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Executives

Ole Hjertaker - Chief Financial Officer

Harold Gavin [ph] - Senior Vice President

Magnus Valeberg - Vice President

Analysts

Justine Fisher - Goldman Sachs

John Parker - Jefferies & Co

Jonathan Chappell - J.P. Morgan

David Shapiro - BGB Securities

C.J. Baldoni - Evergreen Investments

Ship Finance International Ltd. (SFL) Q2 2009 Earnings Call August 20, 2009 10:30 AM ET

Operator

Good day and welcome to the Ship Finance International Q2 2009 earnings release conference call. Today’s conference is being recorded. At this time, I’d like to handle the conference over to Ole Hjertaker. Please go ahead sir.

Ole Hjertaker

Thank you and welcome everyone to the Ship Finance International second quarter conference call. Apologies for the delay and the start up for the call, there was some error with the website for the webcast, but that should be sorted out by now.

My name is Ole Hjertaker, and I am the Chief Executive Officer and Chief of Finance Management. With me here today I also have Harold Gavin [ph], Senior Vice President and Magnus Valeberg, who is Vice President in the company.

Page Two. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within 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 market. 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 securities.

Page Three. The Board of Directors has declared a cash dividend of $0.30 per share, this quarter, similar to the previous two quarters. This represents $1.20 a share on an asset basis, or 10% dividend yield based on the closing price yesterday. We have now declared dividends for 22 consecutive quarters and more than $10 in total aggregate cash dividends.

The net income for the quarter was $53.5 million or $0.72 per share. This is including a $41 million gain on buy back of bonds and a $33.7 million asset impairment, predominantly relating to the remaining single hull assets. We will comment on these two items specifically.

The full effect of the cash flow from the new ultra deep water drilling rigs came in in the second quarter of 2009. The West Polaris was indicated for sale in February of 2009, and the full rate on the rig commenced at that time. We now have close to $100 million in quarterly base bareboat charter revenues from these three ultra deep water rigs. These are accounted for as investments in associate based on US GAAP, and therefore only the net income in these subsidiaries appear in our consolidated income statement.

We have a continued profit share contribution despite a weaker tanker market. We had $8 million profit share contribution in the first quarter and $22.5 million profit share accumulated in the first six months. On average there’s been $85 million or approximately $1.15 per share, average profit share since 2004 on an annualized basis.

The expectations for this spot tanker market in the remainder of 2009 is soft based and ship broker estimates and forward rates as quoted by Imerex. However, Ship Frontline has sub chartered several vessels at high rates, and the breakeven level for vessels in the spot market for profit share purposes is therefore significantly lower than the base rates, which are $26,000 approximately for the VLCCs.

Page Four. At the end of the first quarter there were $449 million of our 8.5% senior notes, due 2013 outstanding. During the second quarter we repurchased bonds with a face value of $148 million and the net remaining outstanding on the Debon [ph] loan is now $301 million. The bonds were repurchased at the prevailing market price of $84.5, representing a $15.5 discount to par value and an effective yield towards return for those bonds of 13.3%.

$125 million acquisition was financed by $90 million of bank loans, a capital raise of $16.5 million and the remaining from the company’s cash reserves. The repurchased bonds will be held as treasury bonds, but for US GAAP purposes they will be treated as extinguished.

In our books, as of June 30, we therefore have $301 million senior notes, plus the $90 million of new financing raise in connection with the repurchase. This is net $58 million lower than the previous quarter. The transaction resulted in total book gain of $41.7 million, including a $19 million mark-to-market gain, relating to the old total return swap agreements that were settled.

In the quarter, we recognized a $26.7 million non-cash impairment, relating to our six single-hull tankers on charter to Frontline. The impairment was triggered by the accounting effect of the sale of the Front Duchess and we decided to revise the book values also for the older vessels.

At the end of the first quarter, the average book values for vessels were on average of approximately $20 million per single-hull tanker, and net of the write down we know as of June 30, as a book value of approximately $15 million. We have so far no indications that Frontline intends to redeliver the vessels to us on the EIMO phase update in 2010, and Frontline has previously announced that two of the vessels have been sub-chartered out until 2011 at least.

The aggregate value of the six single-hull vessels remaining on chartered to Frontline is approximately $92 million now, and this represents less than 2% of our total book vessel value. So the effect from these vessels are in any case marginal for the overall company.

