Ship Finance International Limited Management Discusses Q4 2013 Results - Earnings Call Transcript

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Ship Finance International Limited (NYSE:SFL)

Q4 2013 Earnings Call

February 27, 2014 10:00 am ET


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

Harald Gurvin - Principal Financial Officer and Chief Financial Officer of Ship Finance Management AS


Herman Hildan - RS Platou Markets AS, Research Division

Ceki Aluf Medina - Southpaw Asset Management, LP


Good day, and welcome to the Q4 2013 Ship Finance International Limited Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Ole Hjertaker. Please go ahead, sir.

Ole B. Hjertaker

Thank you, and welcome, everyone, to Ship Finance International and our fourth quarter conference call. With me here today, I also have our CFO, Harald Gurvin; and Senior Vice President, Magnus Valeberg.

Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements.

These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

Net income for the quarter was $18.3 million or $0.20 per share. Aggregate charter revenues recorded in the quarter, including 100%-owned subsidiaries accounted for as investment in associates, was $152 million, which is marginally lower than the previous quarter. This is excluding any cash sweep from the Frontline vessels in the quarter. And in 2012, for reference, the average cash sweep was $13 million or $0.16 per share per quarter.

The EBITDA equivalent cash flow in the second quarter was approximately $114 million and last 12 months, the EBITDA equivalent was approximately $480 million.

The board has increased the cash dividend to $0.40. The dividend represents $1.60 per share on an annualized basis or 9% dividend yield based on closing price yesterday. The dividend declared in the quarter is higher than the reported net income and is a reflection of the long-term view taken by the Board of Directors with respect to the distribution capacity.

Several new assets will be delivered in 2014, and we have significant capital available for new accretive investments. We have now declared dividends for 40 consecutive quarters since the company's inception in 2003, totaling more than $17 per share or $1.3 billion in aggregate. The average payout ratio has been approximately 75% of net income in the period.

We have invested nearly $1 billion over the last year and see additional growth opportunities, particularly in the container and offshore segments. With a robust financial position, we believe we have significant firepower for the right opportunities. In the fourth quarter, and including all 100%-owned assets, more than 50% of our charter revenues came from the offshore segment, less than 30% from tankers and the remaining 20% split between our drybulk and container assets.

The $600 million West Linus transaction was agreed in June and we -- last year, and we paid $195 million of the purchase price at that time. The drilling rig was delivered from the Jurong Shipyard in Singapore this month, and the $405 million balance was paid at that time.

The total financing of the transaction is a combination of $125 million of equity investment, which was already raised in June last year, and $475 million in bank loans. The last payment at delivery was fully covered by the committed bank facility.

The rig is now in the process of being mobilized to Norway and expected startup on the subcharter to ConocoPhillips is in May 2014. The charter rate to North Atlantic drilling from the subcharter is approximately $375,000 per day for a period of 5 years, with extension options up to 9 years.

Our charter rate is approximately $85,000 per day during the mobilization period of approximately 3 to 4 months, effectively covering the interest on the financing plus some returns on the reinvested equity. And thereafter, increasing to $222,000 per day for the next 5 years. The structure is designed to give us a stable cash return on the invested equity over time of approximately 15%.

As for the Seadrill rigs, North Atlantic drilling will compensate us for fluctuations in the interest rate. We have a put option at the end of the 15-year charter period, and this rate will be -- will also be accounted for as an equity investment under U.S. GAAP.

The tanker market rebounded sharply towards the end of the fourth quarter, and many analysts now have increased their projections for charter rates in 2014 and 2015. We are well positioned in this segment with very low financial leverage on the Frontline vessels, and significant upside through a cash sweep arrangement starting at $13,200 per day for the Suezmaxes and $17,675 per day for most of the VLCCs on charter to Frontline. The cash sweep maxes out at $6,500 per day per vessel, and with 20 vessels, the max amount is approximately $46 million.

We also have 2 modern Suezmax vessels in the spot market. These vessels are only 4 years old and are traded in the spot market together with sister vessels owned by Frontline 2012. The average time charter equivalent for the fourth quarter was approximately $16,000 per day for these vessels, and as the market rebound came towards the end of the quarter, we expect to see a much stronger first quarter 2014.

