Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 6-K
 
 
 
 REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of September 2016
Commission File Number: 001-32199
 
 
 
Ship Finance International Limited
(Translation of registrant’s name into English)
 
 
 
 Par-la-Ville Place
14 Par-la-Ville Road
Hamilton, HM 08, Bermuda
(Address of principal executive offices)
 
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F   x             Form 40-F   ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):             .
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):             .
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
 





INFORMATION CONTAINED IN THIS FORM 6-K REPORT
Attached hereto are the unaudited condensed interim financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Ship Finance International Limited (the “Company”) for the six months ended June 30, 2016.
This report on Form 6-K is hereby incorporated by reference into the Company’s Registration Statements on Form F-3 (Registration No. 333-191406), filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 26, 2013.





SHIP FINANCE INTERNATIONAL LIMITED

REPORT ON FORM 6-K FOR THE SIX MONTHS ENDED JUNE 30, 2016

INDEX
 
Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2016 and June 30, 2015 and the year ended December 31, 2015
Page 4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, 2016 and June 30, 2015 and the year ended December 31, 2015
Page 5
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
Page 6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015 and the year ended December 31, 2015
Page 7
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and June 30, 2015 and the year ended December 31, 2015
Page 8
Notes to the Unaudited Condensed Consolidated Financial Statements
Page 9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Page 30
Cautionary Statement Regarding Forward-Looking Statement
Page 39
Signatures
Page 40

3

Ship Finance International Limited


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 2016 and June 30, 2015
and the year ended December 31, 2015
(in thousands of $, except per share amounts)
 
 
Six months ended
 
Year ended

 
June 30,
 
December 31,

 
2016

 
2015

 
2015

Operating revenues
 
 
 
 
 
Direct financing lease interest income - related parties
12,208

 
19,504

 
34,193

Finance lease service revenues - related parties
22,932

 
20,001

 
46,460

Profit sharing revenues - related parties
38,937

 
21,009

 
59,607

Profit sharing revenues - other
74

 

 

Time charter revenues - related parties
28,755

 
5,181

 
30,319

Time charter revenues - other
80,956

 
64,504

 
130,459

Bareboat charter revenues - related parties
6,188

 
6,198

 
12,596

Bareboat charter revenues - other
19,287

 
28,399

 
55,419

Voyage charter revenues - other
9,022

 
14,692

 
35,783

Other operating income
3,215

 
2,626

 
1,904

Total operating revenues
221,574

 
182,114

 
406,740

Gain/(loss) on sale of assets and termination of charters, net
14

 
(114
)
 
7,364

Operating expenses
 
 
 
 
 
Vessel operating expenses - related parties
34,224

 
21,223

 
56,939

Vessel operating expenses - other
34,590

 
32,248

 
63,892

Depreciation
46,304

 
36,301

 
78,080

Vessel impairment charge

 
29,161

 
42,410

Administrative expenses - related parties
730

 
542

 
1,032

Administrative expenses - other
4,058

 
3,605

 
5,705

Total operating expenses
119,906

 
123,080

 
248,058

Net operating income
101,682

 
58,920

 
166,046

Non-operating income / (expense)
 
 
 
 
 
Interest income - related parties, long term loans to associated companies
9,338

 
9,338

 
18,672

Interest income - related parties, other
383

 
6,347

 
13,395

Interest income - other
666

 
4,620

 
7,075

Interest expense - other
(35,274
)
 
(35,687
)
 
(70,583
)
(Loss)/gain on repurchase of bonds
(38
)
 
438

 
1,007

Gain on redemption of loan notes - related parties

 

 
28,904

Gain on sale of loan notes and share warrants - other

 
44,552

 
44,552

Available-for-sale securities impairment charge

 

 
(20,552
)
Dividend Income - related parties
8,250

 

 

Other financial items, net
(13,718
)
 
(4,573
)
 
(21,289
)
Net income before equity in earnings of associated companies
71,289

 
83,955

 
167,227

Equity in earnings of associated companies
14,322

 
17,098

 
33,605

Net income
85,611

 
101,053

 
200,832

Per share information:
 
 
 
 
 
Basic earnings per share
$
0.92

 
$
1.08

 
$
2.15

Diluted earnings per share
$
0.78

 
$
0.94

 
$
1.88

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Ship Finance International Limited


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the six months ended June 30, 2016 and June 30, 2015
and the year ended December 31, 2015
(in thousands of $)
 
 
Six months ended
 
Year ended

 
June 30,
 
December 31,

 
2016

 
2015

 
2015

Net income
85,611

 
101,053

 
200,832

Fair value adjustments to hedging financial instruments
(14,540
)
 
23,167

 
27,154

Fair value adjustments to hedging financial instruments in associated companies
(1,767
)
 
(481
)
 
158

Reclassification into net income of previous fair value adjustments to hedging financial instruments

 
173

 
(1,348
)
Fair value adjustments to available for sale securities
(92,077
)
 
(1,206
)
 
981

Reclassification into net income of previous fair value adjustments to available for sale securities

 

 
20,552

Fair value adjustments to other financial instruments in associated companies

 
(28
)
 

Other comprehensive income/(loss)
11

 
(44
)
 
(136
)
Other comprehensive (loss)/income, net of tax
(108,373
)
 
21,581

 
47,361

 
 
 
 
 
 
Comprehensive (loss)/income
(22,762
)
 
122,634

 
248,193

The accompanying notes are an integral part of these condensed consolidated financial statements.



5

Ship Finance International Limited


UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as at June 30, 2016 and December 31, 2015
(in thousands of $, except share data)
 
June 30,
2016

 
December 31,
2015

ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
82,016

 
70,175

Available for sale securities
119,975

 
199,594

Trade accounts receivable
5,239

 
2,057

Due from related parties
18,663

 
45,659

Other receivables
9,135

 
10,441

Inventories
5,050

 
5,056

Prepaid expenses and accrued income
2,911

 
5,790

Investment in direct financing leases, current portion
31,634

 
37,145

Total current assets
274,623

 
375,917

Vessels and equipment, net
1,789,816

 
1,641,317

Newbuildings and vessel purchase deposits
21,991

 
40,149

Investment in direct financing leases, long-term portion
442,910

 
474,298

Investment in associated companies
171

 
84,615

Loans to related parties - associated companies, long-term
336,997

 
387,712

Long-term receivables from related parties
9,955

 

Other long-term assets
27,992

 
27,746

Financial instruments (long-term): at fair value

 
800

Total assets
2,904,455

 
3,032,554

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Short-term debt and current portion of long-term debt
96,881

 
208,031

Trade accounts payable
1,071

 
835

Due to related parties
1,104

 
416

Accrued expenses
11,178

 
12,646

Other current liabilities
2,224

 
17,037

Total current liabilities
112,458

 
238,965

Long-term liabilities
 
 
 
Long-term debt
1,520,321

 
1,426,174

Financial instruments (long-term): at fair value
129,165

 
113,642

Other long-term liabilities
7,216

 
11,963

Total liabilities
1,769,160

 
1,790,744

 
 
 
 
Commitments and contingent liabilities

 

Stockholders’ equity
 
 
 
Share capital ($1 par value; 125,000,000 shares authorized; 93,504,575 and 93,468,000 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively)
93,505

 
93,468

Additional paid-in capital
286,204

 
285,859

Contributed surplus
588,133

 
588,133

Accumulated other comprehensive loss
(107,643
)
 
(1,037
)
Accumulated other comprehensive loss - associated companies
(3,893
)
 
(2,126
)
Retained earnings
278,989

 
277,513

Total stockholders’ equity
1,135,295

 
1,241,810

Total liabilities and stockholders’ equity
2,904,455

 
3,032,554

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Ship Finance International Limited


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2016 and June 30, 2015
and the year ended December 31, 2015
(in thousands of $)
 
Six months ended
 
Year ended

 
June 30,
 
December 31,

 
2016

 
2015

 
2015

Operating activities
 
 
 
 
 
Net income
85,611

 
101,053

 
200,832

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
46,304

 
36,301

 
78,080

Vessel impairment charge

 
29,161

 
42,410

Available for sale securities impairment charge

 

 
20,552

Amortization of deferred charges
5,663

 
6,037

 
11,613

Amortization of seller’s credit
(694
)
 
(959
)
 
(1,904
)
Equity in earnings of associated companies
(14,322
)
 
(17,098
)
 
(33,605
)
Loss/(gain) on sale of assets and termination of charters
(14
)
 
114

 
(7,364
)
Gain on redemption of Horizon loan notes and warrants

 
(44,552
)
 
(44,552
)
Gain on redemption of Frontline loan notes

 

 
(28,904
)
Adjustment of derivatives to fair value recognized in net income
10,408

 
1,184

 
13,278

(Gain)/loss on repurchase of bonds
38

 
(438
)
 
(1,007
)
Interest receivable in form of notes
(633
)
 
(2,182
)
 
(2,182
)
Other, net
157

 
(827
)
 
(1,134
)
Changes in operating assets and liabilities:
 
 
 
 
 
Trade accounts receivable
(3,182
)
 
560

 
1,196

Due from related parties
6,197

 
9,020

 
14,105

Other receivables
1,307

 
(1,884
)
 
(840
)
Inventories
6

 
(3,593
)
 
(2,529
)
Prepaid expenses and accrued income
2,878

 
550

 
(715
)
Trade accounts payable
235

 
(822
)
 
(1,572
)
Accrued expenses
(1,426
)
 
(4,220
)
 
(5,302
)
Other current liabilities
(14,812
)
 
(3,778
)
 
7,945

Net cash provided by operating activities
123,721

 
103,627

 
258,401

Investing activities
 
 
 
 
 
Repayments from investments in direct financing leases
16,309

 
18,502

 
35,946

Additions to newbuildings
(176,686
)
 
(129,210
)
 
(223,109
)
Purchase of vessels

 
(1,740
)
 
(273,552
)
Proceeds/(payments) from sales of vessels and termination of charters
4,932

 
(2,003
)
 
42,275

Proceeds from sale of investment in associated company

 
111,095

 
111,095

Net amounts received from/(paid to) associated companies
170,866

 
15,211

 
(62,083
)
Proceeds from redemption of Horizon loan notes and warrants

 
71,681

 
71,681

Proceeds from redemption of Frontline loan notes

 

 
112,687

Other investments and long term assets, net
(12,072
)
 
(4,898
)
 
(20,722
)
Net cash provided by/(used in) investing activities
3,349

 
78,638

 
(205,782
)
Financing activities
 
 
 
 
 
Shares issued, net of issuance costs
243

 
675

 
675

Repurchase of bonds
(117,509
)
 
(5,079
)
 
(23,787
)
Proceeds from issuance of long-term debt
277,000

 
130,366

 
595,305

Repayments of long-term debt
(190,612
)
 
(215,062
)
 
(435,706
)
Debt fees paid
(217
)
 
(2,997
)
 
(7,155
)
Cash dividends paid
(84,134
)
 
(79,415
)
 
(162,594
)
Net cash used in financing activities
(115,229
)
 
(171,512
)
 
(33,262
)
 
 
 
 
 
 
Net change in cash and cash equivalents
11,841

 
10,753

 
19,357

Cash and cash equivalents at start of the period
70,175

 
50,818

 
50,818

Cash and cash equivalents at end of the period
82,016

 
61,571

 
70,175

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
Interest paid, net of capitalized interest
33,521

 
34,707

 
68,215

The accompanying notes are an integral part of these consolidated condensed financial statements.