The other impairment is linked to a $10 million financial investment in a container vessel owner and operator, where the company holds a 7% interest. The impairment of $7.1 million was triggered by write downs made by that company, and according to US GAAP, we have reflected that in our own books.

The company question has sufficient cash and other liquidity resources, to sustain its operations for several years under currently depressed market conditions, so the write down is not reflective of a view that the company has serious problems.

We have also subsequent to quarter end, announced the sale of the jack-up drilling rig West Ceres. Seadrill exercised the pre-agreed fixed price purchase option and the vessel was taken over in mid-July 2009. The effect of the transaction is that we got net cash proceeds of approximately $40 million. The effect the transaction will have for our P&L and also from our net cash earnings perspective will be approximately $0.015 per share per quarter. We have also announced that we have agreed to sell the single-hull VLCC Front Duchess, and the delivery of the vessel is expected in early December 2009.

Net cash proceeds after termination fee to Frontline and repayment of associated debt is estimated to be $2.5 million. The effect of EPS on that transaction is estimated to approximately $0.05 per share per quarter, but that will only have a material effect until the second quarter 2010, because at that time the vessel, as it is a single-hull tanker, would go on a very reduced rate to Frontline where we would only earn a very marginal charter revenue.

Page Five. With respect to the dividends, shareholders can elect to receive this in-stock instead, similar to the dividend in the previous two quarters. This is a non-diluted way for existing shareholders to build buffer and investment capacity in the company. 55% of shareholders elected to take stock dividend with respect to the fourth quarter 2008 dividend, and 52% decided to take the stock dividend with respect of the first quarter 2009 dividend.

$3.1 million shares have been issued in a non-diluted way for assisting shareholders, and the average subscription price has been significantly lower than current market values. So this has been a very good investment for those shareholders who elected to take this opportunity. Companies indirectly controlled by Mr. John Fredriksen have already notified us that they wish to take the stock dividend also for the second quarter 2009 dividend.

Page Six. The company filed an after market equity program in December 2008, based on a total of up to seven million shares. This represented less than 10% of shares outstanding and was intended as a tool in the toolbox from a capital management perspective in the company. Unfortunately, this type of program seemed to have gained a negative perception in the investor community, following massive equity sales undertaking by certain other companies.

We decided to use a portion of the program in the second quarter in connection with the acquisition of our own bonds, and sold 1.4 million shares in the market at an average price of $12.24 per share. Implied annualized dividend yield on the stock was approximately 10% and we used the proceeds to acquire bonds with the yield of approximately 13%. The issuing was very cost efficient with low fees and without negative price pressure, sometimes created by large book sales and marketed offerings.

To avoid negative focus in the equity market relating to potential equity overhang from the remaining 5.6 million shares under the program, we have decided to discontinue this program. The company’s access to capital market remained strong and we have a significant liquidity also following the sale of the West Ceres subsequent to quarter end. Following the issuance of the dividend stock in July 2009, the total number of shares outstanding currently is 77.3 million shares.

Page Seven. We have a unique order backlog and all our chartering counterparts are performing. Ship Finance is in a different league than most other shipping and offshore companies, with more than 13 years weighted average charter coverage. We have $7.5 billion fixed rate order backlog or approximately $95 per share, and the EBITDA equivalent backlog is $6.4 billion or more than $83 per share.

These numbers are before profit share and on a fully diluted basis, and this does not include any rechartering after end of the current charters. Our charter backlog is of course also very important for our financing banks in the current economic climate, where access to capital is not as easily available as in the previous few years.

Page Eight. Ship Finance generates a very significant cash flow per quarter. This overview includes all 100% owned vessels, including vessels classified as investment in associate, based on US GAAP. The EBITDA equivalent cash flow before profit share contribution was $190 million, which is up 5% compared to the previous quarter, and the EBITDA equivalent after accumulated profit share was $198 million or $2.65 per share in this quarter.

Compared to the first quarter, the second quarter has the full rate from all the ultra deep water drilling units in the quarter. It’s also partly, but to a much lesser degree, impacted by two VLCCs that were on charter to Frontline, that we have chartered on a bareboat basis and therefore the fixed charter is lower, but then corresponding operating expenses are lower. We have also rechartered one small more container vessel at a lower rate than previously.

