter, be it a five, 10, or even longer charter, we have to assume that our counterparty and the market they are in will go through several cycles in that period. So we just have to be careful so we deal with the companies who can manage that and have the strength and the resources to also pull through the low ends of those cycles.

And of course, in the dry side now we've seen values coming down, which makes it maybe interesting too from a value perspective to invest and maybe do shorter charters, compared to doing very long charters, because there could be more upside in the residual value from where we are.

So practically that means that you are also looking for deals with charters? It's not that you might be tempted in buying some very cheap drybulk vessels given the current turmoil?

Well, our business model is not to charter vessels on short-term basis. We have some Handysize bulkers who have been redelivered from the charters that we are employing in the short-term market, simply because we feel that it's too early to lock them in on long-term charters. We want to wait until the market hopefully recovers.

But that said, we have in the past acquired vessels and then fixed long-term charters on these assets afterwards, and sometimes with very great success. One example was the 9,000-TEU containerships, or 8,700-TEU to be precise, that we ordered in 2013 and that we later chartered out to Hamburg-Sued and will generate a very nice return for us.

So we are -- if you look at it on a portfolio perspective, most of our assets are in long-term charters and then we have a small percentage that we are employing in the shorter-term market. And also from time to time we do invest selectively, but again on a very small scale, in assets where we think there are opportunities to fix longer-term charters when markets come up.

Thank you very much, Ole.

Marcelo Brisac, Armory Investments.

Hi, good afternoon. I have a few questions about West Polaris. I hope I'm not making you guys repeat yourself. I know you gave me a lot of numbers; I tried to keep up with them all but maybe I missed something. So I apologize if I'm asking just to repeat some information.

Just to start, you mentioned that the impact of the sale would be $16 million per quarter in terms of revenue, but only $3 million per quarter in terms of distribution impact. When you say distribution, are you talking about net income or cash flow?

That's the net cash flow.

Net cash flow? Okay.

Based on the financing that was in place at the time of the sale.

Okay. So really, West Polaris was generating like $12 million per year in cash flow, and you'll receive nearly $111 million for that. Seadrill is buying it at a less than 10% return on equity, I guess, right?

No, but it's really -- we own the asset and we have the financing, and they bought a subsidiary including the financing. So the deal was really structured back in 2008, and then we had arranged a new financing in 2013, which gave us some additional liquidity then.

But it's really -- of the three rigs, this was the one that had the worst net cash flow per quarter.

Less than 10% seems pretty low. Just in terms -- you also sold -- so you're not going to take any debt out of your balance sheet, because it was all within the subsidiary, right? That was not consolidated, right?

Yes, that was in the investment in associates, so that was not in our consolidated debt.

Okay; so that's not coming out of the balance sheet. You said you're going to still guarantee part of the debt. I assume that's going to remain off-balance-sheet.

But how big is the guarantee you are going to be giving to debt?

Well, it was $94 million at the time when the deal was done in December. But end of January it came down to $88 million, which is -- we reduce it by $6 million per annum. But of course, we have a full indemnity from Seadrill in case there are any calls under this guaranty.

Okay. Thank you very much.

John Reardon, Merriman Capital.

Hi. Good morning, Ole, and thanks for taking my questions. Just an observation. It's kind of funny. A couple years ago the big fear as far as Ship Finance goes was the Frontline situation; now Frontline is good. And back then the drilling-related, that was the good stuff; now that's where the big fear is.

It sounds to me like you've got the situation well in hand. But getting back to Frontline, I see the claw-back is going to pay you a rather significant amount of money coming up in a couple of weeks. I was wondering if you could share with us what your plans might be for that.

Could we be looking at just putting it up on the shelf for future use, or perhaps a special one-time dividend, or maybe repurchase some stock, which seems to be at pretty depressed levels relative to your earnings, EBITDA, and dividend? Anyway, just some thoughts.

Yes, thank you. You are correct, there is around $33 million Frontline will repay us in a couple of weeks. Historically, when we have received profits paid in cash sweeps we have not paid that out as a special dividend; it's all gone into, what can we say, our balance sheet and with our ambition to reinvest.

So our ambition is to reinvest that capital. But it's of course difficult to earmark it to something very specific, so I can't really comment more than it will continue.

It will strengthen our balance sheet and investment capacity, and I think actually right now it's probably a good time to have investment capacity. Because for a lot of shipping companies, you cannot really access the equity market; that's difficult to access for many shipping companies.

And also with the bond market not being very active -- particularly the Scandinavian bond market is virtually dead, where several companies have come and raised capital -- it means that there is a more interesting playing field for us. So hopefully we will be able to reinvest it at an accretive rate, and hopefully we will also be able to continue increasing the distribution going forward.

Just as one follow-up, the German banks have been playing extend-and-pretend with some of their shipping-related loans, mainly in the container area. I was wondering, now that their regulators seem to be putting a little pressure on them to clean up their balance sheets, are you seeing any opportunities coming from some of the German banking paper in the shipping world?

