Singapore oil borrowers seeking more slack to avoid bond defaults

A boat passes in front of an oil refinery located on Singapore's Jurong Island.
A boat passes in front of an oil refinery located on Singapore's Jurong Island.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Borrowers in Singapore, so far spared from a wave of defaults in the oil services industry, are starting to ask creditors to cut them some slack.

Three companies including Dyna-Mac Holdings Ltd, part owned by Keppel Corp, this month are asking bond holders to alter certain debt limits or profit targets as contract delays wreck firms' earnings. The issuers are among 28 oil services firms listed in Singapore with more than S$1.8 billion of notes maturing next year.

"If the oil markets remain depressed beyond 2016, you're going to see some problems," Joel Ng, an analyst at KGI Fraser Securities Pte in Singapore, said by phone. "Some of the oil and gas players will probably have to restructure their bonds."

The borrowing that helped build Singapore's biggest export industry is looking overstretched after the price of Brent crude slumped near US$40 and the island's economy grew just 0.1 per cent in the third quarter. Delivery deferrals and provisioning by yards are causing "cash flow issues," Maybank Kim Eng Securities wrote in a Nov 20 report.

Money is certainly tighter for the 28 listed oil services firms. The median ratio of their operational earnings to interest expense, a measure of a company's ability to pay its debts, was 5.4 times in their latest filings, a steep drop from 12.5 times at the end of fiscal 2014, according to data compiled by Bloomberg.

Oil services provider Dyna-Mac's measure plunged to minus 4.4 times in the latest quarter from 27 times at the end of 2014. The company is currently asking holders of its bonds due in 2017 to, among other things, change a clause that limits its interest coverage ratio to at least three times. Dyna-Mac declined to comment for this story.

Pacific Radiance Ltd is also seeking to tweak a rule on its 2018 bonds that requires interest coverage above three times, compared with 4.1 times as of Sept 30. The company's debt to equity ratio, a key measure of leverage, jumped to 98.4 per cent at the end of June from 75.7 per cent at the end of December.

"It's a prudent approach because we wouldn't know how long this soft market condition will last," Loo Choo Leong, group finance director, said by phone. "While we do not expect to breach the covenant, leaving it to hope is not a strategy. We have already cut costs and realigned our ops to be as competitive as possible. We have prepared ourselves for the long march ahead."

On average, the debt to equity ratio of Singapore-listed oil firms rose to 73.1 per cent in latest filings from 68 per cent at the end of the last fiscal year, while their mean cash holding fell to US$165 million from US$290 million.

"More delivery deferrals and provisioning by yards suggest clients' unwillingness or inability to pay due to cash flow issues," Maybank Kim Eng analysts wrote in last week's report. "Credit problems have started to surface."

Investors who plowed about US$14 billion into global high- yield energy bonds sold in the past six months are sitting on about US$2 billion of losses, according to data compiled by Bloomberg. And the energy sector accounts for more than a quarter of high-yield bonds that are trading at distressed levels.

More than half of the Singapore dollar bonds that are trading with yields above 10 per cent are from the oil services industry, the data show. The median yield for the 312 notes is 4.03 per cent.

Ezra Holdings Ltd, which successfully raised S$200 million from a rights offering in July, is asking noteholders to change certain requirements on its bonds after it agreed to a US$1.25 billion subsea services joint venture with Chiyoda Corp.  The venture "will be better positioned to capitalize on market opportunities as well as manage risks arising from fluctuating market conditions," an Ezra spokesperson said on Monday.

Both Pacific Radiance and Dyna-Mac cited challenging market conditions as the reason why they may not meet debt requirements, a breach that would legally be considered a default unless bondholders accept changes to the contract clause.

"It's going to be a very bad year for the oil companies and the yards," said Park Moo-Hyun, an analyst at Hana Daetoo Securities in Seoul. "The issue here isn't about when are oil prices going to recover. Oil companies are going to fight for survival."