7

Ship Finance International Limited


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
for the six months ended June 30, 2016 and June 30, 2015
and the year ended December 31, 2015
(in thousands of $, except number of shares)
 
 
Six months ended
 
Year ended

 
June 30,
 
December 31,

 
2016

 
2015

 
2015

Number of shares outstanding
 
 
 
 
 
At beginning of period
93,468,000

 
93,404,000

 
93,404,000

Shares issued
36,575

 
64,000

 
64,000

At end of period
93,504,575

 
93,468,000

 
93,468,000

Share capital
 
 
 
 
 
At beginning of period
93,468

 
93,404

 
93,404

Shares issued
37

 
64

 
64

At end of period
93,505

 
93,468

 
93,468

Additional paid-in capital
 
 
 
 
 
At beginning of period
285,859

 
285,248

 
285,248

Amortization of stock based compensation
139

 

 

Shares issued
206

 
611

 
611

At end of period
286,204

 
285,859

 
285,859

Contributed surplus
 
 
 
 
 
At beginning of period
588,133

 
586,089

 
586,089

Amortization of deferred equity contributions

 
2,044

 
2,044

At end of period
588,133

 
588,133

 
588,133

Accumulated other comprehensive loss
 
 
 
 
 
At beginning of period
(1,037
)
 
(48,240
)
 
(48,240
)
Gain/(loss) on hedging financial instruments reclassified into earnings

 
173

 
(1,348
)
Fair value adjustments to hedging financial instruments
(14,540
)
 
23,167

 
27,154

Loss on available for sale securities reclassified into earnings

 

 
20,552

Fair value adjustments to available for sale securities
(92,077
)
 
(1,206
)
 
981

Other comprehensive income/(loss)
11

 
(44
)
 
(136
)
At end of period
(107,643
)
 
(26,150
)
 
(1,037
)
Accumulated other comprehensive loss - associated companies
 
 
 
 
 
At beginning of period
(2,126
)
 
(2,284
)
 
(2,284
)
Fair value adjustments to hedging financial instruments
(1,767
)
 
(481
)
 
158

Fair value adjustments to other financial instruments

 
(28
)
 

At end of period
(3,893
)
 
(2,793
)
 
(2,126
)
Retained earnings
 
 
 
 
 
At beginning of period
277,513

 
239,275

 
239,275

Net income
85,611

 
101,053

 
200,832

Dividends declared
(84,135
)
 
(79,415
)
 
(162,594
)
At end of period
278,989

 
260,913

 
277,513

Total Stockholders’ Equity
1,135,295

 
1,199,430

 
1,241,810

The accompanying notes are an integral part of these condensed consolidated financial statements.


8


SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Unaudited Condensed Consolidated Financial Statements
 

1.
INTERIM FINANCIAL DATA
The unaudited condensed interim financial statements of Ship Finance International Limited (“Ship Finance” or the “Company”) have been prepared on the same basis as the Company’s audited financial statements and, in the opinion of management, include all material adjustments, consisting only of normal recurring adjustments considered necessary in order to make the interim financial statements not misleading, in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying unaudited condensed interim financial statements should be read in conjunction with the annual financial statements and notes included in the Annual Report on Form 20-F for the year ended December 31, 2015. The results of operations for the interim period ended June 30, 2016 are not necessarily indicative of the results for the entire year ending December 31, 2016.
Basis of accounting
The condensed consolidated financial statements are prepared in accordance with US GAAP. The condensed consolidated financial statements include the assets and liabilities and results of operations of the Company and its subsidiaries including variable interest entities in which the Ship Finance is deemed to be the primary beneficiary. All inter-company balances and transactions have been eliminated on consolidation.
The condensed consolidated financial statements are prepared in accordance with the accounting policies described in the Company’s Annual Report on Form 20-F for the year ended December 31, 2015.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" in order to ensure that revenue
recognition requirements are the same under both US GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 removes inconsistencies and provides a more robust framework for addressing revenue issues. ASU 2014-09 was effective for reporting periods and interim periods beginning on or after December 15, 2016. In August 2015, the FASB issued ASU 2015-14 "Deferral of the Effective Date" to delay the implementation of ASU 2014-09 by one year, in response to feedback from preparers, practitioners and users of financial statements. Accordingly, ASU 2014-09 is now effective for reporting periods and interim periods beginning on or after December 15, 2017. Early adoption is permitted for reporting and interim periods beginning on or after December 15, 2016. The Company is currently assessing the impact of ASU 2014-09 on its consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11 "Simplifying the Measurement of Inventory" to reduce the complexity and cost of the subsequent measurement of inventory, in particular when using the first-in, first-out (FIFO) or average cost methods. The provisions of ASU 2015-11 specifically exclude inventory that is measured using the last-in, first-out (LIFO) or the retail inventory method. Entities should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2015-11 on its consolidated financial position, results of operations and cash flows.

In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 particularly relates to the fair value and impairment of equity investments, financial instruments measured at amortized cost, and the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is only permitted for certain particular amendments within ASU 2016-01, where financial statements have not yet been issued. The Company is currently assessing the impact of ASU 2016-01 on its consolidated financial position, results of operations and cash flows.


9



In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new Accounting Standards Codification Topic 842 "Leases" to replace the previous Topic 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09 (see above). ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-07 "Investments - Equity Method and Joint Ventures" to simplify the transition to the equity method of accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership, the investor must adjust the investment, results of operations and retained earnings retrospectively as if the equity method had been in effect during all previous periods in which the investment had been held. ASU 2016-07 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-07 on its consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09 "Compensation - Stock Compensation" to introduce improvements to the employee share-based payment accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-09 on its consolidated financial position, results of operations and cash flows.

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-13 on its consolidated financial position, results of operations and cash flows.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently assessing the impact of ASU 2016-15 on its statement of consolidated cash flows.


Recently Adopted Accounting Standards
During the period, the Company adopted ASU 2015-03 "Interest - Imputation of Interest, (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and premiums. This ASU was effective for the first interim period beginning after December 15, 2015 and is effective retrospectively. As a result, at June 30, 2016, $26.8 million (December 31, 2015: $32.3 million) of debt issuance costs have been reclassified from Non-Current Assets to Non-Current Liabilities as a direct deduction from long-term debt (see Note 10 - Short-Term and Long-Term Debt).

10






2.
GAIN ON SALE OF ASSETS AND TERMINATION OF CHARTERS
In February 2016, the offshore support vessel Sea Bear, which was accounted for as a direct financing lease asset, was sold to an unrelated third party. A gain of $14,000 was recorded on the disposal, the proceeds of which included $5.1 million gross sales proceeds and an early termination of charter compensation of $11.6 million, at fair value (see Note 15: Related party transactions). An impairment charge of $8.1 million had been recorded against the carrying value of this vessel in the year ended December 31, 2015.


3.
GAIN ON SALE OF LOAN NOTES AND SHARE WARRANTS - OTHER

In May 2015, the Company recorded a total gain of $44.6 million on the disposal of its holding of loan notes in Horizon Lines, LLC and share warrants in Horizon Lines, Inc. These unlisted second lien interest-bearing loan notes and share warrants had been received as compensation on termination of charters to Horizon Lines, LLC in April 2012.


4.
OTHER FINANCIAL ITEMS, NET

Other financial items comprise the following items: 
 
Six months ended June 30,
 
Year ended December 31,
(in thousands of $)
2016

 
2015

 
2015

Fair value loss on non-designated derivatives, net
(9,568
)
 
(1,243
)
 
(13,051
)
Net cash payments on non-designated derivatives
(2,641
)
 
(2,833
)
 
(6,453
)
Fair value (loss)/gain of designated derivatives (ineffective portion)
(840
)
 
59

 
(227
)
Other items
(669
)
 
(556
)
 
(1,558
)
Other financial items, net
(13,718
)
 
(4,573
)
 
(21,289
)
 
The net movement in the fair values of non-designated derivatives and net cash payments thereon relates to non-designated, terminated or de-designated interest rate swaps and cross currency interest rate swaps. The net movement in the fair values of designated derivatives relates to the ineffective portion of interest rate swaps and cross currency interest rate swaps that have been designated as cash flow hedges. Changes in the fair values of the effective portion of interest rate swaps that are designated as cash flow hedges are reported under “Other comprehensive income”. In the event that an interest rate swap, or portion thereof, relating to a loan facility is no longer designated as a cash flow hedge, then corresponding gains/losses previously recorded in "Other comprehensive income" are reclassified as "Other financial items, net" in the Consolidated Statement of Operations. The above net decrease in the valuation of non-designated derivatives includes reclassifications from "Other comprehensive income" of $0 in the six months ended June 30, 2016 (six months ended June 30, 2015: $0.2 million gain reclassified from “Other comprehensive income”; year ended December 31, 2015: $1.3 million loss reclassified from “Other comprehensive income”).

Other items include bank charges, fees relating to loan facilities and foreign currency translation adjustments.
 


11



5.
AVAILABLE-FOR-SALE SECURITIES
Marketable securities held by the Company are debt securities and share investments considered to be available-for-sale securities.
(in thousands of $)
June 30, 2016

 
December 31, 2015

Amortized cost
197,606

 
185,148

Accumulated net unrealized (loss)/gain
(77,631
)
 
14,446

Carrying value
119,975

 
199,594

The Company's investment in marketable securities consists of investments in listed shares and secured notes which mature in 2019. Available-for-sale securities are recorded at fair value, with unrealized gains and losses generally recorded as a separate component of "Other comprehensive income". The accumulated net unrealized loss on available-for-sale securities included in "Other comprehensive income" at June 30, 2016, was $77.6 million (December 31, 2015: net gain of $14.4 million).

The investment in listed shares at June 30, 2016, consists of shares in Frontline Ltd. (“Frontline”) with a carrying value of $86.6 million (December 31, 2015: $164.5 million).

The investment in secured notes at June 30, 2016, consists of listed and unlisted corporate bonds with a total carrying value of $33.4 million (December 31, 2015: $35.1 million). In December 2015, the Company determined that the bonds were other than temporarily impaired and recorded an impairment charge of $20.6 million, reducing their amortized cost to fair value at December 31, 2015.
    
    
6.
VESSELS AND EQUIPMENT, NET
(in thousands of $)
June 30, 2016

 
December 31, 2015

Cost
2,159,655

 
1,964,852

Accumulated depreciation
(369,839
)
 
(323,535
)
Vessels and equipment, net
1,789,816

 
1,641,317

During the six months ended June 30, 2016, the Company took delivery of two 9,300-9,500 twenty-foot equivalent units (“TEU”) newbuilding container vessels at an aggregate cost of $194.8 million.


7.
NEWBUILDINGS AND VESSEL PURCHASE DEPOSITS
During the six months ended June 30, 2016, the Company took delivery of two 9,300-9,500 TEU newbuilding container vessels, which were under construction at December 31, 2015. Upon delivery, the vessels were transferred from Newbuildings to Vessels and Equipment, net. As at June 30, 2016, the Company had agreements for the delivery of two newbuilding oil product carriers.

Total costs of $176.7 million including capitalized interest of $0.7 million were paid in respect of newbuildings in the six months ended June 30, 2016.


8.
INVESTMENTS IN DIRECT FINANCING LEASES
As at June 30, 2016, the Company had 12 VLCCs and two Suezmax tankers on charter to Frontline Shipping Limited (“Frontline Shipping”) on long-term, fixed rate time charters which extend for various periods depending on the age of the vessels, ranging from approximately four to 11 years. Frontline Shipping is a subsidiary of Frontline, a related party, and the terms of the charters do not provide them with an option to terminate the charters before the end of their terms. Subsequent to June 30, 2016, one of the above 12 VLCC oil tankers was sold and delivered to its new owner in July 2016 (see Note 18: Subsequent Events).

12



Also at June 30, 2016, the Company had one offshore suppot vessel chartered on a long-term bareboat charter to Deep Sea Supply Shipowning II AS, a wholly owned subsidiary of Deep Sea Supply BTG AS (“Deep Sea Supply BTG”), which is a joint venture owned 50% by BTG Pactual Oil & Gas Empreendimentos e Particapacoes S.A. (“BTG Pactual”), and 50% by Deep Sea Supply Plc. (“Deep Sea”), a related party. In July 2016, the Company and the charterer agreed amendments to the charter agreements whereby the charter rates are temporarily reduced until May 2018, in exchange for extending the charter period by three years and introducing a 50% profit share on charter revenues earned by the vessels above the new base charter rates. The amendments to the charter rates were effective from June 7, 2016. Also, as part of the amendments to the charter agreements, Deep Sea will join Deep Sea Supply BTG as charter guarantor.
At December 31, 2015, another one of the Company's offshore support vessels was chartered on a long-term bareboat charter to DESS Cyprus Limited, a wholly owned subsidiary of Deep Sea. This vessel was sold in February 2016 (see Note 2: Gain on sale of assets and termination of charters).
The above assets of the Company, i.e. 15 vessels as at June 30, 2016 are accounted for as direct financing leases, all of which are leased to related parties (December 31, 2015: 16 vessels) . The following lists the components of the investments in direct financing leases as at June 30, 2016.
(in thousands of $)
June 30, 2016

 
December 31, 2015

Total minimum lease payments to be received
747,714

 
825,460

Less: amounts representing estimated executory costs including profit thereon, included in total minimum lease payments
(340,027
)
 
(362,959
)
Net minimum lease payments receivable
407,687

 
462,501

Estimated residual values of leased property (un-guaranteed)
193,299

 
195,238

Less: unearned income
(126,442
)
 
(146,296
)
Total investment in direct financing and sales-type leases
474,544

 
511,443

 
 
 
 
Current portion
31,634

 
37,145

Long-term portion
442,910

 
474,298

 
474,544

 
511,443




9.
INVESTMENT IN ASSOCIATED COMPANIES

The Company has certain wholly-owned subsidiaries which are accounted for using the equity method, as it has been determined under ASC 810 that they are variable interest entities in which Ship Finance is not the primary beneficiary.

