SFL Corporation Ltd. (SFL) Q3 2017 Earnings Report, Transcript and Summary

Thank you, and welcome, everyone, to Ship Finance International on our Third Quarter Conference Call. With me here today, I also have our CFO, Harald Gurvin; and Senior Vice President, André Reppen. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission. The Board has declared a quarterly dividend of $0.35 per share. This dividend represents $1.40 per share on an annualized basis, or 9.4% dividend yield based on closing price of $14.95 yesterday. This is our 55th consecutive dividend, and we have now paid more than $23 per share in dividends or more than $1.9 billion in aggregate, since 2004. The reported net income for the quarter was $29 million or $0.31 per share. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was approximately $150 million, and the EBITDA equivalent cash flow in the quarter was approximately $115 million. Last 12 months, the EBITDA equivalent has been approximately $472 million. During the quarter, we took delivery of two 114,000 deadweight ton product tankers, also called LR2 type. The vessels have been chartered out on time charter basis to Phillips 66 with a minimum period of seven years, plus five optional years. The minimum period represents a backlog of approximately $113 million, and the aggregate annual EBITDA contribution from the vessels is estimated to approximately $11 million on average with full cash flow effect now in the fourth quarter. And subsequent to quarter end, we have strengthened our balance sheet by converting $121 million of convertible notes into equity, leaving only $63 million remaining of what was originally of $350 million convertible note issued in 2013. And the balance can easily be refinanced by another instrument or settled in cash at maturity, depending on what our preference will be at that time. In terms of numbers of vessels, we have more vessels operating in the liner market than any other segment. Our focus has primarily been on new design container vessels between 9,000 and 19,000 TEU, and most of our vessels are chartered to the world's two largest container lines. Only the 2010-built, 1,700 TEU vessel, SFL Avon, is currently operated in the short-term charter market. And all the other container vessels are employed on long-term charters. Our business model allows us to be flexible with respect to deal structuring, where we can also invest in older vessels from time-to-time if risk reward is deemed attractive. We have done that in the past and may also look at it going forward. But our main focus also going forward will be on modern eco-design vessels in combination with long-term employment. We also have two car carriers, the Glovis Conductor and the Glovis Composer, which were on long-term charters until the third quarter and which are now being re-chartered until mid-2018 to the same counterparty. Net rate is estimated to $12,300 per day, which is lower than the initial five-year period and given the balance in the car carrier market with very few vessels under construction, our preference has been to charter out these vessels for a shorter period at this stage instead of looking in the vessels for a longer period now. In line with our consistent focus on delevering our balance sheet and maintaining a robust business platform, and we have several of these vessels currently without any debt, including three containerships and the two carriers I just mentioned that are debt-free. We now have nine crude oil carriers remaining on charter to Frontline, and all the vessels are VLCCs. This is down from nearly 50 vessels at the peak in 2004. The profit share arrangement on these vessels has provided us with interesting leverage to the tanker market, and the profits bid takes in from $20,000 per day for these VLCCs. In 2015, we also changed the profits bid calculation from annual to quarterly basis, adding optionality value for us. And we now benefit from this as the spot market in the third quarter was below the threshold and there is no [clawback] of the $5.6 million profit split earned earlier this year. For the fourth quarter, Frontline has today guided $19,200 per day for 76% of their VLCC capacity, which also includes their new vessels. We therefore believe earnings on our vessels could be below the profit share threshold this quarter as well, unless the market strengthens significantly towards the end of the quarter. In addition to the Frontline vessels, we also have exposure to the crude oil tanker market through two modern Suezmax tankers, which are traded in a pool with sister vessels owned by Frontline. For these vessels, the average charter rate in the third quarter was approximately $24,800 per trading day compared to our breakeven level of approximately $17,000 per day after interest and amortization for the vessels. In 2017, we have covered nearly three quarters of the vessel days with a combination of charters with a floor rate and profit split, which serves as a buffer in the current soft markets and still with some upside if and when the market strengthens. And in addition to these crude oil tankers, we have the newbuilding, 114,000 deadweight ton product carriers to Phillips 66, which I mentioned earlier, and also 2008-built chemical carriers chartered until next year. We have 22 dry bulk vessels in the fleet with 15 larger vessels chartered out on long-term basis and seven Handysize vessels traded in the spot market. One of our long-term objectives is to combine stability and predictability in cash flows with optionality. As we have seen over time, that market volatility can generate super returns from time-to-time. So for the eight