Business Context and Reporting Period
This Form 6-K filing by SFL Corporation Ltd. (NYSE: SFL) covers material events announced in a press release dated December 18, 2020. SFL is a Bermuda-based maritime company operating a fleet of tankers, bulkers, container vessels, and offshore drilling rigs. The filing details a new agreement with Seadrill Limited regarding pledged funds and a partial divestiture of a container vessel subsidiary.
Key Financial Metrics and Transactions
- Seadrill Agreement: Seadrill agreed to pay SFL approximately 71% of the existing contracted lease hire for the West Hercules and West Linus rigs. This allows Seadrill to withdraw funds from pledged accounts to cover operating expenses, with excess hire remaining in earnings accounts pledged to SFL.
- Asset Sale: SFL agreed to sell 50.1% of a subsidiary holding 19,000 teu container vessels to an entity affiliated with Hemen Holdings Ltd. (SFL's largest shareholder).
- Sale Proceeds: The agreed sale price is approximately $17.5 million.
- Expected Gain: The transaction is expected to generate a book gain of approximately $1 million.
- Cash Flow Impact: The estimated net reduction in SFL's distributable cash flow is limited to approximately $0.7 million per quarter.
Material Changes and Defaults
Seadrill's failure to pay full hire under the leases for SFL's three drilling rigs constitutes an event of default under the lease and related financing agreements. The new fund withdrawal agreement, which expires on March 31, 2021 unless extended, does not restrict SFL or secured lenders from enforcing remedies related to this default. This agreement follows the expiration of a previous forbearance agreement on December 14, 2020.
Outlook, Risks, and Contingencies
- Transaction Closing: The sale of the container vessel subsidiary is expected to close in the fourth quarter of 2020, subject to final documentation and customary closing conditions.
- Seadrill Restructuring Risk: The filing highlights risks related to Seadrill's potential restructuring and the ongoing default status of its leases.
- Market Risks: Forward-looking statements caution that results may differ due to global economic strength, currency fluctuations, charter hire rates, vessel values, OPEC production levels, and the ongoing impact of the coronavirus outbreak on commercial seaborne transportation demand.
Investor Verification Checklist
- Verify the final closing date and conditions for the $17.5 million sale of the container vessel subsidiary.
- Monitor the status of Seadrill's default and whether SFL or lenders initiate enforcement actions before the March 31, 2021 expiration of the current withdrawal agreement.
- Confirm the actual quarterly cash flow impact of the divestiture against the estimated $0.7 million reduction.
- Review subsequent filings for updates on Seadrill's restructuring progress and its ability to meet the 71% hire payment obligation.