OCBC Asia Credit - Offshore Marine Sector - Many Moving Parts (11 Mar 2015).pdf

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Offshore Marine Sector: Many Moving Parts

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Key Takeaways

We are expanding our coverage on the offshore marine sector. In this report,we initiate coverage on ASL Marine Holdings , Otto Marine Limited , PacificRadiance Limited and Swissco Holdings Limited . The individual creditreviews are provided in this report.

Though energy prices have made some recovery, times remain challenging.We have seen order book pressure, order cancellations, falling fleet utilizationas well as worsening credit profiles.

Given that the sharp decline in energy prices occurred from November 2014onwards, with capex reductions by oil majors announced only subsequently,we can expect 1Q2015 performance to be weaker than 4Q2014 performance.That said, for the majority of the issuers that we cover, management teamsare cognizant of the challenges they face. Most of them have managedthrough prior energy cycles.

Healthy order books do offer some comfort in providing revenue clarity,

though order cancellations highlight the risk of clients walking away.Ironically, several offshore marine players actually diversified into newbusinesses as a response to the prior commodities slump in 2009.

A factor that needs to be considered would be the use of JVs. These maybring liabilities off balance sheet, but due to corporate guarantees, the issuersmay still face liability.

Indicative prices from Bloomberg as of 11 March 2015

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MATURITY PX_ASK _BOND_

MaturityAsk

PriceAsk

YTW

Ezra Holdings Ltd UW EZRASP 5 '15 07/09/2015 100.00 4.994 OWEzra Holdings Ltd UW EZRASP 4.875 '18 24/04/2018 94.50 6.867 NKeppel Corp Ltd N KEPSP 3.1 '20 12/10/2020 101.70 2.769 UWKeppel Corp Ltd N KEPSP 3.145 '22 14/02/2022 100.70 3.032 UWKeppel Corp Ltd N KEPSP 3.8 '27c22 23/04/2027 102.50 3.401 NKeppel Corp Ltd N KEPSP 4 '42 07/09/2042 99.00 4.060 NNam Cheong Ltd N NCLSP 6 '15 05/11/2015 102.50 2.060 NNam Cheong Ltd N NCLSP 5 '17 28/08/2017 102.00 4.134 OWSembcorp Industries Ltd N SCISP 3.7325 '20 09/04/2020 104.50 2.775 UWSembcorp Industries Ltd N SCISP 3.64 '24 27/05/2024 102.50 3.322 UWSembcorp Industries Ltd N SCISP 4.25 '25 30/08/2025 106.00 3.558 NASL Marine Holdings Ltd UW ASLSP 4.75 '17 28/03/2017 98.05 5.778 NASL Marine Holdings Ltd UW ASLSP 5.35 '18 01/10/2018 97.00 6.306 NOtto Marine Services Pte Ltd UW OTMLSP 7 '16 01/08/2016 94.00 11.822 UWPacific Radiance Ltd N PACRA 4.3 '18 29/08/2018 95.00 5.920 OW

Swissco Holdings Ltd N SWCHSP 5.7 '18 16/04/2018 95.00 7.547 N

BondRating

IssuerIssuer

RatingsIssue

mailto:[email protected]





11 March 2015 Monthly Credit View

Treasury Research & Strategy 2

ASL Marine Holdings Limited: Credit Review

Mind the Gap Revenue reversal : For 2QFY2015 (ending December 2014), ASL Marine Holdings (“ASL”) reported

negative S$21.1mn in revenue. This was due to the rescission of shipbuilding contracts for two offshoresupport vessels. As revenue was previously recognized on these contracts (via the percentage of completionmethod), ASL had to reverse S$95.0mn of shipbuilding revenue. Excluding these reversals, shipbuildingrevenue would have been S$5.8mn, while total adjusted revenue would have been S$76.0mn for the quarter(a decline of 20.3% y/y).

Weakness seen across segments : Regardless of the revenue reversal, the quarter would have still beensoft.

1. Shipbuilding revenue (excluding the reversals) declined 94% y/y to S$5.8mn. The management

attributed this to lower percentage-of-completion revenue recognized as most projects were either in thefinal stages or at the beginning of the construction. A gross loss of S$4.9mn was generated by thesegment for the quarter, due to both the reversal of gross profits recognized in prior years as well asheightened costs from subcontractors due to more complex shipbuilding projects.

2. Shiprepair and conversion saw revenue decline 21.3% y/y to S$43.0mn. This was attributed to fewerhigh-value jobs being completed. Gross margins compressed from 19.1% (2QFY2014) to 13.0%(2QFY2015) as well due to lower-margin projects undertaken.

