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Singapore defaults boost calls for state aid as oil firms falter

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Singapore companies struggling to meet debt obligations as oil prices slump may get more support from the government if the economy deteriorates further, according to global auditing firm EY.

[SINGAPORE] Singapore companies struggling to meet debt obligations as oil prices slump may get more support from the government if the economy deteriorates further, according to global auditing firm EY. UBS Group AG's wealth management unit warns more defaults are possible.

"It's possible that off-budget measures may be introduced, as the government has done previously, to help these businesses tide over the slowdown should economic conditions worsen," said Chia Seng Chye, a tax partner at EY in Singapore.

"The Singapore government is already encouraging businesses to innovate and transform against increasing headwinds."

Singapore's Finance Ministry foresaw troubles from the slide in commodity prices when it announced budget plans in March that included a loan assistance program to help ease cash strains at smaller businesses. The situation has since worsened, with energy industry cutbacks leading to default at oil-services provider Swiber Holdings Ltd.

About 28 per cent of the S$18 billion in corporate bonds due over the next 18 months are from industries facing structural headwinds, UBS wrote in an Aug. 16 note to clients.

"In the absence of further bank support, refinancing this debt may prove difficult, potentially leading to more defaults over the next year," analysts Devinda Paranathanthri and Clarissa Lee wrote.

"The bond market is currently not open to issuers from troubled sectors such as oil and gas, industrials, transportation, and metals and mining."

Swiber, which offers engineering and other support services to offshore energy businesses, fell under interim judicial management earlier this month after running out of working capital.

Marine-services peer Ezra Holdings Ltd is considering bolstering its capital, while oil and gas producer KrisEnergy Ltd has said its debt covenants could come under stress.

The price of brent crude oil has halved in the past two years and was at about US$49.8 a barrel as Thursday evening in Singapore. Still, it has rebounded about 84 per cent from this year's low of US$27.1 in February.

Local smaller businesses supporting major oil & gas companies have experienced a drop in business since 2015 and the government is engaging companies that are retrenching workers on placing the affected workers in adjacent industries, the Ministry of Trade and Industry said.

"This approach aims to help the oil and gas sector become more competitive in the long run, especially in a new global operating environment of lower oil prices," a ministry spokesperson said by e-mail on Aug 18.

Singapore's government - one of just 10 sovereigns to hold top credit ratings from all three major assessors - is currently targeting a 2016 budget surplus of S$3.45 billion, although it stands ready to "adjust and respond" should economic conditions turn, Finance Minister Heng Swee Keat said in March. It posted a deficit of S$4.88 billion in 2015.

The marine and offshore industry, which includes the world's two biggest oil rig builders Keppel Corp and Sembcorp Marine Ltd, provides about 19 per cent of Singapore's manufacturing jobs.

Both companies have cut thousands of jobs. Unemployment rose to its highest level in more than two years in the second quarter, at 2.1 per cent.

Swiber's default follows missed payments in the local debt market by telecommunications provider PT Trikomsel Oke and seafood producer Pacific Andes Resources Development Ltd.

While policy support may lessen short-term pain, companies and investors should brace for losses, according to EY's Mr Chia.

"Based on what we have seen so far, it's typically not the government's policy to cover personal investment losses or compensate corporations and financial institutions for their commercial risks," he said.