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Ship Finance International Limited (NYSE:SFL)

Q4 2008 Earnings Call Transcript

February 26, 2009 10:30 am ET

Executives

Ole Hjertaker – CFO

Lars Solbakken – CEO

Analysts

Jon Chappell – JP Morgan

Rick Silva [ph] – Midwest Capital

Anders Rosenlund – ABGSC

Richard William [ph] – Williams Company [ph]

Charles Fisher [ph] – LS Partners

C.J. Baldoni – Evergreen Investments

Mark Rorison [ph] – Cinaret Funds [ph]

Ole Hjertaker

Thank you. And welcome all to the Ship Finance International fourth quarter conference call. From the company today, we have the Chief Executive Officer, Lars Solbakken. And my name is Ole Hjertaker and I’m the Chief Financial Officer.

Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements with the meaning of the US 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. Furthermore, this presentation does not constitute an offer to sell or the solicitation of an offer to buy shares of the company's securities.

Let me turn to page three, the agenda in the presentation. Today we will discuss the fourth quarter highlights and subsequent events. We will also discuss the financial results and afterwards we will open up for questions and answer session from the participant.

Next page. The Board of Directors has declared a dividend of $0.30 per share. This represents $1.20 on an annualized basis or 14% dividend yield based on the closing price yesterday. After consideration with the market environment we are currently in and the wish to build up additional reserves in the company to also be able to opportunistically take advantage of market opportunities that may arise. The Board decided that it will be in the company’s long-term interest to declare a lower dividend than for the previous quarter. The declared dividends for the last 20 consecutive quarters has been in total $9.88 per share.

The net income for the quarter was $48.2 million or $0.66 per share before mark-to-market of derivatives. Net income after mark-to-market of derivatives was $3.1 million or $0.04 per share. The mark-to-market impact was $45.1 million, of which $37.2 million relating to the bond swap agreements we have on our own bonds. Most of our interest rate swaps are now restructured to hedge accounting based on strict SEC guidelines. This means a lower variance in the mark-to-market than we would otherwise see in the market.

There has been a strong profit share contribution also for the fourth quarter. The profit share was $15.7 million and it was $111 million for the full year 2008 or $1.53 per share. The expectations for the spot market in 2009 is lower than for 2008. But Frontline has sub-chartered several vessels at high rates, and we therefore also expect a good profit share contribution in this year.

Frontline expects to drydock three vessels in the first quarter of 2009, which is in line with the fourth quarter of 2008. And the drydocking schedule has an impact on the basis for the profit share, as the profit share is calculated on the actual earnings from the vessels we have on charter to Frontline.

Next page. During the fourth quarter, we took delivery of the second of two 17,000 deadweight chemical tankers. Both vessels are chartered for ten years on a bareboat basis at $8,000 per day. The acquisition cost for the last vessel was $30.1 million, of which $24.5 million was raised through a long-term loan facility. The first vessel was delivered in mid-April and the other delivered in late-October. And the annual net contribution from the two vessels after interest and schedule installments is $0.02 per share.

In the second quarter, we also took delivery of the two semi-submersible drilling units that we announced during the third quarter. This is a record-breaking transaction in the maritime industry. It was a $1.7 billion sale lease-back transaction. And we sourced $1.4 billion in the banking market. The transaction represents more than $2.3 billion of bareboat charter revenues over the 15-year lease period.

In connection with the financing, we drew $1.1 billion in November and we drew the remaining $250 million in February 2009. And there were no problems or issues with the banks relating to this very significant loan facility. Both rigs are now in full operation and earning the full day rates. These units are classified as Investment in Associate based on US GAAP. And therefore, only net income in the subsidiaries appears in our consolidated income statement.

Next page. After the West Taurus, which was the second semi-submersible drilling rig completed the three-month mobilization period to Brazil, we have the full cash flow effect from mid-February 2009. The combined bareboat charter revenues from the three ultra-deepwater units we now have in operation is in aggregate of $98 million per quarter. The growth in the year has been very substantial and also demonstrates our ability to execute transactions.

The aggregate charter backlog is currently approximately $8 billion, of which 30% or $2.4 billion was added through transactions in 2008. On top of that, we of course had significant revenues in 2008. And after the delivery of the ultra-deepwater drilling rigs, only $48 million of net investments remaining are expected to be used – sourced through the company’s liquidity reserves.

