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Ship Finance International Limited (NYSE:SFL)

Q4 2012 Earnings Call

February 25, 2013 10:00 am ET

Executives

Ole B. Hjertaker - Chief Executive Officer and Chief Executive Officer of Ship Finance Management AS

Harald Gurvin - Principal Financial Officer

Analysts

Fotis Giannakoulis - Morgan Stanley, Research Division

Herman Hildan - RS Platou Markets AS, Research Division

Operator

Good day, and welcome to the Q4 2012 Ship Finance International Ltd. Earnings Conference Call. Just to advise, today's conference is being recorded. And at this time, I would like to hand the conference over to Mr. Ole Hjertaker. Please go ahead, sir.

Ole B. Hjertaker

Thank you, and welcome, everyone, to Ship Finance International's fourth quarter conference call. My name is Ole Hjertaker, and I am the CEO in Ship Finance Management. And with me here today, I also have the CFO, Harald Gurvin; and our Senior Vice President, Magnus Valeberg.

Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

Net income for the quarter was $51 million or $0.60 per share. This number included a gain on sale of assets of approximately $21.5 million or $0.27 per share. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $168 million. The EBITDA equivalent cash flow in the quarter was $134 million and last 12 months, the EBITDA equivalent was $585 million. There was a full cash sweep effect on 22 out of 27 Frontline vessels worth $12.1 million in the quarter. Including the accumulated amount in the 3 previous quarters, the cash sweep for the year ended up at $52.2 million or approximately $0.65 per share for 2012. The Board of Directors declared a cash dividend of $0.39 per share for the fourth quarter already in November 2012 with payment before year end. The reason for the early declaration of payment of the dividend was the uncertainty relating to taxes and dividends for our U.S.-based shareholders in 2013. The $0.39 dividend represents $1.56 per share on an annualized basis or 9.6% dividend yield based on closing price on Friday. We have declared and paid dividends for 36 consecutive quarters totaling more than $14.5 per share since 2004. In the fourth quarter and including all 100% owned assets, 50% of our charter revenues came from the offshore segment, nearly 30% from tankers and the remaining 20% split between our drybulk and container assets.

We announced the acquisition of 2 car carriers in the fourth quarter and took delivery of the vessels in October and November. The vessels were built in 2005 and 2006 in Japan and have a capacity of 6,500 car equivalent units. The vessels were immediately chartered out to Hyundai Glovis for a period of 5 years, adding $85 million to our charter backlog. There will be a full cash flow effect from these vessels in the first quarter this year.

Over the last 4 months, we have raised more than $1 billion in the capital markets. This includes equity bonds, convertible notes and equity. Our CFO will elaborate on these transactions, but we are, of course, very pleased to notice the positive reaction in the market with several of these transactions significantly oversubscribed.

Some of the newly raised capital has been used to refinance existing indebtedness, but a part of the capital will also be earmarked for additional growth. Including a vessel to be delivered to the new owner at the end of this quarter, we will have sold and delivered 7 older vessels during the fourth quarter 2012 and first quarter 2013. This includes the 2 remaining single-hull tankers, the 4 remaining combination carriers and 1 Suezmax tankers. The vessels sold were the oldest in our fleet built between 1991 and 1995. The book gain in the fourth quarter was approximately $21.5 million and net cash proceeds after charter termination compensation and prepayment of associated debt was $31 million. In the first quarter and including the vessel due to be delivered at the end of the quarter, we expect there to be a book gain of nearly $18 million with net cash proceeds of approximately $37 million. And the newbuilding program continues with 5 vessels still under construction. One drybulk courier is scheduled for delivery in March and will then go on a 3-year charter to Western Bulk and 4 eco-design 4,800 teu container vessels are due for delivery between the third quarter of 2013 and the first quarter of 2014 and will then be employed on 7-year charter to Hamburg Süd from delivery.

We restructured the chartering agreement with Frontline in December 2011. Frontline paid a cash compensation of $106 million to us, which was equivalent to nearly 2 years reduction in base rates. We used these proceeds to prepay our bank financing and have therefore reduced break-even rates for these vessels to below the new reduced base rates. While we had a net contribution per share of approximately $0.10 per share from these vessels before the restructuring, the cash sweep therefore represents the maturity of the net contribution from the vessels -- these vessels currently. The cash sweep effect for 2012 was $52.2 million or approximately $0.16 per share per quarter on average. Based on historic charter rates provided by Clarksons, there have been few quarters last 15 years where we wouldn't accumulate a cash sweep effect.