Well, frankly, I was totally wrong back in 2009 when I thought there would be a lot of opportunities coming out of the German market. Because it was so obvious, as you point out, that there was a mismatch between leverage on some of those projects and, call it, underlying values. Unfortunately, I was wrong. It hasn't been a big value coming out of the German market.

But last year we picked up nine container ships: seven 4,100-TEU containerships and two 5,800-TEU containerships, which was basically out of structures like that, where we turned around and fixed them out. We got them at a very low price and it's a very nice deal for us. But again from a total investment perspective, when you look at our $4 billion capital base, it's a small piece.

There've been a lot of initiatives out there where they have a lot of, call it, very creative structures really designed to ensure that the banks won't have to take a hit. But that's the issue when you have a strong balance sheet: who's going to pick up the bill in the end?

So we are -- we try to invest carefully. We try to do deals that are not only giving a strong yield the first one or two or three years, but will give a good return over time. I think also having a large shareholder in Mr. John Fredriksen, who is known as a very -- who was the world's biggest dealmaker in shipping perhaps over the years, I would say that he is -- that is really the main focus when we have discussions with him. It's all about counterparty risk and it's all about residuals.

So we try to invest conservatively and we try to get a decent return. Good risk-adjusted return on our investment is probably the best way to phrase it.

Great. Thank you very much for your time.

Ceki Medina, Southpaw Asset Management.

Good morning, guys. Congratulations on the good results. First, on Horizon Lines, I heard you mention profit of $7 million; I'm calculating $47 million. Maybe I misheard, so I just wanted to make sure that's the right number.

Yes, we haven't quantified anything relating to -- you mean the notes and the warrants?

Correct.

Yes, yes. No, I think I said that there is -- depending on the time when the deal closes; and this is pending regulatory approval of a sale of the Hawaii assets in Horizon Lines. But depending on when it closes, the aggregate value of the notes and the warrants -- the price for the warrants will be $0.72 per share -- will be in the region of close to $70 million, we believe. High $60 million, close to $70 million, yes.

Exactly, so I was --

We have recorded them, these notes, at only 40% of face value. So yes, hopefully there should be a good value there.

Right. I was going to mention the $70 million coming in, in addition to the many items you counted with respect to the cash balance you have. So I'm wondering how you are investing the cash in the meanwhile before you use it for an actual investment.

You mentioned first-lien loans. There is a -- the dividend drag, if you will, on the equity is 11%; and so I was wondering how you are making use of the cash as you sit on it.

Yes, yes. I think the main way we have managed liquidity is to reduce drawn amounts on typically revolving credits, because that's where we see a better, call it, use of the cash if we have ambitions to invest it. We have also invested; but that's a relatively small amount, also some in some bonds, typically first-lien type bonds. But again, on a relatively small scale.

We have tried to avoid having a lot of cash sitting on the balance sheet because, as we know, the interest rates on your cash bank account is relatively low, as we see it now.

Yes. Okay. Two more quick questions. What is the amortization schedule of the Frontline bonds? You have a decent balance there as well, I see.

And the second one is, the dayrates on the Suezmaxes for the fourth quarter, you mentioned low $30,000s and I'm seeing from Frontline theirs got $43,000. Can you explain the difference?

Well, the vessels -- first of all, one of our vessels was drydocked in the fourth quarter, which means that you have also positioning and repositioning voyages in and out of the drydock. It was out to drydock for a month.

But if you look at -- but we have our two Suezmaxes in a pool with two Suezmaxes owned by Frontline 2012. But in addition Frontline 2012 also has some vessels on charter. So it's really -- I cannot really comment much on Frontline; you really have to ask them about exact details of those subcharters.

But we only look at the actuals that we bring in. Also, when we talk about this, we talk about this on a time charter equivalent basis, so we don't include -- so the gross charter rate is of course significantly higher, but we have to deduct voyage expenses including bunkers, etc. So we are talking about the net number.

Got it. The amortization schedule of the Frontline bonds on a year-by-year basis maybe? So in 2015, how much and maybe 2016, how much of those are going to amortize?

The way they are structured is that the payments will follow the old charters, with a reduced payment in 2015 and then increasing going out. If you look at 2015, the amortization is around $2 million per quarter, increasing slightly in the fourth quarter. And then going forward into 2016, it's around $4 million per quarter in total amortization.

Got it. Okay, thank you.

That's just amortization and then of course you earn interest on this also.

Sure.

The payments from Frontline are higher, of course.

(Operator Instructions) George Berman, J.P. Turner & Company. (Operator Instructions) It appears that he has stepped away. There are no further questions in the phone queue at this time.

Okay, then I would like to thank everyone for participating in our fourth-quarter conference call; and if you have any follow-up questions, there are contact details in the press release. Thank you very much.