Ship Finance International CEO sees company as a 'different animal,' manages debt carefully

By Paul Deckelman

New York, Sept. 8 - Ship Finance International Ltd. is "a bit of a different animal in this space" - the ship-owning and chartering business - according to its chief executive officer, Ole B. Hjertaker, pointing to the way the company, founded just a few years ago as a spin-off from an existing oil tanker operator, has managed in that time to diversify from just tankers into other kinds of cargo vessels and even energy drilling rigs.

Along the way, he told attendees at Jefferies & Co.'s seventh annual Shipping, Logistics and Offshore Services Conference on Wednesday in New York, the Hamilton, Bermuda-based maritime company has become a solid cash-flow generator. He called its $200 million of EBITDA in this year's second quarter "massive."

And, he said, Ship Finance differs from some other companies because it conscientiously pays its debts.

That might not sound particularly remarkable in and of itself, since it is assumed that a company issuing bonds or entering into a bank facility will pay its debt and most companies in fact do so, just as they are supposed to - but Hjertaker opined that "as some of you [at the conference] may have noted, for some of the yield-structured companies, repaying debt is a novelty. But we believe in actually repaying debt - because these assets have a finite life, and if you don't repay your debt, it's just going to come and really catch up with you."

To that end, Hjertaker said that in the latest quarter, the company paid $1.42 per share in debt amortization, which he said adds up to more than $400 million per year, "so we're basically repaying our debt at a straight-line profile down to around zero after 10 years.

"We have 13 years average charter coverage" - that is, the guaranteed revenues from the long-term charters of its various vessels - "so I think we have a fairly conservative debt profile here."

Little or no recourse

As of the end of the second quarter on June 30, the company had on its balance sheet about $1.9 billion of consolidated, net interest-bearing debt, including $54.6 million of available cash, plus another $1.8 billion of bank loans to its various subsidiaries, which are not carried on the balance sheet but which are classified as "investment in associate(s)."

The CEO said Ship Finance has structured its debt this way because it is "focused, which is absolutely uniquely, on diversifying the risk by not putting everything on our balance sheet."

Most of its ship-purchase or leasing transactions done in the last three years have been financed through single-purpose subsidiaries, "where we only gave limited, or in some cases, no guarantees from the parent company." He said that the company structures the finances of its individual projects "so that they will work out fine over the long run - but if something should happen with one of the projects, at least it won't take the company down."

For instance, he said that when Ship Finance purchased several costly ultra-deepwater energy drilling units, it structured them with $700 million of debt - but only guaranteed $100 million of that. On another transaction, debt incurred by the special-purpose entity was $200 million - but the parent company did not guarantee anything.

"We've paid up for that through maybe marginally higher [rates] than we would have if we put our balance sheet behind everything," he admitted, "but we think this will take us through both a weak market like we see right now and a stronger market with a much better risk-reward profile for our investors."

Bringing down the bond debt

Ship Finance's $1.9 billion of balance sheet debt includes its 8½% notes due 2013. Originally, $580 million of those bonds were sold in late 2003, when Ship Finance was being spun off by then-owner Frontline Ltd., which is still one of its former unit's biggest customers, with several dozen of its nearly 70 vessels under charter.

Since then, however, Ship Finance has repurchased around $280 million of those bonds, most recently last September, when it bought back $148 million of the notes at a 15.5% discount, recognizing a non-recurring gain of $41.7 million. The buyback was partly financed with $90 million in bank loans and a $16.5 million sale of equity.

The B1/B+ rated bonds have most recently traded a little above par, for a yield of around 7.84%.

Hjertaker declared that "it's fair to assume that this loan will be refinanced" before the final maturity in December 2013.

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