In December, we filed a so-called ATM program or At Market Offering program. This is for the company a backstop facility where we can source additional equity capital if we wish to. This can be sold in the market from time to time at the company’s discretion and without any specific deadlines. The filing was made in December in order to utilize our status as a so-called Well Known Seasoned Issuer or WKSI with the SEC. Due to the market capitalization of the company, which came down and therefore required us to make a filing in order to have a shelf registration statement whereby we can easily register the capital market transaction if we wish to. We made this filing in December, and to date, no shares have been issued and sold.

The next page. The dividend declared of $0.30 per share will be paid in cash or at the shareholder’s election in stock. The stock dividend alternative will be offered pursuant to a prospective supplement, which will be filed with the SEC shortly. The stock dividend alternative will be based on market price prior to the ex-dividend date, less a 5% discount and there will be a mailing to all shareholders of election cards on or around March 15th with payment of the dividend in cash or shares on or around April 17th. Our largest shareholders, Hemen Holding and Farahead Investments, representing 41.4% of the shares and indirectly controlled by Mr. John Fredriksen has told the company that they intend to take stock as dividends.

Next page. We have lease accounting and the full finance lease breakdown for the quarter and also the forward four quarters are illustrated on slide 24. And we will also comment on the operational performance of the company separately. We have very significant investments in associates, which are three ultra-deepwater units and also a Panamax dry bulk vessel called Golden Ocean. And these vessels are – the net income from these subsidiaries appears in the P&L statement under results in associate. The numbers in the quarter was $15.2 million in net income generated in these subsidiaries.

As we have lease accounting for most of our assets, not all of the charter revenue is included in the total operating revenues of the company. In the profit and loss statement, we have therefore for illustration process included at the top, charter revenues from operating lease and charter revenues from finance lease and then subtracted out the part of the revenues that are classified as repayment on investment in finance lease under US GAAP.

For consolidated subsidiaries, this was $45 million in the fourth quarter, and there was also a very substantial amount, which was accounted for in our Investment in Associates, a total of $49.2 million, which does not appear in this statement at all. The ship operating expenses have been fairly stable over the last periods and we see the fruits of our delivered avoidance of taking on operating expense risks. All vessels to Frontline, which constitute the majority of the vessels we have on time charter are subject to a fixed rate operating expense agreement at $6,500 per day, including drydocking.

We noted when Frontline reported their numbers earlier today that they reported $12,000 per day on average operating expenses for their overall fleet. So there is a significant value to the company in this agreement. The depreciation amount is also fairly stable from quarter-to-quarter, increased from $7.3 million in the third quarter to $7.5 million in the fourth quarter, which is primarily due to the delivery of the second chemical tanker in mid-October.

Next page. As I mentioned, with the three subsidiaries holding very substantial assets classified as Investment in Associate, the equity portion of this is recognized as investment in associate under long-term assets. We have for information purposes included full earnings, balance sheet and cash flows for all the subsidiaries at the end of the press release to enable our shareholders and analysts to see the full details and the full breakdown of this. If you look at other current assets on the balance sheet, we see that, of other current assets of a total of $180 million, $174 million represents repayment of investment in finance lease, which is the current portion of the leases.

The next page. As we have very substantial investments in – investment in associates, you will see the effect on our consolidated cash flow statement under the heading called Investments in Associated Companies under the heading Investing Activities. In the fourth quarter, the net amount was $296.6 million, which represents the equity investment in the two latest ultra-deepwater drilling units net the cash that we took out from the subsidiaries classified as Investment in Associated Companies. Also under investing activities, the first line called repayment of investment in finance leases is where you will find the portion of the charter hire that does not float over the profit and loss statement.

The next page. Ship Finance generates a very significant cash flow per quarter. This overview includes all 100% owned vessels and also includes assets classified as Investments in Associate. A popular measure for dividend payout is contribution after interest or EBITDA less interest versus dividends paid. As we can see, we had a total EBITDA, excluding profit share, in the fourth quarter of $2.22 per share. And the EBITDA after accumulated profit share was $2.43.