Due to significant delays at the shipyard in China, we had to cancel 2 contracts for 4,800 teu container vessels. The deliveries were originally scheduled for 2013, with long-term charters, financing arrangements and newbuilding contracts closely tied together. While the contracts allow for some flexibility with respect to construction time overruns, the delays exceeded this limit. And following negotiations, with all parties involved, it was deemed that the best solution for us was to terminate the newbuilding contracts.

The charter rates in the short term market is currently significantly lower than the charter we had lined up for the vessel. And while we could have chosen to take delivery of the vessels, also without the charter, we would look at a significant price reduction for that to make sense to us. The monies paid to the shipyard will be refunded to us with interest, and the termination of the newbuilding contracts will not lead to any book losses or asset impairments.

We are, of course, also actively monitoring the situation for the 2 remaining vessels and expect full clarity on the situation for these vessels during the second quarter. There is a risk that these vessels might be delayed and canceled as well.

The company's 4 8,700 teu container vessels under construction in Korea are scheduled for delivery in late 2014 and early 2015 from Daewoo's main shipyard. And the construction is progressing according to schedule and without any delays at that shipyard. The vessels will be built to very high specification, including high reefer capacity and the latest in eco-design features. As a consequence, our vessels will be best in class in terms of consumption and can be operated efficiently in a wide range of speeds, providing a lot of flexibility for container lines.

The 9,000 to 10,000 teu class is regarded as the new Panamax size. And while even bigger vessels can traverse the new expanded canal in 2015, this size will have more flexibility in container ports with size in that restrictions. The vessels are being marketed for medium- to long-term charters, and we expect to finalize both chartering and financing well ahead of delivery from the shipyard. Unlike for the smaller container vessels, this market seems to be holding up nicely and to have been -- other charters concluded at firm levels recently.

In November 2013, the company sold the 2 15-year-old VLCC's Front Champion and Golden Victory and terminated the charters to Frontline. Total sales proceeds was $122 million, including $79 million in amortizing interest-bearing notes from Frontline. Net of prepayment of associated debt, the positive cash effect was $20 million, and going forward, the notes are expected to generate an improved net cash flow of approximately $2.4 million in 2014 compared to the old charter and financing structure. Front Champion and Golden Victory were acquired in 2005 with the highest charter rate across the vessels in charter to Frontline, and these vessels, together with 3 others, did actually not contribute to the $52 million cash sweep we saw in 2012.

The backbone of our business is a significant portfolio of long-term charters. Most of our vessels are chartered out on a long-term basis, and we have more than 10 years weighted average charter coverage. Full details on a vessel-by-vessel basis is available by contacting us on email at

We have $4.8 billion [indiscernible] rate order backlog, and the EBITDA equivalent backlog is approximately $4.2 billion or around $45 per share. These numbers include only the reduced base rates from the Frontline vessels and do not include expectations for charter revenues for the 4 8,700 teu newbuildings scheduled for delivery later this year nor from the cash flow from the 2 Suezmax vessels operated in the spot market.

Cash sweep and/or profit share from the chartering arrangement with Frontline is also excluded. We have a total of 15 customers, and more than 40% of the charter backlog is with companies with a market cap in excess of $5 billion. If we include all listed companies, the percentage is more than 95%, which gives us and our stakeholders a very good visibility on counterparty exposure. I would also add that most of our offshore assets have been paid down significantly already, and underlying asset exposure is very limited in that segment, even in a softening market scenario.

With respect to Frontline, we have the interesting combination of very low financial leverage, actually way below current scrap levels at significant leverage to the market through the cash sweep arrangement. We have amortized down the debt on these vessels very quickly and have reduced the loan amounts by more than 80% since 2008. Even compared to reported scrap value levels, the financing is very moderate and -- as can be illustrated in the graph on the right side.