Capesize bulkers to Golden Ocean, we have a 33% profit split in addition to the base rate of $17,600 per day currently. Based on broker reports, the Capesize market is currently above the threshold level, but the profit split will be based on actual performance by the specific vessels, so we cannot give any specific guidance on when a profit share will materialize. But as the profit share is calculated and payable on a quarterly basis, we believe there is good probability for profit shares over the remaining eight-year charter period when looking at the chart from 2003, where we see very significant volatility over time in the segment. For the seven Handysize dry bulk carriers we currently trade in the spot market, the rates achieved in this quarter were approximately $6,700 per trading day, which is in line with the previous quarter. There are indications that market sentiment may be gradually improving from this segment, too, with reported charter rates so far into the fourth quarter well in excess of the third quarter. From an employment perspective, we intend to continue trading these vessels in the spot market until long-term rates improve. As previously announced Seadrill commenced Chapter 11 proceedings and filed prearranged cases in the Southern District of Texas in September 2017. According to Seadrill, this is part of a comprehensive restructuring plan and financing with various creditors and investors, including Ship Finance. Seadrill believes the comprehensive restructuring plan will provide them with a five-year runway and a bridge to an industry recovery, facilitated by more than $1 billion of capital injection, extended and reprofiled secured bank debt and debt for equity exchanges. As part of this restructuring plan, which remains subject to court approval, we have agreed to reduce the contractual charter hire for three rigs by approximately 29% for a period of five years with an economic effect from January 2018, with the reduced amounts effectively added back in the period thereafter. The term of the leases for West Hercules and West Taurus will also be extended by 13 months until December 2024. And importantly, Seadrill will continue to pay us full charter hire until this restructuring plan is approved and implemented, hopefully, sometime in 2018. We have concurrently agreed with their financing banks that the loan terms will be extended by four years, starting from the original maturity date of each of the three separate loan facilities with reduced amortization during the extension period compared to the current level. Assuming the restructuring plan is approved, the cash flow from the three rigs during the extension period, net of interest and amortization, is estimated to be approximately $29 million per year. Two of the three rigs to Seadrill are working or under process of being reactivated, where Seadrill has sub-chartered the harsh environment jack-up rig, West Linus, to ConocoPhillips until the end of 2028. And the semi-submersible rig, West Hercules, has been awarded a sub-charter in the North Sea with Siccar Energy with expected startup in April 2018. The semi-submersible rig, West Taurus, remains in layoff in Spain. To give some perspective on our exposure, Ship Finance acquired the West Taurus and the West Hercules in 2008 at an approximate cost of $850 million per rig and loan starting at $700 million per rig. Over the nine years since then, we have amortized down the book value to only 40% of the original base starting point, and the loan amounts to only 35% of the original loan amount and this amortization will continue. Including the West Linus, we have reduced the debt from $1.9 billion in aggregate for the three rigs to below $800 million now. And of this aggregate outstanding loan balance, only $235 million or less than 30% is currently guaranteed by Ship Finance. In addition to these three rigs to Seadrill, we also have the 2007-built drilling rig, Soehanah, which is employed under our drilling contract with a national oil company in Asia until June 2018 with an option to extend the charter until June 2019. This is through Apexindo in Indonesia, and the net payable revenues to us are approximately $10,000 per day or $0.9 million per quarter. This rig is debt-free, so there are no financing expenses. If we then have a look at our performance last 12 months, and the normalized contribution from our projects, including vessels accounted for as investment in associate, the EBITDA, defined as charter hire plus profit share less operating expenses and general and administrative expenses, was $472 million in the period. Net interest was $160 million or approximately $1.24 per share, and our normalized ordinary debt installments relating to the Company's projects was $176 million or approximately $1.88 per share in the 12-month period. This is excluding prepayments relating to sale of all the vessels or refinancings. Net contribution after this was $178 million or $1.90 per share over the last 12 months. For the same period, we have declared dividends of $1.60 per share or $150 million in aggregate. And for illustration, in the third quarter alone, the net contribution from our assets after interest and ordinary debt installments was approximately $0.43 per share, while the declared dividend is $0.35 per share. From our inception nearly 14 years ago, we have paid out approximately 80% of net income in dividends, which illustrates the moderate dividend policy, and also, it has allowed us to significantly grow our business organically. And with that, I will give the word over to our CFO, Harald Gurvin, who will take us through the numbers for the third quarter.