In the quarter, we paid $47 million net interest or $0.65 per share, which is up from $34 million in the second quarter, primarily due to the new ultra-deepwater units. The average interest rates were fairly stable in the quarter, but there is limited impact on Ship Finance anyway due to our very substantially hedged portfolio. In the fourth quarter, the contribution after interest for Ship Finance was therefore $130 million or $1.78 per share.

We paid ordinary installments, loan installments of approximately $63 million or $0.86 per share in the quarter, which gives a net of $67 million or $92 per share in the quarter, which is similar to the contribution in the third quarter. The main changes from the third quarter to the fourth quarter was that the first of the ultra-deepwater units, West Polaris, the drill ship delivered to us in July 2008, was in a transit during most of third quarter and came on full charter rates at approximately $350,000 per day in the fourth quarter. And in addition, we also had full rate on the first of the semi-submersibles called West Hercules of approximately $383 million from mid-November and a lower rate on West Taurus for approximately the same time.

The second chemical vessel, as I mentioned earlier, was also delivered in October, but as we can see, the overall impact from that vessel is relatively low compared to the drilling rigs. From the fourth quarter to the first quarter we will have a full quarter of Hercules – West Hercules and West Taurus, and also the West Taurus will have increased charter rates starting from mid-February when the mobilization period to Brazil ended and we will earn a charter rate of approximately $320,000 per day from that period.

Next page. Ship Finance started as a pure tanker company where all the OBOs we are trading in the tanker market. The growth in other segments during the last two to three years has been fueled mainly by profit share payments for Frontline and also the sale of single hull vessels. The investing amounts in 2009 includes the remaining $250 million investment in West Taurus, which is fully covered by a $200 million debt financing. And after the two drilling rigs have been delivered and these have been paid, we have a relatively marginal remaining investment program compared to our overall fleet size.

Net of the sale of two Suezmax tankers that we have agreed to sell, we don’t estimate – we estimate that the net investments for Ship Finance for the year 2009 will be approximately $16 million and there will be a net investment approximately of $32 million in 2010, which gives a total investment in this period of $48 million. In certain projects such as the five container vessels to be delivered in 2010, 20% of the contract price has been paid in as equity and a portion of the remaining capital commitments are expected to be funded by borrowing through banks or export credit solutions. Of course, the exact timing of the delivery of the vessels under the contract is always uncertain, and timing of the investments may therefore be also be adjusted over time.

The next page. We have a substantial loan portfolio of approximately $2.6 billion, including approximately $0.5 billion bond loan. In addition, there is $1.8 billion of loans in subsidiaries that are accounted for as investments in associate. There are more than 25 banks in our syndicates, and a very good access to capital. The rig transactions we did in 2008 demonstrate our ability to source capital in an otherwise difficult financing market for most companies.

Also, with our portfolio of long-term charters, our strategy is to hedge a substantial portion of our interest rate exposure. This is done through swaps, fixed interests, and also interest compensation through charters. We increased the levels of hedging in 2008 due to an attractive interest rate curve, and currently approximately 80% is effectively hedged.

Most of the new projects have been made with limited recourse to our balance sheet. As an example, for the transaction with five container vessels to Horizon Lines, we don’t guarantee anything. For the jackup drilling rigs we have on, we guarantee between $10 million and $20 million per rig. And for the ultra-deepwater units, we only guarantee $100 million per unit of $700 million financing per rig.

We had $58 million of cash available for the fourth quarter. This includes $11.5 million in a subsidiary which are not consolidated based on US GAAP. We have $51 million of profit share payable to us in the first quarter, and we also expect to receive cash from the sale of the Suezmaxes later in the year, in addition of course to the cash flow from all our performing charters.

The next page. The Board of Directors has decided to pay a $0.30 dividend, the quarter, with respect to the fourth quarter of 2008. This represents a 14% dividend yield. And this is based on the consideration of the market environment we are in and also the wish to build up additional reserves in the company to take advantage of market opportunities. Also, to preserve liquidity and build up investment capacity, our largest shareholder Hemen Holding and Farahead Investments who collectively own 41.4% of the shares have also offered to receive the dividend in the form of newly issued shares in Ship Finance. And this, we will also of course offer to all our other shareholders. On a trailing four-quarter basis, the dividend declared represents $2.04 for the last 12-month period.