In addition, on June 5, 2015, the Company received 55 million shares in Frontline, equivalent to approximately 28% of Frontline's issued share capital at the time. Frontline, which is listed on the New York Stock Exchange and the Oslo Stock Exchange and reports its operating results on a quarterly basis, was determined to be an associated company following receipt of these shares. On November 30, 2015, Frontline merged with Frontline 2012 Ltd. ("Frontline 2012"), and increased its issued share capital, thereby reducing the Company's shareholding in Frontline to approximately 7%. Accordingly, Frontline was assessed as no longer being an associated company and the Frontline shares are now held as available for sale securities (see Note 5: Available-for-sale securities). The Company's share of the net income of Frontline for the year ended December 31, 2015, during which it was an associated company accounted for using the equity method, was $2.6 million (six months ended June 30, 2016: $0; six months ended June 30, 2015: $1.3 million).

At June 30, 2016, June 30, 2015 and December 31, 2015, the Company had the following participation in investments that are recorded using the equity method:
 
June 30, 2016

 
June 30, 2015

 
December 31, 2015

SFL Deepwater Ltd (“SFL Deepwater”)
100
%
 
100
%
 
100
%
SFL Hercules Ltd (“SFL Hercules”)
100
%
 
100
%
 
100
%
SFL Linus Ltd (“SFL Linus”)
100
%
 
100
%
 
100
%

13




Summarized balance sheet information of the Company’s wholly-owned equity method investees is as follows:
 
As of June 30, 2016
(in thousands of $)
TOTAL

 
SFL Deepwater

 
SFL Hercules

 
SFL Linus

Current assets
120,965

 
33,722

 
38,308

 
48,935

Non-current assets
1,152,779

 
350,233

 
343,981

 
458,565

Total assets
1,273,744

 
383,955

 
382,289

 
507,500

Current liabilities
105,680

 
25,456

 
28,660

 
51,564

Non-current liabilities
1,167,893

 
358,453

 
353,573

 
455,867

Total liabilities
1,273,573

 
383,909

 
382,233

 
507,431

Total stockholders’ equity
171

 
46

 
56

 
69


 
As of December 31, 2015
(in thousands of $)
TOTAL

 
SFL Deepwater

 
SFL Hercules

 
SFL Linus

Current assets
120,251

 
33,735

 
38,936

 
47,580

Non-current assets
1,207,755

 
364,550

 
360,215

 
482,990

Total assets
1,328,006

 
398,285

 
399,151

 
530,570

Current liabilities
128,455

 
25,221

 
28,624

 
74,610

Non-current liabilities
1,114,936

 
333,538

 
351,821

 
429,577

Total liabilities
1,243,391

 
358,759

 
380,445

 
504,187

Total stockholders’ equity
84,615

 
39,526

 
18,706

 
26,383



Summarized statement of operations information of the Company’s wholly-owned equity method investees is as follows:
 
Six months ended June 30, 2016
(in thousands of $)
TOTAL

 
SFL Deepwater

 
SFL Hercules

 
SFL Linus

Operating revenues
40,565

 
11,112

 
11,738

 
17,715

Net operating revenues
40,565

 
11,112

 
11,738

 
17,715

Net income
14,322

 
3,520

 
3,350

 
7,452

 
 
Six months ended June 30, 2015
(in thousands of $)
TOTAL

 
SFL Deepwater

 
SFL Hercules

 
SFL Linus

Operating revenues
41,929

 
11,335

 
11,768

 
18,826

Net operating revenues
41,923

 
11,333

 
11,766

 
18,824

Net income
15,815

 
3,825

 
3,827

 
8,163

 
 
Year ended December 31, 2015
(in thousands of $)
TOTAL

 
SFL Deepwater

 
SFL Hercules

 
SFL Linus

Operating revenues
82,731

 
22,424

 
23,315

 
36,992

Net operating revenues
82,725

 
22,422

 
23,313

 
36,990

Net income
31,001

 
7,561

 
7,306

 
16,134




14



SFL Deepwater is a 100% owned subsidiary of Ship Finance, incorporated in 2008 for the purpose of holding two ultra-deepwater drilling rigs and leasing those rigs to Seadrill Deepwater Charterer Ltd. and Seadrill Offshore AS, fully guaranteed by their parent company Seadrill Limited (“Seadrill”). In June 2013, SFL Deepwater transferred one of the rigs and the corresponding lease to SFL Hercules (see below). Accordingly, SFL Deepwater now holds one ultra-deepwater drilling rig which is leased to Seadrill Deepwater Charterer Ltd. In October 2013, SFL Deepwater entered into a $390.0 million five year term loan and revolving credit facility, which was used in November 2013 to refinance the previous loan facility. At June 30, 2016, the balance outstanding under the new facility was $259.8 million, and the available amount under the revolving part of the facility was fully drawn. The Company guaranteed $80.0 million of this debt at June 30, 2016. The rig is chartered on a bareboat basis and the terms of the charter provide the charterer with various call options to acquire the rig at certain dates throughout the charter. In addition, there is an obligation for the charterer to purchase the rig at a fixed price at the end of the charter, which expires in 2023. Because the main asset of SFL Deepwater is the subject of a lease which includes both fixed price call options and a fixed price purchase obligation, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary. In the six months ended June 30, 2016, SFL Deepwater paid dividends of $43.0 million (six months ended June 30, 2015: $0; year ended December 31, 2015: $0).

SFL Hercules is a 100% owned subsidiary of Ship Finance, incorporated in January 2012 for the purpose of holding an ultra-deepwater drilling rig and leasing that rig to Seadrill Offshore AS, fully guaranteed by its parent company Seadrill. The rig was transferred, together with the corresponding lease, to SFL Hercules from SFL Deepwater in June 2013. In May 2013, SFL Hercules entered into a $375 million six year term loan and revolving credit facility to partly fund its acquisition of the rig from SFL Deepwater. The facility was drawn in June 2013 and at June 30, 2016, the balance outstanding under this facility was $292.5 million. At June 30, 2016, the available amount under the revolving part of the facility was fully drawn. The Company guaranteed $75.0 million of this debt at June 30, 2016. The rig is chartered on a bareboat basis and the terms of the charter provide the charterer with various call options to acquire the rig at certain dates throughout the charter. In addition, there is an obligation for the charterer to purchase the rig at a fixed price at the end of the charter, which expires in 2023. Because the main asset of SFL Hercules is the subject of a lease which includes both fixed price call options and a fixed price purchase obligation at the end of the charter, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary. In the six months ended June 30, 2016, SFL Hercules paid dividends of $22.0 million (six months ended June 30, 2015: $0; year ended December 31, 2015: $0).

SFL Linus is a 100% owned subsidiary of Ship Finance, acquired in 2013 from North Atlantic Drilling Ltd (“NADL”), a related party. SFL Linus holds a harsh environment jack-up drilling rig which was delivered from the ship yard in February 2014 and immediately leased to North Atlantic Linus Charterer Ltd., fully guaranteed by its parent company NADL. In October 2013, SFL Linus entered into a $475 million five year term loan and revolving credit facility to partly finance the acquisition of the rig. The facility was drawn in February 2014, and at June 30, 2016, the balance outstanding under this facility was $380.0 million. At June 30, 2016, the available amount under the revolving part of the facility was fully drawn. The Company guaranteed $90.0 million of this debt at June 30, 2016. In February 2015, amendments were made to the lease, whereby Seadrill replaced NADL as lease guarantor. The rig is chartered on a bareboat basis and the terms of the charter provide the charterer with various call options to acquire the rig at certain dates throughout the charter. In addition, the charter includes a fixed price put option at expiry of the charter in 2029. Because the main asset of SFL Linus is the subject of a lease which includes both fixed price call options and a fixed price put option, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary. In the six months ended June 30, 2016, SFL Linus paid dividends of $32.0 million (six months ended June 30, 2015: $0; year ended December 31, 2015: $0).

SFL Deepwater, SFL Hercules and SFL Linus have loan facilities for which Ship Finance provides limited guarantees, as indicated above. These loan facilities contain financial covenants, with which both Ship Finance and Seadrill must comply. As at June 30, 2016, Ship Finance and Seadrill were in compliance with all of the covenants under these long-term debt facilities.



15



10.
SHORT-TERM AND LONG-TERM DEBT
(in thousands of $)
June 30, 2016

 
December 31, 2015

Long-term debt:
 
 
 
3.75% senior unsecured convertible bonds due 2016

 
117,500

NOK600 million senior unsecured floating rate bonds due 2017
67,368

 
63,681

3.25% senior unsecured convertible bonds due 2018
350,000

 
350,000

NOK900 million senior unsecured floating rate bonds due 2019
90,380

 
85,434

U.S. dollar denominated floating rate debt (LIBOR plus margin) due through 2023
1,136,249

 
1,049,861

Total debt principal
1,643,997

 
1,666,476

Less: Unamortized debt issuance costs
(26,795
)
 
(32,271
)
Less: Current portion of long-term debt
(96,881
)
 
(208,031
)
 
1,520,321

 
1,426,174



The outstanding debt as of June 30, 2016 is repayable as follows:
(in thousands of $)
 
 Year ending December 31,
 
 
 
2016 (remaining six months)
48,451

2017
195,302

2018
537,385

2019
272,060

2020
172,060

Thereafter
418,739

Total debt principal
1,643,997

The weighted average interest rate for floating rate debt denominated in U.S. dollars and Norwegian kroner (“NOK”) was 4.00% per annum at June 30, 2016 (December 31, 2015: 4.22%). This rate takes into consideration the effect of related interest rate swaps. At June 30, 2016, the three month US Dollar London Interbank Offered Rate, or LIBOR, was 0.654% (December 31, 2015: 0.613%) and the Norwegian Interbank Offered Rate, or NIBOR, was 1.01% (December 31, 2015: 1.13%).
3.75% senior unsecured convertible bonds due 2016
On February 10, 2011, the Company issued a senior unsecured convertible bond loan totaling $125.0 million. Interest on the bonds was fixed at 3.75% per annum and was payable in cash semi-annually in arrears. The bonds were convertible into Ship Finance International Limited common shares at any time up to 10 banking days prior to February 10, 2016. The conversion price at the time of issue was $27.05 per share, representing a 35% premium to the share price at the time. In February 2016, the amount outstanding was fully redeemed in cash without any conversion into shares having taken place.
NOK600 million senior unsecured bonds due 2017
On October 19, 2012, the Company issued a senior unsecured bond loan totaling NOK600 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and are redeemable in full on October 19, 2017. The bonds may, in their entirety, be redeemed at the Company's option from April 19, 2017, upon giving bondholders at least 30 business days notice and paying 100.5% of par value plus accrued interest. Since their issue, the Company has purchased bonds with principal amounts totaling NOK43.0 million, of which NOK8.0 million were subsequently re-sold. The Company holds bonds purchased as treasury bonds. The net amount outstanding at June 30, 2016, was NOK565.0 million, equivalent to $67.4 million (December 31, 2015: NOK565 million, equivalent to $63.7 million).