3. Shipchartering revenues were stable, declining just 2% to S$17.7mn. This is partially due to OSVsbeing just 24% of the segment’s revenue. However, gross margins have compressed sharply from27.3% (2QFY2014) to 16.2% (2QFY2015). This was driven by higher depreciation expense from theincrease in vessels owned, as well as higher costs such as crew salaries and upkeep of vessels.

4. Engineering (the acquired VOSTA LMG business) which focuses on dredging products andcomponents saw revenue plunge 57.4% y/y to S$9.5mn. There was a slump in both new builds as well

as components ordered. Gross margins have decreased as well from 44.1% (2QFY2014) to 18.0%(2QFY2015). Management expects the dredging market to remain tepid.

Execution issues need to be resolved : Given the cancellation of 3 OSVs worth ~S$150mn total over thepast year, management needs to provide more clarity with regards to what went wrong. It was stated by themanagement that these vessels were relatively complicated, and that the design and equipment weresupplied by an external party. The first vessel (cancelled in 4QFY2014) was described by the managementto be a deep water Norwegian design and is of the DNV classification. Given the stress faced by deep waterassets (due to the high production costs) these OSVs may potentially be facing a soft market. Furthermore,the poor macro environment may give customers an incentive to cancel orders should ASL Marine be unableto deliver versus giving the firm more room / slack.

The utilization rates of the firm’s shipcharter vessels may a lso be an area to monitor. It was last disclosed at~60%. About a third of charters are long-term. Finally, ASL moved into the build-to-stock (“BTS”) model atthe end of 2013, in which the building of vessels is started before actual orders have been made. During upmarkets, ASL may have benefitted from better pricing from shorter delivery times, but during down markets

ASL will be bearing inventory risk. The firm has already stated that one of the reasons for the lower cashinflow from operating activities in 1HFY2015 (S$12.7mn) relative to 1HFY2014 (S$31.3mn) was due tohigher work-in- progress under the firm’s BTS program.

Order book and business outlook : The shipbuilding order book (from external customers) has fallen fromS$299mn (1QFY2015) to S$270mn (2QFY2015). This was fair given that the two OSVs cancelled wereworth S$95mn. Management did guide that the sharp decline in commodity prices have led to fewer orderssecured. They also mentioned being more prudent in taking new orders to maintain margins and reduce riskof order cancellations. The current shipbuilding order book is roughly 1x FY2013 and FY2014 shipbuildingrevenues. The shipcharter order book has also declined slightly from S$69mn (1QFY2015) to S$60mn(2QFY2015). Aside from the order backlog, the management mentioned opportunities in dredging and portconstruction business in Singapore and Malaysia. They also mentioned seeing interest in their non-offshore





related charter vessels.

Credit Profile : Net gearing currently stands at 112%, unchanged when compared to the end of FY2014.Though the firm raised a further S$50mn in bonds from its MTN program during the period, the proceedsfrom the bond issue was used to pay down ~S$30mn in short-term loans and S$20mn in trust receipts. Infact, total borrowings have fallen by about S$2mn during the period. Net gearing was already at 92% at theend of FY2013. This is in part due to ASL’s business model. Gearing is high as ASL extends 10%/90% or20%/80% payment terms to its shipbuilding customers. As of FY2014, shipbuilding generates the majority of

ASL’s revenue. On a net debt / EBITDA basis, leverage is more challenging as it increased from 6.4x(FY2014) to 9.8x (1HFY2015). This was due to the sharp fall in EBITDA resulting from the revenuereversals. It should be noted that there has been minimal immediate cash impact as a result of the revenuereversal. The two affected OSVs were shifted from construction work-in-progress to inventories. There maybe some impact on trade receivables or progress billings in excess of construction work-in-progress butlooking at the changes between 1QFY2015 and 1HFY2015 the changes were minimal. Looking forward,

ASL may get a hit if it sells the three OSVs at prices below their intended levels (though this will free upliquidity). Alternatively, ASL could charter out these vessels and wait for a better opportunity to sell.However, this would lock up capital, and current charter rates may not be attractive given the environment.

Liquidity Profile : The firm’s cash balance actuall y increased from $58.4mn (1QFY2015) to $68.3mn(2QFY2015), which is prudent given the current market environment. EBITDA / Interest coverage has fallenfrom 5.3x (FY2014) to 3.3x currently (due to the sharp slump in EBITDA). The firm is facing S$147.1mn inunsecured debt maturities and S$175.7mn in secured debt maturities over the next 12 months (as of end1HFY2015). Most of these relate to vessel financing. One positive aspect is that the firm’s bonds are not duetill March 2017 (S$100mn worth) and October 2018 (S$50mn worth).

