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, 2013
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership and operation of vessels and offshore assets. As of June 17, 2013, the fleet included 61 vessels and drilling units across tanker, drybulk, container, car carrier, and offshore sectors. The company relies heavily on long-term charters, with significant exposure to related party Frontline Ltd.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased by $19.0 million (22.5%) primarily due to the absence of $13.6 million in profit-sharing revenues from Frontline Charterers, attributed to low tanker spot rates. This was partially offset by gains on asset sales and new vessel deliveries.
• Net Income Decrease: Net income fell by $6.6 million, driven by lower net operating income, reduced earnings from associated companies, and higher non-operating costs, partially mitigated by lower interest expenses.
• Asset Sales: Recorded a significant gain of $18.0 million on the sale of three vessels (VLCC Edinburgh, Suezmax Front Pride, and OBO Front Guider), compared to $2.2 million in the prior year.
• Debt Reduction: Total debt decreased by approximately $135 million due to the full redemption of $274 million in 8.5% Senior Notes and repayments of floating rate loans, offset by the issuance of $350 million in 3.25% convertible bonds.
• Cash Flow Improvement: Operating cash flow more than doubled to $68.0 million, largely due to the receipt of a $52.2 million cash sweep payment accrued in 2012.

Outlook, Risks, and Management Commentary

• Frontline Exposure: Frontline, a significant customer accounting for ~42% of revenues, warned of weaker Q2 2013 results due to oversupply in the tanker market. SFL management stated that if Frontline fails to meet obligations, SFL could trade vessels at low break-even rates while retaining 100% of chartering revenues.
• Profit Sharing: No profit-sharing or cash sweep revenues were accrued in Q1 2013. A $50 million prepayment received in 2011 remains unutilized; future recognition depends on Frontline's earnings exceeding thresholds.
• Newbuildings: In May 2013, the company contracted for four new 8,700 TEU container vessels ($340 million total) for delivery in 2014-2015. Seven-year time charters were secured for four 4,800 TEU newbuildings.
• Refinancing: Subsidiary SFL Hercules Ltd. secured a $375 million facility to refinance the ultra-deepwater drilling rig West Hercules, expected to be drawn in June 2013.
• Risks: Key risks include concentration of revenue with Frontline, fluctuations in charter rates, vessel values, and the ability to refinance debt. The company maintains interest rate swaps to fix rates on $1.1 billion of floating debt.

Investor Verification Checklist

• Frontline Performance: Verify Frontline's ability to meet commercial obligations given their Q2 2013 outlook and the current oversupply in the tanker market.
• Profit Share Utilization: Monitor the utilization of the $50 million prepaid profit share from Frontline and the likelihood of future cash sweep accruals.
• Debt Covenants: Confirm continued compliance with financial covenants, specifically the ratio of total liabilities to adjusted total assets (must be < 0.80) and minimum cash requirements ($25 million).
• Newbuilding Progress: Track delivery schedules and charter status for the new container vessels contracted in May 2013.
• Asset Valuation: Review the fair value of the fleet and associated derivatives, particularly given the volatility in shipping markets.