With this low leverage, there is no net loan amortization required. And even with the scratch base rates for Frontline, the free cash flow is approximately $17 million or $0.18 per share per quarter this year. On top of that, if the VLCC time charter markets would hit the $25,000 per day, the cash sweep could be around $0.11 per share per quarter on top of the base rates, increasing to $0.13 per share per quarter in a $30,000 market scenario. This effect is illustrated in the graph to the left.

The threshold level kicks in already at $17,675 for most of the VLs and $13,200 for the Suezmaxes. And as mentioned earlier, the cash sweep in 2012 totaled $52 million or $0.60 per share per quarter, even without any contribution from 5 of the vessels. The cash sweep is an annual calculation, so the average over the year will determine the final payment.

Frontline, on their side, reported more than $50 million for free cash flow at the end of the fourth quarter, and they have sold nearly $9 million newly issued shares in January and February to further strengthen their liquidity position. And I would also note that, in the fourth quarter, the share of EBITDA from the Frontline vessel was approximately 20%, excluding any cash sweep contribution.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates or the EBITDA, which we define as charter hire plus profit share less OpEx and general and administrative expenses, was approximately $480 million in the period. Net interest was $112 million or approximately $1.25 per share.

But more importantly, our normalized, ordinary debt installments relating to the company's projects was just over $200 million. This is excluding prepayments relating to sale of older assets and also without net amortization of Frontline vessels. As mentioned earlier, the Frontline-related vessels have very low leverage currently and no amortization was required during the year. If the loads had been fully drawn, the amortization would have been $71 million or $0.79 per share in this period. And going forward, we expect the positive contribution from our drilling rig and container ship newbuildings.

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

Harald Gurvin

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter of 2013. Please note that this is only a guideline to assess the company's performance and is not is in accordance with U.S. GAAP.

For the fourth quarter, total charter revenues were $151.9 million or $1.63 per share compared to $156.4 million in the previous quarter. Revenues from VLCCs was slightly down due to the sale of 2 older VLCCs during the fourth quarter, while revenues for the Suezmaxes were up in the fourth quarter due to 2 of the vessels trading in the spot market for the full quarter. The increased revenues for the Suezmaxes were offset by increased wage expenses included on the vessel operating expenses for the 2 vessels.

The reduction of revenues from offshore is due to a scheduled step-down in the charter rate for one of the ultra-deepwater drilling rigs on a long-term payable charter to Seadrill. It is important to note that the scheduled rate reduction is balanced by reduced interest in debt repayments on the related financing.

Vessel operating expenses and G&A were $41.2 million compared to $37.7 million in the previous quarter, mainly due to the increased voyage expenses on the 2 Suezmaxes trading in the spot market. In addition, operating expenses for the fourth quarter includes a dry docking expense of $800,000.

There was no cash sweep from Frontline in the fourth quarter, but we recorded a profit share of approximately $500,000 relating to 4 of the Handysize drybulk carriers. We also had the income of $3.2 million on financial investments during the fourth quarter, slightly up from the previous quarter.

So overall, this summarizes to an EBITDA of $114.3 million for the quarter or $1.23 per share compared to $121.1 million in the previous quarter.

We then move on to the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from our book operating revenues and instead booked as revenues classified as repayment of investment to finance leases, results in associates and long-term investments, and the interest income from associates.

If you wish to gain more understanding of our accounts, we will also, this quarter, publish a separate webcast which explains the finance lease accounting and investment in associates in more detail. This webcast can be viewed on our website,

Overall, for the quarter, we reported total operating revenues, according to U.S. GAAP, of $71.7 million. Total operating expenses were $48.3 million, giving net operating income of $23.4 million. We recorded a noncash positive mark-to-market of derivatives of $3.2 million in quarter. Further, amortization of deferred charges includes a negative noncash item of approximately $1 million each quarter, relating to the $350 million convertible bonds issued in January 2013.

According to U.S. GAAP, an equity component of the convertible bond has been capitalized, which is then amortized over the term of the bond. So overall, and according to U.S. GAAP, the company reported net income of $18.3 million or $0.20 per share for the quarter.