The cash sweep accrual is based on 2 separate calculations: one for 22 vessels acquired in 2004 with an average threshold rate of approximately $16,400 per day; and another for 5 VLCCs acquired in 2005 with a higher threshold rates of approximately $24,500 per day. Despite the weak tanker market in the third and fourth quarters, there was a full cash sweep effect from the vessels acquired in 2004 in both these quarters. Two of the vessels were very profitable subcharters in the period, but those charters were terminated in December and going forward, the cash sweep will be more dependent on spot charter revenues. Frontline's cash breakeven on these vessels is higher than our adjusted base rate as the actual OpEx is higher than the $6,500 per day we paid to them to manage the vessels. For the year 2012, Frontline reported average operating expenses across the fleet of approximately $10,400 per day. Frontline stated in their recent quarterly result that if the tanker market does not recover before 2015 and no additional equity can be raised or assets sold, there is a risk that Frontline will not have sufficient cash to repay its $225 million convertible bond loan at maturity in April 2015. With 22 vessels still on long-term charters to Frontline, we will, of course, actively monitor this situation in order to try to minimize any potential negative effect for our company. We note that Frontline reported a cash position of $137 million at quarter end, a reduction of $27 million compared to the previous quarter. Of this, nearly 50% of the reduction in free cash was due to a $13 million installment on newbuildings, and the $52 million cash sweep amount is due to us in March. In addition to the cash position of Frontline, they also own 6.3% of Frontline 2012 with the market value of approximately $67 million based on the closing price on Friday.

As of the third quarter, there was no accumulation to the 25% profit split above the old base rates on a year-to-date basis. Following the $50 million prepayment for Frontline last year, the profit share will not be recorded in the accounts until the accumulated amount is higher than $50 million in aggregate.

In light of the soft tanker market, we would again like to highlight the limited financial exposure relating to the vessels we have on charter to Frontline. The original fleet of 47 vessels was acquired in 2005 and another 5 vessels added in 2005. But after that, we have only reduced the number of vessels and we are now down to 22 vessels going forward after recent sales. This has been through the sale of the oldest vessels in the fleet. And just the last 2 quarters, the reduction has been 7 vessels with aggregate net cash proceeds of nearly $70 million of after debt prepayments and with aggregate book gains of approximately $40 million in the fourth quarter last year and the first quarter this year. We are amortizing down the depth of these vessels very quickly and have reduced the financing amount by more than 60% over a period of only 4 years. Compared to reported scrap value levels, the financial leverage is moderate and the scheduled amortization continues with more than $70 million per year, even with the reduced based rates.

The graph on the right side illustrates the difference between the loan amount over time and the scrap value of the fleet, basis the current scrap price per ton of approximately $420 per long ton. The next refinancing is in 2015, but limited to less than $220 million on a fleet of vessels which was refinanced last time in 2010 at $725 million. If Frontline should default on any payment obligations to us, we will, of course, then be able to trade the vessels in the market with a low cash break-even rate and retain a 100% of any chartering upside. Ship Finance also expects as part of the fleet renewal strategy to continue selling older vessels first and correspondingly reduce the counterpart exposure to Frontline over time.

We still have a significant portfolio of long-term charters, which is the backbone of our business. Most of our vessels are covered up on long-term basis and we still have more than 10 years weighted average charter coverage. Full details on a vessel-by-vessel basis is available by contacting us on email at ir@shipfinance.no.

We have $5.2 billion fixed-rate charter backlog or the equivalent of $61 per share. The EBITDA equivalent backlog is $4.2 billion or approximately $49 per share. These numbers include only the reduced base rates from the Frontline vessels and do not include expectations for cash sweep or profit share. Any rechartering after the end of the current charters are also excluded. We have a total of 17 customers and more than 40% of the portfolio is with companies with a market cap in excess of $5 billion. If we include all listed companies, the percentage is only 3%. In addition, a majority of the backlog in the private segment is with companies with a public rating. Only one of our charterers is behind on their charter payments to us with respect to 2 Suezmax tankers sold on higher purchase terms. We built the vessels at a cost price of $69 million per vessel in 2009 and 2010 and so far, the charterer has paid us $58 million per vessel on average. At year end, the aggregate overdue amount was limited to $1.9 million, and we would like to note that the charter-free value of the vessels are higher than the remaining charter payments plus the purchase obligation due in 2014, 2015.

