Business Context and Reporting Period
This Form 6-K filing by Ship Finance International Limited (SFL Corp Ltd.) covers a material event announced on July 22, 2016, and filed in August 2016. The Company, a Bermuda-based maritime asset owner, operates a fleet of over 70 vessels including tankers, bulkers, container vessels, and offshore assets. The filing details a strategic amendment to long-term chartering agreements with an affiliate of Deep Sea Supply PLC ("DESS").
Key Financial Metrics and Transaction Details
The filing outlines a restructuring of the relationship with DESS rather than reporting standard quarterly financial results. Key financial terms of the amendment include:
- Debt Restructuring: DESS will defer up to $68 million of scheduled debt amortization until March 31, 2018, and extend the maturity of three loan facilities originally due later in 2016.
- Charter Rate Adjustment: Ship Finance agreed to reduce charter rates until May 2018.
- Contract Extension: The charter period is extended by 3 years.
- Profit Sharing: A new 50/50 profit share on charter revenues earned by the vessels has been introduced.
- Prepayment: A $17 million prepayment on bank loan facilities, equal to scheduled amortization until May 2018, will be made.
- Cash Flow Impact: Management states the net effect on distributable cash flow will be neutral, balancing reduced charter hire against reduced loan amortization and lower interest expenses.
- Backlog Increase: The transaction is expected to increase Ship Finance's backlog by approximately $21 million.
Material Changes Versus Prior Period
The primary material change is the shift in the charter guarantor structure. Previously, the guarantor was Deep Sea Supply BTG AS ("DESS BTG"), a 50/50 joint venture between DESS and BTG Pactual. Under the new agreement, DESS will acquire the remaining shares in DESS BTG, becoming the sole charter guarantor. Additionally, the revenue model shifts from fixed charter rates to a hybrid model including a profit-sharing component, and the debt service schedule is significantly altered to defer amortization.
Guidance, Outlook, and Management Commentary
CEO Ole B. Hjertaker commented that the vessels have been depreciated to a comfortably low level after nearly nine years of cash flow generation. Management views the reduced charter rates as balanced by the extended charter period and the optionality of the new profit share, which could be valuable in a market recovery. The base charter rates remain in excess of current spot market rates. The transaction aims to preserve DESS' liquidity and reduce uncertainty regarding offshore asset exposure without impacting distribution capacity.
Risks and Contingencies: The agreement is subject to standard closing conditions, including approval by DESS's shareholders for the issuance of warrants. Forward-looking statements are subject to uncertainties including world economic strength, fluctuations in charter hire rates and vessel values, OPEC production levels, bunker prices, and regulatory changes.
Investor Verification Checklist
- Verify the status of DESS shareholder approval for the warrant issuance required to close the transaction.
- Confirm the specific mechanics of the 50/50 profit share calculation and its potential impact on future earnings volatility.
- Review the updated debt maturity schedule to ensure the $68 million deferral aligns with the Company's liquidity projections.
- Assess the creditworthiness of DESS as the sole guarantor compared to the previous joint venture structure.
- Monitor spot market rates to validate management's assertion that base charter rates remain superior to market alternatives.