From the second quarter to the third quarter, the West Ceres will be taken out as of mid July, and the EBITDA effect of that can be estimated to approximately $4 million. The Front Duchess is expected to be delivered in early September, and the EBITDA effect of that is estimated to approximately $500,000.

Page Nine. If you look at normalized contribution from our projects, which here again includes vessels accounted for as investment in associate, net interest in the quarter was $47 million or $0.63 per share and ordinary debt installments from the company’s projects was approximately $106 million or $1.42 per share.

The net effect of that is that the contribution from a project in the quarter was then $45 million approximately or $0.60 per share, and the corresponding number in the first quarter was $0.73 per share. These numbers compare again to the $0.30 per share dividend that we declared this quarter.

Page Ten. We will now briefly go through both, the income statement, balance sheet and cash flow statements, and we will here highlight some of the items that could be worth noting. First of all here on page ten, if you look at the revenue line, as we have lease accounting for a very substantial part of our assets, a very, very substantial part of the charter revenues are excluded from the total operating revenues as indicated in the presentation.

Ship operating expense is stable quarter-over-quarter and as we have a very low exposure to operating expense risk through locked in operating expense agreements with Frontline at $6,500 per day, including dry docking. Frontline, we have not reported second quarter numbers yet. We reported in the first quarter that the average operating expenses for the vessels in the fleet was $9,300 per day.

Furthermore, it’s worth noting in our income statement, that as we have very substantial assets accounted for as investment in associates, only the net income from these subsidiaries are affected in the income statement on the line called ‘Results in Associates.’ These represent the three ultra deep water rigs and also a Panamax bulker. In the three months ended June 30, this number represented around $19 million.

Also in the income statement, we have the mark-to-market effect of derivatives, and also the gain on the bonds linked to the purchase of the $148 million face value of bonds, and the settlement of the related TRS agreements, which are specified here in the income statement as mark-to-market as derivatives, and gain on repurchase of company bonds.

Page Eleven. In the balance sheet we would like to highlight the line item called Investment and Associate. As I mentioned, a very substantial asset base have this accounting treatment and only the equity portion from these subsidiaries are recognized in our balance sheet under this line item.

Slide Twelve. In the cash flow statement we have highlighted the line where the part of the charter hire that is excluded from operating revenue where that is included, including under investing activities is called repayment on investment and finance lease. Also the net payments to or from the investment and associates, are on the line called investment and associated companies.

Page Thirteen. We have for illustration purposes, also given some summary numbers from the subsidiaries classified as investment and associates. The preliminary cons for each of these subsidiaries are provided separately on our web page. All these subsidiaries have finance lease accounting, and therefore all of these also have a substantial portion of the charter hire excluded from total operating revenues.

The net income from these subsidiaries appears in our consolidated accounts as results in associated companies, and the shareholders equity appears in the consolidated balance sheet as investment in associate.

Page Fourteen. We have a loan portfolio on a consolidated basis of approximately $2.4 billion, including the bond loan. In addition, there are $2 billion of loans in subsidiaries that are accounted for as investment in associate. With our portfolio long term charters, our strategy is to hedge a substantial portion of our interest rate exposure through swaps, fixed interest and interest compensation through charters, and currently approximately 80% of our interest exposure is effectively hedged.

Most of the projects that we have added on over the last few years, have limited recourse to our balance sheet. As an example, the ultra deep water units representing approximately $2 billion of bank loans, we only guarantee approximately $300 million of that from Ship Finance Corporate. On aggregate, approximately $1.8 million of the bank financing is guaranteed by the parent company.

We are in full compliance with bank covenants and we have no near term refinancing needs and as we can also illustrate it by the capital expenditure table, we only have a marginal remaining investment program compared to our fleet size. At the quarter end, we had $61.6 million in available cash on our balance sheet.

Page Fifteen. We have two large counter parts as illustrated by this graph and these are Seadrill and Frontline. Seadrill charters are guaranteed 100% by the ultimate parent in the Seadrill structure, and all the ultra deep water units are sub-chartered to major oil companies, and both the charter and corresponding loan package are very frontloaded, which effectively takes down our exposure very, very quickly.

