Business Context and Reporting Period
This Form 6-K filing by Ship Finance International Limited (SFL) covers the period ending December 31, 2011. The report primarily details a material agreement reached on December 6, 2011, to amend long-term chartering agreements with Frontline Ltd. SFL is a major ship owning company with a fleet of 69 vessels, including 25 crude oil tankers, employed largely on long-term charters.
Key Financial Metrics and Liquidity
- Restructuring Compensation: SFL agreed to receive $106 million in cash from Frontline. This includes the release of $56 million in restricted cash and a $50 million early payment of profit split.
- Debt Reduction: SFL plans to use an additional $50 million to prepay bank financing. Consequently, bank financing for the 28 Frontline vessels is projected to decrease from approximately $740 million to $584 million by year-end 2011.
- Cash Flow Coverage: The combination of debt reduction and the new charter arrangement is expected to ensure cash flow from these vessels covers debt service for the next four years, even at reduced base rates.
- Current Net Contribution: Prior to the restructuring, the net contribution from Frontline vessels after debt service was approximately $8 million per quarter ($0.10 per share).
Material Changes Versus Prior Period
- Charter Rate Reduction: Base charter rates for the 28 vessels will be reduced by $6,500 per day per vessel from 2012 through 2015, reverting to previous levels thereafter.
- Profit Split Adjustment: The profit split calculation is modified so SFL receives 100% of profits up to the old base rate levels and 25% of profits above that threshold.
- Dividend Outlook: Due to reduced near-term net cash flow, the base dividend is expected to be adjusted to approximately $0.25 per share for the next quarter, down from previous levels.
Guidance, Outlook, and Risks
Management views the restructuring as a solution to remove uncertainty regarding Frontline's liquidity and bank covenant compliance. The agreement provides a solid counterpart with low cash break-even rates. While base rates are lower, the new profit split structure offers upside potential if market rates exceed the new base levels. The CEO noted that since 2004, SFL has received over $500 million in profit sharing from Frontline.
Risks and Contingencies: The outlined structure is subject to final board and bank financing approvals by December 31, 2011. Risks include general market conditions, fluctuations in charter hire rates, vessel values, bunker prices, and geopolitical disruptions. The filing includes a standard cautionary statement regarding forward-looking statements.
Investor Verification Checklist
- Confirmation of final board and bank financing approvals for the Frontline restructuring by December 31, 2011.
- Verification of the actual receipt of the $106 million restructuring compensation.
- Monitoring of the actual reduction in bank financing to the projected $584 million level.
- Board declaration of the specific dividend amount for the upcoming quarter (projected at $0.25 per share).
- Assessment of spot tanker market rates to evaluate potential upside from the new 25% profit split tier.