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SFL Adjusts Charter Agreement with Frontline

Maritime Activity Reports, Inc.

May 29, 2015

Photo courtesy of Ship Finance International

Photo courtesy of Ship Finance International

Ship Finance International Limited (SFL) announced that it has entered into a heads of agreement to amend the long-term chartering agreements with Frontline Ltd.

The company currently has 17 vessels on charter to subsidiaries of Frontline, with an average remaining charter term of nearly eight years.

The new agreement will take effect from July 1, 2015 and will be a combination of reduced long-term base rates, increased profit split and an ownership share in Frontline. The operating expenses, including dry-docking, payable to a subsidiary of Frontline will also be adjusted to current market level.

  • New time charter rate for VLCCs: $20 000/day
  • New time charter rate for Suezmaxes: $15 000/day
  • New opex for all vessels: $9,000/day
  • New profit split: 50% above new time charter rates
  • 55 million Frontline shares will be issued to Ship Finance

Ship Finance will continue chartering the vessels to a subsidiary of Frontline, and in exchange for releasing Frontline from their current guarantee obligation on the charters, a cash buffer of $34 million ($2 million per vessel) will be built up in the chartering company.

Accrued cash sweep from January through June 2015 based on the existing agreement, estimated to approximately $20 million, will be paid in cash to Ship Finance.

Under the current agreement, Ship Finance is entitled to a 25% profit split above approximately $26,700/day for the VLCCs and $21,100/day for the Suezmaxes, calculated and payable on an annual basis. Frontline prepaid $50 million of this profit split in December 2011, and no additional profit split has so far accumulated in excess of this amount.

The new profit split agreement will start accruing from July 1, 2015 and will now be calculated and paid on a quarterly basis. Going forward, profit split payments will not be subject to the previous $50 million threshold.

Based on closing shareprice on May 28, 2015, of $3.06 per share, the market value of the Frontline shares to be issued to the Company is approximately
$168 million, and based on the volume-weighted shareprice last 3 months of
$2.64 per share, the value is approximately $145 million.

When issued, the shares will represent approximately 27.7% of the total shares in Frontline on a diluted basis. Following customary filing requirements, the shares received may be distributed to our shareholders as a special dividend or sold at a later stage. In addition, Ship Finance owns approximately $117 million of senior unsecured amortizing notes in Frontline, which will remain unchanged and serviced by Frontline like before.

The release of the charter guarantee relating to our charters is seen as an important feature to facilitate strategic transactions in Frontline, including potential mergers and/or acquisitions going forward.

CEO of Ship Finance Management AS, Ole B. Hjertaker said in a comment: "We are currently enjoying a very strong tanker market, and the new and higher profit share arrangement is likely to generate higher net cash flows from the vessels in the near term. Lower base rates will also ensure a more sustainable long term structure, with a cash buffer to mitigate potential fluctuations in the charter market.

Since the establishment of Ship Finance in 2004, we have received more than $600 million in cash sweep and profit sharing from Frontline. It has enabled the Company to grow and diversify the asset base much faster than originally anticipated with corresponding higher dividend capacity. Changing the calculation of the profit split to quarterly basis and starting from a lower level adds interesting optionality for us going forward, with the potential for increased long term quarterly distribution capacity."


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