On the vessels unchartered to Frontline, they were based on very conservative base rates as they were structured before the market increased substantially after 2004. The 20% profit split has generated on average, approximately $85 million of incremental cash flow per year, and there is a $216 million charter reserve as security for the fulfillment of the charter payments relating to the Frontline charters.

We do provide full details on an asset-by-asset basis and the full revenue backlog, and also accounting treatment, and this can be provided upon request if you e-mail us at ir@shipfinance.no.

Page Sixteen. The profit share agreement with Frontline has generated a lot of additional cash flow for Ship finance. The original charters were structured fairly low in the tanker cycle and therefore have a lower profit share threshold.

As we mentioned previously, there has been on average, an $85 million annual incremental cash flow and this has generated more than $400 million of free cash flow over a period of 5.5 years, which has enabled the company to fuel significant growth. Based on Frontline sub-charters, we believe that the average breakeven TC level for spot VLCC, is significantly lower than the base rate of around $26,000 per day.

Page Seventeen. The quarter has proven to be a strong quarter from a cash earnings perspective, fueled by a profit share contribution also in this quarter, and we recorded $0.72 per share of net income in the quarter. We have increased fixed rate charter revenues in the quarter, as all ultra deep water drilling rigs are now on the full charter hire.

We will look for transaction opportunities that may arise in the financing environment we see currently, but our main focus is long term interest of our shareholders, and we continue our policy of paying a very handsome dividend on the back of long term charters, with performing counterparts.

With that, we open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take the first question from Justine Fisher from Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Good morning.

Ole Hjertaker

Hello.

Justine Fisher - Goldman Sachs

Hi. I see that if the stock has a 10% dividend yield, then obviously the cost of your bank debt is lower than the bond, that makes sense to buy back more bonds, but were you just doing that because of the economics, and is there a plan to buy back more going forward?

Ole Hjertaker

The bond was initially $580 million back at the end of 2003. Currently the net outstanding, net to what we have bought back is just over 300. So I think we have demonstrated that we have in the course of this period, essentially brought back half the bond.

We don’t have a specific stated policy with respect to our bond loan. We will always treat investments in our bonds and we will evaluate it compared to other investment alternatives. But we are of course happy that we were able to buy back these at a very attractive price as demonstrated also through our accounts.

Justine Fisher - Goldman Sachs

Were there restrictions in the bank agreements at all, restricting the repurchase of subordinated debt. I mean were there any to begin with, and if there were, did this kind of fill up your ability to repurchase, to use additional bank debt to repurchase subordinated debt or no?

Ole Hjertaker

No, there are no restrictions in our financing relating to purchasing senior notes.

Justine Fisher - Goldman Sachs

Then as far as the West Ceres is concerned, I know that in the press release announcing the sale, I think you mentioned that you are going to get $135 or so of proceeds from that, but then in the charts in your presentation, when you talk about the asset sales that you expected, only I think for the second half of this year it’s $109 million, but then the proceeds from the West Ceres don’t show up in the Q2 results. So I’m just wondering where that will show up? Is the $109 million, that doesn’t include the West Ceres or…?

Ole Hjertaker

Yes, this is slide 14 in the presentation, and this is where we comment on our capital expenditure commitments. The contract of sale of vessels here are contracted sale of vessels that are under construction. So this table on page 14 does not reflect and include the tale of the West Ceres, which is then effectively in addition to that. So you will see that in our third quarter numbers when they will be released later in the year.

Justine Fisher - Goldman Sachs

Can you refresh the numbers for the amount of recourse debt versus non-recourse debt at Ship Finance and its subsidiaries? Because I know that you guys have given numbers previously as to what percentage of the $2.4 billion of debt on the balance sheet is actually recourse. Is there an updated number of that? We can do this offline too, if you need to.

Ole Hjertaker

Yes. The total value, I’ll call it the total guarantee level of our financings is in the region of $1.7 billion to $1.8 billion, out of a total of $4.4 billion. I am happy to go through that on a sort of item by item basis with you offline.

Justine Fisher - Goldman Sachs

The last question is just about maturities. Obviously you guys have whittled away your CapEx forecasts and again required expenditures, but I guess 2011 is kind of the big maturity year with almost $700 million up. Are you guys making any plans to deal with that? Then the $2 billion of bank loans in your subsidiaries, there may not be recourse and bankruptcy, but I mean are you responsible for maturities of that debt going forward as well?