Next page. The profit share agreement to Frontline has been very favorable for the company. The regional charters restructured at a relatively low level in their tanker market cycle, which also means that there is a lower profit share threshold than we would otherwise see. On average, there has been approximately $90 million annual incremental cash flow from these profit share payments over and above the base charters. And these payments have enabled the company to fuel significant growth. And based on the market outlook, we also expect it to be a profit share contribution in 2009 despite weaker market expectations than 2008.

Next page. We have a unique order backlog. Companies with a large charter backlog typically have five to seven-year coverage. And Ship Finance is in a different league with 13.5-year weighted average charter coverage on this portfolio. The total fixed rate order backlog is $8 billion or $107 per share on a fully diluted basis, assuming all shareholders elect to receive the dividend in shares. The EBITDA backlog is $7 billion or $93 per share on the same basis. These numbers are before profit share and on a fully diluted basis, and do not include any re-chartering after end of current charters. This portfolio of charters and the cash flow derived from this is very important for banks, and with dark clouds on the near-term on the financing horizon, we believe this is a clear strength for the company.

Next page. This graph illustrates the cash flow, the fixed EBITDA contribution from our charters, and also clearly illustrates that we have two main charter counterparts, which are Seadrill and Frontline. For the Seadrill charters, which is the orange part of the bar, we have 100% guaranty from the ultimate parent in Seadrill. And all the ultra-deepwater units are sub-chartered to major oil companies for a substantial period. We have also frontloaded the charter rate and also matched that to loan repayments in order to take down our exposure against those assets very substantially over the first charter period.

With respect to the Frontline charters, we have a conservative base rate and the 20% profit split, as I mentioned, has generated very substantial incremental cash flows per year. In addition, relating to these charters, we also have a $260 million charter reserve as security for these charter payments.

Next page. Therefore, as a summary, I can say that we had a very strong quarter from a cash earnings perspective, fueled by a substantial profit share contribution. The negative mark-to-market of derivatives of $45.1 million was predominantly linked to the pricing of our own bond that is outstanding. We increased our fixed rate charter revenues and we expect to further increase in the first quarter of 2009, but all ultra-deepwater drilling units are under full charter rate.

We have through the year demonstrated our ability to structure deals and source financing in an otherwise challenging financing environment. And we will look for transaction opportunities that may arise in this environment, but of course, our main focus is and will be the long-term interest for our shareholders and to manage the company in a conservative manner.

Thank you. And then we open up for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) And our first question comes from Jon Chappell from JP Morgan. Please go ahead.

Jon Chappell – JP Morgan

Thank you, and good afternoon. Ole, you gave a pretty good detail on the dividend. Can I just have a couple more following questions on that? First of all, was there any pressure from the banks at all to retain capital?

Ole Hjertaker

No, there is no pressure from the banks. We are in full compliance with all the loan covenants. So this is entirely driven by the company and the Board’s view on the market and the opportunities that we see may arise and our wish to therefore increase our liquidity reserves to be able to take advantage of this.

Jon Chappell – JP Morgan

Are you seeing any opportunities now that offer attractive returns, or do you think that maybe there is potential for more asset price declines over the course of 2009, and in the very immediate term, maybe it might be better to pay down some debt with the retained capital from the dividend cut?

Lars Solbakken

It’s Lars. I think that we are – we expected maybe there to be more opportunities. We already see opportunities, but we expect there to be more interesting opportunities a little bit later in the year. And of course, we also want to be conservative in the relative turbulent environment. And so we reduced the dividend now to build more cash and to strengthen our financial position and then to invest when we think the timing is right.

Jon Chappell – JP Morgan

Is there a particular end market that you’re expecting to offer better returns? I know the rig return that you have on these last couple of rigs are very attractive, but obviously a huge amount of capital that needs to be put down for those tankers, dry bulk and anything in particular that you’re looking at?

Lars Solbakken

I think we are pretty open-minded and we also hope that there may be more defaults in the market later and you may be offered the packages basically from banks, also including financing, which may be very interesting. What we have seen in the earlier downturns, I think that is the kind of opportunities that we think can be particularly interesting.

Jon Chappell – JP Morgan

Right. On the Suezmaxes that you’ve agreed to sell in 4Q ’09 and early 2010, does the buyer have the opportunity to back out of that contract if the ships continue to be delayed?

Lars Solbakken

Of course, there is a cutoff date, which is – it's basically 270 days, we have the yard, plus there is 50 days extra in the contract with the buyer. So it’s 320 days after the agreed delivery date. So we don’t expect that to be any problem.