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the third quarter compared to the second quarter. Please note that this is only a guideline to assess the Company's performance and is not in accordance with U.S. GAAP. Total charter revenues for the third quarter were $146.8 million or $1.57 per share, in line with the previous quarter. VLCC and Suezmax revenues were slightly down in the quarter due to the sale of one VLCC and two Suezmaxes in the second and third quarter and lower earnings on the two Suezmaxes trading in the pool. We took delivery of the two product tankers with seven-year charters to Phillips 66 in the third quarter, which will have full earnings effect in the fourth quarter. Offshore revenues were slightly up due to an extra day of earnings in the third quarter compared to the second quarter. As Ole mentioned, Seadrill will continue paying full charter hire until their restructuring plan is approved, but the agreed rate reduction will be effective from January 2018 so that any overpaid hire during the beginning of the year will be deducted from the remaining part of 2018. Further, the jack-up drilling rig, Soehanah, commenced its new bareboat charter at a minimum rate of $10,000 per day in end June, which have full effect in the third quarter. Income from financing investments was down in the quarter, mainly due to no dividend received on our shareholding in Frontline. So overall, this summarizes to an adjusted EBITDA of $150 million for the quarter or $1.23 per share, slightly down from $1.26 in the previous quarter. We then move on to the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investment and finance lease, results in associates and long-term investments, and interest income from associate. If you wish to gain more understanding of our accounts, we will also, this quarter, publish a separate webcast, which explains the finance lease accounting and investment in associate in more detail. This webcast can be viewed on our website, shipfinance.bm, under Investor Relations and Webcast. Overall for the quarter, we reported total operating revenues according to U.S. GAAP of $94 million. We also recorded a minor gain of $345,000 on the sale of the Suezmax tanker from Ardenne. Total operating expenses were $56 million, resulting in an operating income of $38 million. We recorded a positive mark-to-market of derivatives of $8.9 million during the quarter, included under income related to non-designated derivatives, and also, a non-cash foreign exchange loss of $2.9 million, included under other financial items. These movements mainly relate to the early redemption of the NOK 600 million bond in June and July and the issuance of the new NOK 500 million bond in end June, which was hedged in the third quarter. So overall and according to U.S. GAAP, the Company reported net income of $29 million or $0.31 per share. Moving on to the balance sheet. We showed $246 million of consolidated cash at the end of the quarter, excluding net amounts freely available for drawdown under revolving credit facilities and cash in our non-consolidated subsidiaries. Current portion of long-term debt by quarter end includes $184 million outstanding under the convertible notes due February 2018. Following the early conversion of $121 million of these notes, the remaining amount due at maturity is now only at $63 million. Stockholders' equity was approximately $1.1 billion, giving a book equity ratio of 35% at the end of the quarter. Then looking at our liquidity and financing status. We have a strong liquidity position with total available liquidity of $254 million at the end of the quarter. In addition, we had available-for-sale securities of $116 million, which includes the investments in senior secured bonds and other securities with a fair value of $49 million at quarter end and also our 11 million shares in Frontline with a market value of approximately $64 million based on the closing share price yesterday. We have taken several steps to strengthen the balance sheet and also improve our debt maturity profile over the last months. As mentioned, we entered into agreements for the early conversion of $121 million of convertible notes in October, and the remaining outstanding due in the first quarter of 2018 is now only $63 million. In addition, we agreed to four-year extension of the three loans relating to the Seadrill rigs in connection with the restructuring. Subject to the approval of the restructuring plan, the loans now mature between November 2022 and June 2023. With continued amortization of the loans, the amount to be refinanced at the new maturity dates has been significantly reduced compared to the original loan maturities in 2018 and 2019. The main charter maturity is the facility relating to the vessels on charter to Frontline, which matures in end June 2018. Following the recent sales, we only have nine VLCCs remaining on charter and the financing is just above current scrap levels for these vessels. Then to summarize. The board has declared a quarterly cash dividend of $0.35 per share for the quarter. This represents a dividend yield of 9.4% based on the closing share price yesterday. Net income for the quarter was $29 million or $0.31 per share. We continue our fleet renewal with the sale of one older tanker vessel and delivery of the two product tankers with seven-year charters to Phillips 66. We have strengthened our balance sheet through the early conversion of $121 million of convertible notes due in February 2018. We have a strong liquidity position and no remaining CapEx following delivery of the two product tankers in August. And with that, I give the word back to the operator, who will open the line for any questions.

