Business Context and Reporting Period
This Form 6-K filing by SFL Corporation Ltd. (SFL) covers the period of November 2020, with the report dated November 20, 2020. SFL is a Bermuda-based offshore drilling rig owner and operator. The filing primarily addresses a material event involving the Company's lessee, Seadrill Limited, and the resulting impact on SFL's lease agreements and financing.
Key Financial Metrics and Liquidity
The filing does not provide specific consolidated revenue, profit, cash flow, or margin figures for the reporting period. However, it details specific cash flow arrangements related to the Seadrill forbearance:
- Lease Hire Recovery: During the forbearance period, SFL will receive approximately 67% to 70% of the existing contracted lease hire for the rigs West Hercules and West Linus.
- Debt Service Coverage: The partial hire payments are described as essentially equivalent to the interest and amortization due on the secured bank loan facilities relating to these specific rigs.
- Excess Funds: Any hire payments exceeding the amount required for debt service will remain in Seadrill's earnings accounts pledged to SFL.
- Liquidity Status: The filing does not disclose SFL's overall cash position or liquidity metrics beyond the specific rig financing arrangements.
Material Changes and Events
The primary material change is the entry into forbearance agreements with Seadrill Limited and corresponding secured lenders. Key details include:
- Event of Default: Seadrill failed to pay hire for three drilling rigs in October and November 2020, constituting an event of default under the leases and related financing agreements.
- Forbearance Period: The agreements allow Seadrill to use certain funds from charterers to pay operating expenses. Unless extended or terminated, the forbearance lasts until December 14, 2020.
- Rig Status:
- West Linus (jack-up) and West Hercules (semi-submersible) remain on drilling contracts with oil majors in the North Sea.
- West Taurus (semi-submersible) has been held in layup by the lessee for more than five years.
- Seadrill Restructuring: Seadrill is negotiating a comprehensive balance sheet restructuring, which may involve a court-supervised insolvency process.
Outlook, Risks, and Management Commentary
Management states that SFL continues to have constructive dialogue with Seadrill and financing banks to find a long-term solution. However, the Company explicitly states that no assurances can be provided regarding the outcome of Seadrill's restructuring.
Identified Risks:
- Enforcement Risk: If the default is not cured or waived, it could result in enforcement actions by SFL or secured lenders.
- Counterparty Risk: The potential insolvency or restructuring of Seadrill poses a significant risk to future lease payments.
- Market Risks: The filing lists standard industry risks including fluctuations in charter hire rates, vessel values, oil consumption, and the impact of the coronavirus outbreak on demand.
Investor Verification Checklist
- Verify the status of the forbearance agreement extension or termination after December 14, 2020.
- Monitor Seadrill Limited's progress in its comprehensive balance sheet restructuring and potential insolvency proceedings.
- Confirm the operational status and charter contract validity of the West Linus and West Hercules rigs in the North Sea.
- Review subsequent filings for updates on the West Taurus rig, which has been in layup for over five years.
- Assess the impact of the partial hire payments (67-70%) on SFL's ability to service debt on other assets not covered by this specific forbearance.