16



3.25% senior unsecured convertible bonds due 2018
On January 30, 2013, the Company issued a senior unsecured convertible bond loan totaling $350.0 million. Interest on the bonds is fixed at 3.25% per annum and is payable in cash quarterly in arrears on February 1, May 1, August 1 and November 1. The bonds are convertible into Ship Finance International Limited common shares at any time up to 10 banking days prior to February 1, 2018. The conversion price at the time of issue was $21.945 per share, representing a 33% premium to the share price at the time. Since then, dividend distributions have reduced the conversion price to $15.3109. In conjunction with the bond issue, the Company loaned up to 6,060,606 of its common shares to an affiliate of one of the underwriters of the issue, in order to assist investors in the bonds to hedge their position. The shares that were lent by the Company were borrowed from Hemen Holding Ltd., the largest shareholder of the Company, for a one-time loan fee of $1.0 million.
As required by ASC 470-20 “Debt with conversion and other options”, the Company calculated the equity component of the convertible bond taking into account both the fair value of the conversion option and the fair value of the share lending arrangement. The equity component was valued at $20.7 million in 2013 and this amount was recorded as “Additional paid-in capital”, with a corresponding adjustment to “Deferred charges” which are amortized to “Interest expense” over the appropriate period. The amortization of this item amounted to $2.1 million for the six months ended June 30, 2016.
NOK900 million senior unsecured bonds due 2019
On March 19, 2014, the Company issued a senior unsecured bond loan totaling NOK900 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and are redeemable in full on March 19, 2019. The bonds may, in their entirety, be redeemed at the Company's option from September 19, 2018, upon giving bondholders at least 30 business days notice and paying 100.5% of par value plus accrued interest. Subsequent to their issue, the Company has purchased bonds with principal amounts totaling NOK142.0 million at June 30, 2016, which are being held as treasury bonds. The net amount outstanding at June 30, 2016, was NOK758 million, equivalent to $90.4 million (December 31, 2015: NOK758 million, equivalent to $85.4 million).
$49 million secured term loan and revolving credit facility
In March 2008, two wholly-owned subsidiaries of the Company entered into a $49.0 million secured term loan and revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding chemical tankers, which also serves as security for this facility. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of ten years. At June 30, 2016, the amount available under the revolving part of the facility was $20.0 million. The net amount outstanding at June 30, 2016, was $0 (December 31, 2015: $8.0 million).
$43 million secured term loan facility
In February 2010, a wholly-owned subsidiary of the Company entered into a $42.6 million secured term loan facility with a bank, bearing interest at LIBOR plus a margin and with a term of approximately five years. The facility is secured against a Suezmax tanker. In November 2014, the terms of the loan were amended and restated, and the facility now matures in November 2019. The net amount outstanding at June 30, 2016, was $24.9 million (December 31, 2015: $26.3 million).
$43 million secured term loan facility
In March 2010, a wholly-owned subsidiary of the Company entered into a $42.6 million secured term loan facility with a bank, bearing interest at LIBOR plus a margin and with a term of five years. The facility is secured against a Suezmax tanker. In March 2015, the terms of the loan were amended and restated, and the facility now matures in March 2020. The net amount outstanding at June 30, 2016, was $24.9 million (December 31, 2015: $26.3 million).
$54 million secured term loan facility
In November 2010, two wholly-owned subsidiaries of the Company entered into a $53.7 million secured term loan facility with a bank, secured against two Supramax dry bulk carriers. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of eight years. The net amount outstanding at June 30, 2016, was $32.2 million (December 31, 2015: $34.1 million).

17



$95 million secured term loan and revolving credit facility
In February 2011, a wholly-owned subsidiary of the Company entered into a $95.0 million secured term loan and revolving credit facility with a bank, secured against a jack-up drilling rig. The facility bears interest at LIBOR plus a margin and has a term of seven years. At June 30, 2016, the available amount under the revolving part of the facility was $0. The net amount outstanding at June 30, 2016, was $22.5 million (December 31, 2015: $22.5 million). Subsequent to June 30, 2016, the total amount outstanding under this facility was prepaid and the facility cancelled in July 2016.
$75 million secured term loan facility
In March 2011, three wholly-owned subsidiaries of the Company entered into a $75.4 million secured term loan facility with a bank, secured against three Supramax dry bulk carriers. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of approximately eight years. The net amount outstanding at June 30, 2016, was $47.8 million (December 31, 2015: $50.8 million).
$171 million secured term loan facility
In May 2011, eight wholly-owned subsidiaries of the Company entered into a $171.0 million secured loan facility with a syndicate of banks. The facility is supported by China Export & Credit Insurance Corporation, or SINOSURE, which provides an insurance policy in favor of the banks for part of the outstanding loan. The facility is secured against a 1,700 TEU container vessel and seven Handysize dry bulk carriers. The facility bears interest at LIBOR plus a margin and has a term of approximately ten years from delivery of each vessel. The net amount outstanding at June 30, 2016, was $116.1 million (December 31, 2015: $122.2 million).
$53 million secured term loan facility
In November 2012, two wholly-owned subsidiaries of the Company entered into a $53.2 million secured term loan facility with a bank, secured against two car carriers. The facility bears interest at LIBOR plus a margin and has a term of approximately five years. The net amount outstanding at June 30, 2016, was $37.7 million (December 31, 2015: $39.9 million).
$45 million secured term loan facility and revolving credit facility
In June 2014, seven wholly-owned subsidiaries of the Company entered into a $45.0 million secured term loan and revolving credit facility with a bank, secured against seven 4,100 TEU container vessels. The facility bears interest at LIBOR plus a margin and has a term of five years. At June 30, 2016, the available amount under the revolving part of the facility was $9.0 million. The net amount outstanding at June 30, 2016, was $36.0 million (December 31, 2015: $36.0 million).
$101 million secured term loan facility
In August 2014, six wholly-owned subsidiaries of the Company entered into a $101.4 million secured term loan facility with a syndicate of banks, secured against six offshore support vessels. One of the vessels was sold in February 2016, and the facility now relates to the remaining five vessels. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at June 30, 2016, was $71.7 million (December 31, 2015: $87.8 million).
$20 million secured term loan facility
In September 2014, two wholly-owned subsidiaries of the Company entered into a $20.0 million secured term loan facility with a bank, secured against two 5,800 TEU container vessels. The facility bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at June 30, 2016, was $20.0 million (December 31, 2015: $20.0 million).
$128 million secured term loan facility
In September 2014, two wholly-owned subsidiaries of the Company entered into a $127.5 million secured term loan facility with a bank, secured against two 8,700 TEU container vessels which were delivered in 2014. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of seven years. The net amount outstanding at June 30, 2016, was $113.7 million (December 31, 2015: $117.9 million).

18



$128 million secured term loan facility
In November 2014, two wholly-owned subsidiaries of the Company entered into a $127.5 million secured term loan facility with a bank, secured against two 8,700 TEU container vessels which were delivered in 2015. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of seven years. The net amount outstanding at June 30, 2016, was $116.9 million (December 31, 2015: $121.1 million).
$39 million secured term loan facility
In December 2014, two wholly-owned subsidiaries of the Company entered into a $39.0 million secured term loan facility with a bank, secured against two Kamsarmax dry bulk carriers. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of approximately eight years. The net amount outstanding at June 30, 2016, was $32.8 million (December 31, 2015: $34.0 million).
$250 million secured revolving credit facility
In June 2015, 17 wholly-owned subsidiaries of the Company entered into a $250.0 million secured revolving credit facility with a syndicate of banks, secured against 17 tankers chartered to Frontline Shipping. Three of the tankers were sold and delivered to their new owners prior to June 30, 2016, and the facility was secured against the remaining 14 tankers at June 30, 2016. A further vessel was sold and delivered to its new owner subsequent to June 30, 2016. The facility bears interest at LIBOR plus a margin and has a term of three years. At June 30, 2016, the available amount under the facility was $135.6 million. The net amount outstanding at June 30, 2016, was $80.0 million (December 31, 2015: $73.5 million).
$166 million secured term loan facility
In July 2015, eight wholly-owned subsidiaries of the Company entered into a $166.4 million secured term loan facility with a syndicate of banks, secured against eight Capesize dry bulk carriers. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of seven years. The net amount outstanding at June 30, 2016, was $152.6 million (December 31, 2015:$159.5 million).

$210 million secured term loan facility
In November 2015, three subsidiaries entered into a $210.0 million secured term loan facility with a syndicate of banks, to partly fund the acquisition of three newbuilding container vessels, against which the facility is secured. One of the vessels was delivered in November 2015, a second was delivered in February 2016, and the remaining vessel was delivered in May 2016. The Company has provided a limited corporate guarantee for this facility, which bears interest at LIBOR plus a margin and has a term of five years from the delivery of each vessel. At June 30, 2016, the net amount outstanding was $206.7 million (December 31, 2015: $70.0 million).

The aggregate book value of assets pledged as security against borrowings at June 30, 2016, was $2,159 million (December 31, 2015: $2,087 million).
Agreements related to long-term debt provide limitations on the amount of total borrowings and secured debt, and acceleration of payment under certain circumstances, including failure to satisfy certain financial covenants. As of June 30, 2016, the Company is in compliance with all of the covenants under its long-term debt facilities. The $101.4 million secured term loan facility entered into in August 2014 contains certain financial covenants on Deep Sea Supply BTG. As at June 30, 2016, Deep Sea Supply BTG was in compliance with all covenants under the loan agreement.


11.
FINANCIAL INSTRUMENTS
In certain situations, the Company may enter into financial instruments to reduce the risk associated with fluctuations in interest rates and exchange rates. The Company has a portfolio of swaps which swap floating rate interest to fixed rate, and which also fix the Norwegian kroner to U.S. dollar exchange rate applicable to the interest payable and principal repayment on the NOK denominated bonds due 2017 and 2019. From a financial perspective, these swaps hedge interest rate and exchange rate exposure. The counterparties to such contracts are DNB Bank, Nordea Bank Finland Plc, ABN AMRO Bank N.V., NIBC Bank N.V., Skandinaviska Enskilda Banken AB (publ), ING Bank N.V., Danske Bank A/S, Credit Agricole Corporate and Investment Bank, Swedbank AB (publ) and Commonwealth Bank of Australia. Credit

19



risk exists to the extent that the counterparties are unable to perform under the contracts, but this risk is considered remote as the counterparties are all banks which have provided the Company with loans to which the swaps relate.
The following table presents the fair values of the Company’s derivative instruments that were designated as cash flow hedges and qualified as part of a hedging relationship, and those that were not designated: 
(in thousands of $)
June 30, 2016

 
December 31, 2015

Designated derivative instruments - long-term assets:
 
 
 
Interest rate swaps

 
487

Non-designated derivative instruments - long-term assets:
 
 
 
Interest rate swaps

 
313

Total derivative instruments - long-term assets

 
800

 
 
 
 
(in thousands of $)
June 30, 2016

 
December 31, 2015

Designated derivative instruments - long-term liabilities:
 
 
 
Interest rate swaps
26,693

 
11,458

Cross currency interest rate swaps
78,674

 
87,642

Non-designated derivative instruments - long-term liabilities:
 
 
 
Interest rate swaps
13,296

 
2,897

Cross currency interest rate swaps
10,502

 
11,645

Total derivative instruments - long-term liabilities
129,165

 
113,642

Interest rate risk management
The Company manages its debt portfolio with interest rate swap agreements denominated in U.S. dollars and Norwegian kroner to achieve an overall desired position of fixed and floating interest rates. At June 30, 2016, the Company and its consolidated subsidiaries had entered into interest rate swap transactions, involving the payment of fixed rates in exchange for LIBOR or NIBOR, as summarized below. The summary includes all swap transactions, most of which are hedges against specific loans.
Notional Principal (in thousands of $)
Inception date
 
Maturity date
 
Fixed interest rate
 
 
 
 
 
 
 
 
$30,163 (reducing to $24,794)
March 2008
 
August 2018
 
4.05% - 4.15%
 
$32,186 (reducing to $23,394)
April 2011
 
December 2018
 
2.13% - 2.80%
 
$47,816 (reducing to $34,044)
May 2011
 
January 2019
 
0.80% - 2.58%
 
$100,000 (remaining at $100,000)
August 2011
 
August 2021
 
2.50% - 2.93%
 
$151,800 (reducing to $79,733)
May 2012
 
August 2022
 
1.76% - 1.85%
 
$105,436 (equivalent to NOK600 million)
October 2012
 
October 2017
 
5.92% - 6.23%
*
$37,683 (reducing to $32,142)
February 2013
 
December 2017
 
0.81% - 0.82%
 
$100,000 (remaining at $100,000)
March 2013
 
April 2023
 
1.85% - 1.97%
 
$151,008 (equivalent to NOK900 million)
March 2014
 
March 2019
 
6.03%
*
$108,375 (reducing to $70,125)
December 2016
 
December 2021
 
1.86% - 3.33%
 
$110,500 (reducing to $70,125)
January 2017
 
January 2022
 
1.56% - 3.09%
 
$32,760 (reducing to $19,413)
September 2015
 
March 2022
 
1.67%
 
$206,719 (reducing to $149,844)
February 2016
 
February 2021
 
1.0725% - 1.2625%
 

* These swaps relate to the NOK600 million and NOK900 million senior unsecured bonds due 2017 and 2019 respectively, and the fixed interest rates paid are exchanged for the NIBOR plus the margin on the bonds. For the remaining swaps the fixed interest rate paid is exchanged for LIBOR, excluding margin on the underlying loans.