Thanks much, sir. [Operator Instructions] Today's first question is going to come from Mr. Magnus Fyhr calling from Seaport Global. Please go ahead.

Yes. Hey, guys. Just a – first question, with the restructuring of the Seadrill contracts behind and strong liquidity position, are you guys ready to start playing offense? And with that in mind, what asset classes are you currently looking at? And maybe you can shed some light on your different views there.

Absolutely, and thank you. Yes, we are very much focused on, what we say, deal flow, and what we say, building the portfolio, and that has intensified after we finalized the negotiations with Seadrill. As you pointed out, we have a good, robust balance sheet. We have, call it, significant liquidity available. And I would say, our main focus is right now on the container segment, on the tanker segment, then I would say also bulker segment. So all our three main segments, with the exception of offshore where we are, I would say, a bit more careful at the moment. And we are screening projects, I would say, on a daily basis. Call it, the difficult part here always is to make sure that you take the right risk-adjusted return, call it, the positions in the market. The easiest thing in the world is to buy something. You just pay more than the next guy and you get it. The tricky part is to actually get the return over time. And I think with our track record now being 14 years profitable every single quarter, we have invested quite a bit. Since Harald Gurvin and I joined 11 years ago, we have invested $7 billion in new transactions. So we definitely have – yes, we have definitely proven in the past that we have been able to put capital to use. It's all about trying to do the right deals. But I think in several of the segments, we see interesting dynamics. We see strong good counterparties who are interested in doing transactions. We see the financing market, the traditional bank market changing, which also creates more opportunities for us. So I think, definitely, we have a growth mindset. But again, discipline, we don't want to run out and just buy the first thing just because we have the money in our hands.

Yes. You forgot one segment there, LNG. With the recent strength in both spot rates and there's been some time charters here recently looking at those returns and probably under 10% unlevered, is that a segment you would look at? And what kind of benchmarks would you look at as far as returns?

Yes, absolutely. I mean, in my mind, it's all about what – it's the tankers, call it, the type segment, but of course, with its own characteristic. I would say, if you say from a counterparty characteristic, maybe you can stay a bit through the line of it. You have – basically, industrial is part of logistics chain and where you see counterparties willing to commit to long-term charters. We have looked at that in the past, and I would say, it would fit very nicely in our portfolio. It's all about finding the right, call it, risk return parameters. What we have seen in the LNG side has been a technology shift. I would say, we have also seen to a certain degree, the same in the container business. But the fact is that a modern, a new – call it, the new LNG vessels that you build now, they burn 100 ton less fuel per day than vessels that were built, say, 10 years ago. So it's a combination of trying to buy the right type of assets and then get the right type of return out of that. But definitely, yes, we also have that on our target list.

And there's been – seems like there's been increased appetite for bareboat charters here recently. Have you looked – I mean, looks like there are pretty attractive returns on those. I mean, have you passed on those? Or are there opportunities out there?

Well, we have – if you look at our portfolio, we have a mix of time charters and bareboat charters. What we have – like I said, there are benefits and drawbacks with both of them. If you run a vessel on time charter, you, of course, run the risk that they could be more costly to operate. At the same time, you know what the vessel will look like when you get it back, and that is the flip side of bareboat. Bareboat typically looks great in an Excel spreadsheet. The problem is that when you get it back, who is going to set the – who's going to determine what it should look like? And also, if your counterparty hasn't got clear economic incentives to maintain it like it was their own, you could very well risk getting a vessel back that has been poorly maintained and where it will be very expensive to bring it back into trading. So we do have both and we can do both. We are, I would say – structurally, we are agnostic in terms of chartering structure. We just have to be aware of the risk to take also on a bareboat structure. But we have – how many vessels on bareboat do we have? I think we probably have 20, maybe more than 20 vessels on bareboat, so we know how that works. Typically, we do that with – we do that on older vessels where we have very low, call it, residual exposure or we have other, call it, risk-mitigating factors where we don't run the risk of having a very expensive vessel returned to us without being properly maintained.

Okay. Thank you. And just one last. Can you refresh my memory on the profit sharing you have with Golden Ocean? I know they signed seven time charters here at $17,000 a day. I assume those are not included in the ones that you have with them. And are they restricted from getting time charters? Or are they going to be in the spot market?

Well, there are no specific restrictions relating to our vessels. And the profit share is linked to the actual earnings by these specific customers. The profit share kicks in at $17,600 per day. And it's a 33% profit share, dollar-by-dollar above that level, and it's a calculation that's done on a quarterly basis. So what can we say, a strong quarter followed by a weak quarter doesn't mean that there is any clawback in profit share. We do not have specific – we have not given them specific instructions on trading, what we say, up to 12 months, simply because we believe they are closer to the Capesize market, and therefore, closer to establish and determine what is an optimal charter structure for the vessels in the market. But we have seen that market strengthening, and we see broker reports in the fourth quarter well in excess of the profit stake. So we can hope that we are now getting closer to a territory where the profit share will accumulate.