Moving on to the balance sheet. We showed $59 million of consolidated cash at the end of the quarter. In addition, we had approximately $150 million available for drawdown under revolving facilities and approximately $8 million in freely available cash in 100%-owned nonconsolidated subsidiaries. Available-for-sale securities of $76.9 million includes $56.4 million invested in short-term tradable securities as a short-term liquidity placement.

In addition, the second lien notes in Horizon Lines are recorded as available-for-sale securities at $20.5 million or 40% of par value, including accrued interest. The $79 million amortizing Frontline notes are included in amounts due from related parties on the current and long-term assets. The notes are conservatively recorded in our balance sheet at 72% of par value.

The 3 ultra-deepwater units on charter to Seadrill are included on the balance sheet under investment in associates and amount due from related parts is long term. Our investment in the subsidiaries, only the units, is in the form of both equity and shareholder loans from the parent company. The total equity investment in the rigs is thus a combination of the 2, and the splits between equity and shareholder loans from quarter-to-quarter will depend on intercompany accounting.

In addition, the newbuilding harsh-environment jack-up drilling rig in West Linus is equity-accounted, similar to the Seadrill rigs, due to the conservative nature of the transaction. The total investment is $600 million, of which $195 million was paid in the end of June 2013, and the remaining $405 million was paid upon delivery in February 2014. The $195 million invested as per year end is included under amount due from related parties, long term, in our consolidated balance sheet.

Short-term debt and current portion of long-term debt includes a $70 million short-term predelivery facility relating to West Linus, which was repaid from the proceeds of the $475 million long-term post-delivery facility upon delivery of the unit in February 2014.

Stockholders equity stands at approximately $1.3 billion, including the $106 million of deferred equity. The book equity ratio, including deferred equity, was approximately 41% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, the company had total available liquidity of approximately $216 million at the end of the quarter, which includes $66 million in cash and approximately $150 million freely available under revolving credit lines. We also had $77 million in available-for-sale securities at quarter end as previously described.

On the debt side, we had approximately $2.8 billion of gross interest-bearing debt outstanding at the end of the quarter, of which approximately $1.1 billion is consolidated bank loans and $1.1 billion is bank loans in our subsidiaries accounted for as investments in associates. In addition, we had approximately $640 million of consolidated senior unsecured notes outstanding as per December 31.

The figure includes the NOK 500 million bonds maturing in 2014, of which $72 million was net outstanding, and the NOK 600 million bonds maturing in 2018, of which $93 million was net outstanding. The figure also includes the $350 million convertible notes maturing in 2018 and the $125 million convertible notes maturing in 2016. Both our outstanding convertible notes can be repaid in shares at the company's option at maturity.

We have been active in both the capital and banking market over the last year with a successful refinancing of 3 ultra-deepwater drilling units totaling $1.2 billion in addition to the new $475 million facility for the financing of West Linus. In November 2013, we concluded a $390 million refinancing of the West Taurus, which was the last of the ultra-deepwater units to be refinanced. As for the other facilities, the refinancing was significantly oversubscribed, with over $700 million in commitments from the banks. In line with other deepwater facilities, Ship Finance has only a limited guarantee obligation on the facility.

Since December 2012, we have raised more than $1.7 billion in the banking market, and have seen terms improve for each transaction, demonstrating that in a banking environment, where many owners have no limited access to bank financing, the bank folk is on the core clients, benefiting strong owners like Ship Finance.

The graph shows the scheduled installments and amount to be refinanced over the next year. Following the refinancing of the ultra-deepwater units, we have very limited refinancing requirements over the next years. As mentioned earlier, only a portion of the debt related to the Frontline vessels is drawn. And based on the current understanding, there would effectively be no net installments relating to the Frontline vessels in 2014.

The next slide provides some more detail on our newbuilding program and the remaining payments to the shipyards. Following delivery of the harsh-environment jack-up drilling rig in the first quarter of 2014, we have 6 remaining container vessels under construction. The graph shows the committed financing in the blue bars compared to the remaining shipyard installments. The $600 million investment in the newbuilding harsh-environment jack-up drilling rig had a final payment of $405 million included in the above table, which was fully funded by the long-term bank facility upon delivery in February 2014.