If we look at the average-weighted charter tenure, as indicated on the right side, nearly 2/3 of the portfolio still remains in excess of 10 years and only 2% -- sorry, 3% is shorter than 5 years. If we turn to the asset market, we've seen that several of the segments have been under very significant pressure from a vessel value perspective. This has been a combination of several factors, including banks putting increased pressure on weaker owners to sell assets. You have typically seen in most of the segments a number of transactions relating to older vessels either at the scrap levels or near-scrap values. However, in some of the segments and particularly tankers and containers, we have seen a very limited amount of newer vessels being offered for sale. In the drybulk segment, we have seen a higher number of transactions across the board also for newer vessels. What we're also seeing is an increased cost pressure due to shipyards who want to fill up their production capacity. If you look at the graph on the right -- down on the right side, we saw that during -- from the early 2000s, we saw a very significant increase both in orders at the shipyards and also the newbuilding capacity. And then some of these periods, the yards took in a lot more orders than they had production capacity at the time with the ambition to build out yard facilities over time. We have now been in a period of nearly 5 years with reducing ordering, and we believe most of that surplus ordering capacity the yards have taken in have now already been delivered or will be delivered in the near term. Therefore, the yards need to either price their newbuildings at a very competitive level or go out of -- they will have to go out of business. We also see that many shipyard owners have limited access to capital and therefore are not in a position to take advantage of the current attractive pricing levels in most of the segments. And with the reduced newbuilding prices, we see also expect there to be a significant gap between in newbuilding prices and secondhand values as newer vessels are now built to new specifications where we see the yards no more willing to build vessels with more fuel-efficient designs. And also as we've always seen in the market over time, there's always a preference in the market for newer tonnage versus older tonnage. We've, therefore, seen an increasing value gap between newbuildings and secondhand vessels. That said, we are flexible in terms of where we want to invest our capital. We have, of course, a preference for newer vessels, but at the same time, we are -- we can also look at newbuildings or modern secondhand vessels in the market. We're seeing an increasing number of opportunities across all our 4 core segments, we did acquire 2 car carriers in the fourth quarter and are looking at investment opportunities now in all our segments, but we will not give any specific guiding on where we believe our next investments will be. But we'll, of course, report that in due course when we have decided where we want to deploy our capital. As noted earlier, we have raised significant amounts of capital over the last few months and part of that capital is earmarked for growth, and we hope to find interesting opportunities over the next few months.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for investment in associates, the EBITDA, which we defined as charter hire plus profit share, less operating expenses and general and administrative expenses, was $585 million last 12 months. This is equivalent to more than $7 per share. Net interest was $131 million or approximately $1.60 per share. But more importantly, our normalized ordinary debt installments relating to the company's project continue with the steep profile and over the last 12 months, the amount has been $319 million or nearly $4 per share. This is excluding prepayments relating to sale of older assets and early refinancing of debt. We had approximately $3 billion of net interest-bearing debt at year end, and we continue our schedule of steep loan amortization. This amortization represents around 9 year of profile to 0 and this compared to a weighted-average age of the vessels of approximately 5 years. The net contribution from our projects last 12 months after this aggressive debt repayment profile was $136 million or $1.69 per share. Over the last 8 years, aggregate net income has been more than $21 per share while aggregate dividends have been approximately $14 per share, illustrating the conservative profile of the company.

And with that, I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take us through the numbers for the fourth quarter.

Harald Gurvin

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter of 2012. Please note that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP.

For the fourth quarter of 2012, total charter revenues were $155.9 million or $1.84 per share, compared to $166.2 million or $2.10 per share in the third quarter of 2012. The fair share data for the fourth quarter reflect the issuance of 6 million new shares in October 2012. On the VLCCs, Suezmaxes and chemical tankers, revenues were in line with the previous quarter. Our liners, which include container vessels and car carriers, achieved revenues of $80 million in the fourth quarter, up from $14.6 million in the previous quarter. The increase is mainly due to the delivery of the 2 car carriers in end October and mid-November, respectively. The drybulk vessels achieved revenues of $40 million in the third quarter compared to $15.6 million in the previous quarter. The reduction is mainly due to the sale of 3 OBOs during the fourth quarter, partly offset by the delivery of 1 Handysize drybulk carrier in mid-November 2012.