20



The interest rate swaps with a notional principal of $108.4 million have an inception date of December 2016, and the interest rate swaps with a notional principal of $110.5 million have an inception date of January 2017. The total notional principal amount subject to swap agreements as at June 30, 2016, excluding those with inception dates in the future, was $995.6 million (December 31, 2015: $804.8 million).
Foreign currency risk management
The Company has entered into currency swap transactions, involving the payment of U.S. dollars in exchange for Norwegian kroner, which are designated as hedges against the NOK600 million senior unsecured bonds due 2017 and NOK900 million senior unsecured bonds due 2019.  
Principal Receivable
Principal Payable

 
Inception date
 
Maturity date
NOK600 million
$
105.4
 million
 
October 2012
 
October 2017
NOK900 million
$
151.0
 million
 
March 2014
 
March 2019
Apart from the NOK600 million and NOK900 million senior unsecured bonds due 2017 and 2019, respectively, the majority of the Company’s transactions, assets and liabilities are denominated in U.S. dollars, the functional currency of the Company. Other than the corresponding currency swap transactions summarized above, the Company has not entered into forward contracts for either transaction or translation risk. Accordingly, there is a risk that currency fluctuations could have an adverse effect on the Company’s cash flows, financial condition and results of operations.
Fair Values
The carrying value and estimated fair value of the Company’s financial assets and liabilities at June 30, 2016 and December 31, 2015 are as follows: 
 
June 30, 2016

 
June 30, 2016

 
December 31, 2015

 
December 31, 2015

(in thousands of $)
Carrying value

 
Fair value

 
Carrying value

 
Fair value

Non-derivatives:
 
 
 
 
 
 
 
Available for sale securities
119,975

 
119,975

 
199,594

 
199,594

Floating rate NOK bonds due 2017
67,368

 
66,006

 
63,681

 
63,719

Floating rate NOK bonds due 2019
90,380

 
83,170

 
85,434

 
79,549

3.75% unsecured convertible bonds due 2016

 

 
117,500

 
118,021

3.25% unsecured convertible bonds due 2018
350,000

 
372,505

 
350,000

 
378,315

Derivatives:
 
 
 
 
 
 
 
Interest rate/ currency swap contracts - long-term receivables

 

 
800

 
800

Interest rate/ currency swap contracts - long-term payables
129,165

 
129,165

 
113,642

 
113,642

The above long-term receivables relating to interest rate/ currency swap contracts at June 30, 2016, include $0 which relates to non-designated swap contracts (December 31, 2015: $0.3 million), with the balance relating to designated hedges. The above long-term payables relating to interest rate/ currency swap contracts at June 30, 2016, include $23.8 million which relates to non-designated swap contracts (December 31, 2015: $14.5 million), with the balance relating to designated hedges.
In accordance with the accounting policy relating to interest rate and currency swaps described in the Company’s Annual Report on Form 20-F for the year ended December 31, 2015, where the Company has designated the swap as a hedge, and to the extent that the hedge is effective, changes in the fair values of interest rate swaps are recognized in other comprehensive income. Changes in the fair value of other swaps and the ineffective portion of swaps designated as hedges are recognized in the Consolidated Statement of Operations.


21



The above fair values of financial assets and liabilities as at June 30, 2016, were measured as follows: 
 
 
 
Fair value measurements using
(in thousands of $)
June 30, 2016

 
Quoted Prices in
Active Markets
for identical Assets/Liabilities
(Level  1)

 
Significant Other
Observable Inputs
(Level 2)

 
Significant
Unobservable
Inputs
(Level 3)

Assets:
 
 
 
 
 
 
 
Available for sale securities
119,975

 
119,975

 
 
 

Interest rate/ currency swap contracts - long-term receivables

 


 

 
 
Total assets
119,975

 
119,975

 

 

Liabilities:
 
 
 
 
 
 
 
Floating rate NOK bonds due 2017
66,006

 
66,006

 
 
 
 
Floating rate NOK bonds due 2019
83,170

 
83,170

 
 
 
 
3.25% unsecured convertible bonds due 2018
372,505

 
372,505

 
 
 
 
Interest rate/ currency swap contracts - long-term payables
129,165

 


 
129,165

 
 
Total liabilities
650,846

 
521,681

 
129,165

 

Fair value is measured in accordance with FASB ASC Topic 820 “Fair Value Measurement and Disclosures”. ASC 820 establishes a fair value hierarchy as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable market based inputs other than quoted prices or unobservable inputs that are corroborated by market data.
Level 3 - Unobservable inputs for assets or liabilities that are not corroborated by market data.

Listed available-for-sale securities are recorded at fair value, being their market value as at the balance sheet date.

The estimated fair values for the floating rate NOK denominated bonds due 2017 and 2019, and the unsecured 3.25% convertible bonds due 2018, are all based on their quoted market prices as at the balance sheet date.
The fair value of interest rate and currency swap contracts is calculated using a well-established independent valuation technique applied to contracted cash flows and LIBOR/NIBOR interest rates as at June 30, 2016.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that most of the amounts are carried with Skandinaviska Enskilda Banken, ABN AMRO, Nordea, DNB and Credit Agricole Corporate and Investment Bank. However, the Company believes this risk is remote.
Since the Company was spun-off from Frontline in 2004, Frontline has accounted for a significant proportion of our operating revenues. In the six months ended June 30, 2016, Frontline accounted for approximately 33% of our consolidated operating revenues (six months ended June 30, 2015: 32%; year ended December 31, 2015: 33%). There is thus a concentration of revenue risk with Frontline.









22



12.
SHARE CAPITAL, ADDITIONAL PAID-IN CAPITAL AND CONTRIBUTED SURPLUS

Authorized share capital is as follows:
(in thousands of $, except share data)
June 30, 2016

 
December 31, 2015

125,000,000 common shares of $1.00 par value each
125,000

 
125,000

Issued and fully paid share capital is as follows:
(in thousands of $, except share data)
June 30, 2016

 
December 31, 2015

93,504,575 common shares of $1.00 par value each (December 31, 2015: 93,468,000 shares)
93,505

 
93,468


The Company’s common shares are listed on the New York Stock Exchange.

In November 2006, the Board of Directors approved the Ship Finance International Limited Share Option Scheme (the "Option Scheme"). The Option Scheme permits the Board of Directors, at its discretion, to grant options to employees, officers and directors of the Company or its subsidiaries. The fair value cost of options granted is recognized in the statement of operations, and the corresponding amount is credited to additional paid in capital. In the six months ended June 30, 2016, additional paid-in capital was credited with $139,000 relating to the fair value of options granted in March 2016. During the six months ended June 30, 2016, the Company issued a total of 36,575 shares following the exercise of options that had been granted in 2011. The total premium on the shares issued was $0.2 million.


13.
SHARE OPTION PLAN

In the six months ended June 30, 2016, 125,000 options granted in 2011 were exercised by three employees and two officers.
In March 2016, a total of 279,000 options were granted to six directors, two officers and five employees of the Company. There were no other options outstanding at June 30, 2016.
As at June 30, 2016, the unrecognized compensation cost relating to non-vested options granted under the Company's Option Scheme was $0.7 million (December 31, 2015: $0).


14.
EARNINGS PER SHARE
The computation of basic earnings per share (“EPS”) is based on the weighted average number of shares outstanding during the period. Diluted EPS includes the effect of the assumed conversion of potentially dilutive instruments.
The components of the numerator for the calculation of basic and diluted EPS are as follows: 
 
Six months ended June 30,
 
Year ended December 31,
(in thousands of $)
2016

 
2015

 
2015

Basic:
 
 
 
 
 
Net income available to stockholders
85,611

 
101,053

 
200,832

Diluted:
 
 
 
 
 
Net income available to stockholders
85,611

 
101,053

 
200,832

Interest expense on convertible bonds
9,151

 
11,203

 
22,449

 
94,762

 
112,256

 
223,281



23



The components of the denominator for the calculation of basic and diluted EPS are as follows:
 
Six months ended June 30,
 
Year ended December 31,
(in thousands)
2016

 
2015

 
2015

Basic earnings per share:
 
 
 
 
 
Weighted average number of common shares outstanding
93,489

 
93,432

 
93,450

Diluted earnings per share:
 
 
 
 
 
Weighted average number of common shares outstanding
93,489

 
93,432

 
93,450

Effect of dilutive share options

 
18

 
23

Effect of dilutive convertible debt
27,935

 
25,535

 
25,535

 
121,424

 
118,985

 
119,008




15.
RELATED PARTY TRANSACTIONS
The Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was partially spun-off in 2004 and its shares commenced trading on the New York Stock Exchange in June 2004. A significant proportion of the Company’s business continues to be transacted with related parties.
The Company has transactions with the following related parties, being companies in which our principal shareholders Hemen Holding Ltd. and Farahead Investment Inc. (hereafter jointly referred to as “Hemen”) and companies associated with Hemen have, or had, a significant direct or indirect interest:

–    Frontline (1)
–    Frontline 2012 (1)
–    Frontline Shipping and Frontline Shipping II (collectively the Frontline Charterers)
–    Seadrill
–    NADL
–    Golden Ocean Group Limited (“Golden Ocean”) (2)
–    United Freight Carriers (“UFC” - which is a joint venture approximately 50% owned by Golden Ocean)
–    Deep Sea
–    Deep Sea Supply BTG (which is a joint venture 50% owned by Deep Sea)
–    Seatankers Management Co. Ltd. (“Seatankers”)
–    Arcadia Petroleum Limited (“Arcadia”)


(1) On November 30, 2015, Frontline and Frontline 2012 merged, leaving Frontline as the surviving legal entity and Frontline 2012 becoming a wholly-owned subsidiary of Frontline.

(2) In March 2015, Golden Ocean Group Limited merged with Knightsbridge Tankers Limited, leaving Knightsbridge Tankers Limited as the surviving legal entity and changing its name to Golden Ocean Group Limited.






24



The Condensed Consolidated Balance Sheets include the following amounts due from and to related parties and associated companies, excluding direct financing lease balances (see Note 8: Investment in Direct Financing Leases).
(in thousands of $)
June 30, 2016

 
December 31, 2015

Amounts due from:
 
 
 
Frontline Charterers
13,649

 
18,052

Frontline
1,674

 
2,816

UFC
463

 
1,639

SFL Linus

 
23,152

Deep Sea and Deep Sea Supply BTG
2,877

 

Total amount due from related parties
18,663

 
45,659

Loans to related parties - associated companies, long-term
 
 
 
SFL Deepwater
123,275

 
137,437

SFL Hercules
90,460

 
125,275

SFL Linus
123,262

 
125,000

Total loans to related parties - associated companies, long-term
336,997

 
387,712

Long-term receivables from related parties
 
 
 
Deep Sea
9,955

 

Total long-term receivables from related parties
9,955

 

Amounts due to:
 
 
 
Frontline Charterers
229

 
229

Frontline
542

 
143

Golden Ocean
197

 

Seatankers
110

 

Other related parties
26

 
44

Total amount due to related parties
1,104

 
416

SFL Deepwater, SFL Hercules and SFL Linus are wholly-owned subsidiaries which are not fully consolidated but are accounted for under the equity method as at June 30, 2016 within the financial statements (see Note 9: Investment In Associated Companies). As described below in “Related party loans”, at June 30, 2016 the long-term loans from Ship Finance to SFL Deepwater, SFL Hercules and SFL Linus, are presented net of their respective current accounts to the extent that it is an amount due to the associates.
Related party leasing and service contracts
As at June 30, 2016, 14 of the Company’s vessels leased to Frontline Shipping (December 31, 2015: 14) and one of its offshore support vessels leased to a subsidiary of Deep Sea Supply BTG (December 31, 2015: one) are recorded as direct financing leases. At December 31, 2015, there was also one offshore support vessel leased to a subsidiary of Deep Sea recorded as a direct financing lease, which was sold in February 2016. At June 30, 2016, the combined balance of net investments in direct financing leases with Frontline Shipping and Deep Sea Supply BTG was $474.5 million (December 31, 2015: $511.4 million, including the vessel leased to Deep Sea), of which $31.6 million (December 31, 2015: $37.1 million) represents short-term maturities.

