O&M weakness likely to cloud debt recovery for Swiber creditors

Singapore

THE protracted downturn in the offshore and marine (O&M) sector is likely to impose greater uncertainty for the creditors of Swiber Holdings seeking to recover debts from the distressed oilfield-services provider.

While the High Court is still deliberating Swiber's application to reverse its July 28 winding-up petition in favour of judicial management (JM), analysts have flagged two unfavourable market trends that raise the risk levels of credit extended to Swiber or other O&M players under duress.

The first stems from a drastic decline in vessel values, and the second, from the probability of oil companies walking away from new or ongoing contracts.

Pareto Securities Pte Ltd chief executive David Palmer, commenting on the general resale market for distressed vessels with no direct reference to Swiber, cautioned potential sellers against getting their hopes up on securing buyers in this downturn. He also noted that, even among vessels for which buyers are secured, asset values have already tumbled by 50 per cent from two years ago.

The affidavit filed for Swiber's application for JM showed that the listed group has 28 vessels on its fleet - 10 held through wholly-owned subsidiaries, eight through joint ventures, nine through leasing companies and one through a financial lease.

A banking facility list attached to the affidavit heard in court showed that Swiber had pledged vessels or cash flows from ongoing projects to raise loans or credit lines from several financial lenders. These creditors will be able to call on the pledges on the vessels if Swiber proceeds with the winding-up.

Already on the list of vessels under the Sheriff's arrest with Singapore's Supreme Court is the 2007-built tug, Swiber Valiant. The vessel has been pledged to GE-PK AirFinance for a vessel loan to a subsidiary of Swiber, according to the banking facility list.

The list showed that two other banks - DBS and UOB - have extended loans or facilities to Swiber tied to vessels under the listed company's subsidiaries; China Development Bank has a standing finance lease deal with Swiber Offshore Construction Pte Ltd.

Robson Lee, a partner in Gibson, Dunn & Crutcher LLP, said that unless leave of court is obtained for a secured creditor to enforce his security, a moratorium will be imposed on the sales of the pledged vessels if the High Court rules in favour of a JM.

This may suggest secured creditors should support distressed entities entering into liquidation over JM, although market sources suggest that a key factor weighing in would be whether further cash flows can be gleaned from a distressed company proposed to undergo rehabilitation. In this downturn, however, that rehabilitation may well be partly conditional on the recovery of the O&M market.

Even with a troubled entity that undergoes JM, Mr Lee said the rights of secured creditors to realise any security that has been pledged or mortgaged are preserved; they are entitled to realise their security if the JM is not successful, unless it can be established in court that there was any undue preference.

On the other hand, much has also been said that unsecured creditors are likely to support JM. Mr Lee attributed this to a general expectation of obtaining a greater recovery of debts owed to unsecured creditors, as the appointed judicial managers will try to nurse the troubled entity back to solvency. (He also pointed out however that, since its introduction in 1987, there have been few reported or documented companies that have gone into judicial management, restructured themselves under the control and management of a judicial manager, and emerged from JM as financially viable businesses.)

Another question that had been raised for Swiber's JM application is if the listed group and its key operating subsidiary, Swiber Offshore Construction (SOC) - which has also applied for JM - have the required working capital to carry on with business as usual.

The working capital would include cash flows from projects on Swiber's outstanding order book and investments to be injected on the listed group entering JM.

Industry watchers have noted Swiber's heavy reliance on cash flows from contracts tied to India's Oil & Natural Gas Corporation (ONGC) projects prior to the group's filing for a winding-up.

Proceeds from two of these projects - Daman and PRP4 - that flowed first to SOC and then Swiber, have been pledged towards a bridging loan from DBS to redeem the medium-term notes due in July.

Swiber had also announced under two SGX filings in June and last December, three contracts valued at US$215 million in all and a US$710 million project off West Africa.

The listed group had already acknowledged the US$710 million project is deferred indefinitely due to the weak oil and gas market; a US$21 million contract bundled under the June SGX filing has been unilaterally terminated by an undisclosed client.

The Business Times understands the two other contracts announced in June are likely with Total off Qatar and PTTEP off Myanmar.

Sources view retaining these two contracts as an uphill challenge with the JM application still pending and oil companies enjoying the luxury of switching oilfield-services providers under conditions of excess capacity.

Already, Swiber is said to stand to lose out on a letter of intent (LOI) that was awarded by Kangean Energy Indonesia (KEI). The KEI LOI pertained to subsea-related work lined under the Terang Sirasun Batur Phase 2 field development, as earlier reported by BT.

The silver lining is that the listed group is considered by some as standing a greater chance at retaining contracts that SOC has with ONGC's projects, which are more advanced in execution. But even in India, pressure is piling on SOC as the Swiber subsidiary is disputing the bank guarantees on seven projects in all called on by ONGC and an Indian contractor, Punj Lloyd, an Aug 8 SGX filing by the appointed interim judicial manager (IJM) showed.

The same SGX filing acknowledged letters of demand received by Swiber had already ballooned to US$99 million and this amount is set to expand with listed group's trade debts standing at US$264 million as at May 31, court documents have showed.

Resolving the liquidity and, more specifically, the working capital crunch to keep Swiber's operations going (mainly through its key subsidiary SOC) is widely considered a priority of the appointed IJMs, Bob Yap Cheng Ghee and Ong Pang Thye of KPMG Services Pte Ltd.

Legal experts have raised one option for the listed group to claw back S$205 million cash paid out in all to the group's medium-term notes that were due in June and July. According to the Law Gazette, transactions of an insolvent entity are generally voidable within a certain time frame under seven situations, including unfair preferences extended to the involved counter-party or counter-parties.

READ MORE: Will AMTC be roped in to support Swiber's JM application?