OFFSHORE oil and gas provider Ezion Holdings has sold S$120 million five-year bonds at 3.65 per cent. The bonds are backed by an innovative DBS Bank structure that works like a guarantee.
Orders for the issue reached S$1.5 billion - or 121/2 times - seen by many as risky since the slump in oil prices has made oil and gas offshore providers an uncertain bet.
But DBS's support for the notes has seemingly defanged the risk as the notes, due Aug 5, 2020, will be fully backed by a committed funding facility provided by the bank.
Clifford Lee, DBS head of fixed income, said on Thursday there isn't a DBS guarantee for the bonds, rather it's supported via the credit facilities extended to the company. "If you strip it down, the substance has the comfort of a deal supported by the credit facility extended by DBS," he said.
The innovative structure has helped Ezion reduce the interest rate on the bonds by about 3 per cent, giving it access to cheaper funding, he said.
Comparable notes are trading closer to 6.5 per cent, but "they've reduced the coupon by 2-3 per cent", said Mr Lee.
An outstanding S$150 million Ezion bond maturing in 2021 is trading at 95.5, giving a yield of 6.75 per cent. Another S$65 million Ezion bond maturing in 2020 is also trading at 95.5, giving a yield of 6.24 per cent.
Under the structure, DBS has committed S$120 million plus S$5 million that will be in existence for the life of the bond.
If the bond collapses, the principal and the coupon will be paid to the noteholders from the committed funding.
The committed funding is essentially carved out of credit facilities Ezion has from DBS.
"Ezion in the normal course of business is supported by credit facilities from DBS Bank. To facilitate this bond transaction, we have structured a dedicated line of up to S$125 million which will be in place and committed for the the life of the bond," Mr Lee said.
He declined to reveal the fees DBS will earn from the transaction. "They'll be charged accordingly. . . it's a very competitive world out there."
He said he was pleasantly surprised by the strong orders, both from funds and private bank (PB) clients.
The bank thought "this is a new structure, and the yield is not high enough to draw in the PBs; it's also not rated, so institutions wouldn't be interested", he said.
Fund managers got 56 per cent of the deal, while PBs were allocated 43 per cent and others one per cent.
An Ezion statement said that "in view of the current market environment, the group's clients are focusing their main attention on the production phase of the offshore oil and gas field life cycle.
"Despite the weak oil prices, demand for the group's service rigs remains buoyant, and the funds raised will better position Ezion to support its clients in their production related activities".
The funds will be used for general corporate purposes and working capital.
Chew Thiam Keng, Ezion's chief executive, said this "capital raising exercise will better position Ezion to support our clients in the current environment and we would like to thank DBS Bank and our investors for their support".
Ezion said its long-term cash flow comes from the secured multi-year vessel-charter contracts and/or letters of intent for the group's liftboats, service rigs and offshore logistics vessels with an approximate total contract value of up US$3.9 billion. The duration of these contracts ranges from three to seven years.