Ship Finance 'comfortable' with ability to refinance 2013 maturities

By Paul Deckelman

New York, Aug. 28 - Ship Finance International Ltd. ended the second quarter with $101 million of cash on its balance sheet, company executives said Tuesday. They expressed confidence that the Hamilton, Bermuda-based international maritime company would be able to refinance several debt maturities coming up next year on attractive terms.

"We have limited refinancing needs over the next four quarters," the company's chief financial officer, Harald Gurvin, declared on the conference call with analysts that followed the release of results for the quarter ended June 30.

Bond maturity coming up

These include the $274 million of 8½% notes due Dec. 15, 2013 that currently remain outstanding out of the $580 million that the company originally sold at par in December 2003.

Gurvin noted that the bonds are currently callable at par, but he indicated that Ship Finance is in no hurry at this point to resolve them.

"There is still more than a year left until maturity," he said. "We will address this when the time is right, and given the relatively small amount to be refinanced, we are confident that the senior notes can be refinanced at attractive terms."

During the question-and-answer portion of the call that followed the formal presentations by Gurvin and by the company's chief executive officer, Ole B. Hjertaker, an analyst asked about what kind of financing Ship Finance might consider to refinance those notes - secured, unsecured or even borrowing in the European debt markets. The CEO told the analyst that "we have access to different sources of capital."

He noted that the company, which had $3.2 billion of total long-term debt outstanding at the end of the quarter, is well-known and respected in the secured bank debt market, is known in the convertibles market and has a Scandinavian bond issue outstanding as well as having tapped the U.S. bond market.

"So I believe we have various access to financing. ... We have a lot of flexibility."

He also dropped a high-powered name, citing "not least the strong support we have from our biggest shareholder, Mr. John Fredriksen" - the 68-year-old Norwegian-born, now Cyprus-based tanker tycoon, worth an estimated $11 billion, who owns 40% of Ship Finance. Hjertaker said that given his "standing in the capital markets, I think we are quite comfortable with our ability to refinance that before or at maturity at an attractive rate."

Rig financing due soon

Besides the bonds, the company - which owns and charters out 67 vessels of various types, including oil and chemical tankers, energy drilling rigs, dry bulk-carrier ships and container cargo ships - has another 2013 maturity, the remaining outstanding portion of $2.1 billion of financing it entered into in 2008 when it purchased three ultra-deepwater drilling rigs from Seadrill, an offshore drilling company also controlled by Fredriksen and based in Bermuda. That will come due in the second half of next year.

Gurvin pointed out that the $2.1 billion financing "was structured with a very front-loaded repayment structure, and we have already repaid over $800 million on these facilities alone, and we continue to pay down significant amounts before maturity." He estimated that each of the three rigs has an average balloon payment due at maturity of $370 million.

Based upon "the strong outlook for the offshore market" generally, boosting the units' valuations, and the fact that Seadrill signed long-term charters for the rigs when it sold them to Ship Finance - those agreements will still have 10 years to run at the time the financings mature next year, guaranteeing a steady stream of income over the next decade - Gurvin expressed confidence in the company's ability to refinance that more than $1 billion of obligations before they come due.

"The current financings are very attractive," he said, "and we will address the refinancing in due course."

He added that "we have a prudent track record in the banking market and are confident that the rates can be refinanced on attractive terms."

Hjertaker echoed that assessment, telling an analyst that "given what's happened over the last few years, the financial turmoil we've seen over the last four years, I believe we have demonstrated to the banks and to the market that we are able to manage our portfolio in a very prudent way. We have no issues with the banks and we believe - at least that's what we hear from many of the banks - that we are a favorite client."

The company's total $3.2 billion debt load at June 30 consisted of $1.9 billion of long-term parent company debt and another $1.3 billion of long-term debt at various subsidiaries. About half of the total debt is unsecured.

Besides the 2013 bonds, the figure includes a net $73 million equivalent of Norwegian krone-denominated 5.32% bonds due 2014 and $125 million of 3¾% convertible notes due 2016.

Gurvin said that the company has already arranged for long-term financing for all vessels under construction, with remaining total commitments from lenders of up to $198 million.

Besides the $101 million of cash at June 30, liquidity also included another $39 million of securities available for sale.

In compliance with covenants

The CFO said that the company was in compliance with all financial covenants under its loan agreements. Free cash was $101 million, versus the minimum requirement of $25 million, while working capital - required merely to be positive - stood at $219 million. The book equity ratio was 34%, exceeding the minimum requirement of 20%, and the company was in compliance with any minimum-value covenants in its loan agreements.

Gurvin further noted that Ship Finance "has been in compliance with all financing covenants for each of the 34 quarters since the company was established. Given the financial turmoil and depressed shipping markets over the last year, this gives us a very strong standing in the banking market."

He added that "we are well-positioned for continued selective growth with a strong balance sheet, a diversified asset portfolio and premium access to deal flows and capital."

During the quarter, charter revenues from the company's vessels of various types was about flat sequentially versus the first quarter ended March 31 at $185 million and the $151 million of EBITDA was also not much changed. But net earnings rose solidly to $61 million, or 77 cents per share, from $39 million, or 49 cents per share, the previous quarter, mostly due to an accounting provision related to the end of its chartering agreements with Horizon Lines.

Management declared a 39-cent-per-share dividend, the company's 34th consecutive quarterly payment.

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