Athens: Ship Finance International (SFI) has agreed reduced base rates for the 17 tankers it has on long-term charters to Frontline in exchange for a 27.7% stake in the company.
The two Fredricksen-led companies have today signed a heads of agreement for the new rates and equity transfer of 55m shares to SFI. The agreement will be effective on July 1.
The companies have also agreed an increased profit split of 50% above new timecharter rates, an increase on the current 25% level.
The reduced timecharter rate for the 12 VLCCs Frontline has on charter will be $20,000 per day. For the five suezmaxes, the new timecharter rate is $15,000 per day.
Operating expenses, including dry docking, will also be adjusted to the current market level of $9,000 per day.
In exchange for releasing Frontline from its current guarantee obligation on the charters, a cash buffer of $34m ($2m per vessel) will be built up in the chartering company. SFI said this is “an important feature to facilitate strategic transactions in Frontline, including potential mergers and/or acquisitions going forward”.
“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,” Ole B. Hjertaker, CEO of Ship Finance Management, said in a statement today.
“Lower base rates will also ensure a more sustainable long-term structure, with a cash buffer to mitigate potential fluctuations in the charter market.”
SFI will also receive around $20m from the cash sweep accrued between January and June 2015, based on the existing agreement.
“Since the establishment of Ship Finance in 2004, we have received more than $600m 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,” said Hjertaker.
“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.”
At the time of writing, Frontline shares are currently trading at $3.06 per share, making SFI’s new 55m-share stake worth around $168m, or around $145m based on the volume-weighted share price during last three months of $2.64 per share.
In addition to these new shares, SFI owns approximately $117m of senior unsecured amortising notes in Frontline.