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CAI JIN

Spotting the next one in a Swiber fix

Saga of oil support service firm's failure may offer valuable lessons in what to look out for

In the wake of Swiber Holdings' financial debacle, its dismayed bond holders and creditors have been asking themselves one big question: Did they miss red flags suggesting a catastrophe was imminent?

Indeed, the saga of the oil support service company's failure may also offer investors valuable lessons on how to spot other companies caught in a similar fix.

But going by the account given by DBS Group Holdings chief executive Piyush Gupta at his bank's results briefing last month, there was little to go by until a few months before its implosion to suggest that Swiber was on the verge of collapse.

He observed that as at end-June, Swiber had "zero overdues" with the bank on any outstanding working capital, while its order backlog was $1.35 billion in February. "By every dimension, at the end of the first quarter, you would say that the company was doing well. There's nothing to tell you until March or April that there was any problem."

Bond holders were caught in a similar quandary. Until it imploded, Swiber had always been prompt in paying up when its bonds matured and this might have given them a false sense of security.


Swiber's shipyard in Singapore. Its fund-raising activities had accelerated as negative cash flow deepened. Swiber recorded a negative operating cash flow of US$204 million in 2008, followed by another negative cash flow of US$45.29 million in 2009 and a negative cash flow of US$115.47 million in 2010. PHOTO: REUTERS

On paper, Swiber appeared to be extremely profitable. Its earnings had grown from US$12.14 million in 2006 to US$90.81 million seven years later in 2013... But buried in the details is the fact that the cash flow which Swiber got from its business was negative for almost every year between 2006 and 2013, dwarfing the accounting profit which it recorded.

One affected bond holder, Ms Celine Ching, said: "A week before the news of Swiber's collapse, my relationship manager was still assuring me that I could sleep soundly as it had just redeemed a tranche of maturing bonds."

But while DBS and Swiber bond holders nurse their losses, the biggest shock for the rest of us must be to learn that Swiber, which was worth only $51 million when it failed in late July, owed DBS a whopping $721 million and bond holders an equally eye-popping sum of $551.8 million.

Those sums combined are much bigger than the $520 million loss sustained by almost 10,000 investors during the Lehman Brothers minibond debacle eight years ago.

So what caused Swiber to fail? Market pundits would say that one warning sign would have been the stress the marine and offshore industry here was experiencing because of the huge cut in capital expenditure by the previously high- spending oil majors as they reacted to the big slump in oil prices.

However, Swiber might have been more vulnerable than other players, as it struggled under a mountain of debt to repay maturing bonds issued at times when market sentiment was much better and investors' main concern was the size of the coupon payouts.

Ms Elena Okorochenko, managing director and head of Asia-Pacific (ex-Japan) of S&P Global Ratings, noted in an article that the manner in which Swiber had refinanced its debts showed "significant refinancing risks and some inability or unwillingness to reduce debts".

Although Swiber had repaid US$3 billion in debt, it had also raised US$3.1 billion between 2013 and 2015. As at the end of last year, it had outstanding debts of about US$1 billion and only US$100 million of cash on hand.

Ms Okorochenko observed that if Swiber's creditworthiness had been assessed at the end of last year, its credit rating "would have indicated a much higher potential rate of default than other rated entities in Singapore".

She said: "Indeed, Swiber's financial ratios and liquidity profile are typical of companies that we rate at B- or possibly lower."

Credit ratings agencies divide bonds between investment grade and junk. Investment-grade bonds can range from the safest AAA bonds (like Singapore Government debt) to the riskiest, which are graded BBB. Junk bonds range from BB, the "best junk" on offer, down to D grade, which means that a company is in default.

A study found that between 1981 and 2015, B-rated companies were 20 times more likely to default within a year than those rated BBB.

But the snag is that many of the high-yielding bonds issued in recent years are unrated and this makes it difficult for investors to use such indicators to assess a company's creditworthiness.

Market pundits, however, point to other other signals offering clues to Swiber's financial vulnerability.

On paper, Swiber appeared to be extremely profitable. Its earnings had grown from US$12.14 million in 2006 - the first year it was listed - to US$90.81 million seven years later in 2013, while revenues in the same period expanded from US$66.77 million to US$1.04 billion.

But buried in the details is the fact that the cash flow which Swiber got from its business was negative for almost every year between 2006 and 2013, dwarfing the accounting profit which it recorded.

In fact, its fund-raising activities accelerated as negative cash flow deepened, with Swiber recording a negative operating cash flow of US$204 million in 2008, followed by another negative cash flow of US$45.29 million in 2009 and a negative cash flow of US$115.47 million in 2010.

This means that the company had to raise huge sums just to stay afloat. That should have rung alarm bells for investors scrambling to buy its attractively priced bonds or take part in the cash-calls made by the company. Between 2014 and 2015, the cash flow which Swiber got from its business had turned positive but the sums generated were simply too small to cover debt repayments.

Is this an example of a firm which happily tapped the availability of cheap financing when the going was good while failing to do its sums on whether the cash it got from its business was sufficient to repay its debts, while assuming that it would always be able to refinance to get out of its cash-bind?

However, as UBS noted in a recent report, "with the Swiber default, the market saw how quickly liquidity could dry up. To date, the market still has very little or no liquidity in oil and gas credits, with trading in the secondary market practically halted".

The Swiss bank also observed that about $18 billion of Singapore dollar corporate bonds are due to mature in the next 18 months of which 28 per cent come from sectors facing pressure in their businesses. "In the absence of further bank support, refinancing this debt may prove difficult, potentially leading to more defaults over the next year," it said.

But banks may tighten their belts or become less willing to extend support, after the whopping $197 million bridging loans, which DBS gave to Swiber for bond redemptions, went up in smoke.

A simpler test of a company's financial viability would be to check the cash reflected in its balance sheet against the amount which it has to repay on its maturing bonds - and to identify those companies with a significant shortfall.

The financial travails suffered by some of them are already well documented. For example, AusGroup, which has a cash balance of $17 million and a repayment of $110 million that falls due next month, is pleading with bond holders for an extension on debt repayment.

UBS expects more of such debt restructuring exercises, such as maturity extension, to take place in the hope of turning the business around, and extracting the most value for shareholders and creditors, rather than see the business fail outright. All of this is a telling reminder of the difficult route which bond holders will sometimes have to traverse in recovering their funds.

A version of this article appeared in the print edition of The Straits Times on September 05, 2016, with the headline 'Spotting the next one in a Swiber fix'. Print Edition | Subscribe