Company Watch

Nam Cheong: Quiet is not calm

For a company slapped with a court summons by its banker and with under eight weeks till a deadline to pay back $90 million in bonds to investors, Nam Cheong has been awfully silent.

Crucial debt restructuring talks have been ongoing since April, but so far yielded no positive progress updates from the down-and-out shipbuilder.

Nam Cheong's three tranches of outstanding bonds - $90 million due on Aug 28, $75 million due in July next year, and $200 million due in August 2019 - all trade at distressed levels.

The bonds maturing next month had a bid price of 15 cents to the dollar and an ask price of 20 cents, according to bondsupermart's last indicative pricing.

With little else in the way of new information to go by, any of Nam Cheong's 12,000 or so shareholders still vested in the counter should be on edge.

The foremost question: Will the company kick-start a debt restructuring process very soon, or too late? The fact is that unless Nam Cheong and its creditors bite the bullet, the loss-making business will continue to face going concern issues.

And if Nam Cheong wants to stay in control of the situation, it would be wise to reach some sort of consensus with bond holders before Aug 28, so as not to trigger a default. Things are looking grim.

In its last update on June 20, Nam Cheong disclosed that OCBC had filed a writ of summons and statement of claim against it in the High Court of Labuan, Malaysia, for the sum of US$10 million (S$13.8 million) lent to a Nam Cheong unit.

For a trade creditor to take such action is typical. For a bank to do so is uncommon.

"It (the summons) could be a retaliatory move to draw the company to the table, due to discussions that were frustrated," one analyst observed.

Nam Cheong's predicament is not easy. At the end of March, its short-term loans and borrowings amounted to RM941 million (S$303 million), including the $90 million bond repayment due on Aug 28.

Its long-term debt amounted to another RM895 million, of which $275 million pertained to the 2018 and 2019 bonds.

In comparison, its cash balance is down to just RM116 million as at March 31, and dwindling fast.

In the first quarter alone, Nam Cheong burned through RM69.9 million in net operating cash outflows, of which RM69.8 million went into inventory building.

Basically, all Nam Cheong's offshore support vessels (OSVs) for which there are no buyers are parked under "inventories", which had ballooned to RM2.44 billion by the end of March.

With the OSV market weighed down by oversupply, fetching a good price for these vessels will not be easy.

OCBC credit analyst Nick Wong said: "Their business model is their biggest hurdle. If you catch the cycle wrongly, you will be stuck with all these vessels on your balance sheet."

In this the post-peak oil era, Nam Cheong's risky business model seems almost quaint. It would build vessels on a "build-to-stock" (BTS) basis, which means building a ship speculatively, before an order contract comes in.

Nam Cheong enjoyed higher margins from its BTS business than from constructing vessels on a "build-to-order" basis, until orders dried up.

In addition to its shipyard in Sarawak, Nam Cheong also subcontracted construction to shipyards in China.

How much longer the Chinese yards are willing to delay vessel delivery remains to be seen, as are the unanticipated costs that Nam Cheong might incur if that time comes.

Investors may be hoping for Nam Cheong's major shareholder, Tan Sri Datuk Tiong Su Kouk, to pull a rabbit out of a hat and give the ailing firm an equity injection.

A move like that might bring some comfort to the banks. Or it might be perceived as throwing good money after bad at a business from a dead era.

Nam Cheong shares closed flat at 2.1 cents yesterday.

A version of this article appeared in the print edition of The Straits Times on July 06, 2017, with the headline 'Nam Cheong: Quiet is not calm'. Print Edition | Subscribe