SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2019
Business Overview: SFL is a Bermuda-based international ship owning and chartering company. Its portfolio includes crude oil tankers, dry bulk carriers, container vessels, car carriers, and offshore drilling units. The company generates revenue primarily through long-term bareboat and time charters, as well as direct financing and sales-type leases.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 26% to $116.5 million, driven by the addition of container vessels acquired in 2018 and increased time charter revenues. Direct financing lease interest income rose 55% due to new container vessel acquisitions and reclassifications.
• Profitability: Net income increased 36% to $33.6 million. Net operating income rose 45% to $51.3 million, primarily due to fleet expansion, partially offset by higher interest expenses.
• Expense Increases: Total operating expenses increased to $65.3 million (from $55.6 million), with depreciation rising $7.1 million due to new vessel additions. Interest expense increased significantly to $36.5 million (from $22.5 million) due to higher LIBOR rates and new debt issuances, though partially offset by the redemption of NOK900 million bonds.
• Asset Reclassification: Two container vessels (MSC Margarita and MSC Vidhi) were reclassified from operating lease assets to sales-type leases following charter amendments.
• Non-Operating Gains: Other non-operating items resulted in a net gain of $9.1 million, largely due to a $10.5 million unrealized gain on equity securities and positive mark-to-market adjustments on derivatives.

Guidance, Outlook, and Risks

• Subsequent Events: In May 2019, the company issued NOK700 million ($80 million) in senior unsecured bonds. A quarterly dividend of $0.35 per share was declared, payable in late June 2019.
• Charter Extensions: The company extended charters for four 8,700 TEU container vessels to Maersk Line and four 4,100 TEU vessels to MSC. Carriers were re-chartered to Hyundai Glovis.
• Related Party Risks (Solstad): A Standstill Agreement with Solship (related to offshore support vessels) defers 100% of charter hire until at least June 20, 2019, with a request for extension to October 2019. This impacts cash flow timing.
• Related Party Risks (Seadrill): Significant income (approx. 25% of net income) is derived from associated companies leasing rigs to Seadrill. While covenants are currently met, the company remains exposed to Seadrill's financial stability following its 2017 restructuring.
• Customer Concentration: Revenue is concentrated among major charterers: Maersk (~30%), MSC (~14%), Evergreen (~14%), and Golden Ocean (~12%).
• Market Risks: The company faces risks related to global economic strength, fluctuations in charter rates, vessel values, interest rates, and currency exchange rates (specifically NOK/USD).

Investor Verification Checklist

• Solstad Standstill Agreement: Verify the status of the charter hire deferral and the likelihood of the requested extension to October 2019.
• Seadrill Exposure: Monitor the financial health of Seadrill and the performance of the associated companies (SFL Deepwater, SFL Hercules, SFL Linus) which contribute significantly to net income.
• Debt Maturity Profile: Review the repayment schedule for the $1.43 billion debt principal, noting the significant portion due in 2021 ($470 million) and 2023 ($282 million).
• Equity Investment Valuation: Assess the sustainability of the $10.5 million unrealized gain on equity securities (Frontline, NorAm Drilling, ADS) included in net income.
• Dividend Sustainability: Confirm that operating cash flows remain sufficient to support the declared dividend of $0.35 per share amidst deferred receivables from Solstad.