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Ship Finance International Limited (NYSE:SFL)

Q4 2009 Earnings Call Transcript

February 26, 2010 10:30 am ET

Executives

Ole Hjertaker - CEO and Interim CFO

Analysts

John Parker - Jefferies

Jon Chappell - JP Morgan

Justine Fisher - Goldman Sachs

Ole Ben Hagen [ph] - SCB

George Burmann - GunnAllen Financial

Operator

Good day and welcome to the Ship Finance International Q4 2009 earnings release conference call. For your information, today’s conference is being recorded. At this time, I’d like to hand the conference over to Mr. Ole Hjertaker. Please go ahead sir.

Ole Hjertaker

Thank you and welcome to Ship Finance International and the fourth quarter conference call. My name is Ole Hjertaker, and I am the CEO and Chief Finance Management. With me here today I also have Harald Gurvin, Senior Vice President; and Magnus Valeberg, Vice President.

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.

The Board of Directors has declared a cash dividend of $0.30 per share for the quarter. This represents $1.20 per share on an annualized basis or 7.7% dividend yield based on closing price yesterday. We have now declared dividends for 24 consecutive quarters and $11.08 per share in total aggregate cash dividends.

The net income for the quarter was $62.4 million or $0.80 per share. This is including a $24.7 million gain related to the Suezmax Glorycrown, which was delivered in November 2009 and where the charter has paid $40.5 million cash upfront. The gross charter revenues including subsidiaries accounted for as ‘investment in associate’ was $203 million or $2.60 per share, and the EBITDA equivalent cash flow was $184 million or $2.35 per share.

We have seen an increased profit share contribution compared to the third quarter 2009. The profit share has increased from $4.8 million in third quarter to $5.7 million in the fourth quarter and a total of $33 million has accumulated in 2009. On average, there has been $80 million of profit share or $1.02 per share annual average profit share since 2004.

The first of the two Suezmax tanker new buildings chartered to North China shipping was delivered from the shipyard in November 2009. The second vessel is scheduled for delivery in the first quarter of 2010 and we expect it to be ready mid March, so it is only a few weeks from now on. That vessel will then also be chartered to North China Shipping on similar terms. For each of the vessels, we will receive an upfront payment of $40.5 million net and the bareboat rate will be approximately $16,700 net per day.

At the end of the charter period, there is a purchase obligation of $40.7 million net per vessel. North China will have annual purchase options first time one year after initiation of the charter. The net purchase option prices are $51.2 million after year one, $49 million after year two, $46.6 million after year three, and $44.1 million after year four. Excluding upfront payments and the purchase obligation, the transaction represents a $61 million net increase in our chartered backlog.

The single-hull VLCC Front Vanadis, which has been employed on a bareboat higher purchase scheme to an affiliate of Taiwan base TMT for two and a half years has been sold to the charter pursuant to a pre-agreed purchase option in November 2009. The option price was $11.7 million and the transaction generated $1.2 million net cash in the fourth quarter after prepaying $10.5 million of associated debt. This transaction did not have a material impact on the profit and loss statement.

The 1998 VLCC Front Vista was sold to a subsidiary of Frontline for net sales proceeds of $58.5 million in February 2010 including a compensation by Frontline for the termination of the charter. Frontline has simultaneously agreed to sell the vessel to an undisclosed third party with settlement by way of installments. That transaction is linked to a ten-year time charter to a state-owned oil company. Ship Finance will receive net proceeds of approximately $22 million after pre-payment of associated debt and the sale is expected to result in a book gain on sale of assets in the first quarter of approximately $1.8 million.

One of the very important features with Ship Finance is our long-term charter portfolio that gives us a transparent secured cash flow. Ship Finance is in a different league than most of the shipping and offshore companies with more than 12 years weighted average charter coverage. We had a total of $6.9 billion fixed rate order backlog at the end of 2009, which is equivalent to $89 per share. The EBITDA equivalent backlog was $6.1 billion or $77 per share and these numbers are before any profit sharing and does not include any re-chartering after the end of the current charter. Our charter backlog is very important also for our financing banks in the current economic climate for access to capital is not as easily available as in the previous few years. This is also demonstrated by the overwhelming response to the $675 million financing we are in the process of completing this quarter.