On the offshore side, charter hire came in at $81.9 million, down from $93.9 million in the previous quarter. The reduction is due to a scheduled step-down in the charter rate for the ultra-deepwater drillship West Polaris, which is on a long-term bareboat charter to Seadrill. It is important to note that the rate reduction is balanced by reduced interest and debt repayments on our related financing. We also generated a cash sweep from Frontline of $12.1 million in the quarter, which represents a full cash sweep on 22 out of the 27 vessels trading in the quarter. Vessel operating expenses and G&A was in line with the previous quarter, having an income of $2.3 million on financial investments during the fourth quarter, slightly up from the previous quarter. Overall, this summarizes to an EBITDA of $134.4 million for the quarter or $1.59 per share.

We then move onto the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from our book operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associate and long-term investments and interest income from associate. If you wish to gain more understanding of our accounts, we'll also this quarter publish a separate webcast, which explains the finance lease accounting and investments in associates in more detail. This webcast can be viewed on our website, shipfinance.org

Overall for the quarter, we reported total operating revenues according to U.S. GAAP of $77.6 million. Charter revenues from operating leases were up approximately $2 million compared to the previous quarter, mainly due to delivery of the 2 car carriers in end October and mid-November with both commenced 5-year time charter to Hyundai Glovis. Charter revenues from finance leases were slightly down to the sale of 3 OBOs during the quarter. The cash sweep from Frontline had a net positive effect of $12.1 million or $0.14 per share. The aggregate cash sweep after 31st December 2012 was $52.2 million, which is payable to us in March this year. We also booked a gain of $21.5 million arising from the sale of the 3 OBOs and 1 single-hull tanker during the quarter. The number of common shares outstanding increased by 6 million during the quarter in connection with equity issued in October 2012. The overall and according to U.S. GAAP, the company reported net income of $51.1 million or $0.60 per share for the quarter.

Moving on to the balance sheet. We showed $61 million of cash at the end of the quarter. In addition, we have $57 million available for draw down on the revolving credit facilities. Available-for-sale securities of $56 million includes $38 million invested in short-term tradable securities as a short-term liquidity placement. In addition, the second lien notes in Horizon Lines are recorded under available-for-sale securities at $18 million or 40% of par value including accrued interest. Amount due from related parties includes the final cash sweep of $52 million payable to us in March this year. Our stockholder equity stands at over $1 billion including the $151 million of deferred equity. The book equity ratio, including deferred equity, was 37% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, the company had total available liquidity of $180 million at the end of the quarter, which includes this $1 million in cash and $57 million available on the revolving credit lines. It should be noted that the cash per quarter end is net of the accelerated fourth quarter dividend of approximately $33 million, which was paid in December 2012. We also had $56 million in available-for-sale securities after quarter end as previously described.

On the debt side, we had approximately $3 billion of growth interest-bearing debt outstanding at the end of the quarter, of which $1.3 billion is consolidated bank loans and approximately $1.2 billion is bank loans in our subsidiaries accounted for investments and associates. In addition, we had approximately $600 million of senior unsecured notes outstanding as per December 31, 2012. This figure includes the unsecured NOK 500 million bonds maturing in 2014, of which $79 million is net outstanding; the unsecured NOK 600 million bonds maturing in 2019, of which $108 million is net outstanding; and $125 million of convertible notes maturing in 2016. The convertible bonds can be repaid in shares in the company's option at maturity. The number also includes $248 million net outstanding under our 8.5% senior notes maturing in December 2013, which will be refinanced by part of the proceeds from the $350 million convertible notes issued in January 2013.

We have raised more than $1 billion in equity bonds, convertible bond notes and bank debts since October 2012. In October, we raised a net amount of $89 million in a public offering, issuing 6 million new shares. The equity issue was earmarked for growth and we used part of the proceeds to acquire the 2 car carriers. We also successfully placed a 5-year senior unsecured bond in the Norwegian market with an interest of LIBOR plus 5% per annum. The principal amount of the notes is NOK 600 million, equivalent to USD 105 million. All payments have been swapped to U.S. dollars with a fixed interest rate of 6.06% per annum and the net proceeds we used to refinance other indebtedness.