Ole Hjertaker

Of course, we have an active approach to our banks and the financings we have. You are correct, there is one facility that is due for refinance in 2011. This is a financing which has been going on, which used to be more than $1.1 billion, and it will be closer to $600 million at the time. So we have paid down a very substantial amount of the debt there, and it’s also secured by a big proportion of the vessels that we have on charter to Frontline and as we see it, a significant, more value supporting that than the loan.

So we are quite confident that we will be able to refinance that at attractive terms, but we cannot specifically on timing or exactly how we will do that. It’s still more than 1.5 years to maturity, so we believe we still have a decent time.

Justine Fisher - Goldman Sachs

That doesn’t include any of the potential maturities of the $2 billion of bank loans of the subsidiaries right? Because those are off balance sheets, but is Ship Finance still responsible for any of those maturities?

Ole Hjertaker

Yes, they are 100% owned subsidiaries of Ship Finance, and when those facility matures in 2013, Ship Finance will still guarantee $275 million of those loans, and the balance at that time will be in the region of $1 billion or a little over; of course we will address that when we get there.

Again, these are loans linked to assets which have be paid down very substantially through the initial part of the life of those transactions. Our view has been for basically all our transactions to ensure that we are not depending on a high market level or to be high up in the market cycle, to be able to finance that in a meaningful way. So, we are also quite confident that that is something we can deal with in a good way, and that is something that of course will come up within the next four to five years.

Justine Fisher - Goldman Sachs

Thanks so much.

Ole Hjertaker

Thank you.

Operator

Your next question comes from John Parker from Jeffries.

John Parker - Jefferies & Co

Hi. You guys haven’t done any new projects recently, and we’ve been through a lot of turmoil, but can you talk to us about all of that, the pipeline and what types of transactions you are looking at or considering in this environment?

Ole Hjertaker

Yes. It’s fair to say that we do have an active approach to looking at projects. We have not done any projects, we will of course make the appropriate notification if and when we do.

I think our view has been that we have been through some very significant turmoil in the financial markets. We see that, both in some segments, but also with payers that some players are struggling. We think that we can play a role and that there will be very interesting opportunities for us, but we don’t see the need to necessarily rush out and do something right now.

We have a very substantial charter backlog on our books as it is, and we believe that in order to take care of our shareholder’s interest in the best way, we have so far felt that it has been prudent to sit back and await as we anticipate that there will be many, many opportunities going forward.

It’s difficult to quantify exactly what kind of project we will do and in which segment. We have a multiple segment approach. We do offshore, tankers, bulkers, container, but I think our overall goal is to build on our charter backlog with strong charter counterparts and build also our dividend capacity over time.

John Parker - Jefferies & Co

Okay, that’s all I have. Thank you very much.

Ole Hjertaker

Thank you.

Operator

Next question comes from Jonathan Chappell from J.P. Morgan please go ahead.

Jonathan Chappell - J.P. Morgan

Ole, can you give us a status update on the two Suezmaxs that are agreed to be sold in the second half of ‘09 and 2010. There has been a lot of talk about shipyard delays and the tanker side especially in the Suezmax market. So I’m wondering if those ships are still going to be delivered on time, and is there a loophole in your contract for the sale of vessels, where the buyer could back out if there is a substantial delay.

Ole Hjertaker

Yes, thank you. We have two Suezmax tankers contracted at a yard in China. There has been delays here, so both vessels are delayed in excess of six months, but we expect them still to be delivered within the time window that we have with the yard.

Also if you look at the agreement we have with the buyer, as we have agreed to subsequent, due to resale of the vessels when they are delivered from the shipyard, we have in the agreement there built in extra time so that we will not be in a situation where that buyer could walk away from us before we could walk away from the yard.

Based on the latest updates from our team at the shipyard, we expect the first vessel to be delivered in the fourth quarter and the second vessel delivered early second quarter next year. This is well within the canceling date for the buyer of these vessels. I would think I would add that the buyer that has an active inspection crew at the shipyard. They have paid their deposit as agreed and we expect them to honor the contract fully of course.