As we mentioned, Ship Finance generates a very significant cash flow per quarter and 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 was $178 million in the quarter and $184 million or $2.35 per share after profit share. Compared to the third quarter, the main difference relates to the Front Duchess, which was sold in the third quarter but with full accounting effect in the fourth quarter. In addition, Front Vanadis as we mentioned earlier, was delivered to the new owner in November and had a massive negative effect on the VLCC line of approximately $1.1 million.

On the Suezmax side, we took delivery of the Suezmax Glorycrown in late November and we had a positive contribution from that vessel of approximately $600,000. In addition in the quarter compared to the previous quarter, we had lower operating expenses partly due to the sale and delivery of Front Duchess and also because we have lower general and administrative costs in this quarter. If you compared the fourth quarter to the first quarter of 2010, we then expect to have a full quarter of revenues from the first Suezmax tanker Glorycrown which represents another $900,000 approximately compared to the fourth quarter. And in the second quarter, we also expect to have the second Suezmax tanker Everbright in and that will have a contribution of about $1.5 million.

Also in the first quarter of 2010, two of our single-hulls will go on the pre-agreed lower rate as they have reached their anniversary day in 2010 and we expect that to have a net effect of approximately $1.8 million in the first quarter compared to the fourth quarter of 2009. We provide a full breakdown on charter hire per vessel including the accounting treatment upon request to the email address ir@shipfinance.no

If you look at normalized contribution from a project and then also include vessels accounted for as ‘investment in associate’ the EBITDA, which then is the charter hire plus profit share less operating expenses and G&A as illustrated on the previous slide was $2.35 per share in the quarter.

Net interest in the quarter was approximately $44 million or $0.56 per share while ordinary debt installments relating to the company’s projects was approximately $103 million in the quarter or $1.32 per share. This means that net contribution from our projects in the quarter after the above very significant repayment of debt was approximately $37 million or $0.47 per share. This is similar and slightly higher than the third quarter contribution of approximately $0.44 per share, and we have declared dividends for the quarter of $0.30 per share.

If you look at the profit and loss statement, I will only highlight some of the items that you should be aware of. First of all, a lot of our vessels and a lot of the cash flow are in subsidiaries accounted for as investment in associate and therefore not included at the top of the profit and loss statement. Instead the net income in these subsidiaries is in the line called results in associates, which for the quarter was $18 million. Also as we have financed lease accounting for most of our assets, a very significant portion of the charter hire also for those vessels that are consolidated on our profit loss statements is excluded from the total operating revenues.

In the quarter, those revenues which are called the repayment of investment in financed leases amounted to $78.5 million. This number is higher than the previous quarter mainly due to the $40 million upfront payment by the charterer on the Suezmax tanker Glorycrown. In the balance sheet, the vessels and assets that are classified as ‘investment in associate’ are not fully consolidated EBIT. We only have the equity in these subsidiaries on the line called “investment in associate’ and at the end of the fourth quarter that amounted to $444.4 million.

Also I would like to highlight that in addition to the stockholders’ equity of $749.3 million we also have a so called deferred equity, which is $246.5 million at the end of the quarter. This is an element that is carried over from the original transaction with Frontline and is being amortized back to our equity over the life of the charters to Frontline.

On the cash flow statement, the repayment of investment in finance leases, as I mentioned in the P&L statement, is on the line under investment activities called 'repayment of investments in finance lease'. Also in the cash flow statement, the cash flow from the subsidiaries that are accounted for as investment in associated are also under investment activities on the line called cash received from or investment in associates and that number was $18.7 million in the fourth quarter.

The preliminary accounts for each of the subsidiaries that are accounted for as investment in associated are provided separately on a red page. All these subsidiaries have finance lease accounting and therefore a significant portion of the revenues in those subsidiaries are classified as repayment of investment in finance leases. The net income from these subsidiaries appears in the consolidated accounts as results in the associated companies and from the balance sheet, if you look at the stockholders equity that is in our consolidated balance sheet classified as ‘investment in associates’.