Management remains aligned : One aspect to consider is that the founding Ang family controls about 61%of ASL’s outstanding shares . The Ang family occupy most of the management positions in the firm, andgiven their significant stake, they should remain aligned with other stakeholders. The firm has been throughcycles (such as the oil slump of 2009 resulting from a severe global recession) and yet managed to stayprofitable through those tough times. This should give investors some comfort.

Recommendation : We initiate coverage on ASL with an Underweight issuer rating. The firm’s decisionregarding the three OSVs remains pending, we expect to see more pressure on the firm’s order book andutilization of its charter vessels may be pressured due to the current environment. The engineering segmentlooks to be weak in the near future as well. However, we are Neutral on both the ASLSP’17s and

ASLSP’18s. The bonds are both trading below 95c (on the bid side), while the bid -ask spread is wide,reflecting the relative illiquidity of the market. We believe that the firm has some buffer before hard decisionsneed to be made. We believe that 3QFY2015 to be more telling, with the firm re-orienting itself to the toughenvironment.

Issuer NameCpn(%)

MaturityDate

AmountIssued (mn) Curr ISIN

YTW (bid / ask)

ASL Marine Holdings Ltd 4.75 28/03/2017 100.0 SGD SG6Z90991217 7.5% / 5.8%

ASL Marine Holdings Ltd 5.35 01/10/2018 50.0 SGD SG6TC3000008 7.3% / 6.3% Indicative prices from Bloomberg as of 11 March 2015





ASL Marine Holdings LimitedTable 1: Summary financials

Year ended 30th June FY2013 FY2014 1H2015

Income statement (USD mn)

Revenue 465.4 509.8 47.4EBITDA 99.3 73.1 24.0EBIT 60.2 26.3 1.1Gross interest expense 11.0 13.8 7.4Profit before tax 55.2 26.1 3.7Net income 44.5 22.1 4.5Balance sheet (USD mn)

Cash and equivalents 88.2 73.2 68.3

Total assets 1,124.8 1,216.9 1,183.1Gross debt 462.7 539.1 538.3Net debt 374.4 465.9 470.0Total equity 405.5 416.5 421.0

Total capitalization 868.2 955.6 959.3Net capitalization 779.9 882.4 891.0Cash flow (USD mn)

Funds from operations (FFO) 83.6 68.9 27.5CFO -112.1 27.6 12.7Capex & acquisitions 94.3 113.2 27.8Dividends 7.3 8.4 4.2

Adjusted FOCF -206.4 -85.6 -15.0Disposals 26.4 8.4 49.4Free Cash Flow (FCF) -187.4 -85.6 30.2Key ratios

EBITDA margin (%) 21.3 14.3 50.7

Net margin (%) 9.6 4.3 9.6Gross debt/EBITDA (x) 4.7 7.4 11.2Net debt/EBITDA (x) 3.8 6.4 9.8Gross debt/equity (x) 1.14 1.29 1.28Net debt/equity (x) 0.92 1.12 1.12Gross debt/total capitalization (%) 53.3 56.4 56.1Net debt/net capitalization (%) 48.0 52.8 52.7FCF/gross debt (%) -40.5 -15.9 5.6FFO/gross interest (x) 7.6 5.0 3.7EBITDA/gross interest (x) 9.0 5.3 3.3

Source: Company, OCBC estimates

Figure 1: Revenue breakdown by business line – FY2014

Shipbuilding55%

Shiprepairand

conversion20%

Shipcharter

14%

Engineering11%

Shipbuilding Shiprepair and conversion

Shipchartering Engineering

Source: Company

Figure 2: Gross profit breakdown by business line - FY2014

Shipbuilding7%

Shiprepairand

conversion48%

Shipcharter

14%

Engineering-2%

Shipbuilding Shiprepair and conversion

Shipchartering Engineering

Source: Company

Figure 3: Debt maturity profile

Amounts in USD mn As at 31/12/2014 % of debt

Amount repayable in one year orless, or on demand

Secured 147.1 27.1%Unsecured 70.8 13.0%

217.9 40.1%Amount repayable after one year


325.7 59.9%

Total 543.7 100.0%

Source: Company

Figure 4: Net debt/net capitalization

48.0%

52.8% 52.7%

FY2013 FY2014 1H2015






Otto Marine Limited: Credit Review

Signs of Stress Business Shift : Otto Marine Limited (“OTML”) increasingly generates most of its revenue from offshore

vessel chartering (2013: 52%, 2014: 68%). This is mainly at the expense of its shipyard business (2013:43%, 2014: 23%). The balance subsea business is small at 9% of revenue. The shift in revenue is bad formargins, as the offshore chartering segment currently has the worse gross margins. For 2014, though vesselchartering was ~70% of revenue, it is only ~30% of gross profit. Looking forward, the firm intends to pushharder into the cabotage protected Indonesian market via its subsidiary, PT Go Marine.