Jonathan Chappell - J.P. Morgan

Now asset prices have obviously fallen substantially since this agreement was first arranged, and although $32 million is a pretty material down payment, I guess there is a chance that they could potentially walk away from economic reasons despite what you just said. Is there a contingency plan in place, just in case this $218 million of scheduled proceeds doesn’t come into play to meet the remainder of your capital commitments?

Ole Hjertaker

Yes, I mean we have not disclosed the name of the counterpart based on a confidentiality agreement, but it is a company with substance. So our counterparts are not, let’s call it, MC or single purpose companies. We believe that there is asset behind the signature for those sales contracts. We have not specifically arranged financing for these vessels.

First of all, we believe that we have a good cash flow and we can take delivery without arranging financing at least for the first one. Secondly, we believe that we can fairly easily, and this is based on discussion with banks for other type of projects, we believe that we fairly easily could arrange financing for these kinds of assets if we wanted to.

Jonathan Chappell - J.P. Morgan

Okay. That’s going to lead into my last one too. You didn’t give the terms for the $90 million of new bank loans that you used to repurchase the notes, and I’m not asking you to if you don’t want to, but I’m just wondering how receptive the banks are to potential new projects right now, and what’s the general type of spread that we’re talking about on new loans in the market today?

Ole Hjertaker

Yes. It’s very difficult to give sort of a general answer to that, and that is because the pricing is so depending on the project structure, it has to do with the type of asset, with the kind of leverage you have on the asset, who the counterpart is and how the deal is tied up. Of course in general the pricing has increased, and of course everyone is well aware of that. So for instance, a loan that you probably would have paid 1.25% margin on, you may now look at 2.5% spread.

With that said, the base LIBOR has come down very substantially, so I would say that the reduction in base LIBOR has more than offset the increase in spreads to the banks. From a more general perspective, some may view that the shipping space has been almost subsidized by some banks through big competition, and we have to fight for the capital along side all other industries. These, I’ll call it margin increase or spread increase, it’s not something that’s only applicable for shipping, it’s all across the board. So it has to do with the bank’s risk premiums.

We all know that there is a very substantial capital requirement within the shipping space over the next few years, but at the same time shipping is a relatively small segment from an overall perspective. So I would think it’s also a pricing issue for when that market effectively will clear.

Jonathan Chappell - J.P. Morgan

Okay. Thank you Ole.

Ole Hjertaker

Thank you.

Operator

(Operator Instructions) We’ll now take the next question from David Shapiro from BGB Securities.

David Shapiro - BGB Securities

Hello gentlemen.

Ole Hjertaker

Hello.

David Shapiro - BGB Securities

A question sort of regarding your profit share; I got on the call late, and I’m not sure if you addressed it. Do you guys sort of have a forecast for the rest of the year on the profit share based on current operations?

Ole Hjertaker

No, we don’t prepare a profit share estimate for the year. The profit share that we have with Frontline is aggregate on a quarterly basis, but it’s calculated annually in arrears and is payable in March the following year. We do know that Frontline has a substantial sub-charter portfolio, which of course in a weak tanker market supports the profit share calculation, but we do not give estimates unfortunately.

David Shapiro - BGB Securities

Do you know how long the duration is on some of those charters? They booked them at attractive rates versus what spotted them before. How long the majority of those sub-charters in place were before they start rolling off? I’m just trying to assess here the likelihood of Frontline to cover their obligations and I understand there are reserve accounts, but just the likelihood of covering their obligations without having to dip into those reserve accounts.

Ole Hjertaker

Yes. We would have then to refer to the Frontline’s first quarter results, which were announced back in May. They will announce their second quarter results next Friday, so then you will get updated numbers, but in Frontline’s presentation back in May, they indicated that for 2009, 25% of their double hull capacity was covered, while for 2010 it was 7% at the net average, bareboat TC rate of $50,000 per day.

For 2009, the single hulls had a coverage of 79%, whereas it would be around 61% in 2010. If you look at the double hull, the Suezmax is at 24% in 2009 and 13% in 2010, and the OBOs which are combination vessels, oil-bulk-ore vessels, each of them had 100% coverage in 2009 and eight of them have coverage in 2010 at a high rate of $47,000. I’m sure they will give an updated figure on this when they report their numbers next week.

David Shapiro - BGB Securities

Right. On those VLCCs, I guess they don’t really split out between what’s Ship Finance vessels versus own vessels?