We had $84.2 million cash in the balance sheet at year-end and we had loans, consolidated loans of approximately $2.1 billion including a bond loan facility. In addition, there are approximately $1.9 billion of loans in subsidiaries that are accounted for as ‘investment in associates.’ We are in full compliance with bank covenants and we have no near-term refinancing needs, and we only have a marginal remaining investment program compared to our fleet size as we will illustrate a little bit later.

We are in the process of refinancing a $675 million facility related to 26 oil tankers and OBOs one year before final maturity of that facility in February 2011. We expect to close the financing within the first quarter. This facility has been significantly over-subscribed and also demonstrates a standing in the financial markets. The lower margin level has increased somewhat but the swap interest rates have declined. So net interest payable is expected to be at a similar level or marginally higher than the current structure.

With the portfolio long-term charters, we think that a strategy with a significant portion of the financing effectively hedged is a good way to manage the risks. Currently, approximately 80% of our loans are hedged and this is done through swaps, fixed interests, for interest compensation causes with our charterers.

We only have a total of approximately $223 million gross capital commitments. We think this a very low number compared to our overall fleet size. If we look at the lines, the tanker investment relates to the second Suezmax tanker and it is actually expected to be $36 million cash positive after upfront payment by the charter and drawdown of the associated loan. The net investment will then be $187 million. The remaining vessels are primarily dry bulk vessels after we have changed contracts for four container vessels into handysize dry bulk vessels instead. We have signed contracts and all formalities are in place for three of the bulkers, which are replacing two 1700 TEU container vessels. And we have an agreement in principal for four bulkers replacing two 2500 TEU container vessels but have not signed the formal contract yet, and this is expected to take place within the next few weeks.

All in all, the exercise where we effectively are replacing container ships with bulkers, we are increasing the investment marginally at the shipyards and we are investing approximately $30 million more in total. We believe this will give our shareholders better value for money compared to building the container vessels in the current environment for containers and instead build vessels that are priced based on the current market but also where we see significantly better chartering opportunities in the near term. We also believe that the bulkers will be easier to source financing for than the container vessels when we go out to secure financing for these vessels.

Our two largest counterparts are Seadrill and Frontline. For Seasdrill, we have a full corporate guarantee from the ultimate parent in Seadrill for the full payment of the charter hire. And all the deepwater units are sub-chartered to major oil companies providing a very substantial cash flow. We have also frontloaded the charter rates on the ultra-deepwater units substantially which also takes down the loan exposure related to these vessels very quickly and thereby also our exposure to the assets.

For the Frontline charters, we have agreed to make some amendments to the structure with Frontline, which we think is beneficial for Ship Finance. Previously, these have not been guaranteed by Frontline but a counterpart has been a subsidiary of Frontline where there has been a cash deposit just sitting as a buffer for potentially weak markets. In the new structure, we will now have a full 100% the Frontline limited guarantee for the fulfillment of the charter hire. We will then reduce the cash deposits from the current average of approximately $5.5 million to a fixed level of $2 million per vessel. I would like to note that the $5.5 million cash buffer previously was a buffer that they could effectively dig into in lead markets and therefore from a security perspective for Ship Finance, we could not touch those deposits until they would have been much, much smaller.

Also I would like to add that Frontline is a very different company now compared to the original structure when the original structure was done in 2003. Frontline now has effectively more vessels outside Ship Finance than they have chartered in vessels from Ship Finance, and they have a separate market cap of approximately $2.1 billion. We think this structure both benefits Frontline, because they free up some capital, but at the same time we also receive part of the freed up capital as prepayment for part of the charter hire for the next six months, and thereby we can optimize our financing structures better, and we can utilize that capital in a more efficient way and Frontline will effectively get the money released over a six-month period.

