Ship Finance: Clinches Yet Another Deal

|
About: Ship Finance International Limited (SFL), Includes: FRO
by: Tudor Invest Holdings
Summary

Opportunistic deal done by SFL.

Rebalancing the fleet with more new crude oil tankers.

Counter party an unknown factor.

In my recent article on Ship Finance International (SFL) titled “Stable Performance Yielding 10 Percent”, I touched on the diminishing tanker fleet, and I was looking for the company to add more tankers to balance their fleet. The fleet has become very much centered towards container ships.

The obvious way for SFL to grow the tanker fleet is to continue to do deals with Frontline (FRO). After all, this is how SFL got started. Deals from them may still come. However this time a very opportunistic deal landed on their table.

SFL Buys 3 New VLCCs

Today SFL announced that they have agreed to purchase three 300,000 dwt VLCCs, currently under construction at Daewoo Shipyard ME in Korea. The net purchase price is a low $60 million per vessel. These three ships are “ Hunter Atla” (with hull number 5455), “Hunter Saga” (with hull number 5456) and “Hunter Laga” (with hull number 5460). All are of the latest fuel economic design fitted with exhaust gas cleaning systems. The building process is in advanced stages as can be seen from recent photographic below.

Newbuilding “Hunter Atla” alongside berth at Daewoo Shipyard in Korea – Source: Marine Traffic

Expected delivery of all three ships is within the next two months. After delivery to SFL, the vessels will immediately commence 5-year bareboat charters to Hunter with purchase options during the charter period. The bareboat rate has not been disclosed and we can assume that it is confidential. However, SFL has stated that the revenue backlog increases by more than $100 million. Assuming it is very close to that figure, we can calculate a bareboat rate of about $18,300 per day per vessel.

The seller of the vessel is a small Norwegian listed company called Hunter Group ASA. They will be the charterer which will have to pay SFL this hire going forward. On top of this, they will also have to pay a ship manager to take care of both commercial and technical management. Hunter has presently neither the experience nor the resources to do this. Frontline, which are managing SFL’s tankers would possibly be a very good choice for Hunter, as it would also be comforting for SFL to know the ships are managed by professionals. SFL presently pays FRO $9,000/day per vessel for technical and commercial management.

Why sell at a 50% discount?

Some questions that come to my mind is why Hunter agreed to a purchase price which is 50 percent lower than recent market assessments. Shipbrokers, like Fearnley, are estimating that the price of a VLCC newbuilding today is $90 million.

Source: Fearnley Shipbrokers, 4 Sep 2019

On top of this, shipowners will incur expenses like supervision of the building which would at least add another $1 million, plus interest costs on initial payments made to the shipyard.

Hunter Group ASA has in total eight such newbuilding under construction in the same yard. On June 17th, 2019, they sold one of the other vessels at a price of USD 98 million. This vessel will be delivered to another buyer on October 31st, 2019.

By investigating more around the recent corporate activity done by Hunter, we find the following activities over the last few months.

Hunter Group ASA's, CEO Erik Frydendal commented today:

This transaction reflects our ongoing efforts to continuously optimize our financing and drive out unnecessary costs wherever possible, while maintaining a high level of flexibility, in order to create value for our shareholders.

To finance these eight VLCC ships, Hunter worked with DNB Bank (OTCPK:DNHBY) in July to do a private placement of new shares raising equity equivalent to about $ 77 million. This was subsequently canceled. The reason given for this was that the subscription price of NOK 3.65 per share was much higher than the NOK 3.19 per share the share traded on the last day of the subscription period

With no additional equity, it is possible that Hunter was, in fact, being hunted rather than being the hunter. Daewoo Shipyard obviously requires payment on the vessels before they are delivered. Financing purchase of ships has become more difficult with traditional lenders like banks exiting that segment of their business. Therefore, when Hunter decided not to go ahead with raising more equity, perhaps the time was running out and this could potentially have left, Hunter with few options.

SFL will initially fund the acquisition from its cash position, but expect to finance a significant portion of the purchase price in the commercial bank market.

Conclusion

It looks like a great deal for SFL. We do not know when Hunter can declare their purchase option, and we also do not know at what price they can buy them back. Both are obviously very important since we know that they have already sold another of the ships at $ 98 million.

Other risks associated with this deal would be non-performance under the bareboat charter agreement. Hunter is not, in my opinion, a counterparty that holds the same kind of financial or operational caliber as the other clients SFL has.

No matter the outcome, I take it that SFL has protected themselves against any downside risk associated with this deal, so that whatever action Hunter takes, SFL will still be left with good upside potential.

Disclosure: I am/we are long SFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.