SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Unaudited Condensed Interim Financial Statements)
Reporting Period: Nine months ended September 30, 2015
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, chartering, purchase, and sale of vessels and offshore assets. The fleet includes oil tankers, dry bulk carriers, container vessels, car carriers, jack-up drilling rigs, ultra-deepwater drilling units, offshore supply vessels, and chemical tankers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 23% to $292.8 million, driven by a net increase in vessels operating on time charters (including eight new Capesize dry bulk carriers and four container vessels) and higher profit-sharing revenues.
• Profitability: Net income increased 50% to $146.5 million. This was primarily due to a $44.6 million gain on the sale of loan notes and share warrants (Horizon Lines), higher operating income, and lower interest expense, partially offset by a $29.2 million vessel impairment charge and adverse mark-to-market adjustments on derivatives.
• Asset Impairment: A non-cash impairment charge of $29.2 million was recorded against two container vessels, compared to no impairment charge in the prior year period.
• Debt Structure: Total debt increased slightly to $1.78 billion. The company repurchased bonds and fully prepaid several secured facilities (including a $725 million facility and a $167 million facility) while drawing down new facilities to finance vessel acquisitions.
• Related Party Transactions: Significant amendments were made to charter agreements with Frontline Shipping effective July 1, 2015. In exchange for reduced charter rates and increased management fees, SFL received 55 million shares of Frontline (valued at $150.2 million) and an increased profit-sharing percentage (from 25% to 50%).

Guidance, Outlook, and Risks

• Outlook: Management notes that seasonal factors do not significantly affect the business due to long-term fixed-rate charters. However, profit-sharing arrangements with Frontline and UFC are subject to market fluctuations.
• Subsequent Events:
  • Agreed to sell two Suezmax tankers (Front Splendour and Mindanao) in late 2015 for net proceeds of approximately $31 million combined.
  • Completed the merger of Frontline and Frontline 2012, diluting SFL's ownership interest in Frontline from ~28% to ~7%.
  • Declared a quarterly dividend of $0.45 per share, payable December 30, 2015.
• Risks and Contingencies:
  • Concentration Risk: Frontline accounted for approximately 33% of consolidated operating revenues in the period.
  • Market Risk: Exposure to fluctuations in charter rates, vessel values, and bunker prices. Currency risk exists regarding NOK-denominated bonds, though hedged via swaps.
  • Derivatives: Significant fair value adjustments on non-designated derivatives impacted non-operating income.
  • Guarantees: The company guarantees $255 million of debt held by equity-accounted subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus).

Key Facts for Investor Verification

• Impairment Charge: Verify the specific vessels subject to the $29.2 million impairment charge and the rationale for the write-down.
• Frontline Investment Dilution: Confirm the impact of the November 2015 Frontline merger on the valuation and accounting treatment of the ~7% remaining stake.
• Debt Covenants: Review compliance with financial covenants across the $1.78 billion debt portfolio, particularly given the recent refinancing activities.
• Related Party Leases: Assess the long-term revenue stability of the amended Frontline charters, specifically the new 50% profit-sharing mechanism versus the previous cash sweep arrangement.
• Asset Sales: Track the closing and net proceeds of the two Suezmax tankers agreed to be sold in late 2015.