We have now had 24 quarters with profit share and this has generated a lot of additional cash flow for Ship Finance. The regional charters were structured fairly low in the tanker cycle and therefore the profit share has a very low threshold. On average there has been $80 million incremental cash flow generated from the profit share, and over the six-year period, approximately $480 million has been generated for Ship Finance which has enabled us to reinvest the capital in other segments such as the ultra-deepwater segment and effectively trade a much more diversified company than we were six years ago. Therefore, the Frontline sub-charters are due to a significant charter coverage still based on the sub-charters they have we anticipate that they have a breakeven time charter level for the spot VLCCs owned by Ship Finance but chartered out through Frontline of approximately $14,000 per day in 2010 before they generate revenues for the profit share.

So then as a summary, we would like to highlight that we have had a strong charter from a cash earnings perspective fueled by additional profit share contribution also this quarter, and a nice gain on the first Suezmax new building. We continue our policy of paying dividends on the back of long-term charter with performing counterparts. We have demonstrated access to the financing market and we will look for transaction opportunities that may arise in the market as we see it but most importantly, for us it is important to do the right deals so we cannot give you specific guiding on the size or timing of these potential investments. And then I would like to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take the first question from John Parker from Jefferies.

John Parker – Jefferies

Hi, I just want to be clear if I look at your cash flow statement, your repayment of finance leases, if I want to adjust that for the actual ships out in (inaudible) I should subtract it by $45.5 million for the Glorycrown payment, is that correct?

Ole Hjertaker

Yes that is correct.

John Parker – Jefferies

And could you talk a little bit about your decision to convert the container ships to Panamax [ph] bulkers, was the shipyards that you were working with did you feel that was a good class of ship for them or was it a market you – what other options did you consider in terms of ship classes and why did you end up coming up with Panamax as the ship of choice?

Ole Hjertaker

We think Panamax is an interesting segment that (inaudible) you to the balance of the order book. In some of the other bulker segments, the order books are significantly higher relative to current semi-fleet, and also the age mix in this segment is much more favorable with a lot of older vessels that we can expect to be phased out gradually.

Our move to go to the shipyards and discuss to change these vessels from our perspective has been pure opportunistically. We think that the container market is difficult currently, and we anticipate that it will continue to be difficult for the next few years. So what we did, we went to the shipyards and remember for the shipyard, their key focus is to build vessels and not necessarily exactly what type of vessel. So for the shipyards, they then had to turn to their sub-suppliers and effectively re-negotiate equipment that was intended to be built as container ships and then get equipment suitable for bulker (inaudible).

At the same time, we have marginally increased our investments by approximately $30 million at these shipyards, which of course is a win-win situation for both them and us. They increased their overall orders and we get vessels that we think have better earnings characteristics over the next few years and also we think it will be easier to secure financing for in the near term. So in many ways we see this as a win-win both for us and the shipyards and we think this is a good benefit for our shareholders.

John Parker – Jefferies

Yes, I would tend to agree, that is a much better asset to be getting into. Just on the single-hull tankers, we have all pretty much written down our assumptions and our models to close to zero on those, is there any chance for upside in terms of the single-hull, any idea how this is all going to play out or is it just – you really do not know at this time?

Ole Hjertaker

For us, we have our single-hulls chartered out to Frontline for another three to four years. The revenues from the single-hulls, as you point out, go down to a very low level where these vessels reach their anniversary date in 2010 and the time charter rate is then reduced to $7500 per day, whereas we pay Frontline $6500 per day in operating expenses, so it is a net of approximately $1000 per day.

Frontline has the option to deliver these vessels back to us on 30 days notice and you can say that, yes, currently of course we expect to get a very low cash flow from these vessels as they effectively have been paid down over the last six years. So for us in a way you could say that it would almost be better for us if the vessels were scrap because then we would get the capital back now and we could redeploy that capital instead of waiting for time to receive that capital. But this is all built into our cash flow and our assumption so we will just have to wait and see what Frontline might do.

They have already sub-chartered out three of these vessels on sub-charters that goes out into 2011 and 2012. So we think that in any case it will be a gradual process if and when they will re-deliver some of these vessels to our survey.

John Parker – Jefferies

What would you estimate the approximate scrapping value of those ships right now?

Ole Hjertaker

The vessels have an approximate light-weight of 33,000 tons, so then you can effectively multiply that up with the scrap price that you think is applicable. You have seen scrap being done in excess of $400 per ton but of course the exact number we do not know as we have not tested that market and negotiated scrap yet.