Our premium access to the bank market was recently demonstrated through the refinancing of the 2 car carriers acquired during the fourth quarter of 2012 and the refinancing of the ultra-deepwater drillship West Polaris. On the 2 car carriers, we have several banks competing for the financing, offering higher leverage than requested, but in line with our conservative profile. The financing is for 70% of the already attractive purchase price. The financing terms are attractive, including competitive margin and repayment profile and nominal value close for the majority of the 5-year charter period. We also entered into a $420 million facility for the refinancing of the ultra-deepwater drillship West Polaris in December 2012, which was drawn in January 2013. There was significant interest from the banks and the facility was substantially oversubscribed. The 2 financings demonstrate that in the banking environment, where many owners have no access to attractive bank financing, the banks focus on the core client, benefiting strong owners like Ship Finance.

The outstanding debt relating to the 2 remaining ultra-deepwater units matures in the fourth quarter of 2013 and will be refinanced in due course, while we in the meantime enjoy the benefit of attractive margin on the existing financing. In January 2013, we issued $350 million of convertible notes due in 2018. The notes have an annual coupon of 3.25% per annum, and the initial strike price is just below $22. The offering was significantly oversubscribed and the offering was upsized from the originally targeted amount of $250 million to $350 million. The net proceeds will be partly used to refinance remaining $248 million net outstanding under the 8.5% senior notes due in December 2013, while the remaining amount is available for new investments. The convertible notes may be settled in shares at our option at maturity in 2018.

Concurrently, with the convertible notes, we entered into a share lending agreement with one of the underwriters to facilitate hedging arrangements for investors in the convertible notes. The share lending agreement is for up to approximately 6 million shares, but did not generate cash any proceeds to Ship Finance. And the shares will be returned to us prior to maturity of the convertible note.

The next slides provide some more detail on our newbuilding program and the remaining payments of our shipyards. With an enterprise value of approximately $4.4 billion, the gross remaining newbuilding commitment represented less than 5% of our enterprise value. As per December 31, we had 1 remaining drybulk carrier under construction, which is scheduled for delivery in March 2013, plus 4 container vessels scheduled for delivery from the third quarter 2013 until the first quarter of 2014. All vessels have medium- to long-term charters attached. We have arranged long-term bank financing for all vessels under construction with the remaining total commitment of up to $165 million and maturities between 10 and 12 years from delivery of the vessels. The graph shows the committed financing in the blue bars compared to the remaining shipyard installment in the yellow bars. We have already paid significant amounts in cash shipyards while we have chosen not to utilize all available pre-delivery financing in order to reduce interest expenses during construction period. This means we may have a positive cash effect relating to the newbuilding program in the quarter where we fully utilize available financing.

If you look at the period overall from now until the first quarter 2013, the overall net cash investments compared to the available financing is only $26 million.

We are in compliance with all financial covenants on our loan agreement. The free cash was $118 million compared to the minimum requirement of $25 million. This includes $57 million available under revolving credit facility. The working capital was $203 million compared to requirement of being positive, and the book equity ratio was 37% compared to the minimum requirement of 20%. And on the loan agreements, where we have minimum value covenant, we are fully in compliance at the end of the quarter. It is once again worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 36 quarters since the company was established. Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market as recently demonstrated on the refinancing of the ultra-deepwater drillship West Polaris.

So then to summarize. Net income for the quarter was $51.1 million or $0.60 per share. The total cash sweep from Frontline for 2012 was $52.2 million, which is payable to Ship Finance in March. The aggregate EBITDA was $134 million or $1.59 per share. The fourth quarter dividend of $0.39 per share was prepaid in December 2012 and represents a dividend yield of 10% based on the closing share price as of February 22 on an annualized basis. We have raised more than $1 billion in capital since October 2012 as a combination of equity, bonds, convertible notes and bank financing, reflecting our premium access to the capital market. We see attractive investment opportunities in several segments and are well-positioned for selective growth. And with that, I give the floor back to the operator, who would open the line for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley, Research Division

I want to ask about the containership sector, and what is the situation right now with the 4 smaller containership vessels? As we know that there is a lot of stress in this particular category, what are your thoughts about employment of these ships or if there are also thoughts of potentially disposing these vessels?

Harald Gurvin

Yes, we have now 6 smaller container vessels and -- sorry, 7 smaller container vessels, and all of them are currently trading. The market, as you know, fairly depressed and the rates are in the region low-$6,000 to mid-$6,000 per day. Our strategy will be to continue trading these vessels in the short-term market until rates pick up, and we do not have any current plans of disposing these vessels.

Fotis Giannakoulis - Morgan Stanley, Research Division

Just adding to this question, since you are not planning to dispose and given that there are a lot of reports of a lot of distressed sales of containerships, have you really seen any of the German banks willing to sell containership vessels? And would you consider potentially acquiring these types of vessels at the current very low prices?

