A dramatic bid on July 27 by offshore services firm Swiber Holdings to be liquidated - corporate hara-kiri - was a bolt from the blue for Singapore market watchers.
Certainly, many knew the offshore sector was struggling with crude oil prices at historically depressed levels. But almost no one realised that behind the scenes, Swiber bosses had been frantically working with investors and banking executives for at least six months to get the firm out of a deepening financial black hole, court documents showed.
In the last days of May, a desperate Swiber chairman, Mr Raymond Kim Goh, was facing the abyss as US$466 million (S$627 million) in revenues from several projects had failed to materialise in the second quarter, and S$205 million in note redemptions - money borrowed from bond-holders - was due in June and last month.
To compound this nightmare, a US$200 million cash infusion that Singapore-listed Swiber had been banking on from London private equity firm AMTC to tide over its cash flow crunch had been delayed.
As the first S$130 million note redemption was due on June 6, and AMTC's funds still had not arrived, Swiber management approached its biggest lender, DBS Bank, which had arranged these bonds.
They spoke to DBS group head of small and medium-sized enterprises (SME) banking Joyce Tee seeking an urgent loan to help the firm redeem the bonds.
Cash left in Swiber Holdings
Cash left in Swiber Offshore Construction
Outstanding loans with banks
Letters of demand from trade suppliers and subcontractors
Revenues from delayed and lost projects in second quarter
AMTC's proposed investment
DBS exposure to Swiber
Since listing on the Singapore Exchange in 2006, Swiber had been raising funds through private share placements, rights issues and the issuance of convertible bonds. The offshore sector can be expensive. The Swiber group operates a fleet of 28 vessels in offering its suite of back-up services to the industry, so access to credit is vital. Owing to its relatively small market capitalisation, it has had to access debt markets using a S$1 billion multi-currency medium-term note and a US$500 million multi-currency Islamic trust certificate issuance programme.
Swiber began facing difficulties raising new funds from debt and capital markets as banks started cutting their exposure to the oil and gas industry from early last year as oil prices tanked. This and other factors resulted in a rapid deterioration in Swiber's finances in the second quarter, prompting its bosses to step up their push for a deal with investor AMTC.
TALKS WITH AMTC
On May 24, Swiber group vice-chairman Francis Wong, chief financial officer Leonard Tay and chief executive Darren Yeo met Ms Tee to inform DBS of the potential urgently needed investment from AMTC. They also told DBS the company had three notes totalling S$305 million due later this year.
Ms Tee told them that DBS would not be able to help with the repayment of the $130 million note due on June 6, or a $75 million note due on July 6, but was willing to consider granting a loan to help with another note.
Things briefly looked brighter when AMTC struck a memorandum of understanding (MOU) for a US$200 million investment into a Swiber subsidiary on May 27. The MOU provided that the first tranche of US$100 million would be made by May 31, and a second tranche 30 days later.
But fears that AMTC would not be able to make the May 31 deadline prompted Swiber to ask DBS for help with redeeming the $130 million note due soon afterwards.
This proved no solution. Ms Tee said DBS was unable to assist given the "tight deadlines". As the pressure grew, another meeting was held with DBS to discuss a bridging loan and this yielded some results. In anticipation of the AMTC funds, Swiber got a bridging loan of US$85 million from DBS on June 2.
On June 9, AMTC agreed to buy US$200 million of preference shares in a Swiber unit, Swiber Investment - a move that would have provided vital funds to help the company stay afloat.
But one day after the agreement was signed, Swiber Investment received a request from AMTC to do more due diligence - the process of checking a company's books that is a part of any corporate deal. This delay was the last thing Swiber bosses needed at this critical moment.
Increasingly alarmed that the AMTC investment would not come, Swiber executives again met Ms Tee to seek another loan to repay S$75 million of bonds maturing on July 6. These notes were arranged by DBS and ANZ.
Without AMTC's cash infusion, Mr Goh turned to his main bankers, DBS senior management on July 4, for help with redeeming the bonds.
DBS on July 5 granted a US$61 million loan to redeem the bonds, subject to various conditions, including requiring Swiber to assign the main receivables of its unit, Swiber Offshore Construction (SOC), to the bank.
Swiber's woes worsened as negotiations with AMTC dragged on. Swiber broached the idea of a bridging loan with the London firm but later rejected that alternative as too expensive. AMTC turned cold about investing in Swiber on advice from its consultants.
In desperation, Swiber decided on liquidation if the AMTC money did not arrive by July 26. Meanwhile, bills were piling up. Letters of demand from various creditors, trade suppliers and subcontractors totalled US$25.9 million.Swiber pulled the trigger on July 27 and filed for a winding up. That move prompted DBS, with an exposure of S$700 million to the firm, to get Swiber to withdraw the liquidation bid and place itself under judicial management instead, insiders said.
This notwithstanding, it may be premature to write off AMTC's investment in Swiber. The Business Times reported yesterday that AMTC chief executive Smith O'Connor claimed the deal was still "alive", albeit in a different form.
AMTC's investors, comprising those from the Middle East and Russia, had needed more convincing that a deal was a sound investment, BT reported, quoting Mr O'Connor.
He noted a Singapore-based consultant hired by AMTC had not deemed the deal to be a wise one. "It's not that we didn't want to transfer the funds... We have a right to protect our investment. We needed some more time to go through the report (prepared by the consultant) and run it by our board and investors," he told BT.
But time was what Swiber did not have, as it turned out.
Two weeks after Swiber's deep financial woes became public, questions are swirling over whether DBS should have extended loans totalling S$146 million to help Swiber redeem the two bond issues that were due in June and last month. And whether the security it gave for one of the loans, which left it without any working capital, was the final straw that broke its back.
No doubt the loans helped prolong Swiber's survival, but that was delaying the inevitable, observers said.
Assigning the receivables of its main revenue generator, SOC, to DBS left Swiber without working capital. And when the cash infusion from AMTC did not materialise, Swiber was left with no other option but to file for liquidation as it was facing a mountain of debt, with only US$7.7 million in its kitty.
As of July 27, the outstanding amount under the medium-term note and the Islamic note was US$437.3 million. As of May 31, it also owed trade suppliers and subcontractors US$264 million. Thirteen banks have extended Swiber group loans totalling more than US$736 million.
DELAYING THE INEVITABLE
Some analysts say Swiber's shift from liquidation to judicial management "only delays the inevitable cascade defaults within the sector".
UOB KayHian, which downgraded the offshore marine sector to underweight, noted that the protracted slump in oil prices and a recent spate of poor earnings from oil majors will likely stall a turnaround.
Already, there are questions over whether Swiber can turn its fortunes around using judicial management. "How are they going to execute their order books when they have no working capital? Even if Swiber Offshore Construction remains a going concern, will clients be convinced that it can execute its projects on time and on budget?" an industry source asked.
Banks' ability to continually keep companies afloat in a protracted downturn is now seriously questioned. "Without their support, companies are likely to run into cash-flow concerns that either see them defaulting, or requiring capital raising," UOB KayHian said.