In May 2013, we entered into contracts for 4 newbuilding 8,700 teu container vessels in Korea with expected delivery in late 2014 and early 2015. The total contract price is $340 million, of which $60 million has been paid so far. A majority of the payments are due upon delivery of the vessels.

We have not yet entered into any financing with respect to these vessels, but have seen interest from both commercial banks and export credit agencies. We will arrange financing for the vessels in due course, and the expected equity investment is up to $100 million. We also have 2 remaining 4,800 teu container vessels under construction, now scheduled for delivery during the first half of 2014.

The above overview includes the remaining yard installments of $75 million and committed bank financing of $64 million. As mentioned earlier, there is a risk that our 2 vessels will be canceled if they are further delayed.

We are in compliance with all financial covenants under our loan agreements. Free cash for covenant purposes was $208 million compared to the minimum requirement of $25 million. This includes $150 million available under revolving credit facilities at quarter end. Working capital was $180 million compared to the requirement of being positive. And the book equity ratio was 41% compared to minimum requirement of 20%. And on the loan agreements, where we have minimum value covenants, we were fully in compliance at the end of the quarter.

It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 40 quarters since the company was established. Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market, as recently demonstrated on the refinancing of the 3 ultra-deepwater drilling units and the financing of the harsh-environment jack-up rig.

Then to summarize. Net income for the quarter was $18.3 million or $0.20 per share. The aggregate EBITDA was $140 million or $1.23 per share. The board has declared an increased quarterly cash dividend of $0.40 per share for the quarter. This represents a dividend yield of 9% based on the closing share price as of February 26. We have now paid dividends for 40 consecutive quarters, totaling more than $17 per share in aggregate. The West Linus was successfully delivered in February. The low outstanding amount in the facility is related to the Frontline vessels given no -- gives no net amortization, effectively improving the distributable cash flow. In addition, the firmer tanker market provides significant upside potential through the cash sweep agreement.

And with that, I give the word back to the operator, who will open the line for any questions.

Question-and-Answer Session


[Operator Instructions] Our first question today comes from Herman Hildan of RS Platou.

Herman Hildan - RS Platou Markets AS, Research Division

My first question relates to the cash sweep at Frontline. I mean, is the tanker market exposed [ph] on the upside? Has there been any discussions in the board meeting with respect to whether you're going to let that have an immediate impact on shareholders in terms of ramping up dividends on top of the $0.40 per quarter?

Ole B. Hjertaker

Well, I think that, for now -- I mean, we have good expectations, of course, for 2014, but we have only concluded the 2013 annual account. So I think that is -- that will be a discussion the board would have in when we look into the first quarter numbers. But I would say, so far, at least the tanker market has been quite firm -- very firm in the first quarter. And also, if you look at the, what do you say, the guiding from some of the leading analysts, there is at least -- there is room to be hopeful for also cash flow for the full year. But as we all know, while we account for the cash sweep on a quarter-by-quarter basis, the actual cash payment is on an annual basis. So it's really too early to tell exactly what that sort of -- what the number can be for the year.

Herman Hildan - RS Platou Markets AS, Research Division

Okay. That [indiscernible] understand that. And also, I mean, if you listen into the Frontline conference call early on today, they were saying that the strong balance sheet and more positive view on the spot market should create opportunities. And I mean, you, as well, have a pretty robust balance sheet at the moment with significant cash buffer. Is it -- has there been any discussions internally in terms of potential additional deals with Frontline on the sale-lease back side?

Ole B. Hjertaker

Well, we have, what you say, ongoing discussions with many parties on for deal opportunities. And if there is anything specific and we have a deal, we, of course, will announce that. We have an extensive relationship with Frontline, 20 vessels there and significant upside potential through the cash sweep, which is -- which could be material in -- both in 2014 and 2015. If we then look at the agreements at Frontline, the base rates hops up with the equivalent number of the cash sweep the year after. And with our extremely low leverage against these vessels, there could be very significant cash sweeps or I would say, cash revenues coming from those assets. But I cannot comment on any specific negotiations or discussions we may have with various parties, until and unless we have concluded a deal.