Ole B. Hjertaker

This is Ole. I think if you want to, you can probably acquire as many containerships as you wish out from the, call it, from the KG market. The dilemma is how much debt is associated with the vessels and will you be able over time to service that debt. We have been -- and at the same time we are, of course, very mindful of the technological shift we're seeing, eco designs where we're seeing a much more pronounced effect in the containership segment compared to many of the other segments. That's partly due to the fact that the containerships have traditionally been operating at much higher speeds than they are currently trading at and therefore optimized for a different speed pattern and have therefore higher suboptimal construction figures compared to where they're trading now. Also, we've seen the effect of the new designs in the 5,000 teu range where vessels previously designed to go through the old Panama Canal. They will be difficult to trade, we believe, economically after the new canal opens because they have a very high fuel consumption and they need to carry around a lot of ballast water to be stable because they're designed to be very long and relatively narrow compared to a more optimal design, if you design that container capacity from scratch. I would say that we are, of course, looking at the opportunities in all sectors, including also the containership sector. We have not made any investments there. We invested in 2 car carriers, which are also liner vessels as we define them and we will see how that market develops and where we will find investment opportunities. But right now, we have not lined up any additional investments in the container space. We have, of course, the 4 newbuildings coming for delivery later this year and early next year.

Fotis Giannakoulis - Morgan Stanley, Research Division

I don't want to ask -- I know that you're not going to respond to what type of vessels you are thinking of getting into. But I would like if you can give us a little bit sense of the timing of these investments. We've seen the last few quarters that you are using your fleet with consecutive disposal of Frontline vessels and at the same time, reducing your risk to Frontline. But given the fact that you have very significant amount of capital, you have a very high availability to acquire vessels, the concern is how long it's going to take you to deploy this capital given the fact that you're Frontline fleet is likely going to be -- continue to decline.

Ole B. Hjertaker

Yes, I think for us, from a strategy perspective, I mean, we are looking at investment opportunities in all the 4 core segments we're targeting. Exact timing and details of that, of course, we cannot disclose before we do anything. But I think generally, the environment is more attractive now than it has been, say, for the last 18 months or so. And you are absolutely correct, we have been disposing of older vessels. Typically, we've been selling off vessels that are 18 to 22 years old at the end of their, call it, commercial life. And we've also generated very nice both book gains relating to these sales of around $40 million just in the fourth quarter and expected this quarter, and also the cash proceeds of nearly $70 million in those 2 periods combined. We hope, of course, to deploy that capital again efficiently, but can unfortunately not give you any more specific guiding on when that will take place.

Fotis Giannakoulis - Morgan Stanley, Research Division

I have one question for Harald. You recently refinanced the West Polaris, and I also saw in your statements that the debt of the ultra-deepwater, the deepwater rig was also called as a short-term debt. Can you explain what is the situation there and if you are in the process of refinancing this debt as well?

Harald Gurvin

You are referring to the remaining ultra-deepwater unit. Now these were, of course, done in November 2008. We did a 5-year loan, which then matures in November 2013. The initial amount was $1.4 billion. We're now down to around $800 million. Both vessels are on profitable subcharters. The West Hercules has a new subcharter to start with for 4 years, which just commenced. So -- and the West Taurus is the initial subcharter to Petrobras. So we are discussing the refinancing there, but we have not started any sort of indication process yet. We are, of course, enjoying the nice margin we have on these -- on the existing loans and also based on the huge success of the West Polaris refinancing. We're not concerned about this refinancing.

Fotis Giannakoulis - Morgan Stanley, Research Division

Is it safe to assume similar amount to what you got for the West Polaris vessel?

Harald Gurvin

Yes, it will probably be in that region.

Operator

We will now take our next question from Herman Hildan from RS Platou Markets.

Herman Hildan - RS Platou Markets AS, Research Division

I was just wondering how much of your $1 billion market transactions have you earmarked for growth?

