Saturday, 17 September 2016

Shipping, Oil and Gas industries – Where is the light?

The shipping and oil and gas industry are in dire straits.

Hanjin Shipping – No longer too big to fail!

The biggest news lately is the collapse of Hanjin Shipping leaving so many ships, cargo and crew stranded globally. Even the state-owned company is clearly “not too big to fail”. Korean government decided not to inject anymore capital in the mismanaged company burdened with >$5 billion in debt.

Hanjin’s collapse is considered by some analysts to have the same detrimental impacts in the shipping industry liken to that of Lehman’s brother’s to the financial industry. Almost over 80 ships are released into the market now. Clearly there are no signs of any short-term recovery due to the over-supply.

So do you think Temasek made the right decision to sell NOL?

Oil and Gas – long harsh winter

Almost two years of depressed oil price has sent shivers down the spines of so many O&G / Offshore and Marine related companies. While oil price rout is the main culprit in the beginning,  the biggest problem now is no longer the oil price per se for many companies in Singapore. Just like the shipping industry, the main problem is the hugely oversupply of the rigs and vessels.

Even if oil price is to soar for whatever reasons, International Oil Companies (IOC), National Oil Companies (NOC) will be prudent in their new Capital Expenditures (CAPEX) plans and Final Investment Decisions (FID). The new projects trickled into the industry will not be sufficient to absorb the largely oversupply of rigs and vessels, which were mostly speculated during the height of the oil price as well as during periods of unusually low interest rates after the GFC. Mind you, there are hundreds of vessels and rigs combined now still stuck in the shipyards all over the world, let alone the many more that are cold-stacked near-shore.

It could have been worst (or it will be even worst!)

The biggest fallen stories so far are still only the judicial management of Swiber and Technics.

Frankly, being in the industry, I think it is under-stated. There are seriously more companies in trouble than what is shown on the surface. We are only talking about the listed entities. How about the private ones?

The single biggest key reason why many O&G companies are still hanging on precariously is in my opinion, due to the leniency of the banks. The question is how long can banks support more and more debt-ridden and mismanaged companies?

Even Korean government is already letting Hanjin go?

Borrow more to redeem what was already owed

One example of bank providing the lifeline is shown in the company Mencast Holdings. The company redeemed S$50 mil Fixed Rate Notes due this month. In order to redeem the “Notes” to avoid default, Mencast borrowed more money. According to announcement on SGX, on 19 August 2016 Mencast entered into the following banking facility agreements with UOB. 

1   (i)  secured loan facility of up to S$50.0 million; and
2   (ii)  secured facilities of up to S$24.9 million, comprising term loan facility, trade facility and money market credit facility,  

The funds will be used for the redemption of the outstanding bonds, refinancing of certain existing loan facilities, general trade and working capital purposes.

Of course bank will not just lend. There is a condition relating to each of the Banking Facilities named (the “Relevant Condition”) whereby a mandatory prepayment event may occur if:

(i)  the controlling shareholder of the Company (who is also the executive chairman and chief executive officer of the Company), Mr Sim Soon Ngee Glenndle, fails to own and control, directly or indirectly, at least 10% shareholding in the Company and certain subsidiaries; or

(ii)  Mr Sim Soon Ngee Glenndle loses management control of the Company and certain subsidiaries.

The aggregate level of facilities which may be affected by a breach of the Relevant Condition (including facilities which will be affected as a result of cross defaults) is approximately S$74.9 million (excluding interest) as at the date of the announcement. 

Earlier in June this year, Mencast was served a Writ of Summons and a Statement of Claim by S & W Engineering Pte. Ltd. and Mr Wong Chung Kang seeking a sum of S$2.35 million allegedly due from the Company.

In another instance, Marco Polo has also just convened an informal meeting exploring various options relating to the impending maturity of the S$50 mil Notes due 2016. They are in discussion with the Noteholders to proceed with an exercise to solicit for consent from the Noteholders for an extension of the maturity date of the Notes.

Rife with Legal issues

During the good times, nobody really bothers too much about the details of the terms and conditions. When times are good, trust is easily established because everyone’s attention is only on harvesting. During bad times like now, relationships or friendships are forgotten. Many companies are already resorting to legal methods in any attempt to keep oneself afloat. Ethics…..Nah…. It is all about survival!

Some examples of legal struggle as follows:

Marco Polo Vs Sembmarine – Breach of newbuiild rig contract?
Nam Cheong Vs Petra Offshore – cancellation of newbuild vessel contract
Pacific Radiance Vs Chinese yard – refund of installments for newbuild vessels contracts
Otto Marine Vs Hoe Leong - winding up application for debts owed.

CAD is also involved now.

The hottest boardroom tussle recently is involving SBI Offshore. The company has appointed new directors and lodged a report with the Commercial Affairs Department (CAD) in relation to possible breaches of securities laws and other offences related to transactions involving a former associate company. Read : “SBI Offshore lodges report with CAD over possible breaches of securities laws”

So the tunnel is dark, with no signs of light ahead in the short term. 




21 comments:

  1. Thank you for great article.
    Hoping my ezion + swissco can survive this downturn

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    Replies
    1. Thank you. I am on the same ship as you. Hopes are low for me!

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