In addition, included under operating leases at June 30, 2016, there were four offshore support vessels leased to a subsidiary of Deep Sea Supply BTG (December 31, 2015: four), eight Capesize dry bulk carriers leased to a subsidiary of Golden Ocean (December 31, 2015: eight) and three dry bulk carriers leased to UFC (December 31, 2015: six). At June 30, 2016, the net book value of assets leased under operating leases to Golden Ocean, Deep Sea Supply BTG and UFC was $412.4 million (December 31, 2015: $499.6 million).

25



On June 5, 2015, amendments were made to the charter agreements with Frontline Shipping, relating to VLCCs and Suezmax tankers accounted for as direct financing leases. The amendments, which do not affect the duration of the leases and were effective from July 1, 2015, consist of reductions in the long-term daily time charter rates to $20,000 per day for VLCCs and $15,000 per day for Suezmax tankers, and increases in the daily management and operating fees payable to a subsidiary of Frontline to $9,000 per day for all vessels. As part of the amended agreements, the Company's profit sharing percentage increased from 25% to 50%, and is now calculated and paid on a quarterly basis. In the six months ended June 30, 2016, the Company recorded profit share revenues of $38.7 million (six months ended June 30, 2015: $0; year ended December 31, 2015: $37.3 million), all of which related to the 50% arrangement effective from July 1, 2015.

In December 2011, amendments were made to the charter agreements then in place with Frontline Shipping and Frontline Shipping II providing for a $6,500 per day reduction in charter rates for the period January 1, 2012, to December 31, 2015. Thereafter the charter rates were to revert to the previously agreed daily amounts. The amendments provided that for the four year period of the temporary reduction in charter rates, Frontline Shipping and Frontline Shipping II would pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel. This arrangement was discontinued from July 1, 2015, when the amendments agreed in June 2015 became effective. In the six months ended June 30, 2016, the Company earned and recognized no revenue under this arrangement (six months ended June 30, 2015: $19.9 million; year ended December 31, 2015: $19.9 million), which is also reported under "Profit sharing revenues".

In consideration for the amendments to the charter agreements made on June 5, 2015, the Company received 55 million ordinary shares in Frontline, representing approximately 28% of the issued share capital of Frontline at the time of receipt in June 2015. On November 30, 2015, Frontline merged with Frontline 2012 and increased its issued share capital, reducing the Company's holding to approximately 7%. Accordingly, from June 5, 2015 to November 30, 2015, the Company's shareholding in Frontline was accounted for as an investment in associated companies (see Note 9: Investment in associated companies). Since December 1, 2015, the Company's holding in Frontline shares has been held under available-for-sale securities (see Note 5: Available-for-sale securities). In February 2016, Frontline enacted a 1-for-5 reverse stock split of its ordinary shares. Accordingly, the Company's holding in Frontline changed from 55 million shares to 11 million shares, remaining at approximately 7% of Frontline's issued share capital. In the six months ended June 30, 2016, the Company received dividends of $8.3 million on its holding of shares in Frontline.

In the six months ended June 30, 2016, the Company had eight dry bulk carriers operating on time-charters to a subsidiary of Golden Ocean, which include profit sharing arrangements whereby the Company earns a 33% share of profits earned by the vessels above threshold levels. In the six months ended June 30, 2016, the Company earned no profit share revenue under this arrangement (six months ended June 30, 2015: $0; year ended December 31, 2015: $0).

In the six months ended June 30, 2016, the Company had six dry bulk carriers operating on time-charters to UFC, which include profit sharing arrangements whereby the Company earns a 50% share of profits earned by the vessels above threshold levels. In the six months ended June 30, 2016, the Company earned and recognized $0.3 million under this arrangement (six months ended June 30, 2015: $1.1 million; year ended December 31, 2015: $2.5 million).

A summary of leasing revenues and repayments from the Frontline Charterers, Golden Ocean, UFC, Deep Sea Supply BTG and Deep Sea is as follows:
 
Six months ended
 
Year ended

(in millions of $)
June 30, 2016

 
June 30, 2015

 
December 31, 2015

Operating lease income
34.9

 
11.4

 
42.9

Direct financing lease interest income
12.2

 
19.5

 
34.2

Finance lease service revenue
22.9

 
20.0

 
46.5

Direct financing lease repayments
16.3

 
18.5

 
35.9

Profit share and cash sweep income
38.9

 
21.0

 
59.6





26



In February 2016, the Company sold the offshore support vessel Sea Bear to an unrelated third party, and simultaneously agreed to terminate the corresponding charter with a subsidiary of Deep Sea. As compensation for the early termination of the charter, termination fees were received from Deep Sea in the form of an amortizing senior unsecured loan note, receivable over a period of six years. The initial face value of the note, on which interest at 7.25% is receivable, was $14.6 million and their initial fair value of $11.6 million was determined from analysis of projected cash flows, based on factors including terms, provisions and other characteristics of the notes, default risk of the issuing entity, the fundamental and other characteristics of that entity, and the current economic environment and trading activity in the debt market.
In addition to revenues and repayments, the Company paid the following fees to related parties:
 
Six months ended
 
Year ended

(in millions of $)
June 30, 2016

 
June 30, 2015

 
December 31, 2015

Frontline:
 
 
 
 
 
Vessel Management Fees
23.6

 
20.8

 
48.0

Newbuilding Supervision Fees

 
0.1

 
0.1

Administration Services Fees
0.4

 
0.5

 
0.9

Golden Ocean:
 
 
 
 
 
Vessel Management Fees
10.2

 

 
8.2

Operating Management Fees
0.4

 
0.4

 
0.8

Office Facilities:
 
 
 
 
 
Arcadia

 
0.1

 
0.1

Frontline Management AS
0.2

 
0.2

 
0.4

Frontline Corporate Services
0.2

 

 


In addition to the above, the Company paid $0.2 million for the six months ended June 30, 2016 in relation to a new agreement with Seatankers effective January 1, 2016 for the provision of advisory and support services.  
Related party loans – associated companies
Ship Finance has entered into agreements with SFL Deepwater, SFL Hercules and SFL Linus granting them loans of $145 million, $145 million, and $125 million, respectively at fixed interest rates. These loans are repayable in full on July 11, 2023, October 1, 2023, and June 30, 2029, respectively, or earlier if the companies sell their drilling units. Ship Finance is entitled to take excess cash from these companies, and such amounts are recorded within their current accounts with Ship Finance. The loan agreements specify that the balance on the current accounts will have no interest applied and will be settled, to the extent that it is a receivable from Ship Finance, by offset against the eventual repayments of the fixed interest loans.
In the six months ended June 30, 2016, the Company received interest income on these loans of $3.3 million from SFL Deepwater (six months ended June 30, 2015: $3.3 million; year ended December 31, 2015: $6.5 million), $3.3 million from SFL Hercules (six months ended June 30, 2015: $3.3 million; year ended December 31, 2015: $6.5 million) and $2.8 million from SFL Linus (six months ended June 30, 2015: $2.8 million; year ended December 31, 2015: $5.6 million).
Long-term receivables from related parties
The Company received loan notes from Frontline as compensation for the early termination of the charters on five vessels in 2013 and 2014. The loan notes were redeemed in full in December 2015, and a gain on redemption of $28.9 million was recorded. In the six months ended June 30, 2016, the Company received no interest on these loan notes (six months ended June 30, 2015: $6.3 million; year ended December 31, 2015: $13.4 million).

The Company received a loan note from Deep Sea as compensation for the early termination of the charter on an offshore support vessel in February 2016. In the six months ended June 30, 2016, the Company received $0.4 million interest on the loan note (six months ended June 30, 2015: $0; year ended December 31, 2015: $0).


27




16.
COMMITMENTS AND CONTINGENT LIABILITIES
Assets Pledged
 (in millions of $)
June 30, 2016
Book value of consolidated assets pledged under ship mortgages
$2,159

The Company and its equity-accounted subsidiaries have funded their acquisition of vessels, jack-up rigs and ultra-deepwater drilling units through a combination of equity, short-term debt and long-term debt. Providers of long-term loan facilities usually require that the loans be secured by mortgages against the assets being acquired. As at June 30, 2016, the Company ($1.6 billion) and its 100% equity-accounted subsidiaries ($932 million) had a combined outstanding principal indebtedness of $2.6 billion (December 31, 2015: $2.5 billion) under various credit facilities. Most of the Company’s vessels and rigs have been pledged under mortgages in respect of this outstanding indebtedness as at June 30, 2016, excluding three 1,700 TEU container vessels and the newbuilding vessels not yet delivered.
Other Contractual Commitments and Contingencies
The Company has arranged insurance for the legal liability risks for its shipping activities with Gard P.& I. (Bermuda) Ltd, Assuranceforeningen Skuld (Gjensidig), The Steamship Mutual Underwriting Association Limited, The Korea Shipowner’s Mutual Protection & Indemnity Association, The West of England Ship Owners Mutual Insurance Association (Luxembourg), North of England P&I Association Limited, The Standard Club Europe Ltd and The United Kingdom Mutual Steam Ship Assurance Association (Europe) Limited, all of which are mutual protection and indemnity associations. The Company is subject to calls payable to the associations based on the Company’s claims record in addition to the claims records of all other members of the associations. A contingent liability exists to the extent that the claims records of the members of the associations in the aggregate show significant deterioration, which may result in additional calls on the members.
SFL Deepwater, SFL Hercules and SFL Linus are wholly-owned subsidiaries of the Company accounted for using the equity method. Accordingly, their assets and liabilities are not consolidated in the Company's Consolidated Balance Sheets, but are presented on a net basis under “Investment in associated companies”. As of June 30, 2016, their combined borrowings amounted to $932.3 million (December 31, 2015: $831.2 million) and the Company guaranteed $245 million (December 31, 2015: $250 million) of this debt.
At June 30, 2016, the Company had commitments under contracts to acquire newbuilding vessels totaling $87.0 million (December 31, 2015: $261.9 million). In addition, two subsidiaries had contractual commitments relating to the chartering-in of two 19,200 TEU container vessels on 15 year bareboat charters amounting to $406.1 million at June 30, 2016 (December 31, 2015: $406.1 million), of which $30.0 million represents initial payments due on delivery of the vessels. There are no other contractual commitments at June 30, 2016.
The Company is routinely party both as plaintiff and defendant to law suits in various jurisdictions under charter hire obligations arising from the operation of its vessels in the ordinary course of business. The Company believes that the resolution of such claims will not have a material adverse effect on its results of operations or financial position. The Company has not recognized any contingent gains or losses arising from the pending results of any such law suits.


17.
CONSOLIDATED VARIABLE INTEREST ENTITIES

The Company’s consolidated financial statements include 25 variable interest entities, all of which are wholly-owned subsidiaries. These subsidiaries own vessels with existing charters during which related and third parties have fixed price options to purchase the respective vessels, at dates varying from September 2017 to July 2025. It has been determined that the Company is the primary beneficiary of these entities, as none of the purchase options are deemed to be at bargain prices and none of the charters include sales options.

28



At June 30, 2016, the vessel of one of these entities is accounted for as a direct financing lease with a carrying value of $21.6 million, unearned lease income of $0.9 million and estimated residual value of $4.0 million. The outstanding loan balance in this entity is $10.7 million, of which the short-term portion is $2.4 million.
The other 24 fully consolidated variable interest entities each own vessels which are accounted for as operating lease assets, with a total net book value at June 30, 2016, of $587.1 million. The outstanding loan balances in these entities total $292.0 million, of which the short-term portion is $29.9 million.