Okay. So do you know if any of those seven vessels that they chartered at $17,000 a day, are they any of your vessels?

I think, I cannot comment specifically on that. I would just say that we have lasted to Golden Ocean to freight our vessels where we – in the spot market or up to 12 months, and we follow their judgment on how our vessels should be traded within those parameter.

Okay, great. Thanks, Ole. That's it for me.

Thank you.

Thank you much, sir. We'll now go to Fotis Giannakoulis calling from Morgan Stanley. Please go ahead.

Yes. Hi, Ole and thank you. Can you please remind us of the time schedule of Seadrill restructuring? When do you expect that this is going to be officially approved? What are the next steps that we should wait?

Yes. When they filed – they had a time schedule that was effectively, I believe it was nine months from – when the filing took place and – or actually more than that. I think you have two levels here. One is when the plan is finally approved by the court and then one, when it's finally implemented. My understanding again, just following the process, seems to be that the time plan seems to be pretty much in line with what was laid out. I think they allowed for some relatively good time during the process with the hope that potentially the process can be accelerated. I think at this – so far, we haven't heard anything negative about our charters in the discussions that have been. We understand that they currently – Seadrill is in a – what they call, a go-shop period, i.e. where they are going out to various parties in the market to see if there are any better alternatives out there. And we just have to follow that process, but usually these processes takes time. The good thing of course, for us is that we get full charter hire on our rigs. We have been – and there’s been no interruption in charter payments in connection with the filing. And also, as we have communicated to the market, as part of the restructuring agreement, we have agreed to reduce our charter rates with economic effect from January 1. But we will receive the full charter hire until Seadrill emerges from Chapter 11 and after the plan is approved. So of course, if something adverse should happen, we will have received the full charter hire until that time. But as I said, so far it seems – it looks like it's proceeding, I would say, according to schedule and it's really – there's nothing more really we can – more likely we can share on it. I believe there is quite a bit of information available through – in the public domain relating to the proceedings in the court as well.

No, that's very clear. It seems that any delay in the process as so long as everything goes well that – your benefit at this point?

Well, yes, as long as we get the full charter hire, of course we don't mind. But we also think that it's in everybody's benefit to have a strengthened Seadrill coming out of Chapter 11. And also we all know that these processes are extremely expensive in terms of lawyers' fees and various advisers' fees, et cetera. So of course we hope that they will emerge sooner and – so they can focus on their main business activity, which is running the drilling rigs and not be distracted by the financial restructuring.

Okay. Thank you, Ole. And one more about the opportunity that you see out there, how do the returns compare between each sector and I also wonder if you can focus on the tanker sector given the fact that your fleet has been reduced significantly. It seems that most of your recent deals are in containerships. How do you view the differential in returns across each of the sectors?

Well, the return, it's a mix of a couple of things. It's, of course, a mix of where you think to invest in the cycle and also who you are chartering to. And who you are chartering to will have an influence on the financing. You can structure. So for instance, the Phillips 66 vessels that we recently delivered, we have long-term financing, very attractive rates on that one. If we buy tankers and we run them, call it more in the spot market or short-term market, of course financing will be different. So it's a difficult question to answer because returns vary a bit between segments and they also vary more, depending on your chartering counterparties. But I would say that from a financing perspective, if you have a long-term charter, say, five, seven, 10-year charter, you can typically get 75% to 80% financing. The two latest containerships we did, we had in excess of 80% financing, but we utilize, call it – it was a Chinese lease structure without any guarantees from Ship Finance. Again, that's also an area where we focus because most shipping companies out there. They put their balance sheet behind each and every deal. We try to be disciplined and we try to limit guarantees if we can or, certainly, have a very risk focus on when we give full corporate guarantees and when we don't. So typically, if we buy vessels at scrap value, say if there are opportunities there that we think is attractive. We wouldn't mind guarantee it 100% because the risk is very low, i.e. the exposure is very low. If we buy a very sophisticated vessel, shorter charter, more exposure, we would be more hesitant to guarantee because – simply because the risk balance is different. So all these factors goes together, and it's all about trying to create a long-term risk-adjusted return that we feel is attractive for us as a Company, but at the same time also where we can get the charter rates that are attractive for our counterparties.