Ole B. Hjertaker

When we raised the equity of $90 million, we communicated that, that would be earmarked for growth. We have invested approximately $25 million of equity in the car carriers so there's a chunk there leftover. Also when we did the convertible loan, we went out with -- and planned to raise $250 million, which was a refinancing of the outstanding amount in the 2013 notes. And as you know, it was a great success. We had more than $1 billion orders in that loan and we have therefore decided to upsize that loan from $250 million to $350 million. That leaves, of course, $100 million of call it the surplus capacity for us. It's a financing at an attractive coupon, but of course, carries the dilution of effect of being a convertible loan. But we still feel that it is attractive for us if we can deploy that capital in an efficient manner. We've also sold vessels in the fourth quarter and so far in the first quarter. These are Frontline-related vessels generating very significant net cash amounts to us of approximately $70 million in total. So between that, those amounts, there is clearly a good investment capacity. We will not sort of be specific on exact amounts and how we will allocate that capital between the sectors, but I think we have a good standing for investing new capital and at the same time, of course, have a conservative profile on our remaining debt and particularly relating to the Frontline vessels where there have been some increased attention lately particularly after Frontline numbers on Friday.

Herman Hildan - RS Platou Markets AS, Research Division

Okay. And also, I mean, we saw that you got about 20% return on equity to actually [ph] be accountable 5 years. Is this representative or should we assume a more conservative 15% return on equity for further growth? What's your hurdle rate basically?

Ole B. Hjertaker

Well, call it the equity return will vary from segment to segment. That's a consequence of several factors. It could have something to do with who the counterpart is. They call it the security of the cash flow. It has to do -- had to do with where you invest. And of course, if we acquire vessels where there are no purchase options, you will have to make certain assumptions for the residual value after the end of the chartering period. Typically, when we have invested capital, we have invested the capital with returns between, I would say, on equity between 13% and 22%, 23%. Hopefully, we will have very nice equity returns also on new additional deals, but we'll caution you to sort of to go out with call it specific percentages but because there are always a lot of assumption that will have to go into such returns and not least, as I mentioned, the residual value assumption.

Herman Hildan - RS Platou Markets AS, Research Division

Yes, obviously, I mean, it's more for, call it, getting a feel of how much you could potentially raise dividends with time and we have seen in the past that you raised dividends with growth. I mean if you add up the numbers that you refer to, you should have at least sort of $60 million, which means that you could raise dividends by say $0.40, $0.50? Could you elaborate a bit about the communication with the board in terms of the intention to increase dividends with growth or how should we think about that going forward?

Ole B. Hjertaker

Well, the board has always been cautious with respect to guiding on dividends and the board sets the dividends on a quarter-by-quarter basis. And we do, of course, hope that new investments will enable us to increase distribution capacity, but I can unfortunately not advise you with any specifics on how -- when and how that will take place. But of course, if you look at the company and the business model, our business model is to build the company and hopefully then by building the company, we can also make that meaningful for investors by also potentially increasing dividends over time. The Board, from -- when you look at how the board decides on dividends, the only guiding they can give is that the board does not necessarily only look at the current quarter when they set a dividend. I think they take a more long-term view and what they believe is a more long-term sustainable distribution level when they set the dividend. Therefore, we can see and for instance when -- in the past, when we had very significant profit splits from Frontline, we saw the dividend being relatively stable even though we got a very high, call it, cash payments. And part of those cash payments were then used to reinvest and continue build the company in a more long-term stable fashion.

Herman Hildan - RS Platou Markets AS, Research Division

Okay. And just finally, you had a comment where you said that the environment is more attractive now than over the last 18 months. I presume that you were referring to deal flow or could you elaborate a bit on that?

Ole B. Hjertaker

Well, we see the attractiveness both in terms of increased deal flow. We see banks now putting more pressure on what we call weaker owners to do something on the asset side where we believe that could be attractive opportunities. And we also see shipyards now quoting prices that are what we would say in modern time and an all-time low levels particularly if you adjust for inflation. So from that perspective and the influence, newbuilding prices have on secondhand values, we believe the timing is interesting now, particularly if you have a view on inflation in the main vessel-producing countries such as Korea and China.

Herman Hildan - RS Platou Markets AS, Research Division

Okay. So you're not worried that you won't be able to deploy your $250 million over the next 12 months?

Ole B. Hjertaker

No, I'm not concerned of our ability to do that. We could do that extremely quickly, but I think we take a cautious approach. We try to make the right investments. Of course, we will not know that until afterwards. But we hope that we over time can show that we make a good long-term investments that will build on the distribution capacity.

Operator

[Operator Instructions] There are no more questions, gentlemen.

Ole B. Hjertaker

Thank you. I would then like to thank everyone for participating in our fourth quarter conference call and wish everyone a nice day.

Operator

That will conclude today's conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.

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