Ship Finance (SFL) Enters Amendments with Frontline (FRO) Upon Restructuring
Ship Finance International Limited (NYSE: SFL) has agreed, subject to final board and bank financing approvals, to amend the terms of the long-term chartering agreements with Frontline Ltd. (NYSE: FRO).
This will happen concurrently with a proposed recapitalization of Frontline, where some of their assets will be sold and a significant capital commitment relating to newbuildings will be transferred to a new company to be established, Frontline 2012. Frontline's balance sheet will be strengthened and the current uncertainty relating to its liquidity position and bank covenant compliance will be removed.
At the same time, all of Frontline's tonnage providers, including Ship Finance, have been requested to reduce the base charter rates in order for the restructured Frontline to manage through a potentially very weak spot tanker market in the short to medium term. For Ship Finance, the preliminary agreement is to reduce the base charter rates by $6,500 per day per vessel from 2012 through 2015, and thereafter revert to previous charter rate levels.
Ship Finance will receive a restructuring compensation of $106 million in cash from Frontline, including the release of $56 million restricted cash currently serving as security for their charter payments to us. The remaining $50 million will be an early payment of profit split, and will effectively be used to offset future profit split revenues over and above the old base rate.
There will also be an adjustment to the profit split calculation whereby Ship Finance will get 100% up to the old base rate levels, and 25% profit split above that. The profit split will be payable on an annual basis as before.
In addition to the $106 million cash payment from Frontline, we plan to use an additional $50 million to prepay on bank financing, with corresponding reduced interest and loan amortization. The net effect of this significant debt reduction and new charter arrangement is that the cashflow from these vessels will at a minimum cover the debt service, even at the reduced base rate, for the next four years.
At year-end 2011, the bank financing relating to the 28 Frontline vessels will then be reduced from approximately $740 million to approximately $584 million. This is just a marginal level above current scrap values for the vessels, and we will continue to amortize down the debt further according to schedule.
Currently, the net contribution from the Frontline vessels, after debt service, is approximately $8 million per quarter, or approximately $0.10 per share. It is expected that the near-term dividends will be adjusted to reflect a reduced net cash-flow, potentially reducing the base dividend to approximately $0.25 per share for the next quarter. If the market is higher than the new reduced base charter rates, significant additional cash will be generated with the potential to increase SFL's dividend in the future. Any final decision to pay dividends, and the amount of such dividends, is made by the Board of Directors on a quarter by quarter basis.
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This will happen concurrently with a proposed recapitalization of Frontline, where some of their assets will be sold and a significant capital commitment relating to newbuildings will be transferred to a new company to be established, Frontline 2012. Frontline's balance sheet will be strengthened and the current uncertainty relating to its liquidity position and bank covenant compliance will be removed.
At the same time, all of Frontline's tonnage providers, including Ship Finance, have been requested to reduce the base charter rates in order for the restructured Frontline to manage through a potentially very weak spot tanker market in the short to medium term. For Ship Finance, the preliminary agreement is to reduce the base charter rates by $6,500 per day per vessel from 2012 through 2015, and thereafter revert to previous charter rate levels.
Ship Finance will receive a restructuring compensation of $106 million in cash from Frontline, including the release of $56 million restricted cash currently serving as security for their charter payments to us. The remaining $50 million will be an early payment of profit split, and will effectively be used to offset future profit split revenues over and above the old base rate.
There will also be an adjustment to the profit split calculation whereby Ship Finance will get 100% up to the old base rate levels, and 25% profit split above that. The profit split will be payable on an annual basis as before.
In addition to the $106 million cash payment from Frontline, we plan to use an additional $50 million to prepay on bank financing, with corresponding reduced interest and loan amortization. The net effect of this significant debt reduction and new charter arrangement is that the cashflow from these vessels will at a minimum cover the debt service, even at the reduced base rate, for the next four years.
At year-end 2011, the bank financing relating to the 28 Frontline vessels will then be reduced from approximately $740 million to approximately $584 million. This is just a marginal level above current scrap values for the vessels, and we will continue to amortize down the debt further according to schedule.
Currently, the net contribution from the Frontline vessels, after debt service, is approximately $8 million per quarter, or approximately $0.10 per share. It is expected that the near-term dividends will be adjusted to reflect a reduced net cash-flow, potentially reducing the base dividend to approximately $0.25 per share for the next quarter. If the market is higher than the new reduced base charter rates, significant additional cash will be generated with the potential to increase SFL's dividend in the future. Any final decision to pay dividends, and the amount of such dividends, is made by the Board of Directors on a quarter by quarter basis.
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