18.
SUBSEQUENT EVENTS
In July 2016, the Company delivered the 1998 built VLCC Front Vanguard to an unrelated third party. Net sales proceeds were approximately $24 million, including compensation receivable from Frontline of approximately $0.3 million for the early termination of the charter.
In July 2016, the Company agreed to amend the terms of the long-term chartering agreements with an affiliate of Deep Sea relating to five offshore support vessels acquired in 2007 and early 2008. Under the amended agreements, the charter rates will be temporarily reduced until May 2018, in exchange for extending the original charter period by three years and introducing a 50% profit share on charter revenues earned by the vessels above the new base charter rates. The previous charter guarantor was Deep Sea Supply BTG, which was a joint venture owned 50% by Deep Sea and 50% by the Brazilian company, BTG Pactual. In September 2016, Deep Sea acquired BTG Pactual’s share in the joint venture and Deep Sea will join Deep Sea Supply BTG as charter guarantor under the amended chartering agreements.
On August 31, 2016, the Board of Directors of the Company declared a dividend of $0.45 per share, which will be paid in cash on or around September 29, 2016.
In September 2016, the Company agreed to terminate the charter agreement relating to its jack-up drilling rig Soehanah which has been chartered to a subsidiary of the Indonesia-based drilling company Apexindo since 2011. In return, the Company received a $6 million non-amortizing loan note which bears an interest rate of 2.25% per annum if paid in cash and 4.5% per annum if capitalized. The loan note has a term of approximately six years.
 



29



SHIP FINANCE INTERNATIONAL LIMITED
As used herein, “we,” “us,” “our” and “the Company” all refer to Ship Finance International Limited and its subsidiaries. This management’s discussion and analysis of financial condition and results of operations should be read together with the discussion included in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2015.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
for the six months ended June 30, 2016

General
We are Ship Finance International Limited, a Bermuda-based company incorporated in Bermuda on October 10, 2003, as a Bermuda exempted company under the Bermuda Companies Law of 1981 (Company No. EC-34296). We are engaged primarily in the ownership and operation of vessels and offshore related assets, and also involved in the chartering, purchase and sale of assets.  Our registered and principal executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and our telephone number is +1 (441) 295-9500.

We operate through subsidiaries located in Bermuda, Cyprus, Malta, Liberia, Norway, Singapore, the United Kingdom and the Marshall Islands.
We are a leading global ship-owning company with one of the largest and most diverse asset bases across the maritime and offshore industries. As of September 19, 2016, our assets consist of 15 oil tankers, 22 dry bulk carriers, 20 container vessels, two car carriers, two jack-up drilling rigs, two ultra-deepwater drilling units, five offshore support vessels, two chemical tankers and two newbuilding oil product tankers. In addition, we have entered into agreements to charter-in two 19,200 TEU newbuilding container vessels on a long-term bareboat basis when they are delivered from the shipyard in 2016 and 2017, respectively.

As at September 19, 2016, our customers included Frontline Shipping Limited (“Frontline Shipping”), Seadrill Limited (“Seadrill”), United Freight Carriers LLC (“UFC”), Sinochem Shipping Co. Ltd, Heung-A Shipping Co. Ltd, Hyundai Glovis Co. Ltd., Rudolf A. Oetker KG (“Hamburg Süd”), Orient Overseas Container Line Ltd (“OOCL”), MSC Mediterranean Shipping Company S.A. (“MSC”), China National Chartering Co. Ltd (“Sinochart”), Golden Ocean Group Limited (“Golden Ocean”), Maersk Line A/S (“Maersk”), and Deep Sea Supply Plc. (“Deep Sea”).


30



Recent and Other Developments

In May 2016, we took delivery of the 9,300 TEU newbuilding container vessel Maersk Shivling, the third of the three newbuilding container vessels announced in June 2015. Immediately upon delivery the vessel commenced a five year time charter to Maersk. The Company drew down the final tranche of $70.0 million against the $210 million facility which we entered into in November 2015 to partly finance the acquisition of the three vessels.

In July 2016, the Company delivered the 1998 built VLCC Front Vanguard to an unrelated third party. Net sales proceeds were approximately $24 million, including compensation receivable from Frontline of approximately $0.3 million for the early termination of the charter.

In July 2016, the Company agreed to amend the terms of the long-term chartering agreements with an affiliate of Deep Sea relating to five offshore support vessels acquired in 2007 and early 2008. Under the amended agreements, the charter rates will be temporarily reduced until May 2018, in exchange for extending the original charter period by three years and introducing a 50% profit share on charter revenues earned by the vessels above the new base charter rates. The previous charter guarantor was Deep Sea Supply BTG, which was a joint venture owned 50% by Deep Sea and 50% by the Brazilian company, BTG Pactual. In September 2016, Deep Sea acquired BTG Pactual’s share in the joint venture and Deep Sea will join Deep Sea Supply BTG as charter guarantor under the amended chartering agreements.

On August 31, 2016, the Board of Directors of the Company declared a dividend of $0.45 per share, which will be paid in cash on or around September 29, 2016.
In September 2016, the Company agreed to terminate the charter agreement relating to its jack-up drilling rig Soehanah which has been chartered to a subsidiary of the Indonesia-based drilling company Apexindo since 2011. In return, the Company received a $6 million non-amortizing loan note which bears an interest rate of 2.25% per annum if paid in cash and 4.5% per annum if capitalized. The loan note has a term of approximately six years.








31



Operating Results
 
 
Six months ended

 
Six months ended

(in thousands of $)
June 30, 2016

 
June 30, 2015

Total operating revenues
221,574

 
182,114

Gain/ (loss) on sale of assets and termination of charters
14

 
(114
)
Total operating expenses
(119,906
)
 
(123,080
)
Net operating income
101,682

 
58,920

Interest income
10,387

 
20,305

Interest expense
(35,274
)
 
(35,687
)
Other non-operating items, net
(5,506
)
 
40,417

Equity in earnings of associated companies
14,322

 
17,098

Net income
85,611

 
101,053

Net operating income for the six months ended June 30, 2016, was $101.7 million, compared with $58.9 million for the six months ended June 30, 2015. The increase was principally due to an impairment charge of $29.2 million booked in the same period in 2015, higher profit sharing revenues and additional revenue earned from the net increase to the fleet of vessels, partly offset by higher operating expenses (see below). Net income for the period decreased by $15.4 million compared with the same period in 2015, mainly due to a $44.6 million gain on sale of notes and warrants included in “Other non-operating items, net” in the same period in 2015 and lower interest income for the six months ended June 30, 2016. The effect of these lower gains and interest income was partly offset by the increase in net operating income.
Two ultra-deepwater drilling units and one harsh environment jack-up drilling rig were accounted for under the equity method during the six months ended June 30, 2016, and also the six months ended June 30, 2015. The net income of the wholly-owned subsidiaries owning these assets are included under “equity in earnings of associated companies”, where they are reported net of operating and non-operating expenses.
Total operating revenues
 
Six months ended

 
Six months ended

(in thousands of $)
June 30, 2016

 
June 30, 2015

Direct financing lease interest income
12,208

 
19,504

Finance lease service revenues
22,932

 
20,001

Profit sharing revenues
39,011

 
21,009

Time charter revenues
109,711

 
69,685

Bareboat charter revenues
25,475

 
34,597

Voyage charter revenues
9,022

 
14,692

Other operating income
3,215

 
2,626

Total operating revenues
221,574

 
182,114


Total operating revenues increased by 22% in the six months ended June 30, 2016, compared with the same period in the previous year.


32



Direct financing lease interest income arises on most of our oil tankers and also two offshore support vessels, one of which was sold in February 2016. In general, direct financing lease interest income reduces over the terms of our leases, as progressively a lesser proportion of the lease rental payment is allocated to interest income and a greater proportion is treated as repayment of investment in the finance lease.

With effect from July 1, 2015, amendments to the charter agreements relating to our tankers on charter to Frontline Shipping included reduced daily charter hire rates and increased fixed daily vessel operating costs. The lease schedules were amended to reflect these changes together with the compensation received on agreeing the amendments. The 37% reduction in direct finance lease interest income from the six months ended June 30, 2015 to the six months ended June 30, 2016 is mainly a result of the agreed reduction in charter rates, and also to the sale of three Suezmax tankers in the second half of 2015 and one offshore support vessel in February 2016, which were accounted for as direct financing lease assets.

The vessels chartered on direct financing leases to Frontline Shipping and prior to July 1, 2015, Frontline Shipping II Limited (“Frontline Shipping II”, and together with Frontline Shipping the “Frontline Charterers”), are leased on time-charter terms, whereby we are responsible for the management and operation of such vessels. This has been effected by entering into fixed price agreements with Frontline Management (Bermuda) Ltd. (“Frontline Management”), a subsidiary of Frontline, whereby we pay them management fees of $9,000 per day for each vessel chartered to Frontline Shipping from July 1, 2015, onwards, before which the fee was $6,500 per day for each vessel chartered to the Frontline Charterers. Accordingly, $9,000 per day (previously $6,500 per day) is allocated from each time charter payment received from Frontline Shipping (previously the Frontline Charterers) to cover lease executory costs, and this is classified as "finance lease service revenue". If any vessel chartered on direct financing leases to Frontline Shipping is sub-chartered on a bareboat basis, then the charter payments for that vessel are reduced by $9,000 per day for the duration of the bareboat sub-charter. The 15% increase in finance lease service revenues from the six months ended June 30, 2015 to the six months ended June 30, 2016 is due to the increase in fixed daily management fees payable on the tankers chartered to Frontline Shipping, partly offset by the sale of three Suezmax tankers in the second half of 2015.

Prior to December 31, 2011, the Frontline Charterers paid us profit sharing of 20% of their earnings from our vessels on a time-charter equivalent basis above average threshold charter rates each fiscal year. Amendments to the charter agreements made in December 2011, increased the profit sharing percentage to 25% for earnings above those threshold levels, and provided for a four year period of reduced charter rates, during which the Frontline Charterers would pay us 100% of any earnings on a time-charter equivalent basis above the temporarily reduced charter rates, subject to a maximum of $6,500 per day per vessel - this latter item was called "cash sweep" income. In the six months ended June 30, 2015, we earned $19.9 million under these arrangements, all of which was cash sweep income. Following further amendments to the charter agreements effective from July 1, 2015, onwards, the profit sharing percentage was increased to 50% above the new time charter rates, calculated and paid on a quarterly basis, and the cash sweep arrangement was terminated. In the six months ended June 30, 2016, we earned $38.7 million under the 50% profit share arrangement.

We also had a profit sharing agreement relating to certain Handysize dry bulk carriers chartered to UFC and one of our two Suezmax tankers trading in a pool along with two tankers owned by Frontline, which earned us $0.3 million in the six months ended June 30, 2016 (six months ended June 30, 2015: $1.1 million).

We also have a profit share arrangement related to the eight Capesize dry bulk vessels on charter to a fully guaranteed subsidiary of Golden Ocean, whereby the Company is entitled to a 33% profit share above the base rate, calculated and paid on a quarterly basis. The vessels were delivered between July and September 2015, but no profit share revenue was earned by these vessels in the six months ended June 30, 2016.
During the six months ended June 30, 2015, time charter revenues were earned by six container vessels, two car carriers and 14 dry bulk carriers. Since June 30, 2015, we have taken delivery of eight Capesize dry bulk carriers and three 9,300 - 9,500 TEU container vessels, operating under time charters. In addition, one Suezmax tanker previously traded on a voyage charter basis in the same period in 2015 was fixed on a time charter contract during the six months ended June 30, 2016. The 57% increase in time charter revenues for the six months ended June 30, 2016, compared to the same period in 2015 is mainly due to the additional vessels operating under time charters.
Bareboat charter revenues are earned by our vessels and rigs which are leased under operating leases on a bareboat basis. In the six month periods ended June 30, 2015, and June 30, 2016, these consisted of four offshore support vessels, two chemical tankers, one jack-up drilling rig, two 1,700 TEU container vessels, two 5,800 TEU container vessels and seven 4,100 TEU container vessels. The decrease in bareboat charter revenues is mainly due to the jack-up drilling rig Soehanah, where we did not receive full charter hire in the six months ended June 30, 2016. We have now agreed a termination of the charter and are currently looking for new chartering opportunities for this rig (see Note 18: Subsequent Events).

