Frontline Ltd. has entered into a heads of agreement to reduce long term charters with Ship Finance International Limited in exchange for 27.7 stake in the company.
A subsidiary of Frontline has 17 vessels on charter from Ship Finance with an average remaining charter period of 7.7 years.
The new agreement will take effect from July 1, 2015 and will reflect a combination of reduced long-term base rates, increased profit split to Ship Finance, increased operating expenses payable by Ship Finance, release of Frontline’s guarantee for the charters and an ownership interest in Frontline for Ship Finance.
The chartering counterparty will continue to be a subsidiary of Frontline, and in exchange for releasing Frontline from the current guarantee obligation on the charters, a cash buffer of USD 34 million (USD 2 million per vessel) will be built up in the chartering counterparty.
The estimated reduction in fixed charter payments to Ship Finance under the amendments amounts to approximately USD 283 million.
Based on closing share price on May 28, 2015, of USD 3.06 per share, the market value of the Frontline shares to be issued to Ship Finance is approximately USD 168 million, and based on the volume-weighted share price last 3 months of USD 2.64 per share, the value is USD 145 million.
The shares to Ship Finance will be issued once the transaction is completed, representing 27.7% per cent of the shares and votes in Frontline.
In the current charter arrangement, Ship Finance is entitled to a 25% profit split above an average of USD 26,737/day for the VLCCs and an average of USD 21,100/day for the Suezmax tankers, calculated and payable on an annual basis..
“The new structure will reduce Frontlines cash break-even rates significantly and ensure a more sustainable long-term structure. This agreement significantly strengthens Frontline’s balance sheet and reduces its financial risk. The board and management can now shift the focus from balance sheet restructuring to business development and growth. This represents a major milestone for the company,” CEO of Frontline Management AS, Robert Hvide Macleod said in a comment.
Ship Finance owns approximately USD 116 million of senior unsecured amortizing notes in Frontline, which will remain unchanged.
Frontline recorded net income of USD 31.1 million in the first quarter, equivalent to earnings per share of $0.25, compared with a net loss of USD 13.0 million for the previous quarter.