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Ship Finance International Limited (NYSE:SFL)
Q3 2017 Earnings Conference Call
Nov. 2, 2017, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Q3 2017 Ship Finance International Limited Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ole Hjertaker, CEO. Please go ahead.

Ole Hjertaker -- Chief Executive Officer

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, Andre 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 not paid more than $23.00 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 reported 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. The last 12 months, the EDBITDA equivalent has been approximately $472 million.

During the quarter, we took delivery of two $114,000 dead weight ton product tankers, also called LR2 ton. The vessels have been chartered out on a 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 a $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 charted to the world's two largest container lines. Only the 2010-build 7,100 TEU vessel, SFL Avon, is currently operated in the short-term charter market. And all the other container vessels are employed in long-term charters.

Our business model allows us to be flexible with respect to deal structuring, where we can also invest in auto vessels from time to time, if risk award 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 recharted 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 care 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 time now. In line with our consistent focus on delivering our balance sheet and maintaining a robust business platform, we have several of these vessels currently without any debt, including three container ships and the two carriers I just mentioned that are debt-free.

We now have nine crude oil carriers remaining chartered 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 profit split takes in from $20,000 per day for these VLCCs. In 2015, we also changed the profit split calculation from annual to quarterly basis, adding optionality value for us. And we know benefit from this, as the spot market in the third quarter was below the threshold, and there is no callback on 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 toward 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 and approved 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 break-even 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 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 new build in 1,400 dead weight ton product carriers to Phillips 66, which I mentioned earlier, and also, 2008-build chemical carriers until next year.

We have 22 drybulk vessels in the fleet, with 15 larger vessels charted out on a 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 time to time. So, for the eight Capesize tankers 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 profits bid will be based on actual performance by these specific vessels, so we cannot give any specific guidance on when a profit share when 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 drybulk carriers we currently trade in the spot market, the rates achieved in this quarter were approximately $6,700 per trading day, which is 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 entered into 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 a billion dollars of capital injection, extended and reprofiled secure 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 Taurus and West Vela will also be expanded by 13 months, until December 2024. And importantly, Seadrill will continue to pay us full charter hire until this restructuring plan is improved and implemented, hopefully sometime in 2018.

We have concurrently agreed with our 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 one. Assuming the restructuring plan is approved, the cash flow from the three weeks during the expansion period net of interest and amortization is estimated to be approximate $29 million per year. Two of the three rigs to Seadrill are working or in the process of being reactivated, where Seadrill has subchartered 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 subcharter in the North Sea with CIRCOR Energy, with expected start-up in April 2018. The semi-submersible rig West Taurus remains in [inaudible] in Spain.

To give some perspective on our exposure, Ship Finance has acquired the West Taurus and the West Hercules in 2008, at an approximate cost of $850 million per rig, a loan starting at $700 million per rig. Over the nine years since then, we have advertised 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 weeks 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-build drilling rig Soehanah, which is employed under a drilling contract with a national oil company in Asia until June 2018, with an option to expand 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, the normalized contribution for our projects, including vessels accounted for investment in associate, the EBITDA defined as charter hire plus profit share, less operating expenses and general 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 other vessels or refinancing. Net contributions 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 installment 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.

Harald Gurvin -- Chief Financial Officer

Thank you, Ole. On this slide, we have shown our performance illustration of cash flows for the third quarter compared to the second quarter. Please note that this is only a guideline to assess the 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 Suezmaxs in the second and third quarter, and lower earnings on to the Suezmaxs trading in the pool.

We took delivery of the two product tankers with seven-year chargers to Phillips 66 in the third quarter, which will have total 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 through a charter hire until their restructuring time has improved, but the agreed rate reduction will be effective from January 2018. And the overpay hire during the beginning of the year will be deducted from the remaining part of 2018. Further, the jack-up drilling rig Soehana commenced its new [inaudible] charter at a minimum rate of $10,000 day in June, which has economic effect in the third quarter.

Income from financial investments was down in the quarter, mainly due to no dividend received on our shareholding income plan. So, overall, this summarizes to an adjusted EBITDA of $150 million for the quarter, or $1.23 per share, slightly down from $1.36 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 have set booked as revenues classified as repayment of investment and finance leases, results in associates and long-term investment, and interest income from associates. 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 investments in associates 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 a Suezmax tanker from [inaudible]. Total operating expenses were $56 million, resulting in an operating income of $38 million. We recorded a positive margin 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, many related to earlier redemption of the note $600 million bond in June and July and the assurance of the new note $500 million bond in June, which was hedged in the third quarter. So, overall, and according to U.S. GAAP, the company reported a net income of $29 million, or $0.31 per share.

