SINGAPORE (THE BUSINESS TIMES) - The plan to demerge Sembcorp Industries and Sembcorp Marine (Sembmarine) will meet the loss-making marine unit's "critical" liquidity needs, strengthen both companies' financial positions and is in the best interest of shareholders.

This is according to the companies' boards and management teams as they responded on Wednesday (July 22) to questions from the Securities Investors Association (Singapore), or Sias.

In June, the two firms proposed a $2.1 billion recapitalisation for Sembmarine as well as a demerger from each other, which will result in Temasek Holdings having a direct stake in the marine arm.

Sias had asked, among other things, why they were undertaking the corporate action now, while economic conditions were poor.

The companies on Wednesday replied that they had earlier been exploring multiple options to recapitalise Sembmarine. The transaction was then proposed shortly after both the Covid-19 situation and the sudden drop in oil prices had triggered the immediate need for funds.

DECIDING SAY

Meanwhile, Sembmarine clarified that its independent shareholders will have the deciding say in whether the rights issue will proceed.

This is because these shareholders will be the only ones voting on the whitewash resolution waiving rights to a general offer by Temasek Holdings, which is inter-conditional with the rights issue resolution. If the whitewash resolution is not approved, the rights issue will not proceed even if its resolution was approved.

Sias had asked how the proposal's structure gives Sembmarine's public shareholders an actual say in the matter, given that Sembcorp owns 61 per cent of Sembmarine and has undertaken to vote in favour of the rights issue, which requires a simple majority to be greenlit.

All Sembcorp directors who hold shares in Sembmarine will abstain from voting on the whitewash resolution.

REFINANCING

Sembmarine also said that continuing to add debt is not a long-term solution, as this will further burden its balance sheet with higher gearing and interest payments at a time when its cash flow and financial flexibility are still constrained by the "challenging market dynamics and outlook".

The group's current balance sheet is already highly geared, and obtaining support from banks to maintain its current loan facilities is already "challenging", it noted.

"To request banks to provide additional loan facilities is therefore not realistic and also unlikely to be sufficient to meet our liquidity needs."

This was in response to Sias' question as to whether Sembmarine would consider taking on new debt given that interest rates have fallen substantially in recent months.

'A NEW WAY FORWARD'

If approved, the rights issue will allow Sembmarine to "chart a new way forward" by improving its cash position and strengthening the balance sheet. It will enable it to fund ongoing commitments, help the group compete for new high-value projects and ensure long-term viability, it said.

Under "general corporate purposes", the group will also use some of the $600 million raised to fund its research and development efforts, and strengthen core engineering and execution capabilities that will drive future growth initiatives.

In the immediate term, Sembmarine will focus on completing ongoing projects. To date, none of them have been cancelled.

Over the longer term, the company will diversify into clean energy growth areas, such as offshore wind, and expand into its established segments, such as the gas value chain.

While all of Sembmarine business segments have been affected by the current challenging business conditions, the repair and upgrades segment has remained profitable and generated over $600 million in revenue for FY2019. Sembmarine said it will continue to grow this segment.

SUBORDINATED LOAN

Sembcorp clarified that under the proposal, it will not "write off" the $1.5 billion outstanding principal loaned to Sembmarine. Instead, the debt will be converted into an equity stake in Sembmarine via the rights issue. Sias had asked how writing off a related party's debt will benefit Sembcorp. If the debt were indeed written off, SCI would not have received any consideration in return.

The loan settlement through the rights issue substantially recapitalises Sembmarine's business, materially reduces its debt servicing obligations and puts it in a strong position to ride out the current crisis, said Sembcorp.

It added that the settlement also provides value to Sembcorp, in the form of Sembmarine shares. All Sembcorp shareholders will benefit as well, as they will get the flexibility to calibrate their holdings in both companies once there is a clean demerger.

BALANCE SHEET

Sias argued that Sembcorp's reduced debt post-transaction may be driven by accounting treatment rather than expected economic improvements to its business.

In response, the company pointed out that a deconsolidation of Sembmarine will bring "tangible" benefits, as the improved debt position will open opportunities for more debt financing, and is not simply accounting treatment.

If the transaction goes through, Sembcorp will no longer need to set aside the remaining $500 million commitment under the $2 billion subordinated loan, given that this remaining commitment will be cancelled.

With a less constrained balance sheet, Sembcorp said it will be better placed to pursue some of the opportunities to serve Asian markets where there is burgeoning demand for sustainable energy solutions.

Sembcorp also replied that the demerger will deliver a "clearer investment proposition" to its shareholders, and this may lead to a positive re-rating of its equity value and appeal to equity investors focused on the energy and urban space. Sias had asked for specifics on the expected improvement to shareholder value when Sembcorp transforms into a focused energy and urban company.

The two companies will seek their shareholders' approval for the proposal at extraordinary general meetings expected to take place around end-August and early September.

As at 2.01pm on Wednesday, Sembcorp shares were down $0.01 or 0.6 per cent to $1.76, while Sembmarine shares fell one cent or 2.3 per cent to 42.5 cents.