The Straits Times says

Coping with blindside disruptions

Amid the swirling questions raised by the Swiber debacle, some might take comfort in assurances from independent observers and top local bankers. Ratings agency Fitch believes leading banks here are "positioned well to meet rising credit risks" from the troubled sub-sector occupied by Swiber, a construction and support services provider catering to the offshore oil and gas industry. Once a market darling feted by investors and lenders, Swiber's sudden bankruptcy announcement has left the nation's largest bank, DBS, with a $700 million exposure to the mess.

Swiber, now subject to a rescue plan, is just one of many highly leveraged firms in a sector being battered by cheap oil prices. Consequently, DBS expects its non-performing loan rate to rise but not over 1.3 per cent to 1.4 per cent this year - no cause for alarm when ratios of about 2 per cent "are considered healthy" for banks around the world, according to a Standard & Poor's analyst. But that is not the half of it. The bigger question is the wider knock-on effects of the Swiber implosion, as a fifth of manufacturing employment is said to be tied to the offshore and marine industry, and the continuing weakness of the sector will drag down the nation's gross domestic product.

Whatever DBS and other banks are able to recover from offshore support service firms that go under, the losses will remain substantial and prompt questions about large-scale lending offered to a sector that is seeing a tectonic shift. New fracking technology upset the older order dominated by oil cartels, propelled the United States as a major oil producer and knocked the bottom out of the market. Quite apart from the geopolitical implications of this revolution, profound economic change is in the offing as oil majors contemplate a future of prolonged price weakness. It was against this backdrop that oil-related firms had amassed debt by issuing $1.4 billion of Singapore dollar bonds maturing up to 2018, according to Bloomberg. They were supported by banks and investors swooning over the high yields of unrated bonds. Did they pause to ask how these bonds would be ultimately repaid when contracts are drying up in an uncertain market?

A tighter regime should be demanded to cope with both blindside and foreseeable disruptions. When the disclosure policies of firms are so weak that even a major lender is caught by surprise, what hope is there for ordinary bondholders to react in time? Particularly egregious was the way Singapore-listed Swiber gave no reason for halting the trading of its shares last month and how three directors, including its chief financial officer, quit in tandem with its announcement of a winding-up application (since withdrawn). Such goings-on certainly call for a relook, along with the manner in which firms in troubled sectors pile on debt based largely on working capital.

A version of this article appeared in the print edition of The Straits Times on August 18, 2016, with the headline 'Coping with blindside disruptions'. Print Edition | Subscribe