Ole Hjertaker

And what that means is that we will then – if we see that the yard is so much delayed, we will then have the option to terminate the agreement with the yard and receive back the deposits paid in before we are in a position where we have – where that deal is terminated with the buyer.

Jon Chappell – JP Morgan

Okay. So either way you’re not going to have any massive increase in the capital payments [ph] from what you’ve already laid out in the presentation?

Ole Hjertaker

No, we don’t expect that as a current, and we –

Lars Solbakken

And of course, we have also – of course, we have a 15% deposit from the buyer.

Jon Chappell – JP Morgan

Okay. Thanks a lot, Lars and Ole.

Lars Solbakken

Okay. Bye-bye.

Operator

And the next question comes from Rick Silva [ph] from Midwest Capital. Please go ahead.

Rick Silva – Midwest Capital

Good morning, gentlemen. The prior question answered most of what I had. But I did have one other question regarding the payout. Why the extra five-week delay on the payout of the dividend, which is going to take place in mid-April?

Ole Hjertaker

This is because we want to give the shareholders the opportunity to also to elect shares if they wish to. And this is based on standard mailing procedures, which is done through our transfer agent in Mellon. So unfortunately, there is some time because there is a mailing that needs – there is election card that needs to be mailed out and there are standards for hold-on time that needs to be out with investors and the reply time before we would know the exact number of investors who elect this alternative.

Rick Silva – Midwest Capital

Okay. And as it relates to the next dividend payout and the one after that, will you revert back to your normal schedule for your payouts?

Lars Solbakken

I think the dividend is basically decided by the Board on a quarterly basis. So it’s not something that we can basically comment on. It’s entirely up to the Board to decide, depending on how they look at the markets at that time.

Ole Hjertaker

But the payment schedule –

Rick Silva – Midwest Capital

Well, I was referring to the payout dates, not the payout amounts.

Ole Hjertaker

Yes. The payout dates are normally within a month or so from the date we report. So that all depends on if we want to give or if the company wants to give at the time the investors’ ability to also invest in shares. And of course, we cannot comment on that, and that is certainly not something the Board has discussed or decided.

Rick Silva – Midwest Capital

Just one last question, gentlemen. Do you have any comment on the situation there with Golden Ocean as it relates –

Ole Hjertaker

Hello?

Operator

We just lost the connection.

Ole Hjertaker

I’m sorry.

Operator

I’m opening up for Anders Rosenlund from ABGSC.

Anders Rosenlund – ABGSC

Thank you. Could you give an indication on your depreciation level for the first couple of quarters in 2009?

Ole Hjertaker

The depreciation level will be fairly similar to what we recorded in the fourth quarter.

Anders Rosenlund – ABGSC

Because there are no assets coming in there.

Ole Hjertaker

Well, the asset came in the fourth quarter of 2008. So – and it increased from 7.3 in the second quarter – in the third quarter to 7.5. I would estimate that as that asset came in midway through the quarter, we are talking about $100,000 to $200,000 more. I don’t have the exact number in front of me, but it’s fairly marginal.

Anders Rosenlund – ABGSC

That’s good enough. My other questions were answered. So, thank you.

Ole Hjertaker

Thank you.

Operator

And the next question is from Richard William [ph] from Williams Company. Please go ahead.

Richard William – Williams Company

Yes. I’m curious why the – at the end of the conference with Frontline, the CEO indicated it was the second best year that you had had. Yet the dividends are being cut to a five-year low. And now all of a sudden this also is being cut drastically. I’m wondering why that was so necessary.

Ole Hjertaker

The reason for dividends and for the decision from the Board to make the dividend and the amounts is based on an evaluation of the market as it is currently. There are very significant uncertainties in the market. We experienced very dramatic turbulence in the financial markets. And therefore, to be prudent and also build up the reserves in the company after very heavy investment schedule in 2008 where we invested in the region of $2.5 billion in new assets. The Board decided to reduce the dividend in order to retain more liquidity and also then be able to take advantage of some of the opportunities we think may arise out of the financial turmoils in the market.

Richard William – Williams Company

Do you anticipate in the future you will go back to a more reasonable – what has been reasonable for you dividend amount?