John Parker – Jefferies

Okay. It looks to me like you are improving your liquidity position here and I guess I ask this frequently but what is the pipeline looking like for new deals? What types of deals have you seen that you are able to look at and when do you think you will be doing new deals again?

Ole Hjertaker

Yes, we do not want to give specific comments on what kind of deals we want to do and the size and the timing because for us it is more important to do the right deals than necessarily run out and do things. I think the refinancing process that we are doing right now is a good demonstration that the banking market is certainly there for quality companies. So, we think that sourcing financing for new deals should be achievable. We are looking as we have done all the way through also in the weak markets last year, but we are looking at projects but if and when any of those will materialize, we will have to get back to you.

John Parker – Jefferies

Okay and can you comment at all on the new bank loans, it looks like it is sever subscribed but I see new lines coming in with the LIBOR spread of 200 plus or minus, is that kind of in line with where you think this thing will price or you are not going to comment on that?

Ole Hjertaker

That is in line with where we think this will price. Remember, there has been a change in the banking environment where effectively the banks also have a higher funding cost than they had previously. But at the same time, I will also add that as we have a strategy of swapping out most of our interest exposure, the swap rate level has of course come down significantly from where we were relating to the financing that is being refinanced. Therefore on a net basis, we think the new facility will be at a similar level only slightly higher and will not on a combined basis reflect the change in margin alone.

John Parker – Jefferies

Okay, that is all I have, thank you very much for your help.

Ole Hjertaker

Thank you.

Operator

Next question comes from Jon Chappell from JP Morgan.

Jon Chappell - JP Morgan

Thanks, good afternoon.

Ole Hjertaker

Hi.

Jon Chappell - JP Morgan

Ole, just a question about the new structure with the Frontline charters, it is pretty simple to understand that if the rates went below the contracted rates where Frontline could – that money that Frontline could tap to pay you back, with that lowered level, can you just explain a little bit more what this “guarantee” is and are there assets outside the Ship Finance structure that you would have access to if you were into an extended decline in the market where they can earn the rates that they are required to pay you?

Ole Hjertaker

The guarantee from Frontline is a full corporate guarantee from the ultimate parent, the listed entity. It is not a secured facility, so we do not have sledge over specific assets for this, but we think that Frontline with its standing in the capital markets is a company that will have or should have access to the capital markets even in a weak market environment, if that is what is required. We have of course access to the $2 million per vessel cash deposits and it is important to stress here that this is an absolute minimum level. The old structure with average of $5.5 million was a buffer, which they can tap into. So in a worst case scenario where in a weak market, we would have to assume that that cash buffer would have been smaller and smaller than the $2 million per vessel that we know has a minimum if and when we had to access that security.

So in all, we think this is a true win-win both for us but also for Frontline and then utilize the capital that has been locked in there for years in a better way and where they can earn a slightly better return on that capital. Whereas we get better security, we get the guarantee from the ultimate parent, and also we have built in a feature where they pre-pay a part of the charter hire for the next six months and thereby gives us the opportunity to optimize the interest income in this period.

Jon Chappell - JP Morgan

Okay. You laid out your views on the container market as to why you canceled those container vessels, you still have that one 1700 TEU ship coming in that is not contracted so far, what is your plan with that? I am sure the second-hand market is pretty soft right now, so selling it at a loss may not be your top priority, are there contacts available to that, would you just operate it on the spot market if there is a liquid spot market for containers at this point?

Ole Hjertaker

Yes, the change from container vessels to bulkers is an opportunistic move; it does not mean that we have lost all confidence in the segment. We think the feeder size container segment is quite interesting also because of the market balance in that segment. But we think that right now it is better for us to build bulkers than the container vessels. We do not have a specific charter lined up for that vessel right now. We expect to take delivery of that vessel at the end of 2010 and we intend then to either put it into the short-term market awaiting improvement in the longer term charter market or we could put it straight on the long-term charter market if that market has improved.