Herman Hildan - RS Platou Markets AS, Research Division

That sounds great. Because, I mean, you just referred to the container market and the offshore market as interesting opportunities, but that doesn't rule out that there's going to be any kind of potential in the other segments?

Ole B. Hjertaker

No, no. And I think that's maybe one of our benefits, be it by having a multiple-segment approach, we can look at deals in -- across the board, and we can benchmark the deal from segment to segment. We highlight containers and also offshore, because that's where we have seen and where have pulled together deals that we do think makes a lot of sense. But we've also looked at deals recently on the tanker side, we're looking at deals on the drybulk side. So I think there is -- there are quite [indiscernible] to look at. But of course, what we are focused on is the long term from -- I would say, sort of a risk -- both risk management and also what we think is -- as a long-term sustainable cash stream and also risk associated with the counterparts. And I think, the 4 -- between the 4 segments, what we have seen in down cycles is that we've seen more defaults on the counterpart side in the drybulk segment than we have in the other sectors. So I would say, we are generally more careful on the dry side, but that doesn't mean that we cannot do deals say, for the restructured, right?

Herman Hildan - RS Platou Markets AS, Research Division

Yes. I mean, concerning -- hypothetically, if -- from what's required, 6 vessels a season for Suezmaxes, what would be the key in -- after having been through 2 years on a weak market, how would you structure that yield differently from the vessels you already have structured?

Ole B. Hjertaker

Well, I think if you look at the vessels we have to Frontline, I think we have to look at that also with the eyes of, call it, the original deal, and that was -- that deal also happened before both Harald Gurvin and myself joined the company. So if you look at the deals we have done over the last 5 years, we only -- we did the deepwater -- sort of we did the jack-up drilling rig at Linus last year. But we haven't done any other deals with any related parties for more than 5 years. So we have a much wider market perspective and, of course, we are looking at deals wherever they may be. And whether that may end up to being some company with -- over the common shareholder or not, that is secondary. Important thing for us is to build our portfolio with quality assets where we think that we can get nice cash flows with a right kind of risk profile and where we can add on good financing packages and grow the business.

Herman Hildan - RS Platou Markets AS, Research Division

And the final question, I mean, your open container vessels under construction in Korea, clearly, there's a huge fuel savings on those assets and you see that the operators are very keen on getting hold of new tonnage [ph]. The later you get the delivery, are you able to kind of reap a bigger portion of that fuel savings in the charter rate? Is that kind of the thinking between keeping that open as long as possible?

Ole B. Hjertaker

Well, that remains to be seen. Of course, I cannot go into details about the discussions we're having with some of the container lines. But I would say that there is definitive interest in the vessels. And it's also clear that, if you look at vessels, call it older-type vessels with older technology type vessels, and the charter rate there, we see that a lot of companies are willing to pay up for more efficient -- and both from a fuel efficiency perspective, but also from a load factor and in terms of loaded container you can put on the vessel. So we have seen charters relatively recently for similar size vessels in the $39,000 to $40,000 per day range for sort of 3- to 5-year contracts. So it's good to see that the market is firm, and we -- as we also said in our press release, we are quite comfortable with the position and also that we will find long-term employment for these vessels well before delivery.

Herman Hildan - RS Platou Markets AS, Research Division

Let me rephrase that question. I mean, if you -- what's the initial thought behind keeping those assets open that you would be able to reap a bigger or higher rate irrespectively of the -- call it the market move, and that's why you kept them open because I think you initially mentioned that there's -- already give interest for the vessel and it's kind of -- did -- seems to have chosen not to fix them out yet.