Ole Hjertaker

Yes. The Board is very committed to shareholders and of course dividends are always in the shareholders’ interest. But at the same time, they also have to balance that with near-term prospects in the market and how that capital can be deployed. The dividends are decided quarter-by-quarter, so I cannot make any representations as to the Board’s decision the next quarter or the quarter after. But I’m confident that the Board will decide on dividends that are sustainable and are also representable for the cash flow generated by the company.

Richard William – Williams Company

Yes. In previous years you commented early in the year on committing to a specific dividend schedule.

Ole Hjertaker

Well, the company has never committed to a specific dividend schedule. We have in the past shown increasing dividends over time. But we have been quite – we've told quite expressly that the dividend in fact [ph] on a quarterly basis by the dividend. And the Board does not make any forward projections for where the dividend should be.

Richard William – Williams Company

I’m sorry, last year you commented early in the year that the dividend would be $1.50 a quarter for the balance of the year. So that was a forward projection.

Ole Hjertaker

Well, I think maybe you referred to Frontline. We have never paid that much dividend. We increased the dividends from $0.58 per share to $0.60 per share from the second to the third quarter of 2008. And that is the highest dividend we have ever paid.

Richard William – Williams Company

No, I understand. I’m sorry. I was referring to Frontline, but to me, you’re both the same. So –

Ole Hjertaker

Okay. That’s okay.

Operator

And the next question is from Charles Fisher [ph] from LS Partners. Please go ahead.

Charles Fisher – LS Partners

Good morning, gentlemen. My question is also on the dividend. Speaking about cutting the dividends, would you say that you are motivated because you wanted to create opportunities that may arise or because you really need to because there is a lack of capital to run the business? And let me just – the reason I’m asking is, if you were to make investments, where you would get a return on equity of – with the current yield at 14% and possibly more because the cost of capital is so expensive, maybe you could talk about that.

Lars Solbakken

I think that – we have commented that a few times now, but it’s – we had a very heavy investment program the second half of last year. And of course – so we currently have less cash reserves than we historically have had. So we of course – and then we have also a more turbulent market. We see also and expect a softer shipping market. So we clearly want to strengthen the financial position of the company, which we think is important when we have turbulence in the market. It is also to prepare ourselves, and for taking advantage of the opportunities that we think will be there later in the year. So it’s a combination of both of those.

Charles Fisher – LS Partners

Okay. And just if you’d bear with me, on the opportunities in the future, I’m assuming based on my math you would have to have at least 20% – 25% IR kind of opportunities. It looks like on my analysis historically the companies earn between, say, 13% and 15% on their equity. When you look at your big deal, that’s kind of what you are earning. Is that a fair assumption that in the future your return hurdles are going to have to be much higher than they have been in the past?

Ole Hjertaker

Given the cost of capital in the market, that is a reasonable assumption. But what of course goes into that equation is the risk associated in the project. For instance, these ultra-deepwater units that we have invested in, in the last year, heavy investments, equity return to us is 15%, but that is after a very steeper payment profile and very frontloaded charter rate and also where we have eliminated the interest rate exposure and also the operating cost environment. So in the way of very protected, call it, 15% return, the question is, would you do the same deal today? What kind of returns will you get? It’s difficult to tell. All investments are different. But I think it’s fair to say that in the current environment and from what we expect that we may be able to achieve later on in the year we think returns should be higher than they have been historically.

Charles Fisher – LS Partners

Well, sure, because otherwise you could just buy your shares back and earn a 15% cash flow yield day one, correct?

Lars Solbakken

Exactly, or by the bonds.

Charles Fisher – LS Partners

Okay. Thank you.

Ole Hjertaker

Thank you.

Operator

And we have Rick Silva back for his questions. Please go ahead.

Rick Silva – Midwest Capital

Hello again, gentlemen. I guess I got cut off at the tail end of my last question. I guess I was wondering if you could comment about the Golden Ocean situation, what their credit situation, and how, if any, it's affecting your people?

Lars Solbakken

We’re not able to comment on Golden Ocean. Of course, we – as we have reported earlier, the two Capesize vessels that we had agreed to buy from Golden Ocean was cancelled. And that was due to the fact that there were substantial delays and they were not able to meet the number of requirements in the agreement we had.