Moving on to the balance sheet, we show $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 nonconsolidated subsidiary. Current portion of long-term debt by quarter end includes the $184 million outstanding under the convertible notes, due February 2018. Following the early conversion of $121 of these notes, the remaining amount due at maturity is now only $63 million. The quarter's 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 statement. We have a strong liquidity position, with total available liquidity of $254 million at the end of the quarter. In addition, we have available for sale securities of $116 million, which includes the investment 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 month. As mentioned, we entered into an agreement 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 a four-year extension of the three loans relating to the Seadrill rigs in connection with the restructuring. Subject to approval of the restructuring plan, the [inaudible] notes now mature between November 2022 and June 2023. With continued amortization of the loans, the amount to be refinanced at the new maturity date has been significantly reduced compared to the original loan maturities in 2018 and 2019.

The main short-term maturity is the [inaudible] relating to the vessels chartered to Frontline, which matures and ends June 2018. Following the recent sales, we only have nine VLCCs remaining on charter, and the financing is just above current scrap levels for those vessels.

Then the 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 current share price yesterday. Net income for the quarter was $29 million, or $0.0.31 per share. We continue our fleet renewal with the sale of one older tanker vessel and delivery of the two LR2 tankers with [inaudible] charters to Phillip 66. We are strengthening our balancing 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 the delivery of the two LR2 tankers in August.

And with that, I give the word back to the operator, who will open the line for any questions.

Questions and Answers:

Operator

Thanks much, sir. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Please also ensure that your mute function of your phone is not switched on. So, once again, please press star 1. Today's first question is gonna come from Mr. Magnus Fyhr, calling from Seaport Global. Please go ahead.

Magnus Fyhr -- Seaport Global -- Analyst

Yeah. Hey, guys. Just first question, with the restructuring of the Seadrill contract 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.

Ole Hjertaker -- Chief Executive Officer

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 significant liquidity available. And I would say our main focus is right now on the container segment, on the tanker segment, and I would say also bulkdry segment. So, all the three main segments, which 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. The difficult part here always is to make sure that you take the right risk-adjusted return volatility 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. And CFO Harald Gurvin and I joined 11 years ago. We have invested $7 billion in new transactions. So, we definitely have -- 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, yes, 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 on our hands.

Magnus Fyhr -- Seaport Global -- Analyst

You forgot one segment there, L&G. With the recent strength in both spot rates, and there's been some time charters here recently. Looking at those returns, they're probably under 10% unlevered. Is that a segment you would look at, and what kind of benchmarks would we look at as far as return?

Ole Hjertaker -- Chief Executive Officer

Oh yeah, absolutely. I mean, in my mind, it's sort of what we say it's a painter's holistic time segment, but of course, with its own characteristics. I would say you could say from a counterparty characteristic, maybe you can steer it a bit to the liner business, to have specifically 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 fits very nicely in our portfolio. It's all about finding the right -- we call it risk return parameters.

What we have seen on the L&G 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 -- the new L&G assets that you build now, they burn 100 tons less fuel than vessels that were built, say, ten years ago. So, it's a combination of trying to buy the right type of asset and then get the right type of return out of that. But definitely, yes, we also have that on our targeted.

Magnus Fyhr -- Seaport Global -- Analyst

There seems like there's been an 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?

Ole Hjertaker -- Chief Executive Officer

Well, if you look at our portfolio, we have a mix of time charters and bareboat charters. And what we say, there are benefits and drawbacks with both of them. If you run a vessel on time charter, you of course run a 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, but the problem is that when you get it back, who is going to set the -- who's gonna 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 could do both.

We are, I would say -- structurally, we are agnostics in terms of chartering structure. We just have to be aware of the risk you 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 -- you can do that on older vessels where we have very low quality residual exposure, or we have other quality risk mitigating factors, where we don't run the risk of having a very expensive vessel returned to us without being properly maintained.

Magnus Fyhr -- Seaport Global -- Analyst

Okay, thank you. And just one last -- can you refresh my memory on the profit sharing you have with Golden Ocean? I know they run 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 gonna be in the spot market?

Ole Hjertaker -- Chief Executive Officer

Well, there are no specific restrictions relating to our vessels. And the profit share is linked to the actual earnings by the specific vessel. The profit share kicks in at $17,600 per day, and it's the 33% profit share dollar-by-dollar above that level. And it's a calculation that's done on a quarterly basis. So, what we say a strong quarter followed by a weak quarter doesn't mean that there is any claw back in profit share. We do not have specific -- we have not given out 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.

Magnus Fyhr -- Seaport Global -- Analyst

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

Ole Hjertaker -- Chief Executive Officer

No, I cannot comment specifically on that. I'll just say that we have left it to Golden Ocean to appraise our vessels in the spot market or [inaudible]. And we follow their judgment on how our vessels should be traded within those parameters.