We do not have any plans as of current to sell that vessel and we think historically the price we have ordered the vessel at has been at a decent level. We did not order the vessel at the peak so we think that over time that investment will be decent for us. The key reason for not doing something with that vessel was that that was already in production at the shipyard, and therefore due to the progress it was not efficient for the yard to convert that to a bulker.

Jon Chappell - JP Morgan

Okay, understood. Final question is regarding future debt facilities and their expirations, I think the 2011 exploration was a concern of some investors and your new facility will I think allay a lot of those concerns. Can you just give us an update on the next big payment, whether that is 2012, 2013, when you may have to go and refinance the next facility?

Ole Hjertaker

Yes, I think the next refinancing that is coming up are relating to five vessels on charter to Frontline, that is approximately $200 million, and that will happen in the third quarter, has maturity in June 2012. It is a relatively small amount we think compared to our company size and certainly compared to the kind of interest we have seen in the chartering market. Thereafter, facilities that are coming due are the deepwater drilling units where there is a refinancing in 2013.

But there is one thing I would like to stress here is that if you look at our financing, they are all amortizing financing with a fairly significant repayment structure and therefore when you look at it from the bank’s perspective, we will have paid down a lot of those facility when we get there. So for the ultra-deepwater units, we would have paid down approximately half the loan over the first five years period. Therefore the amount to be refinanced is at a much lower level than the initial amount and this should not be mixed with the structures as we have seen other companies have in the market where they have so called bullet loan facilities. If you do not amortize loans in the shipping space, I think you may run into problems refinancing in the banking market, but we think that the banks, if you have a decent structure both on the loans and also you managed to keep the business going in a sound way, I think the bank market will be there.

Jon Chappell - JP Morgan

Okay. Thank you.

Operator

(Operator instructions) We will have our next question from Justine Fisher from Goldman Sachs.

Justine Fisher - Goldman Sachs

Good morning or good afternoon for you?

Ole Hjertaker

Good morning, Justine.

Justine Fisher - Goldman Sachs

So, I am still trying to understand why you guys in Frontline changed the structure of the cash reserve? So, is there something that they needed to use that cash format? I guess when there were decision fees in the spot rates that they were chartering the vessels out versus what they owed you, I think they said this morning that they just dipped into their cash balances as opposed to restricted cash balance. So it seems – what is going to make up for the decisions in the future if that cash balance is reduced?

Ole Hjertaker

First of all, I think as you point out, it is the cash balance that they can dip into and it is a reserve and if we go back six years when Ship Finance was set up, Frontline had no other assets than the vessels that they chartered in from Ship Finance and therefore there was no other buffer in Frontline apart from this call it cash buffer and these subsidiaries. Over the last six years, they have never ever dipped into those cash buffers even in weak market environments, and of course a fairly inefficient use of capital to have that cash sitting there earning a fairly low deposit rate when it could be put to use in a better way.

So that is one, so therefore they came to us and asked us if we could be willing to look at a change in the structure and the change we have negotiated now includes a full corporate guarantee by Frontline Limited. We did not have a corporate guarantee by Frontline Limited before we only had those cash buffers. And as I think I mentioned a little bit earlier on in the call, if we went into a very weak market environment, we would have to assume that those cash buffers would have been effectively eaten into with a minimum or call it a default level which would have been lower than the cash buffer we now have which will stand there as an absolute minimum and cannot be utilized to subsidize rates elsewhere.

So we think from a structural point of view, we now have a full corporate guarantee and we have a minimum cash sitting there and Frontline will effectively get most of that cash released over the next six months, which has also been of benefit for us compared to getting all the money released they needed.

Justine Fisher - Goldman Sachs

Right but I guess from (inaudible) perspective, the corporate guarantee is good but the cash before was sitting there in an escrow account that would go only directly to the bonds, right?

Ole Hjertaker

No, it would not go to the bonds until there was a default. So the bond holders, if you look at those isolated, could not access that money until it was a situation and in such a situation you would have to assume that they would have utilized all they could of that buffer and then the minimum level would actually be lower than the current level as we have negotiated with Frontline.

