Tuesday, April 28, 2015

The NYFEX Report: Analysis of the Golden Ocean Group Sale & Lease-Back Deal

Last Monday Golden Ocean Group Limited (GOGL) announced the sale & leaseback of eight modern cape size bulk carriers to Ship Finance International Limited (SFL).

The eight vessels have an average age of approximately five years and are scheduled for delivery to Ship Finance in July. The vessels were sold for $34 million apiece, and will be chartered back to Golden Ocean for ten years at base rate of $17,600 for the first seven years and $14,900 for the remaining three years. Golden Ocean will have the option (but not the obligation) to buy the vessels back from Ship Finance at the end of the 10-year term for an average $14 million per vessel.

The deal comes with a twist: Ship Finance will also receive a 33% profit sharing if prevailing spot rates during the 10-year period are in excess of the base rate. A profit sharing agreement is identical to a call option on the spot market for cape size vessels. What makes it particularly attractive is that spot cape size rates are the most volatile in the dry cargo industry. 

Assuming an operating cost of $8,000 per day (inclusive of G&A and dry-dock repairs) and 97.50% capacity utilization, the base rate yields an internal rate of return (IRR) of 4.25%. But if we add the value of the profit sharing agreement, using the Black-Scholes pricing formula, the deal yields an IRR of 6%.

Golden Ocean will be able to effectively borrow at a relatively low rate of 4.25% and at the same time improve its leverage ratio. I presume that the charters will be classified as operating leases and be taken off the books. Golden Ocean will give away a 33% profit sharing above the base hire, but in effect it is writing a covered option, since it will retain commercial control of the vessels.

I believe the deal is a win-win for both companies. Ship Finance will get cash flow visibility and profit sharing potential. Golden Ocean will get off-balance-sheet financing at a reasonable rate and will keep commercial control of the eight cape size vessels.

Continue reading the full article published on Seeking Alpha

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