Ole Hjertaker

No, they don’t, but at least it gives an indication for the level where they are, and of course although they don’t give it specifically per vessel, you would assume that as long as they have the financial exposure to charter in the vessels, you would assume that they would probably charter them out again on an even basis.

David Shapiro - BGB Securities

Okay, thank you.

Ole Hjertaker

Thank you.

Operator

Next question comes from C.J. Baldoni from Evergreen Investments.

C.J. Baldoni - Evergreen Investments

Hi, thank. Why did you chose to unwind the total returns swap now as opposed to maybe a few months ago? Is it just because of the turmoil in the market?

Ole Hjertaker

Yes, it was partly due to the turmoil in the market. We felt that it was an interesting time to do it, because we felt that generally the market had moved, but the bond market hadn’t moved as much we felt at the time. So and then we negotiated the financing structure with the banks and we agreed on a structure to do that.

C.J. Baldoni - Evergreen Investments

That financing was supplied by unaffiliated third party banks?

Ole Hjertaker

Yes.

C.J. Baldoni - Evergreen Investments

Does the maturity of that loan match the maturity of the bonds?

Ole Hjertaker

No, it is a combination of two loans. Maturity is shorter, but we believe that they can be refinanced at the time of maturity.

C.J. Baldoni - Evergreen Investments

I guess I should know this, but to refresh my memory, the original 580 is reduced to 449, so that 130 odd million of bonds, they have been retired, right?

Ole Hjertaker

Yes.

C.J. Baldoni - Evergreen Investments

So then this next amount you are going to hold them as treasury bonds, which I guess if you wanted to you could sell them back out and bring in cash.

Ole Hjertaker

Yes, in theory, correct.

C.J. Baldoni - Evergreen Investments

Why not retire them?

Ole Hjertaker

Well, I think for US GAAP purposes, they are treated as extinguished when you buy back bonds. From the time when we acquired the previous, call it set of bonds and now there’s been legislation change in Bermuda.

Previously a company could not own their own securities. You had to cancel them fully. One and half years ago, there was a change in the laws in Bermuda where we had domicile, where a company could hold their own securities, and therefore we think it’s prudent and also gives the company more flexibility by holding them as treasury bonds.

C.J. Baldoni - Evergreen Investments

In case you wanted to reissue them?

Ole Hjertaker

Exactly.

C.J. Baldoni - Evergreen Investments

Then you have like $400 million or so of short term debt, could you talk a little bit about that? Is it just a bunch of different things? Are going to refinance that or pay it off as a company would do? Do you guys supply like a debt schedule or a Cap table for investors?

Ole Hjertaker

We don’t give a breakdown facility by facility. We have several loans relating to different projects. If you look at our debt schedule, there are a couple of facilities there that’s worth noting. For instance, as we have agreed to sell one jack-up drilling rig at $95 million, so that is included there.

We also have $19 million of remaining seller credit relating to the two latest ultra-deepwater drilling rigs, which have much shorter maturity, but where there is, we believe significant flexibility in the final term, based on our overall liquidity and so forth, but as we see it, we do have the means to take that out of course if you want to.

We also have very significant amortization on some of the loans, for instance relating to the Frontline vessels, where we believe that if we decided to refinance prior to the maturity date in 2011, we would have significantly lower amortization per quarter, but of course it is included here in this schedule asset.

We also have for instance, the full loan on Front Duchess, $13.8 million falling, that should have been there, that now is classified as short term as that vessel has been agreed, sold and it will go out. Also some other smaller facilities that we expect to be rolled over. So it’s a mix of the different facilities, but certainly no maturities here that we are concerned about.

C.J. Baldoni - Evergreen Investments

Right. Okay, well thank you for all your help.

Ole Hjertaker

Thank you.

Operator

(Operator Instructions) There are no further questions. I’d like to hand the call back over to your host for any additional closing remarks.

Ole Hjertaker

Yes, thank you. Then I will thank all participants for listening to the Ship Finance second quarter 2009 earnings call. Thank you.

Operator

Thank you. That concludes today’s conference. Thanks for participating ladies and gentlemen. You may now disconnect.

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Source: Ship Finance International Ltd. Q2 2009 Earnings Call Transcript
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