SINGAPORE (BLOOMBERG) - With a market value of S$50 million, Swiber Holdings Ltd hardly seemed the kind of company to cause a ripple in the financial markets. Yet, the near-liquidation of the penny-stock firm has set off tremors in Singapore's banking and energy industries.
The Singapore-based supplier to offshore oil and gas explorers, facing about $50.5 million of demands last month from various creditors, said July 29 that it seeks to operate under court supervision as it attempts to turn around its business. Two days earlier, it had filed a petition for liquidation, which was subsequently dropped following talks with lenders.
While Swiber is the latest victim of the collapse in crude prices, the spending cuts by explorers such as Royal Dutch Shell Plc and Statoil ASA are testing Singapore's position as a hub for the marine and offshore industry that accounted for 6.9 per cent of the city-state's manufacturing output in 2015. The rut is also hurting the nation's lenders including DBS Group Holdings, which said it may recover only half of its S$700 million exposure to Swiber and its units.
"The sector has been a drag on the overall gross domestic product," said Mr Song Seng Wun, an economist at CIMB Private Banking in Singapore. "The period of downturn could last longer. There will be pressure on all the players - large and small."
As a global financial hub, Singapore provides for 25 per cent to 35 per cent of commodities trading in Asia, according to International Enterprise Singapore, a government agency. It is also Asia's largest physical oil trading hub. Additionally, it is home to the world's largest bunkering port.
Singapore's marine and offshore industry, which includes the world's two biggest oil rig builders Keppel Corp and Sembcorp Marine Ltd, provides for 19 per cent of the island-nation's manufacturing jobs. The halving of Brent crude prices in the past two years is posing a risk to the sector and the country's economy, which is estimated to expand 1.8 per cent this year, the slowest pace in seven years, according to a Bloomberg survey.
The marine and offshore industries in Singapore aren't alone in facing challenges. Their counterparts in South Korea are undergoing restructuring after posting losses last year spurred by delivery delays. State-owned Korea Development Bank led other creditors to push shipyards to draw up aggressive measures to raise funds, cut capacity and jobs.
The Straits Times Index has fallen 3.9 per cent since Swiber's woes were made public. The FTSE Straits Times Oil & Gas Index, which tracks the marine and offshore engineering companies, dropped 6.3 per cent during the same period, while Ezra Holdings slumped 23 per cent and Ezion Holdings slid 11.6 per cent.
Swiber's shares plunged to 10.9 Singapore cents before trading was suspended on July 28, from as high as 88.4 Singapore cents about two years ago.
For the financial industry, Swiber's distress augurs more trouble. DBS, which provided a bridging loan to Swiber before the liquidation filing, has the biggest exposure to the troubled firm among Singapore's banks, according to court documents. Of the total S$700 million, DBS said July 28 it only expects to recover about half of that amount. About S$300 million of those loans are secured by collateral, including property and vessels, according to DBS, which reports its quarterly earnings on Monday.
DBS will make S$150 million of provisions following Swiber's financial trouble, the lender has said. The extra provisioning would be taken in the second quarter and cut DBS' 2016 earnings by 3 per cent, Goldman Sachs Group Inc said in a July 29 report.
"These developments are credit negative," Moody's Investors Service said on Aug 4, adding that the funds Singaporean banks are setting aside to cover souring energy exposures aren't enough. "The substantial upward revision to DBS' provisioning for its Swiber exposure is an indication that the current deterioration in the oil and gas industries could have a far stronger bottom line impact than previously expected."
DBS has built "a lot of" provisions and reserves ahead of time, and it is unlikely it will have an impact on its capital adequacy or the fundamental strengths of its balance sheet, chief executive officer Piyush Gupta told CNBC in an interview on Aug 4. The bank's common equity Tier 1 ratio stood at 14 per cent as of March.
Besides loans, Swiber defaulted on a S$150 million Islamic bond after notifying the stock exchange that it was unable to pay the coupon on the security due on Aug 2. The non-payment caused a cross-default on the company's four other outstanding notes, according to data compiled by Bloomberg.
Oil and gas-related loans accounted for 5.3 per cent of gross lending by Singapore banks as of December, a higher proportion than at banks in South Korea, Thailand and the European Union, according to Moody's. Of the 19 offshore service companies listed in Singapore, 10 companies recorded net losses in the first quarter, the rating agency has said.
The exposures of Oversea-Chinese Banking Corp and United Overseas Bank Ltd to offshore marine services companies amounted to 13 per cent to 18 per cent of their common equity Tier 1 capital and loan-loss reserves at the end of June, Moody's said in an Aug 1 statement. DBS had a total S$22 billion exposure to the sector at the end of March.
The Swiber case "may prompt banks to tighten lending to the sector", said Mr He Yuxuan, an analyst at Daiwa SB Investments (Singapore) Ltd. "If suppliers and other creditors cannot collect debts from Swiber, there may not be enough money to go down this chain." As lenders count their losses, the woes of the energy industry are far from over.
Keppel last month predicted a long, harsh "winter" in its rig-building business after reporting a 48 per cent plunge in net income in the quarter through June. Smaller rival Sembcorp Marine said profit in the period tumbled 90 per cent and warned that spending cuts in oil and gas will "continue to have a negative impact on the recovery process".
"Highly geared companies exposed to oil and gas sector with weak cash flows would remain under pressure," said Mr Joel Ng, an analyst at KGI Fraser Securities in the city. "The pressure on bank stocks would also be significant and may lead to less support from lenders and shareholders for any fund-raising in the future."