Business Context and Reporting Period
This Form 6-K filing by SFL Corporation Ltd. (SFL) is dated February 11, 2021. The report discloses a material event regarding the Chapter 11 bankruptcy proceedings filed by Seadrill Ltd. and its subsidiaries in the Southern District of Texas. SFL, a Bermuda-based maritime company with a fleet of over 80 vessels including offshore drilling rigs, has significant exposure to Seadrill as a charterer.
Key Financial Metrics and Material Changes
The filing does not provide consolidated revenue, profit, or cash flow figures for a specific reporting period. Instead, it details specific financial impacts related to the Seadrill restructuring:
- West Linus and West Hercules: SFL has entered into agreements to receive approximately 75% of the lease hire from sub-charterers. These amounts are sufficient to cover the full debt service for these rigs. Excess funds remain in Seadrill's earnings accounts pledged to SFL.
- West Taurus: The lease for this rig is expected to be rejected in Seadrill's bankruptcy proceedings, leading to redelivery to SFL. The rig is debt-free and has been in layup for over five years.
- Book Adjustment: SFL expects to record a net negative book adjustment of approximately $187 million in the fourth quarter of 2020. This figure includes a gain on the redemption of bank debt associated with the rig.
- Default Status: Seadrill's failure to pay hire and the commencement of Chapter 11 proceedings constitute events of default under the leases and related financing agreements.
Guidance, Outlook, and Risks
Management is engaged in constructive dialogue with Seadrill and financing banks to secure long-term solutions for the West Linus and West Hercules. The agreements for these rigs are subject to bankruptcy court approval, and the West Hercules agreement additionally requires approval from financing banks.
Regarding the West Taurus, SFL is evaluating strategic alternatives, including potential recycling at an EU-approved green facility. The filing highlights significant risks, including the uncertainty of the Chapter 11 proceedings, potential enforcement of default provisions, and the impact of Seadrill's restructuring on SFL's financial position. Hemen Holdings Ltd. is noted as the largest shareholder of both Seadrill and SFL.
Investor Verification Checklist
- Verify the status of bankruptcy court approvals for the agreements regarding West Linus and West Hercules.
- Confirm the timeline for the redelivery of the West Taurus rig and the execution of its recycling or redeployment.
- Review the Q4 2020 financial statements to confirm the $187 million net negative book adjustment and the associated debt redemption gain.
- Monitor communications regarding the 75% lease hire collection mechanism and the sufficiency of funds for debt service.
- Assess the potential for further enforcement actions if Seadrill defaults are not cured or waived.