Sembcorp Industries issues S$1.5b worth of bonds to extend SembMarine S$2b loan

SEMBCORP Industries (SCI) is providing Sembcorp Marine with a five-year subordinated loan of S$2 billion to help it retire S$1.5 billion of borrowings, it said on Friday.

To fund the loan, SCI will issue S$1.5 billion of bonds through a private placement underwritten by DBS Bank. SCI will fork out the balance S$500 million from its existing resources and facilities.

The SCI bonds will be issued by July 20, and carry a 3.55 per cent coupon with a five-year maturity. Temasek Holdings will be one of the investors in the bonds.

The terms and conditions of the bonds are in line with SCI's existing medium term note programme.

The move strengthens SembMarine's financial position amidst the current downturn in the global offshore and marine industry, the companies said on Friday.

"The respective board of directors of Sembcorp Industries and SembMarine have considered a wide range of options and decided that the proposed financing option would be in the best interests of the companies," they said in a joint announcement.

SCI is Sembcorp Marine's largest shareholder.

Given SembMarine's high gearing relative to its Asian shipyard peers, a cash call has been a subject of occasional market speculation.

So the fact that SCI has managed to avoid a rights issue while helping SembMarine lengthen its debt maturity profile is "good enough news" for SCI shareholders and slightly positive for SembMarine, one stock watcher said.

SCI's S$2 billion loan to SembMarine will be split into two facilities.

The first facility is for S$1.5 billion, at a fixed rate of 3.55 per cent per annum. The S$1.5 billion will be used to retire SembMarine's existing debts.

This fixed rate facility is credit neutral for SCI, said iFast fixed-income analyst Ang Chung Yuh: "SCI is just on-lending to the subsidiary, and is effectively paying 3.55 per cent as well as receiving 3.55 per cent on the transaction."

The second facility is for S$500 million, and carries an annual interest of 1.91 per cent plus the Singapore swap offer rate. This loan will be used to meet SembMarine's working capital requirements.

Mr Ang said: "This part is credit negative (for SCI) on a short-term basis, as they are essentially pumping in more working capital into a currently underperforming segment.

"But in the longer term, if the marine side can turn around, it would be a long-term positive."

SembMarine posted back-to-back profits in the last two quarters, though many believe a sector rebound is still years in the making. The yard operator's order book has been declining.

The group said on Friday: "While the offshore and marine industry has shown signs of recovery, such recovery is expected to be gradual and sustained new orders for Sembcorp Marine will take time to materialise. Working capital needs have also increased especially for major engineering, procurement and construction projects."

In any case, the show of support from the companies' ultimate parent, Temasek Holdings, which will partake in SCI's mega-sized bond issue, is a "positive sign", said Mr Ang.

In Friday's announcement, the companies noted that SembMarine delivered strong and consistent performance for the 15 years prior to the current industry downturn which started in 2014.

"It was profitable every year with cumulative net profit of approximately S$5.4 billion and distributed cumulative dividends of about S$3.5 billion," the group said.

Assuming the S$2 billion loan had been fully drawn as at March 31, SCI's gross debt-to-capital ratio would increase from 56 per cent to 58 per cent, it said. Debt is a form of capital.

Before the bond issue was announced, SCI shares fell two Singapore cents or 0.81 per cent to S$2.45 on Friday. SembMarine shares rose two Singapore cents or 1.31 per cent to S$1.55.