Heat rising on local banks from O&M exposure

Singapore

SINGAPORE'S three banks - DBS Bank, OCBC Bank and United Overseas Bank, are probably feeling more heat from their offshore and marine (O&M) lending exposure.

They are understood to rank among principal bankers to Ezion Holdings and Pacific Radiance, two listed companies that are undergoing debt refinancing or restructuring.

Both companies are facing cashflow difficulties amid a protracted sectoral downturn that has challenged their ability to service debt.

They have appointed advisers to help in debt refinancing or restructuring and in the event that these efforts fail, their lenders may have to raise more provisions for O&M exposure.

The Business Times understands that DBS, OCBC and UOB rank alongside three foreign banks - Maybank, CIMB and ANZ - as senior lenders to Ezion. Ezion, at its first meeting with noteholders, flagged over US$1.05 billion in outstanding loans on its books.

The six banks, together with up to three other senior lenders, are believed to be behind these loans extended to Ezion.

Pacific Radiance, in announcing its second-quarter financial results, indicated that its bank loans ran in excess of US$450 million, some US$51 million of which was classified under current liabilities.

In its 2016 annual report, the offshore support vessel-focused group stated that it had six principal lenders: DBS, CIMB, HSH Nordbank, OCBC, Standard Chartered and UOB.

DBS at its Q2 results presentation said that it had S$2.4 billion in exposure to five names in the O&M sector. The bank has non-performing loan provisions set aside for two of these and indicated that two other clients may undergo debt restructuring in the coming months.

Speculation is rife that Ezion and Pacific Radiance may be the next immediate O&M pressure points for DBS, but between the two, only Ezion is believed to have made the bank's top five O&M clients. Besides having extended bank loans to these two entities, DBS has also pledged committed funding towards some S$120 million of notes issued by Ezion.

UOB stands as the least exposed among Singapore's three major banks to the O&M sector. But sources suggested that UOB was the top bank lender to Pacific Radiance, followed by DBS. The two local banks are also believed to answer for the largest combined chunk of bank loans to Pacific Radiance's group of companies.

OCBC is widely considered as the top bank lender to Singapore's OSV players though the bank's exposure to Pacific Radiance is said to be trailing far behind DBS and UOB.

Both Ezion and Pacific Radiance have slipped into negative operating cash flows in a lower-for-longer environment for oil prices and thus O&M vessel charter rates.

In its Aug 15 research note, DBS Vickers flagged liquidity and solvency risks at Pacific Radiance, taking into account the group's negative cash flow of US$10.3 million for Q2 FY17 plus pressure from redeeming a S$100 million medium term note that is maturing in August 2018. The brokerage noted though that successful negotiation of capital restructuring could be a positive catalyst going forward.

Equity analysts have touted Ezion as a potential survivor before it surprised the market with a trading suspension. In its Q2 financial results, the liftboat-focused group acknowledged that a protracted downturn has presented "many challenges" to its cash flow and it warned that if such adverse conditions persist, its business fundamentals would come under pressure.

UOB Kay Hian warned that "a failure to get banks and noteholders to agree to a debt deal" may have dire implications on Ezion's chances at surviving this downturn.

Pacific Radiance and Ezion, however, have not defaulted on their debt obligations, unlike Nam Cheong and Marco Polo Marine, which have also commenced dialogues with their noteholders. Nam Cheong on Thursday called for a second meeting with its noteholders on Sept 7 at 7-9 pm.

Banks responding to BT have maintained that they have sufficient provisions for their O&M exposure.

UOB chief financial offer Lee Wai Fai said: "We continue to monitor this sector and remain comfortable with the prudent levels of provisioning that we have set aside to manage any emerging uncertainties that may come out of this."

OCBC head of group corporate communications Koh Ching Ching reiterated that sufficient provisions have been set aside for the sector that remains under stress. "The overall quality of our loan portfolio remains stable - in the second quarter of 2017, we disclosed an overall NPL ratio of 1.3 per cent, unchanged from the preceding two quarters."

DBS, ANZ and CIMB have declined comment. Maybank did not respond to BT as at press time.