Rick Silva – Midwest Capital

Right. Okay. As far as – how many ships currently have you leased out to them? Is it just the one or –?

Lars Solbakken

Only one vessel, and this is the kind of $20 million type of investment.

Ole Hjertaker

And also I want to add to that, that investment is made in a single-purpose subsidiary of ours, and we have only guaranteed $2.3 million of the loan obligation in that subsidiary. So our financial exposure relating to Golden Ocean is quite marginal compared to our overall charter profile.

Lars Solbakken

We have a very low exposure and this was an investment that was made before the dry bulk values started to increase.

Rick Silva – Midwest Capital

Really good. Thank you very much, gentlemen, for the information.

Lars Solbakken

Okay, thank you.

Ole Hjertaker

Thank you.

Operator

(Operator instructions) And we have our next question from C.J. Baldoni from Evergreen Investments. Please go ahead.

C.J. Baldoni – Evergreen Investments

Yes. Hello. Can you talk about the container ships and the counterparty risk that you see with Horizon Lines? Are those vessels being fully utilized right now?

Ole Hjertaker

Those vessels are operated by Horizon Lines under US flag in a line that goes from the US West Coast through Hawaii, Guam, to the Far East with a slot program with Maersk. We have the vessels on bareboat charter, and therefore we don’t have our people on board the vessel, our crew on board the vessel. We charter it out without crew. Of course, we have regular dialog with Horizon Lines, but we can of course not comment specifically on Horizon Lines other than that we have a very good relationship with them. There have been no issues related to payment or charter hire or otherwise. Their vessels are very well maintained and we are very happy with that relationship. In terms of the structure of that deal, we have – those vessels are owned in the single-purpose subsidiaries of Ship Finance. The deal was originally structured with $210 million of loan financing and we invested $70 million of equity. The loan financing is fully without any recourse to Ship Finance. So we don’t guarantee any of the debt associated to those vessels. But as I said, we are very happy with the arrangements we have and charter hire is coming in punctually.

C.J. Baldoni – Evergreen Investments

So if there were to be a problem, you would just get your vessel back?

Ole Hjertaker

Yes. I mean, we own the vessel. If there was a breach in the contract, i.e. – for instance, if they should not – if they should discontinue paying the charter, we could take the vessels back and we will then if it’s – and this relates to all our charter contracts. We will then of course have a claim against that specific charter. But no indications or signals or whatever that will – that may or will occur with Horizon or others.

C.J. Baldoni – Evergreen Investments

Okay. Thanks for that clarification. With respect to the Frontline vessels, the 216 in cash that backs up the performance under the charters, that amount was reduced from when the deal was originally done? Is that because of the sales that have occurred?

Lars Solbakken

Yes, that is because of sales of vessels. It’s about $5.3 million per vessel.

Ole Hjertaker

Of course, as these leases now – we've had them on for five years and there is a very significant remaining lease period. But the reserve is static so that you can say that the reserve increases relatively to the outstanding of the remaining lease payments over time. Also, with the sub-charters that Frontline has – have on those vessels, even in a weak market environment, we expect there to be a positive profit share, i.e., no need to get into that cash reserve for quite some time even if the market should be dramatically weaker than they currently are.

C.J. Baldoni – Evergreen Investments

At this point, is it possible to say what your expectations are for profit share?

Ole Hjertaker

No, we don’t take any representations as to the profit share. The profit share is based on what these specific vessels generate in revenues over the calendar year. Of course, that’s impacted from – everything from the drydocking cycle, positioning, drydocking, et cetera. But as we are talking about 39 vessels in total, on average the profit share has been very substantial, but can unfortunately not give any guiding as to what it would be in 2009.

C.J. Baldoni – Evergreen Investments

And that cash reserve, that sits on Frontline’s books. Is that right?

Lars Solbakken

Yes, and it’s pledged to the bank as security for the financing.

C.J. Baldoni – Evergreen Investments

So this is the one –

Lars Solbakken

But it went – if they need, they can dip into that and subsidize the charter rate.

Ole Hjertaker

To us. So it's structured in what's been called the bankruptcy remote subsidiaries of the Frontline. And the cash can only be utilized to pay us in case the revenues from the market was too low to pay our base rate. And – but of course, Frontline cannot take up any money from those subsidiaries where we charter in all these vessels until that reserve is restored again.

