Monday, February 13, 2017 - 05:50

Singapore

EZRA Holdings' massive impairment charges and a second merger deal in Norway to create the world' s fourth-largest offshore support vessel (OSV) player are telling signs that consolidation is on the horizon in the offshore and marine (O& M) sector.

Observers noting that the government aid released catered mainly to the broader O& M sector, further argued that bank lenders have to lead by writing down debts to the sector to facilitate consolidation, and ensure those left standing can compete on the global stage.

While the sector may be over-represented by the two large yard groups, Keppel O& M and Sembcorp Marine, the fall-out from Swiber Holdings' collapse demonstrates the influence small to mid-cap O& M players may wield over Singapore' s financial market.

Data from the Singapore Exchange dated Dec 30, 2016 showed that small to mid-cap entities made up the bulk of maritime, offshore and engineering (MOE) listings on the local bourse. Some 48 out of a total 58 listed companies in the sector were small to mid-cap plays with market cap of no more than US$500 million as at Dec 30.

At the height of the last O& M upswing, market cap for some of these entities surged past US$1 billion, though their fortunes have since faltered as debts piled up against dwindling operating cash flows from a lack of new order in-take under this multi-year downturn.

The government had unleashed support measures for the beleaguered O& M sector, but most of these were not targeted at relieving the financial stress facing many small to mid-cap players.

The enhancement of IE (International Enterprise) Singapore' s International Finance Scheme focused on funding for " future projects" but not the immediate working capital issues, Swissco Holdings' chairman, Lim How Teck said. Spring Singapore has reintroduced its Bridging Loan scheme, but the agency' s mandate lies mainly with helping the SMEs.

What many small to mid-cap players require is support towards deleveraging their highly-geared balance sheets. In this respect, Gibson Dunn' s partner, Robson Lee said that the proposed amendments to Singapore' s debt restructuring law will help, but these have to be tabled for debate in Parliament and there is no predefined time frame for a Bill to be made into a law.

Analysts say it is down to bank lenders backing the bulk of credit extended to these players to carry the weight and share the pain of debt restructuring.

Meanwhile, as the market waits on Ezra Holdings to disclose its game plan for fending off the latest threat from the potential US$170 million writedown on its subsea joint venture, a potential merger in Norway among three OSV players - Farstad Offshore, Solstad Offshore and Deep Sea Supply (DSS) - is in the works.

The merger, as advised by Pareto Securities, to create the fourth-largest OSV player by fleet size involves the conversion of debt and/or interest payments Farstad owed to bondholders, banks and other senior lenders to equity.

All in, some 2.8 billion Norwegian krone (S$475.85 million) of debt and debt obligations including senior debt and bonds are to be converted to shares. In addition, the anchor shareholders of DSS and Solstad, John Fredriksen and Kjell Inge Rokke, will fully underwrite a new equity issue by Farstad to raise 650 million krone.

The success of this merger deal hinges on two factors.

First, bank lenders and noteholders must agree to take on their share of haircuts. Pareto Securities Pte Ltd' s chief executive, David Palmer, said that it is on this basis that new equity can be new investments, the newly merged company can then grow and take advantage of opportunities in a distressed market.

But O& M debt-holders in Singapore had resisted any haircuts. Swissco Holdings had failed to secure support from senior lenders towards writing down its bank debts in order to bring in a new investor. Likewise, noteholders have turned down Rickmers Maritime' s offer to convert outstanding notes to equity.

So this raises the question of whether and when bank lenders and investors in Singapore will eventually come to terms with the notion of writing down their debts extended to the O& M sector.

Mr Palmer points out that without deleveraging their highly geared balance sheets, O& M entities will at best emerge as " overly debt-burdened ' zombie' companies that will not be able to compete in the global marketplace" .

Mr Lim added that banks and noteholders need to realise haircuts will be unavoidable in the event these O& M players are forced to either enter judicial management or liquidate.

But debt-holders cannot be throwing their support behind every O& M player, so a second factor must also be considered that is, any restructuring exercise will stand a better chance at succeeding if it can create additional stakeholders' value.

One major setback to assessing stakeholders' value as analysts have pointed out, is many small to mid-cap companies have yet impaired their assets on their books to align with the new normal in the market.

But if Ezra' s latest US$170 million writedown and the US$370.3 million impairments and provisions posted under its Q4 FY16 results are anything to go by, this results season may well see more listed companies raising impairment charges.

No one, however, will throw good money after the bad. PwC' s partner, Wilson Chew, argued that " meaningful assistance should be extended to companies that are able to demonstrate that they have sustainable competitive advantage with a strong value proposition" .

The merger of Farstad, Solstad and DSS for instance, is premised on the creation of an entity with the necessary clout - a combined fleet of 154 vessels, the fourth-largest in the world.

Dr Chew also argued for extending assistance to companies that are " innovative and differentiated" , including those which " have spent time focusing on what the market needs tomorrow" .

These would need to be weighed against structural changes affecting the standing of industry players in the O& M sector. EY Asia Pacific Oil & Gas Leader, Sanjeev Gupta highlighted for instance, the emergence of a global liquefied natural gas market and digitisation as two mega trends changing industry fundamentals.

But perhaps more importantly, any downturn can and should be looked upon as a window of opportunity. Dr Chew noted that some industry players exited the sector when oil prices were sky high, only to return in recent times with innovative drilling solutions that can provide significant cost savings.

One threat lurking behind this downturn is that appetite for O& M funding in the capital market here - whether in the form of new bank loans or equity issuances - may have dried up. This would mean those industry players with viable business proposals have to raise the required financing overseas.

Against the headwinds, Mr Lim called for the market to recognise the contributions Singapore' s O& M sector had made to the economy. The O& M sector has not only generated billions of dollars of exports in terms of the rigs delivered from Keppel and SembMarine, but also bred self-made millionaires including the likes of Michael Kum and Tan Boy Tee, he said.