SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended March 31, 2018
Business Overview: SFL is a Bermuda-based shipping company owning and operating a diversified fleet of container vessels, tankers, dry bulk carriers, and offshore drilling rigs. The company focuses on long-term fixed-rate charters to reputable operators.

Key Financial Metrics

Note: Total Charter Revenues include revenues from subsidiaries accounted for as "Investment in associates" which are not fully consolidated under U.S. GAAP.

Material Changes vs. Prior Period

• Revenue Decline: Total charter revenues decreased 12.5% to $133 million from $152 million in Q4 2017. This was primarily driven by lower earnings from crude oil tankers chartered to Frontline Shipping Limited (FSL) and the absence of profit share income from dry bulk vessels due to market rates falling below thresholds.
• Net Income Increase: Despite lower revenues, Net Income increased 22.9% to $24.7 million. This was supported by a $5.1 million gain on non-designated derivatives and lower administrative expenses.
• Asset Divestiture: The company recorded a $1.4 million loss on the sale and charter termination of the vessel Front Circassia.
• Debt Reduction: Total interest-bearing debt decreased slightly due to the settlement of $63 million in senior unsecured convertible notes due in 2018 (paid in cash and shares).

Guidance, Outlook, and Material Events

Strategic Acquisitions and Backlog

SFL executed significant capital deployment to expand its charter backlog by approximately $600 million subsequent to the quarter end:

• Feeder Vessels: Acquired 15 feeder container vessels with 7-year lease-back agreements, adding ~$140 million to the backlog and ~$20 million annual EBITDA.
• Large Container Vessels: Acquired four 14,000 TEU eco-design vessels on long-term charters until 2024, adding ~$450 million to the backlog and ~$60 million annual EBITDA.
• Current Backlog: As of March 31, 2018, the fixed-rate charter backlog was approximately $3.6 billion with a weighted average remaining term of nearly 8 years.

Dividend Declaration

The Board declared a quarterly cash dividend of $0.35 per share, marking the 57th consecutive quarterly dividend. Payment is scheduled for June 29, 2018.

Risks and Contingencies

• Frontline Tanker Exposure: Eight crude oil tankers chartered to FSL are earning below the base rate ($12,300/day vs. $20,000/day base). FSL lacks sufficient funds to cover the full hire, linking revenues to spot market earnings until rates recover. The company is exploring alternative uses (conversion, storage) for these assets.
• Seadrill Restructuring: Following Seadrill's bankruptcy court-approved restructuring, SFL will receive a 30% reduced hire for five years on three rigs, with economic effects starting in January 2018. Reduced amounts will be added back from 2023.
• Solstad Farstad Discussions: Discussions are ongoing regarding the capital structure of the subsidiary guaranteeing charters for five offshore support vessels. Payments have been deferred until early June 2018.

Financing Activities

Subsequent to quarter end, SFL issued $164 million of senior unsecured convertible notes due 2023 at 4.875% interest. The company also secured a $50 million bank commitment for the feeder vessel acquisition and a $320 million unsecured loan facility for the large container vessel acquisition.

Investor Verification Checklist

• Frontline Cash Buffer: Verify the duration of FSL's ability to pay base rates and the timeline for spot market recovery to assess the risk of further revenue shortfalls on the eight crude tankers.
• Seadrill Restructuring Impact: Confirm the long-term financial modeling of the 30% hire reduction and the certainty of the 2023 add-back mechanism.
• Financing Terms: Review the specific terms of the $320 million loan facility from Hemen Holdings Ltd. and the $50 million bank commitment to ensure no restrictive covenants impact future liquidity.
• Dividend Sustainability: Assess whether the $0.35 dividend payout is fully covered by the Adjusted EBITDA of $100 million given the recent capital expenditures and debt service obligations.
• Accounting Treatment: Understand the "Investment in associates" classification for three drilling rigs, as their full operating revenues and expenses are not consolidated, potentially obscuring the true operational scale of the offshore segment.