Lessons from Rickmers for KrisEnergy

AS IT contemplates its response to demands by its noteholders for fairer terms, KrisEnergy would do well to heed the lessons from the current state Rickmers Maritime has found itself in: namely, that there is a price to be paid for keeping a financially-strapped company alive, and shareholders cannot expect to get out of default with only a small sacrifice.

Some of KrisEnergy's noteholders have expressed unhappiness with the current terms offered by the company in its financial restructuring efforts. A group of them, in a letter on Monday, demanded for higher coupon rates and a shorter extension period; otherwise, they say they intend to vote no to an "inequitable offer".

The Business Times understands that there are some 100 individual investors in the group, but it is unclear how much of KrisEnergy's S$330 million bonds due 2017 and 2018 they hold.

KrisEnergy, when launching the consent solicitation exercise last Thursday, had indicated to BT that these terms are final. On Monday, when approached by BT, its spokesperson said that the firm is reviewing the noteholders' letter and will respond "if and when management deems appropriate".

With the latest development, the question that naturally arises is: Could KrisEnergy end up in the same dire straits as Rickmers Maritime, which has had to suspend trading of its units in the midst of uncertainty over its financial restructuring efforts?

After defaulting on bond interest payment of S$4.26 million on Nov 15, Rickmers Maritime, a container ship operator, said the next day that it couldn't show it was able to continue as a going concern, given the current uncertainty over the outcome of its talks with senior lenders to obtain standstills and/or waivers for its loan obligations.

A noteholders' meeting held earlier on Nov 9 had to be adjourned, after failing to garner the required threshold to justify a vote. Another meeting is being planned for between Nov 23 and Dec 21.

Rickmers has struggled to get noteholders to swap its S$100 million notes due next May for S$40 million worth of notes due in November 2023 and new units in the trust. Its noteholders said they saw the plan as promoting the interests of secured creditors and the majority unitholders in the shipping trust over that of unsecured creditors.

Even for KrisEnergy - which has been lauded for being upfront about its financial difficulties as compared with many other firms - efforts to make sure the company stays in business might go down to the wire on Dec 9. That day, noteholders will vote on whether to approve the extraordinary resolutions which require them to swap their existing bonds at full face value for new ones that mature five years later.

The group currently has S$130 million of 6.25 per cent notes due 2017, and S$200 million of 5.75 per cent notes due 2018.

On the very same day, the group will have interest payment due on the 2017 notes, amounting to about S$4.1 million.

If the extraordinary resolutions are approved, other financial restructuring plans also fall into place. The company will be able to access the remaining US$35 million bridge facility on its revolving credit facility from DBS, which will be used for the interest payment, resolving an immediate liquidity challenge for the firm.

With the noteholders' nod, KrisEnergy will also be able to tap S$140 million from the preferential offering of zero coupon secured notes due 2024 which come with up to 1.25 billion warrants.

These essentially provide the company with a five-year runway to further develop some of its assets and bring its production of oil and gas to a higher level.

If the resolutions aren't passed, however, the company said there is a risk it might not be able to make the payment for the interest.

As at Sept 30, the group's unused sources of liquidity - including cash and cash equivalents as well as the undrawn portion of its revolving credit facility - stood at US$37 million, an amount that seems large enough to pay for the interest. The group's current liabilities of US$191.2 million, however, overwhelm its current assets of US$128 million.

A failure to pay the interest on the bonds could trigger an "event of default" that would in turn set off cross-default and/or cross-acceleration clauses in its revolving credit facility and other loans. Legal proceedings resulting from these may lead to the group losing its operatorships and petroleum licences due to government confiscation, KrisEnergy said.

In other words, when the company reaches that stage, it becomes a lose-lose situation for all involved: shareholders, noteholders and employees.

For now, KrisEnergy appears to be starting off from a better position than Rickmers. Its noteholders have asked for warrants as compensation for having up to 2 per cent of the original coupon levels being capitalised; this potentially shows a confidence on their part in the company's future growth.

It is inevitable that both shareholders and noteholders will have to pay the price for keeping a company alive, but with good management and a forward business plan, the price paid today can be recovered with growth tomorrow.