We assess Ship Finance's liquidity as "adequate" under our criteria. We consider Ship Finance's liquidity profile to be sufficiently supported by the company's policy of maintaining an ample cash balance, its largely stable contracted cash flows, its strategy of prefinancing vessels on order, and what we consider to be proactive treasury management.
Our base-case liquidity assessment as of June 30, 2012, for the upcoming 12 months reflects the following factors and assumptions:
-- We expect the company's liquidity sources (including operating cash flows, surplus cash balances, and committed bank financing for newbuilds) to exceed liquidity uses (capital spending, mandatory debt repayments, and dividends) by about 1.3x.
-- Liquidity sources will continue to exceed uses, even if EBITDA declines by 15%.
-- We understand that the company's bank covenants require it to hold at least $25 million in cash, cash equivalents, or available in long-term committed facilities at the end of each quarter and to adhere to certain minimum value clauses. Other covenants in Ship Finance's corporate senior secured bank facilities and $449 million high-yield notes include restrictions on payments, investments, and the incurrence of new debt. The covenants include requirements for the company to maintain an equity-to-asset ratio of at least 20% at the end of each quarter and consolidated current assets minus consolidated current liabilities of $0 or better. On June 30, 2012, the company was in compliance with all covenants.
-- The company appears to have sound relationships with its lenders and a satisfactory standing in credit markets.
-- We consider Ship Finance's liquidity management to be generally prudent.
As of June 30, 2012, Ship Finance had about $101 million of unrestricted cash and about $40 million of securities available for sale. Furthermore, our base-case operating scenario estimates that Ship Finance will generate about $420 million of operating cash flow (after cash interest costs) in 2012. This includes cash flows from fully owned, but unconsolidated subsidiaries. As of June 30, 2012, short-term debt repayment obligations total about $385 million, and capital-expenditure commitments for ordered vessels due for delivery in 2012-2013 amount to $224 million, for which the company obtained committed funding of $198 million, resulting in a required cash contribution of only $26 million.
We note that Ship Finance has bulk refinancing needs, with about $1.1 billion in bank loans related to drilling rigs and a $274 million bond maturing at various dates in the second half of 2013. Based on its favorable track record, we anticipate that Ship Finance's management will arrange funding for the debt instruments well ahead of their maturities.
Ship Finance's senior unsecured debt is rated 'B+', two notches lower than the corporate credit rating. This is a result of the contractual subordination of the company's notes to the unrated senior secured bank facilities. The notes contain a change-of-control clause, which could trigger early repayment if the company were sold. We note that all of Ship Finance's vessel-owning subsidiaries have issued supplemental indentures with joint and several guarantees in favor of the senior unsecured debt.
The negative outlook reflects our view that, given the anticipated ongoing weak trading conditions, Ship Finance might not be able to maintain its rating-commensurate financial profile. In our view, a downgrade would primarily stem from a prolonged downturn in the shipping industry, absent prospects for recovery in 2013. Moreover, negative rating pressure could arise if the credit profiles of Ship Finance's counterparties deteriorated further, increasing the risk of delayed payments or nonpayment under the charter agreements, or if debt reduced slower than we expect on account of sizable vessel acquisitions.
As we estimate in our base-case operating scenario, the ratio of adjusted FFO to debt will deteriorate to about 13% in 2012, before improving to the rating-commensurate level of 15% by 2013, thanks to the full performance of long-term charters and moderate contribution of cash-sweep and profit-share incomes. However, we might consider lowering the rating if we see clear signs that credit measures are unlikely to turn around by 2013.
We could revise the outlook to stable if we observed a gradual market recovery and if we considered the company's credit measures to be sustainably in line with the rating: for example, a ratio of adjusted FFO to debt of 15%.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008