Justine Fisher - Goldman Sachs

Okay. Then from the Frontline perspective, they are basically getting the 112 freed up but they are paying you guys $74 million upfront for the next slice of the charter, what is the motivation for that agreement? If they really wanted to free up the liquidity why would they then turn around and pay back a little less than three-quarters of it upfront?

Ole Hjertaker

It is not a permanent repayment. The $73 million represent approximately $12 million per month over the next six months. That means that we get the money now and we can play with that money and get some returns on that money instead of receiving the charter hired gradually over this period. So this was just a part of the overall negotiated deal and we think it is a benefit for Ship Finance to hold that money and optimize returns for our shareholders.

Justine Fisher - Goldman Sachs

Does the fact that you guys have a preference for lump sum of cash upfront mean that there are opportunities either to pay dividends or make acquisitions that are more imminent than before which is why you want that cash now as opposed to over time?

Ole Hjertaker

Or we could get deposits derived in the bank if we held it on cash or if we reduced drawn amounts on revolving credits we would have reduced borrowing costs, but all in all, compared to receiving the $73 million gradually over the next six months, having it now has in our view a value for us in Ship Finance.

Justine Fisher - Goldman Sachs

Okay, thanks. I will get back in the queue.

Ole Hjertaker

Yes, thank you.

Operator

We will take our next question from Ole Ben Hagen [ph] from SCB.

Ole Ben Hagen – SCB

Hi, you have just answered my question because it was a weather rolling $74 million buffer or whether it was just this one time and you answered it. So thank you very much.

Ole Hjertaker

Okay, thank you.

Operator

Now we will take a follow up question from Justine Fisher from Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Sorry, I did not think the queue will be that short. The question I have now is about just pricing of vessels in SDR, I know on the call earlier Frontline management was talking about how it would be interesting to see the cancellation rate at the yard for these vessels are ordered at really high levels maybe a year to go and then they maybe canceled because the orders do not want to pay that price and on the flip side we have seen in the news a lot of stories about how the yards are seen obviously at very low order rate and so they are probably now trying to think about how they are going to sustain their building schedules with so few orders last year. I am wondering, based on your conversations with the yards, especially given that you have just done the conversion deal for the panamax [ph] do you think that the yard will be more willing to renegotiate a lower price so as to fill the berth as opposed to say no, we are only going to build at VLCC for $150 million or something like that, and if you cannot pay that then it is no good, you think they will be amenable to change the price?

Ole Hjertaker

I think, first of all, if we distinguish between existing orders where deposits have been paid in and you call it fresh orders at the yards, I think for the first, the yards will continue to build and certainly if they get paid yard installments. What we have seen is that at some yards, banks have provided guarantees and even in settings where we would assume that the companies or the entities who have ordered them did not have capital. When yards are provided guarantees, the yards themselves get decent funding. So, so far a lot of the cash flow has then effectively come from the bunks and the yards continue building.

Of course you can see that some players negotiate delivery position with the yards and maybe some do the same exercises we have done where we have discussed on a win-win basis with the yard for how to build vessels that are better for the buyer and where the yards can do what they do best which is of course to optimize the production at the yards. Whether or not the yards will build vessels and take orders where they lose money, it is of course a question of whether they have the buffer and are willing to subsidize orders to keep the production going, or if it would then instead prefer to close down whole or parts of the facility in order to mitigate losses.

So that is really more a question, will there be someone with a subsidy call it component that could effectively help to mitigate the losses. Because it is clear that the shipyards they have their cost base. They have to buy the steel, they have to buy the equipment and they have to pay the workers and irrespective of movements in the shipping market and the state of the order book right now where we have a fairly significant order book in most segments, for the shipyards to really start cutting down on prices, there is a limit to what they can do.

And also if you look at the input factor of some of the yards say for instance in China where they of course have benefitted from low wages for sometime, you have to assume that there is some price pressure also on the working force while at the same time they can maybe work more efficiently and therefore mitigate some of that difference. But it is really down to the cost factors on the input component say in the billing process and I do not think that we will see the yards building vessels with losses for a long period I think then they will instead convert the facilities to build other industrial goods instead.

