Singapore Shipping and Offshore – Restructuring and Reflection
The downturn in the shipping and offshore sector has spurred a significant number of financial workout and insolvency proceedings over the last years. Wikborg Rein is involved in a significant number of the on-going restructurings within the OSV segment in Norway and also several international companies in the UK, US, Brazil, China and Mexico. The international nature of the shipping and offshore industry may complicate the financial workout when a company goes into distress, however, the global presence of a company may also present opportunities as the rules of statutory debt reorganisations vary.
In August 2016, a survey carried by Singapore’s Business Times (which drew on data released on Bloomberg) showed the precarious financial state of many of Singapore’s SO listed firms. The figures were ominous, but showed what we already knew – that Singapore’s SO companies are badly over-leveraged. Of the 14 companies polled, 12 have short-term debt of over S$100m maturing shortly, 10 have negative/low cash flow, and nearly all are too highly geared.
As a result of just such market conditions Swiber Holdings Ltd an ex-darling of the Singapore stock exchange (which operates construction vessels to support the oil industry), having initially filed for liquidation in July 2016 is now under interim judicial management and Rickmers Maritime (which operates container ships), having recently asked its bondholders for a 60% haircut, now faces liquidation after its bondholders refused and instead demanded an immediate acceleration of outstanding debt.. Marco Polo Marine Ltd (a provider of offshore support vessels to the oil and gas, commodities and construction sectors), having previously announced that there may be a substantial doubt about the group’s ability to continue as a going concern due to growing financial difficulties, is counting itself lucky as bondholders approved its proposal to delay paying S$50 million of securities initially due in October 2016, however, its situation nonetheless remains extremely precarious as it continues to be hit by decreased vessel utilisation. The Singapore shipyard sector is faring no better and builders like Sembcorp Marine Ltd and Keppel Corp have also seen profits tumble in recent months due to very few newbuilding orders being placed, and delivery of many vessels currently under construction being delayed, particularly in the jack-up rig market.
How did we get from boom to gloom in such a short space of time?
In the last couple of years, the Singapore SO industry saw a rapid surge in growth built primarily on record oil prices. Bond and bank debt was easy to come by, and this debt was freely used to grow (in many instances) businesses with diminishing revenues that ordinarily would not have survived the evolutionary race. When the oil price plunged and the global economy faltered therefore, decreased revenue meant that many companies were simply unable to meet their debt repayments, particularly in the bond sector where margins were often extremely high.
Is there a silver lining?
The crisis currently facing the Singapore SO industry forces us to relook at how business is done in the SO market and is certainly a good time for market recalibration. Of course many companies are anxiously trying to pre-empt liquidation outcomes, but it is quite apparent that some companies will not (and perhaps do not deserve to) survive this shake up.
Some segments will of course fare better than others – it is no secret that lenders are steering clear of dry bulk and the offshore market, but the bigger offshore projects such as FSRUs and FPSOs that are backed by long term contracts may have better chances of securing new or re-financing. There are also opportunities for new entrants to the financing market, such as the Chinese leasing houses who, having less exposure to the SO sector than some of the more established players, are now in a good position to invest into distressed assets such as larger containerships, LNG/LPG carriers and higher value ships such as FSRUs and FPSOs. We will likely also see an increase in consolidation and M&A activities as stronger players look to pick up distressed assets/companies at attractive prices as seen by recent market rumours that Maersk Line is being touted as the white knight to save South Korea’s two struggling liner companies, Hyundai Merchant Marine and Hanjin Shipping.
To be in with a chance of survival however, proper balance sheet restructuring will be required and reductions must be made in borrowing by repaying existing debt either by raising cash through divestment of assets or by raising new equity. But these processes take time and it will therefore be vitally important that investors and creditors play their part and practice patience and forbearance in order to give borrowers the best chance of making it through the downturn. A good example of such forbearance is the attitude being shown to Ezra Holdings Ltd. (an integrated offshore support providers) by its bondholders, who so far are showing leniency to Ezra Holdings as it seeks possible refinancing options with its bankers.
Those companies that do not have sufficient financial buffers however or are unable to realise assets at realistic prices or to raise additional equity are bound to suffer and will probably be forced to exit the SO market – but this should be viewed as the market attuning itself to the new commercial reality and therefore perhaps in the best interests of the industry in the long-term.
If possible therefore, when faced with liquidity problems, management should engage financial advisers (very) early, talk (and keep talking) to creditors and look honestly and dispassionately at restructuring options. Nothing is gained by management being in denial and giving “vague” propositions/disclosures to stakeholders about “plans” to restructure their existing debt obligations or by them trying to “escape” payments. As a bondholder in Ezra noted (after Ezra, despite the downturn, still delivered on a $3.66 million coupon recently) – “we can feel the management’s sincerity and so we are prepared to tide through this difficult period with them”. This is contrasted with the response showed by bondholders of Rickmers, who flatly refused what they perceived as a move to “bulldoze note holders”.
Management teams will also need to admit that they may be part of the problem. Salary and bonus payments may need to be reduced (though this will need to be balanced with the need to retain and motivate good staff) and staff reductions (including at senior management level) will probably be required as part of wider cost-cutting measures. By way of example, Sembcorp has already reduced headcount by about 8,000 which reflects the trend across the industry.
Unfortunately in any sector of business there is risk as well as reward… and we are now seeing a considerable downside. How we come out of the current market decline and who will be left standing will depend greatly on the performance of industry leaders, the patience of creditors, and the oversight of the regulators.