Thank you, Ole. And trying to understand a little bit better the competitive dynamic in each of these sectors, where do you see the other shipping companies or more competition are being focused on, particularly the Chinese leasing companies? Are there any specific sector that you see more people bidding for the same deals and some other sectors that you see less interest or less capacity from the side of your competition to bid for these transactions?

Well, I wouldn't necessarily call Chinese capital a competition. As I mentioned, the containerships, it's complementary. We work together and create better, call it financial structure for our counterparties. But we have seen, call it, Chinese and also Japanese call it, leasing companies quite active on the container segment. We've seen the Japanese being very active in the dry bulk segment. I would say also, for the very big dry bulk vessels, both Chinese and Koreans have been active. And we've also seen quite a few investments made in the LNG space. I would say, generally, if there is a very long-term charter behind it, you will – and if it's a bareboat charter, in particular, you will have many, call it, very financial players focused on a potential deal. Of course, our strength there is – I would say, one is access to capital. We are among the biggest listed shipping companies out there. We have access to various sources of capital. But we also importantly, we believe we have very good access to deal flow, and this is through our association with the Fredriksen system. I think we see a lot of potential deals and – which is also equally important, making sure that. If we see deals before others do, hopefully we can share and pick some deals off the market before others do. But you have to remember, this is a very big market and we have a $4.1 billion balance sheet. We’re still – we’re still a small – we're a bigger fish in a very small pond is probably the way to phrase it. We could easily double or triple our portfolio without really making an impact in the market. So there is room for a lot of people. The maritime space is a very capital intensive business, and we hope to take – and get deals done that are – have the right risk adjusted return profile for us and our investors.

Thank you very much Ole.

Thank you.

Thank you, sir. [Operator Instructions] We'll now go to Mr. Richard Diamond calling from Castlewood Capital.

Hi, good afternoon. Ole, can you talk about financing markets available to traditional ship owners outside SFL, especially the traditional sources such as European banks?

Yes. What we have seen is that – or a more clear impression is probably the way to phrase it, is that the traditional financing source for the, call it, traditional ship owner and the traditional ship owner, I would say is typically private equity, family office. Typically, families have been invested in shipping for a long time. They have a handful of vessels, maybe a mixed bag of tankers and bulkers. And they've been used to go to their sort of house bank and they can finance anything at almost the same rates as the much stronger companies out there. But what we have seen certainly in the European market is that with the change in regulations and also with the downturn we've seen in some of the sub-segments, we've seen several European banking institutions, call it reallocate their capital. So they switch from lending smaller amounts to virtually anyone with a decent asset to focusing on counterparties with stronger balance sheet and who have other access to other capital sources, like us and – or the likes of us. So what we have seen recently and I think that is a growing trend, we've seen more capital funded in the private equity market. We have seen more project secured, project bonds, we've seen a few here in the Scandinavian market quite recently, and I think that is a process that will intensify. Of course, it's relatively expensive capital, but at the same time, if the traditional sources are not as abundant, readily available. It's the way many will have to go. So I think from a competitive perspective, if you look at cost of capital, I think the bigger companies will get an increasing competitive advantage over the smaller participants out there. But of course, call it funding is just one part of it. If you make an investment, there are a couple of things, factors going into that. The other is of course, also residual value, so if you are very extremely optimistic on your residual value, it's very – you can still make a calculation work even with expensive funding. I think part of our – call it, part of our DNA is to try to structure deals with a fairly conservative residual value assumptions when we make investments, and hopefully, over time, that will prevent us from maybe making the worst mistakes. But we cannot promise anything, of course. But we only have to look at our business, and we think the competitive landscape is changing. But that doesn't mean that there's not capital out there, be it from the Asian markets or we saw the German market being extremely active a few years ago, the KG market. We've seen the U.S. private equity market being invested in shipping, so there are many participants and players looking at the space.

Well, all I want to say, Ole is, from someone in Texas that it's not bragging if it's true. And you folks have done a splendid job of navigating a very difficult current. Thank you.

Thank you very much. End of Q&A

Thank you, Mr. Diamond. [Operator Instructions] We do not appear to have any further questions at this time. I'll turn the call back over to the organizers for any additional or closing remarks. Thank you.

Thank you. Then I would like to thank everyone for participating in our third quarter conference call. And if you have any follow-up questions, there are contact details in the press release or you can get in touch with us through the contact pages on our webpage, www.shipfinance.bm. Thank you.