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Several O&M counters take beating from Ezra fallout

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Singapore

PUNTERS and analysts betting on the offshore and marine (O&M) sector bottoming out may have to do a second take after Ezra Holdings' Chapter 11 filing over the weekend battered several of its peers on Monday.

Shares of the big three local banks also retreated over their exposure to Ezra - the second erstwhile stockmarket darling to declare insolvency after Swiber Holdings. DBS Bank, OCBC Bank and United Overseas Bank fell by up to 0.41 per cent.

Keppel Corp, likewise, slipped 0.29 per cent on having been named as an unsecured trade creditor to Ezra's subsea unit, Emas Chiyoda Subsea (ECS). But it said on Monday night that Borr Drilling had taken over the massive but delayed contract from Transocean for five jackup rigs.

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Monday's O&M losers among the small to mid-caps include ASL Marine, Nam Cheong, Pacific Radiance and Mermaid Maritime. One broker noted exceptions amid the slide - Sembcorp Marine and Marco Polo Marine advanced - though the consensus is for more bloodletting to come.

With two high-profile insolvencies in the sector since July 2016, observers also noted some lessons for investors looking to spot potential survivors that will sail through the rest of the downturn to the next upswing.

Though the 2014 oil price collapse played a big part for the pain in the industry, two tell-tale signs of distress in the O&M sector emerge on a closer look at Swiber and Ezra's fall from grace. Analysts said that Swiber and Ezra - along with other financially distressed O&M counters - may have overleveraged without biting the bullet to restructure their highly-geared balance sheets.

These troubled entities are often "companies with unbalanced financing" that came from "excessive leverage and over-valuation of the assets", Pareto Securities managing director David Palmer said.

In the months leading up to its Chapter 11 filing, Ezra had announced two massive writedowns - US$370.3 million impairments and provisions for Q4 FY16 in November 2016, and another US$170 million potential writedown for its interest in its subsea associate, Emas Chiyoda Subsea.

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Further complicating the debt restructuring process of these troubled entities were the complex financial instruments they had tapped to fund their ambitious expansion during the better years of the oil and gas cycle.

One was the sale and leaseback arrangement, through which companies went asset light by selling - or offloading from their balance sheets - vessels and leasing them back under typically long-term charters.

OCBC credit analyst Nick Wong said that though such moves freed capital for growth during an upswing, they turn into "financial burden" when the market sours, because the leases need to be serviced "even if the vessels are not put to work".

In the months leading to their respective Chapter 11 and judicial management filings, Ezra and Swiber faced claims tied to unpaid leases from shipowners. One shipowner, Forland Subsea, took a step further to file a statutory demand against Ezra.

Further adding to the stress from the sale and leaseback arrangements is the challenge confronting financially-stretched O&M counters seeking to align the expectations of a vastly retail-based Singapore dollar-denominated bondholder community with the harsh reality of the O&M downturn.

It took almost two years into the sectoral downturn and after Swiber's judicial management filing for notes restructuring to kick in in Singapore.

For both Swiber and Ezra, expending cash to fully redeem the notes in the months leading up to their JM and Chapter 11 filings only added stress to their balance sheets, some observers said. And even after months into the subsequent notes restructuring, Mr Palmer said that the patience and faith of bondholders - as with banks - had been tested when they came to understand that "there is little if any equity left in the companies".

Some argued that bondholders - as with senior lenders - after having extended longer runways for cash burn to the companies, may have to go one step further to grant the needed debt relief, but this could have exceeded the risk appetite of the bondholder community here.

But the oil and gas business is never one for the faint-hearted; investors including Kristian Siem, Norway's Warren Buffet, have been touted for their longer-haul view.

For any O&M player eyeing the high-teen margins from the engineering, procurement, installation and commissioning business, the payback takes years, if Mr Siem's experience with Subsea 7 is any indication.

IHS Markit principal researcher Ang Dingli explained: "The first few projects can be seen as 'investments' in the company's future in terms of capability and track record, both of which are favoured by oil companies when selecting their contractors."

In addition, the current testing oil market conditions have required investors to wait out longer for payback on startups in the deep-water market. Mr Ang said: "The deepwater market does not look optimistic to a newcomer in the next five years."

The fates of Ezra's two Singapore-listed subsidiaries, Triyards and Emas Offshore Limited (EOL), remain undecided as they headed into trading halt and trading suspension, respectively. EOL said after Monday's close that it had about US$170 million owing to Ezra and US$566 million in total bank facilities that are guaranteed or secured by securities provided by either Ezra or Ezra and the group. It had US$231 million charter hire liabilities as at Nov 30 2016, which are either guaranteed solely by Ezra or jointly guaranteed by Ezra and the group. It also highlighted it may experience a negative impact from Ezra's Chapter 11 filing.

READ MORE: Keppel signs deal with Borr Drilling for Transocean rigs

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