Ole B. Hjertaker

Absolutely. Sorry, I misunderstood you a little bit. Well, I think you have 2 types of transactions you can do for a complete setup like us. One, if you do it back to back with the charter, typically, that will be based on the yard contract and the liner company or the tanker company. Whoever the counterparty is, they could have gone out and ordered those vessels themselves. So that is really more a cost of capital arbitrage. If you take a position like we've done on the container ships and no one can go to a shipyard and ask for those kind of deliveries, because if they do, the yard will probably close the delivery 1.5 to 2 years later, then you're talking about the, call it, some market leverage, which of course, has an impact on the negotiations. So the question is then, okay, if you really need the capacity at the time where we have the vessels and if there are not really a lot of competitors out there, you can imagine that, that has an impact on the negotiations we're having with that counterpart. But I would say that the negotiations, it isn't really down to what is the fuel saving and how many percentage will I have of this or that. It's -- I would think it's more of an overall discussion on -- we have our expectations for what we think is a good charter rate. It also boils down to who is the counterpart, is it a very strong counterpart, what kind of financing can we structure around it. So there are other factors also going into what makes a great deal and what makes an okay deal.

Herman Hildan - RS Platou Markets AS, Research Division

Yes. And a final question. There's a bit of debate around the yard capacity. But if you went to the yards that -- toward 8,700 teu vessel, when do you think you will get it delivered?

Ole B. Hjertaker

I would think that if you did that, you would probably -- you may be able to squeeze in a few slots in 2016, and the yards will probably rather give you vessels in 2017, so we're talking 2 to 3 years. But as you know, of course, for those who work with the shipyards and have seen this over time, what we believe is, that the shipyards, they have booked up a lot of capacity quite interestingly for the first time for 6 or 7 years. They have now booked more capacity than their actual building capacity. They're sort of building their backlog. But usually, the yards also have some flexibility up their sleeve, [indiscernible] more efficient yards that they may offer from time to time. But I would say that generally, the 2016 order book seems to be filling up quite significantly, at least for bigger vessels, and we are now looking more into 2017 for volume deliveries.

Herman Hildan - RS Platou Markets AS, Research Division

So it's the reason why it's going to -- for realistic purposes, most [indiscernible] in 2017 is because there's been a lot of -- like we have to see [indiscernible] newbuilds taking up this upside, you would build these vessels up?

Ole B. Hjertaker

Yes. And also, fair to say, I think there are also some clients of the shipyards out there who still hold some options. So maybe if you order 5, 6 vessels, you get a few options. And of course, until and unless those options are exercised or lapsed, the yard will be careful to sort of double the capacity. But we -- it's an interesting dynamic, and you also see that in terms of newbuilding prices, where that also has moved north.


[Operator Instructions] We'll take our next question from Ceki Medina of Southpaw Asset Management.

Ceki Aluf Medina - Southpaw Asset Management, LP

On the cash sweep, I see a cap and I don't see a lot of profit share. I know profit share accrues after accruing $50 million, which was prepaid. But why is there a cap on the cash sweep if it includes the profit share?

Ole B. Hjertaker

Well, you know the cash -- we have to look at the 2 different asset types. We have the Frontline vessels where there's sort of the big volume, and then we also have some profit split on some Handysize drybulk vessels. So if you look at the profit split for 2013, we had zero cash sweep nor profit split from the Frontline vessels, but we had a total of $1 million of profit split relating to drybulk vessels. If we then switch to the Frontline vessels, which where I think your question was, because the Frontline prepaid $50 million, nonrefundable profit split to us back in 2011, we would have to accumulate $50 million of profit split and this is after the cash sweep. We have a profit split where we get 25% of, call it, revenues above the cash sweep. But because they prepaid $50 million of that, we have to accumulate $50 million before there will be any sort of cash payments. So I think for all, call it, realistic purposes, at least, for the next 2 years, we do not guide any expectations for profit split on top of the cash sweep. We think that the cash sweep in itself is quite meaningful and a very significant number.


[Operator Instructions] We have no further telephone questions queued.

Ole B. Hjertaker

Okay, thank you. Then, I would like to thank everyone for participating in our fourth quarter conference call. As a close, a wise person who said we shall endeavor to safeguard and further strengthen our position for our shareholders in the deliberate predictable and prosperous way. If you have any follow-up questions, there are contact details in the press release. Have a nice day.


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

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