WE refer to the opinion piece by Ben Paul, headlined “Investors should consider the motivations of major shareholders in Sembcorp Marine’s deals” published Aug 22, 2022.

In the article, Paul stated that “Sembmarine and SCI unveiled a corporate exercise that crashed Sembmarine’s stock price. Sembmarine tapped its shareholders for S$2.1 billion through a deeply discounted rights issue, and used the bulk of the proceeds to repay a S$1.5 billion subordinated loan from SCI. SCI then offloaded its shares in the recapitalised Sembmarine to its own shareholders as a distribution in-specie.”

To help readers recall and make an informed opinion, Sembcorp Industries (Sembcorp) would like to reiterate the full background and rationale of the recapitalisation of Sembcorp Marine (Sembmarine) and demerger.

The offshore and marine industry had seen a prolonged and severe downturn since 2014, which resulted in reduced demand for Sembmarine’s services and significantly lower operating cash flows. Sembmarine was in urgent need of fresh capital to shore up its cash flow situation.

As the 61 per cent shareholder of Sembmarine, Sembcorp stepped in to provide support. On Jun 21, 2019, Sembcorp announced that it would provide Sembmarine with a 5-year subordinated loan facility of S$2 billion, to strengthen Sembmarine’s financial position. Sembmarine would use the subordinated loan to retire approximately S$1.5 billion of borrowings, and the balance S$500 million to support working capital and general corporate purposes. To raise the funds necessary to fund the subordinated loan, Sembcorp had to borrow S$1.5 billion, adding significant stress to its own balance sheet.

In 2020, the offshore and marine industry downturn was further exacerbated by Covid-19. Yet again, Sembmarine had to urgently recapitalise to address its liquidity requirements and strengthen its balance sheet. This round, however, Sembcorp was no longer able to inject more capital into Sembmarine, given its own stressed balance sheet.

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To enable the long-term viability of both companies, Sembcorp and Sembmarine on Jun 8, 2020 jointly proposed to their respective shareholders the S$2.1 billion renounceable rights issue by Sembmarine to strengthen its cash position and balance sheet, and the proposed demerger of Sembcorp and Sembmarine via distribution in specie of Sembcorp’s stake in the recapitalised Sembmarine to Sembcorp shareholders as dividends. Sembcorp would subscribe pro-rata its shareholding to Sembmarine’s S$2.1 billion rights issue, via a set-off against the S$1.5 billion subordinated loan provided by Sembcorp to Sembmarine in 2019. For Sembcorp shareholders, it was equitable that the 2019 subordinated loan would be repaid through the recapitalisation and demerger with Sembmarine.

The rights issue and proposed distribution were inter-conditional, and could proceed only if shareholder approvals were received for all resolutions at both companies’ extraordinary general meetings.

The demerger would enable Sembcorp to transform into a focused energy and urban business in its sector amid the global energy transition and offer distinct advantages to its stakeholders. It would also contribute towards an improvement in the financial metrics of Sembcorp with the removal of its exposure to the offshore oil and gas sector.

Sembmarine, on its part, would be able to pursue a focused strategy and build further on its core engineering and execution capabilities as a standalone company. Furthermore, post the rights issue, its balance sheet would strengthen with pro forma net gearing ratio improving from 1.82 to 0.45. The proposed distribution would also not dilute the interests of Sembmarine shareholders, and it would have Temasek as a direct and significant shareholder.

The boards and management of both companies believed that the inter-conditional transaction would strengthen the 2 companies’ financial positions and unlock shareholder value, thus being in the best interest of their respective shareholders.

The transaction was approved and passed with overwhelming support by Sembcorp and Sembmarine shareholders at their respective EGMs held on Aug 11, 2020.

The rationale, along with the full details of the subordinated loan and the transaction, have been clearly disclosed and explained to shareholders prior to the respective EGMs. We summarise the key facts here, so that discerning readers can draw their own conclusions.

Karin Xiao Assistant Vice-President, Group Media Communications Sembcorp Industries