C.J. Baldoni – Evergreen Investments

Right. It’s been a long time since the deal came. So, thanks for clarification.

Ole Hjertaker

We’ve never ever dipped into the cash reserve during this five-year period.

C.J. Baldoni – Evergreen Investments

Okay. That was my next question. I thought that to be the case. And then right now, are there any unencumbered or unpledged vessels within your fleet?

Ole Hjertaker

No, the vessels on the water have all very long-term charters and have financing, which are then matched to those charters. And we have not arranged any financing for the five container ships new buildings that we have on order in China. We expect – so the yard installments there have been paid in as all equity. We expect that there will be opportunities to arrange some financing on these, but as there is still quite some time until delivery scheduled late 2010, we have not arranged this yet.

C.J. Baldoni – Evergreen Investments

Thank you very much.

Ole Hjertaker

Thank you.

Operator

And the next question is from Mark Rorison [ph] from Cinaret Funds [ph]. Please go ahead.

Mark Rorison – Cinaret Funds

Good morning. I’m sorry, I tuned in a little late. Could you just repeat how much the dividend was reduced, what the dividend payment will be per quarter, when the record date is and if it’s payable out of the cash flow, expected cash flow of the company?

Ole Hjertaker

Yes. The dividend declared for the fourth quarter is $0.30 per share, which is payable in cash or at shareholder's election in newly issued shares. This dividend is a reduction from the previous dividend of $0.60 per share, which is based on an evaluation by the Board of Directors where it is believed that the company can create more long-term value for shareholders by retaining additional cash and also by deploying capital opportunistically to capitalize on new market opportunities. The dividend will be paid on or about April 17th. And the reason for the late payment date is that we will send out an election card after we file a prospective supplement, whereby investors can elect to receive the dividend in shares instead of cash. The record date is March 9th and the ex-dividend date will then be March 5th.

Mark Rorison – Cinaret Funds

And do you expect that that will – the reduced dividend is payable out of the cash flow?

Ole Hjertaker

Yes.

Mark Rorison – Cinaret Funds

Or will you have to go into reserves?

Ole Hjertaker

No, we have very substantial cash flow from our projects. So that is payable out of the – payable from the projects.

Mark Rorison – Cinaret Funds

Very good. Thank you very much.

Ole Hjertaker

Thank you.

Operator

And we have a follow-up question from Anders Rosenlund. Please go ahead.

Anders Rosenlund – ABGSC

Yes. The vessel sales in 2009 and 2010, could you just quickly remind us which quarter those sales are taking place and the gains which would be realized in your P&L?

Ole Hjertaker

Yes. Currently, based on our own estimates from our team at the shipyard, we estimate delivery of these vessels in the fourth quarter of 2008 – sorry, fourth quarter of 2009 and the first quarter of 2010. This is after the, call it, the base contract date, well within the permitted window from the shipyard. We have a yard contract price of $71 million per vessel, whereof 60% of that is payable on delivery. The agreement to sell the vessels is with immediate delivery after the delivery from the shipyard. The buyer – and the net purchase price will be $108.5 million approximately after broker commissions. The buyer has paid in around $16 million per vessel in cash deposits. And the balance is then payable on delivery. Sorry – and you also asked about the gains. I don’t have the exact number in front of me. We estimate the gains when we made the press release, when we announce the deal. I believe that the gains is in the region of $68 million, but I might find it –

Anders Rosenlund – ABGSC

Sounds familiar.

Ole Hjertaker

Yes, I think it’s in that level.

Anders Rosenlund – ABGSC

Great, thank you.

Ole Hjertaker

Thank you.

Operator

We have no more questions.

Ole Hjertaker

Yes. So, thank you all for participating in this fourth quarter earnings release call from Ship Finance. We appreciate that you took the time to listen in. And also for those who participated, thank you for the questions. In the presentation – at the very end of the presentation, we have an outline of the finance leases with also forward four quarters. We will have available for investors and analysts on a request basis the full lease schedule on a vessel-by-vessel basis throughout the leasing period to make it easier for – which will also have a breakdown on the different components and where that appears in the profit and loss statement and the cash flow statement. And this is made available to make it easier to analyze the company and make projections going forward. So, thank you all.

Operator

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

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Source: Ship Finance International Limited Q4 2008 Earnings Call Transcript
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