Sembcorp Marine flags liquidity issues after Sias queries proposed $1.5 billion rights issue

SINGAPORE (THE BUSINESS TIMES) - In response to queries raised by the media and Securities Investors Association (Singapore), or Sias, on the necessity of its proposed $1.5 billion rights, Sembcorp Marine (Sembmarine) said the impact of the Covid-19 pandemic has been protracted and could have serious consequences if it does not take action.

The company cited the "prolonged and severe downturn" in the offshore and marine (O&M) industry since 2015, due to the collapse in oil prices, and the impact of the pandemic as reasons for the rights issue, in a regulatory filing on Monday night (July 20).

The group said the reintroduction of Covid-19 measures this year, including tighter border controls, has disrupted supply chains and exacerbated the shortage of skilled manpower.

Although there have been no cancellations to any of the group's existing projects, project delays have been extended and the risk of terminations has increased.

"To mitigate the risk of project cancellations, the group has been coordinating with customers to reach mutually beneficial outcomes of project rescheduling and deferment in payments," Sembmarine said, adding that deferral of cash collections will impact the near-term liquidity position of the group.

Sembmarine noted that it has a net order book of $1.89 billion as at March 31 this year, with a majority of the projects to be completed by end-2022 and cash collection to follow after.

Furthermore, the group foresees an increasing need to repay more debt upon their maturity over the next 18 months.

Regarding queries about the sufficiency of its $2.1 billion rights issue in September 2020, Sembmarine noted that $1.5 billion was used to set-off an earlier loan from Sembcorp Industries, with $0.3 billion of the balance used for working capital purposes.

"The remaining $0.3 billion net proceeds from last year's rights issue is now insufficient, as it has progressively become evident that the impact of Covid-19 and the industry downturn has been more protracted than originally anticipated," Sembmarine said.

While the group's board did consider other financing options, it settled on the equity rights issue as its fully committed nature meant that the group and its stakeholders would be assured that it will raise the approximately $1.5 billion that it needs until at least the end of 2022.

Other options that the board considered were debt, equity-linked financing and/or other equity financing and each was evaluated based on availability, quantum, timing and transaction execution risks.

Debt financing, as suggested by Sias, was deemed unsuitable as challenging business conditions have pressured the group to refinance its existing maturing debt facilities, despite its net debt to equity ratio being at around 0.74 times. The board found that obtaining additional debt financing from lenders is unlikely to be available or sufficient to meet Sembmarine's funding needs.

"Adding debt would also increase the pressure on cash flow through higher debt servicing needs, which is not ideal in the current prolonged industry downturn and uncertainty due to Covid-19 pandemic," the group said.

Sias had earlier questioned if there would be a need for further fundraising post-2022, to which Sembmarine said that it would depend on the pace of recovery in the O&M sector, the continued impact of Covid-19 and its own business transition to the high-growth renewable and clean energy segment.

Specifically, the group's diversification into the renewable and clean energy sector is expected to diminish the impact of oil prices on its business in the long term.

Referencing Sias' question on the consequences should shareholders not approve the proposed rights issue, Sembmarine said the most immediate impact would be the group's inability to meet its liquidity requirements. It will then have to re-evaluate other financing options that it had earlier considered, based on availability, quantum, timing and transaction execution risks.

"In the absence of a recapitalisation, the group will face challenges to continue operating as a going concern," Sembmarine said.

Sembmarine shares closed down 8.8 per cent at 10.4 cents on Wednesday.