Magnus Fyhr -- Seaport Global -- Analyst

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

Ole Hjertaker -- Chief Executive Officer

Thank you.

Operator

Thank you much, sir. We'll now go to Fotis Giannakoulis of [inaudible] from Morgan Stanley. Please go ahead.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

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 gonna be officially approved? What are the next steps that we should wait?

Ole Hjertaker -- Chief Executive Officer

Yes. When they filed, they had a time schedule that was effective -- I believe it was nine months from when the filing took place, 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 so far, we haven't heard anything negative about our charters in the discussions that have been. We understand that currently, Seadrill is in 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 take time. The good thing, of course, for us is that we get full charter hire on our rigs, and there has been no interruption on charter payment in connection with the filing. And also, as we have communicated to the market, we have -- as part of the restructuring agreement, we have agreed to reduce our charter rates with economic effect from January 1st. 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 looks like it's proceeding, I would say, according to schedule, and it's really -- there's nothing more really with more light we can share on it. I believe there is quite a bit of information available in the public domain relating to the proceedings in the court as well.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Well, that's very clear. It seems that any delay in the process, as long as everything goes well, is to your benefit at this point.

Ole Hjertaker -- Chief Executive Officer

Well, yeah. 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 advisors' fees, etc. So, of course, we hope that they will emerge sooner so they can focus on their main business activity, which is running the drilling rigs, and don't be distracted by the financial restructuring.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Okay. Thank you, Ole. And one more about the opportunity that you see out there. How do the returns compare between its specter and -- I also want to, if you can, focus on the kind of specter, even the fact that your [inaudible] has been reduced significantly since most of your recent deals are in container ships. How do you view the differential in returns across each of these sectors?

Ole Hjertaker -- Chief Executive Officer

Well, the return, it's a mix of a couple of things. It's, of course, a mix of where you think you 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 took delivery of, we have long-term financing, very attractive rates on that one. If we buy tankers and we run them a bit 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 could typically get 75% to 80% financing. The two latest container ships we did, we had in excess of 80% financing, but we utilized -- well, it was a Chinese lease structure without any guarantees from [inaudible]. 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 focused on when we give 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 the 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 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 to charter rates that are attractive for our counterparts.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

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 being focused on, particularly the Chinese leasing companies? Are there any specific sectors that you see more people beating for the same deal, and some other sectors that you see less interest or less capacity from the side of your competition to beat for these transactions?

Ole Hjertaker -- Chief Executive Officer

Well, I wouldn't necessarily Chinese capital competition. As I mentioned, the container ships, it's complementary. We work together and create better quality financial structure for our counterparties. But we have seen, we 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 drybulk segment. I would say also for the very big drybulk vessels, that both Chinese and Koreans have been active. And we've also seen quite a few investments maybe in the L&G space. I would say generally, if there is a very long-term charter behind it, and if it's a fair boat charter in particular, you will have many, call it very financial players focused on a potential deal.

Of course, our strength there, 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, which is also equally important, making sure that if we see deals before others do, hopefully we can sure take 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. And we are 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 get deals done that have the right risk-adjusted return profile for us and our investors.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you very much, Ole.

Ole Hjertaker -- Chief Executive Officer

Thank you.

Operator

Thank you, sir. Ladies and gentlemen, once again, if you have any questions, please press star 1 on your telephone keypads. We'll now go to Mr. Richard Diamond, calling from Casswood Capital. Please go ahead.

Richard Diamond -- Casswood Capital -- Analyst

Good afternoon.

Ole Hjertaker -- Chief Executive Officer

Good afternoon.

Richard Diamond -- Casswood Capital -- Analyst

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

Ole Hjertaker -- Chief Executive Officer

Yes. What we have seen is that -- or a 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 a 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 sheets, who have access to other capital sources, like us 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 and 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 disciplines out there. But of course, funding is just one part of it if you make an investment. There are a couple of factors going into that. The other is, of course, also residual value. So, if you are extremely optimistic on your residual value, 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 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, so 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.

Richard Diamond -- Casswood Capital -- Analyst

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 very difficult currents. Thank you.

Ole Hjertaker -- Chief Executive Officer

Thank you very much.

Operator

Thank you, Mr. Diamond. Ladies and gentlemen, once again, if you have any questions, please press star 1. We do not appear to have any further questions at this time. I turn the call back over the organizers for any additional or closing remarks. Thank you.

Ole Hjertaker -- Chief Executive Officer

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.

Duration: 44 minutes

Call participants:

Ole Hjertaker -- Chief Executive Officer

Harald Gurvin -- Chief Financial Officer

Magnus Fyhr -- Seaport Global -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Richard Diamond -- Casswood Capital -- Analyst

More SFL analysis

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