Ship Finance Intl Executive Insights: Cash Sweep, Container Ships

On Thursday, Ship Finance International Ltd (NYSE:SFL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Cash Sweep

David Missal: Yes, my question concerns the cash sweep. Is the money kept in the segregated account does it come to you what happens (within few) quarter there is no cash sweep or there is problem with Frontline can they claw the money back or is it a cumulative cash sweep? What are the actual particulars of how that works?

Ole B. Hjertaker – CEO: The way it works is that it is calculated every quarter, but it’s a final calculate, it’s always on a year-to-date basis, with the final calculation at the end of December. So that means that the first quarter we have just announced, when we get to the second quarter, it will be year-to-date in June minus what had been accounted for in the first quarter and so forth.

David Missal: In other words, if there’s an issue with Frontline at the end of the year, that whole cash sweep could disappear?

Ole B. Hjertaker – CEO: It could disappear in theory at least, but we are relatively confident on the ability to generate cash sweep based on two things. First of all, the cash sweep kicks in at the very low charter rates for many of the vessels. As illustrated on one of the slides, for 23 of the vessels, the cash sweeps actually starts at just a little over effective, call it, technical management or operating expenses for the vessels. Also Frontline, they have sub-chartered many of these vessels at a higher rate. Frontline is reporting the numbers tomorrow, so we don’t have access to the details but they have in previous quarters indicated that they have charters for instance on some of the OBO vessels, the oil/bulk/ore vessels, at significantly higher rates than the base rates. So, that will of course give a positive contribution irrespective of where the spot market is going.

David Missal: From an actual cash stand going forward, I was a little confused, for 2013, you’re actually fronting – you’re paying Frontline’s portion of it in anticipation of getting it back at the end of the year if you went for the 2013 correct?

Ole B. Hjertaker – CEO: We received $106 million from (front) in December which was in the way or you can say two years of front paying of…

Container Ships

Rasta Behrang – Jefferies and Co.: Just to follow up on the potential carve out of your containerships. If that happens would you include your containerships that have long-term contract or is it only going to include containerships with short-term contracts?

Ole B. Hjertaker – CEO: Well, that has not been determined yet. We were indicating in the press release in the presentation that this is something that we are evaluating now as we have the seven vessels effectively in the short-term market. So, I think that all depends on the specific situation and how we see call it more value for the Ship Finance shareholders in the structure. So, with more and more details on that we will of course have to come back to when we have done some more work on this and call it that project has progressed somewhat more. But I think from a structural perspective the container vessels that are operating in the short-term market is of course a little bit on the side of the core business of Ship Finance which is still long-term charters. So, those are of course the most natural vessels to focus on, but if that should also include some of the other vessels it could be, but we have to get back to it.

Rasta Behrang – Jefferies and Co.: The two containerships that you just fixed in the market, the short-term contracts, what is the rate on those vessels?

Ole B. Hjertaker – CEO: The market rate currently as indicated by brokers is in the range of $6,500 to $7,500 per day. We don’t give exact details on all charter rates per vessels, but they are fixed basically, it’s a relatively liquid market and they are fixed at market. That is also of course the reason why we go short-term, is that we believe that the market rates will improve and will firm up and therefore we’re trying to charter these out on short-term as we can and hopefully catching that upturn in the market.