Justine Fisher - Goldman Sachs

Okay. Thank you for that, that was a very interesting answer. The last question is just on the (inaudible) contract, you guys are getting $14.5 million upfront for that contract. How did you negotiate that? Why would a counterparty ever do that?

Ole Hjertaker

They always think it is a nice deal. I think the history is that we originally had a deal where we were to sell those vessels to that charterer. And then in the fourth quarter or last year, we re-negotiated the deal where then they will pay $40 million, $40.5 million upfront and then a bareboat charter rate and with a purchase obligation in the end. So the reason for this phenomenally good deal for us is that we had a deal originally that was re-negotiated.

Justine Fisher - Goldman Sachs

Okay, excellent, thank you so much, I appreciate it.

Ole Hjertaker

Thank you.

Operator

We will now take our next question from George Burmann from GunnAllen Financial. Please go ahead.

George Burmann - GunnAllen Financial

Good morning, good afternoon gentlemen. Congratulations, you are definitely making progress in this marketplace.

Ole Hjertaker

Thank you.

George Burmann - GunnAllen Financial

The upcoming refinancing, would you foresee this to be done at more or less at the (inaudible) interest rates than you currently have?

Ole Hjertaker

If you looked at our hedging strategy where we effectively hedge most of our interest exposure, I think the combination of the swap rates and the margin will be at similar or slightly higher level. And that is the cause in general. The bank’s margins have increased somewhat due to higher costs for the banks for their own funding, the swap market has come down, so for us, we expect that to be relatively neutral.

George Burmann - GunnAllen Financial

Okay and overall, do you see opportunities for you to purchase ships on distressed type of sales in the upcoming say 12 months, do you see the industry going now full bore lower with shipping rates up, with the new deliveries coming in, are you prepared to make any new investments in your fleet?

Ole Hjertaker

Yes, we are definitely looking at new investments and we have done that actually all along and also through 2009. We made very significant investments in 2008, so of course key focus for us was last year to ensure that they were taking well care over that and that we had no issues in our portfolio, and I am very happy to report that there have not been. But we all along have looked at potential projects but the exact timing and size of those projects is not something that we will comment on specifically. It is much more important for us to do the right deals than necessarily rush out and do the first deal available.

I would comment however that we see more project opportunities, we right now I think than we have for some time and also with the financing market being more active as demonstrated by the very strong interest in the refinancing that we are in the process of completing, we think that this gives us a good confidence that we could both find projects and financing if we wanted to go ahead. So hopefully we can come back and report new investments but I will not give any guiding on the exact time.

George Burmann - GunnAllen Financial

Okay and then the last question, the dealerships that you have on the contract with Seadrill, I think Seadrill last year opted to acquire or buy one of those leases out and I think for the existing growth of sales, I have options to just buy the thing from you, right?

Ole Hjertaker

Exactly. So there are purchase options on the ultra-deepwater drilling units and also on the offshore [ph] drilling. So when they exercised that option last year, that was a pre-agreed option that we also disclosed when we entered into the deal. So you will find full information on those purchase options on our Web site under Investor Relations and you will look up the announcement for the different investments.

George Burmann - GunnAllen Financial

And if those options, one of the other options was going to be exercised by the party, you would then take the funds received, pay off the debt and you would have large financial flexibility to redeploy the funds somewhere else, right?

Ole Hjertaker

Exactly.

George Burmann - GunnAllen Financial

Okay, good, thank you very much.

Ole Hjertaker

Thank you.

Operator

As there are no further questions, I would like to turn the call back to Mr. Hjertaker for any additional or closing remarks.

Ole Hjertaker

Thank you for attending this conference call and also for the questions. I think 2009 has been a very good year. It has been a very challenging financing environment but I think Ship Finance has come through that in a strengthened state and we now have a very robust base to build on.

I would also like to thank all the employees of Ship Finance who have done a phenomenal job over the last year and really put a lot of efforts into restructuring the new buildings in a way is an optimization as we see it for Ship Finance.

So with that, I would like to say thank you and I hope to come back to you and report further progress next quarter. Thank you.

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Source: Ship Finance International Limited Q4 2009 Earnings Call Transcript
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