33



The decrease in voyage charter revenues for the six months ended June 30, 2016, is mainly due to one of the two Suezmax tankers previously traded on a voyage charter basis in the same period in 2015 began a time charter contract during the six months ended June 30, 2016. The reduction in voyage charter revenues compared to the same period in 2015 was partially offset by the addition of a dry bulk carrier which began trading on a voyage charter basis since February 2016.
Cash flows arising from finance leases
The following table sets forth our cash flows from the direct financing leases with the Frontline Charterers, Deep Sea Supply BTG and Deep Sea, and shows how they were accounted for: 
 
Six months ended

 
Six months ended

(in thousands of $)
June 30, 2016

 
June 30, 2015

Charter hire payments accounted for as:
 
 
 
Direct financing lease interest income
12,208

 
19,504

Finance lease service revenues
22,932

 
20,001

Direct financing lease repayments
16,309

 
18,502

Total direct financing lease payments received
51,449

 
58,007


Gain on sale of assets and termination of charters
A gain of $14,000 was recorded in the six months ended June 30, 2016, on the disposal of the offshore support vessel Sea Bear, against which an impairment charge of $8.1 million had been made in December 2015. In the six months ended June 30, 2015, losses totaling $114,000 were recorded on the disposal of five 2,800 TEU container vessels, against which impairment charges totaling $11.8 million had been made in 2014.
Operating expenses
 
Six months ended

 
Six months ended

 
June 30, 2016

 
June 30, 2015

Vessel operating expenses
68,814

 
53,471

Depreciation
46,304

 
36,301

Vessel impairment charge

 
29,161

Administrative expenses
4,788

 
4,147

Total operating expenses
119,906

 
123,080


Vessel operating expenses consist of payments to Frontline Management of $9,000 per day ($6,500 per day before July 1, 2015) for each vessel chartered to Frontline Shipping (the Frontline Charterers before July 1, 2015) and also payments to Golden Ocean Group Management (Bermuda) Ltd. (“Golden Ocean Management”) of $7,000 per day for each vessel chartered to a subsidiary of Golden Ocean, in accordance with the vessel management agreements. In addition, vessel operating expenses include operating and occasional voyage expenses for the container vessels, dry bulk carriers and car carriers operated on a time-charter basis and managed by related and unrelated parties, and also voyage expenses for the two Suezmax tankers and one Handysize dry bulk carriers operating in the spot market during the six months ended June 30, 2016.
Vessel operating expenses increased by $15.3 million for the six months ended June 30, 2016, compared with the same period in 2015. The increase was mainly due to the delivery in the second half of 2015 of eight Capesize dry bulk carriers chartered to a subsidiary of Golden Ocean, the delivery of the three 9,300-9,500 TEU container vessels between November 2015 and May 2016, higher drydocking expenses and the increase in daily amounts payable to Frontline Management since July 1, 2015, partly offset by the disposal of three Suezmax tankers chartered to the Frontline Shipping in the second half of 2015 and five container vessels in February 2015.
Depreciation expenses relate to the vessels on charters accounted for as operating leases and on voyage charters. The increase in depreciation by $10.0 million for the six months ended June 30, 2016, compared to the same period in 2015 is due to the eight Capesize dry bulk carriers and three container vessels delivered since June 30, 2015, partly offset by the disposal of five container vessels in February 2015.

34



The 15% increase in administrative expenses for the six months ended June 30, 2016, compared to the same period in 2015 is due to increased salary costs, marketing and investor relations costs and service administration fees partly offset by reduced professional fees.
Interest income
Total interest income decreased by $9.9 million for the six months ended June 30, 2016, compared to the same period in 2015. Interest receivable on Frontline loan notes, which were fully redeemed in December 2015, amounted to $6.3 million in the six months ended June 30, 2015. There was also a $4.2 million reduction in interest receivable on debt securities, partly offset by increases in interest receivable on bank deposits and the Deep Sea loan note (see Note 15: Related party transactions).

Interest expense
 
Six months ended

 
Six months ended

(in thousands of $)
June 30, 2016

 
June 30, 2015

Interest on US$ floating rate loans
14,531

 
11,207

Interest on NOK600 million senior unsecured floating rate bonds due 2017
2,059

 
2,522

Interest on NOK900 million senior unsecured floating rate bonds due 2019
2,341

 
2,922

Interest on 3.75% senior unsecured convertible bonds due 2016
329

 
2,331

Interest on 3.25% senior unsecured convertible bonds due 2018
5,688

 
5,688

Swap interest
4,642

 
4,976

Other interest
21

 
4

Amortization of deferred charges
5,663

 
6,037

Total interest expense
35,274

 
35,687

At June 30, 2016, the Company, including its consolidated subsidiaries had total debt principal outstanding of $1.6 billion (June 30, 2015: $1.5 billion), comprising $157.7 million (NOK1,323 million) outstanding principal amount of NOK floating rate bonds (June 30, 2015: $181.1 million, NOK1,421 million), $350.0 million in 3.25% convertible bonds (June 30, 2015: $350.0 million), $0 outstanding principal amount of 3.75% convertible bonds (June 30, 2015: $125.0 million), and $1.1 billion under floating rate secured long term credit facilities (June 30, 2015: $0.8 billion). The average three-month LIBOR was 0.63% in the six months ended June 30, 2016 and 0.27% in the six months ended June 30, 2015. The increase in interest expense associated with our floating rate debt for the six months ended June 30, 2016, compared to the same period in 2015, is mainly due to the higher level of floating rate debt in the period.
The reductions in interest payable on the NOK bonds due 2017, the NOK bonds due 2019 and the 3.75% convertible bonds are due to, respectively, the purchase in January 2015 of NOK bonds due 2017, several purchases in 2015 of NOK bonds due 2019, and the redemption in full of all outstanding 3.75% convertible bonds in February 2016.
At June 30, 2016, the Company and its consolidated subsidiaries were party to interest rate swap contracts, which effectively fix our interest rates on $1.0 billion of floating rate debt at a weighted average rate excluding margin of 2.92% per annum (June 30, 2015: $0.8 billion of floating rate debt fixed at a weighted average rate excluding margin of 3.40% per annum).
As reported above, certain assets were accounted for under the equity method in 2016 and 2015. Their non-operating expenses, including net interest expenses, are not included above, but are reflected in “equity in earnings of associated companies” - see below.

Other non-operating items
In the six months ended June 30, 2016, other non-operating items amounted to a net loss of $5.5 million, compared to a net gain of $40.4 million for the six months ended June 30, 2015. The net loss for the six months ended June 30, 2016, consists mainly of $10.4 million adverse mark-to-market adjustments to financial instruments and $2.6 million cash payments on non-designated interest rate swaps, partly offset by $8.3 million dividends received on the Frontline shares we acquired in June 2015. The net gain for the six months ended June 30, 2015, consists mainly of a $44.6 million gain on sale of loan notes and share warrants, partly offset by $1.2 million adverse mark-to-market adjustments to financial instruments and $2.8 million cash payments on non-designated interest rate swaps.

35




Equity in earnings of associated companies
During the periods under review, the Company had three wholly-owned subsidiaries which are accounted for under the equity method, as discussed in Note 9 of the Consolidated Financial Statements included herein. The total equity in earnings of associated companies in the six months ended June 30, 2016, was $2.8 million lower than in the comparative period in 2015 due to the inherent reduction in direct financing lease interest income earned by the ultra-deepwater drilling units West Taurus and West Hercules and the harsh environment jack-up drilling rig West Linus.


36



Seasonality
Most of our vessels are chartered at fixed rates on a long-term basis and seasonal factors do not have a significant direct effect on our business. Our tankers on charter to Frontline Shipping and our dry bulk carriers on charter to a subsidiary of Golden Ocean are subject to profit sharing agreements and to the extent that seasonal factors affect the profits of the charterers of these vessels we will also be affected. One of our two Suezmax tankers trading in a pool along with two tankers owned by Frontline and one of our Handysize dry bulk carriers remaining under short-term charters to UFC are also subject to agreements for profit sharing. The significant effects of seasonality will be limited to the timing of these profit sharing revenues.

Liquidity and Capital Resources
At June 30, 2016, we had total cash and cash equivalents of $82.0 million and available for sale securities of $120.0 million. In the six months ended June 30, 2016, we generated cash of $123.7 million from operations and $3.3 million net from investing activities. We used $115.2 million net in financing activities.

Cash flows provided by operating activities for the six months ended June 30, 2016, increased to $123.7 million from $103.6 million for the same period in 2015 mainly due to the higher net operating income. This includes an increase in cash receipt by $12.6 million from Frontline in respect of cash sweep and profit share income. In the six months ended June 30, 2015, we received $32.7 million in cash sweep income accrued for the full year ended December 31, 2014. This is in comparison to receipts of $20.6 million and $24.7 million in profit sharing income in the six months ended June 30, 2016 accrued for the quarter ended December 31, 2015 and the quarter ended March 31, 2016, respectively. This was following the further amendments to the charter agreements with Frontline effective from July 1, 2015, onwards, where the profit sharing percentage was increased to 50% above the new time charter rates, calculated and paid on a quarterly basis, and the cash sweep arrangement was terminated.
Investing activities generated $3.3 million in the six months ended June 30, 2016, compared with $78.6 million generated in the same period in 2015. The higher cash generated by investing activities for the same period in 2015 was mainly due to $111.1 million received from the sale of SFL West Polaris Limited and $71.7 million received from the sale of loan notes in Horizon Lines, LLC and share warrants in Horizon Lines, Inc. There were no disposals similar in nature during the six months ended June 30, 2016 and we spent an additional $47.5 million in the financing of newbuilding additions compared to the same period in 2015. These reductions in cash generation and outflow in the current period were partly offset by a $155.7 million increase in amounts received from associated companies.
Net cash used by financing activities for the six months ended June 30, 2016 was $115.2 million, compared to $171.5 million net cash used in the same period in 2015. The $56.3 million reduction in net cash used in financing activities results primarily from the increase of $171.1 million in net cash generated from the issuance and repayment of long term debt, partly offset by the cash used in the redemption in February 2016 of the outstanding $117.5 million of 3.75% convertible bonds due 2016. Also, the Company made dividend payments of $84.1 million in the six months ended June 30, 2016, compared with $79.4 million in the same period in 2015.
In addition to bank financing, the Company continually monitors equity and debt capital market conditions and may raise additional capital through the issuance of equity or debt securities from time to time.

The following table summarizes our consolidated borrowings at June 30, 2016.
 
As of June 30, 2016
(in millions of $)
Outstanding balance

 
Net amount available to draw

Loan facilities secured with mortgages on vessels and rig including newbuildings
1,136.2

 
164.6

Unsecured borrowings:
 
 
 
NOK600 million senior unsecured floating rate bonds due 2017
67.4

 

3.25% senior unsecured convertible bonds due 2018
350.0

 

NOK900 million senior unsecured floating rate bonds due 2019
90.4

 

 
1,644.0

 
164.6

As of June 30, 2016, there was $164.6 million net available to draw under secured revolving credit facilities.

37



In addition to the above, our equity accounted subsidiaries had total debt principal outstanding of $0.9 billion as at June 30, 2016.

Security and Collateral
The main security provided under the secured credit facilities include (i) guarantees from subsidiaries, as well as instances where the Company guarantees all or part of the loans, (ii) a first priority pledge over all shares of the relevant asset owning subsidiaries and (iii) a first priority mortgage over the relevant collateral assets which includes substantially all of the vessels and the drilling units that are currently owned by the Company as at September 19, 2016, excluding three 1,700 TEU container vessels, a jack-up drilling rig and the newbuilding vessels not yet delivered.


38



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed herein may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts.
The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. The words “believe,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” “expect,” “pending” and similar expressions identify forward-looking statements.
The forward-looking statements herein are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, our management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
Important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market conditions, including fluctuations in charter rates and vessel values, changes in demand in the tanker market as a result of changes in OPEC’s petroleum production levels and worldwide oil consumption and storage, changes in demand for the carriage of dry bulk cargoes and goods shipped in container vessels, the level of global oil exploration, changes in our operating expenses, including bunker prices, dry-docking and insurance costs, the market for our vessels, availability of financing and refinancing, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, vessels breakdowns and instances of off-hires and other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission and our Annual Report on Form 20-F.

39



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SHIP FINANCE INTERNATIONAL LIMITED

Date: September 19, 2016

 
By:
/s/ Harald Gurvin
 
Name: Harald Gurvin
 
Title: Chief Financial Officer
 
Ship Finance Management AS


40