A wake-up call for banks to properly assess credit risk

Monday's article ("Spotting the next one in a Swiber fix") was intriguing and a real eye-opener.

It noted that while offshore services firm Swiber Holdings appeared historically profitable, detailed financial analysis showed that the cash flow that it got from its business was negative for almost every year between 2006 and 2013.

Only in 2014 and last year did Swiber register positive cash flows, but these were inadequate to service its mountain of debt.

However, its main banker, DBS, said that the company showed no real signs of concern a few months before its "implosion".

It seems surprising that DBS did not do a thorough historical and future cash-flow analysis of its client to anticipate the problems that would beset it in an industry that has faced extremely weak conditions for almost two years.

It is cash flow that repays debts and it is over-borrowing that kills companies when cash flows are weak or negative.

With more customers in the oil and marine industry, as well as other economically challenged industries, banks should take this as a wake-up call to correctly assess the quality of their clients' credit risk.

Raymond Koh Bock Swi

A version of this article appeared in the print edition of The Straits Times on September 09, 2016, with the headline 'A wake-up call for banks to properly assess credit risk'. Print Edition | Subscribe