Recent Performance : For 4Q2014, we estimate that revenue has slumped to US$69.9mn fromUS$162.0mn, a decline of 56.9% y/y. For the quarter, we also estimate a loss before tax of ~US$45mn.

1. Shipyard segment saw the sharpest deceleration in the quarter, generating just US$17.5mn (external

sales) in 4Q2014 compared to US$107.0mn in 4Q2013. Management explained that FY2013 was atough comp for the shipyard business as it saw the sale of two substantially completed vessels. Thesegment gross margins (including internal sales) for the year actually improved from 5.3% (2013) to6.6% (2014). However, COGS jumped sharply from US$56.3mn (9M2014) to US$99.3mn (2014). Partof this was driven by the distinct increase in inter-segment sales (up ~US$23mn for the quarter). Theother reason was cost overruns, as mentioned by the management.

2. Offshore chartering estimated revenue for the quarter fell from US$46.3mn to US$45.3mn (externalsales) y/y. For the year, the decline of 8.2% y/y was also manageable. The management mentioned thatthe decline was due to lower utilization resulting from the docking of vessels for periodic surveys. Thesegment gross margins (including internal sales) for the year compressed sharply to 2.6% (2014) from11.8% (2013). The management attributed this to lower utilization rates as well as greater depreciationexpense (some vessels joined the fleet only later in 2013).

3. Subsea services revenue grew sharply by 32.8% to US$31.0mn while gross margins improved to

23.7% (from 21.3% in 2013). This was due to higher charter rates as well as the addition of two morevessels towards the end of 2014.

Profit warning : On the 10 Feb 2015, the firm released a profit warning for fiscal year 2014. Specifically, thefactors mentioned were 1) cost overrun for the construction of a vessel 2) low utilization and delayed chartercommencement for vessels. We have mentioned earlier how COGS jumped sharply in the shipyardsegment. Aside from the specific cost overrun due to one vessel, it is likely that the firm faces a decrease inoperating leverage due to the lower shipyard revenue. Regarding the challenges faced by the ship charteringbusiness, it should be noted that OTML has 3 high specification vessels capable of working in deep waters.Given that the deep water market is more stressed currently (due to the high cost of production), thesevessels might find it hard to find charters, or good charter rates. It can be seen that the gross profitattributable to the offshore chartering business actually fell from US$28.4mn (9M2014) to US$6.4mn (2014).This sharp fall would have accounted for about half of the losses seen in 4Q2014. The firm has actually beenmoving away from smaller OSVs (which might be more focused on shallow water markets). Ironically, theshallow water market has been more defensive relative to deep water markets given current oil prices.

Order book deceleration : The offshore chartering order book declined from US$470mn (3Q2014) toUS$322mn (4Q2014). This is about 1.3x 2014 offshore chartering segment revenues. Given that offshorecharters are the largest revenue driver, coupled with the weak environment, order book growth trends will bea good indicator of future performance.

Credit profile improvement : The credit profile for OTML has seen a sharp improvement in recent years,with gross debt falling from US$674.3mn (2012) to US$538.6mn (2014). Net gearing fell as well from 282%(2012) to 195% (2013). However, the improvement has halted in 2014 with net gearing held at 195%. Itactually deteriorated r elative to 3Q14’s 172%. This was due to the losses generated, reducing shareholder’sequity, rather than any increase in debt. Leverage remains elevated on an absolute basis. The firm was ableto support its level of debt partially via asset disposals over the last few years (~US$40mn each in 2012 and2013). Looking forward, we expect the pace of asset disposals to pick up (especially given the firm’s intent to





keep its charter vessels relatively new).

Liquidity remains tight : Operating cash flows net of capex & acquisitions swung back to negative in 2014.EBITDA / interest coverage is only 0.4x due to weak EBITDA generation. The firm had US$29.6mn in cashat the end of 2014. Comparatively, the firm has US$148.3mn in secured debt due in a year (most are likelyto be vessel financing) and a further US$15.5mn in unsecured debt due. The firm’s S$70mn in bonds aredue in August 2016.

The firm has been here before : It is worth noting that OTML only returned to profitability in 2013. Duelargely to order cancellations on new-build OSVs by Mosvold Supply, the firm lost US$56.1mn in 2011 and afurther US$113.7mn in 2012. In fact, if not for once-off gain from de-consolidating a loss-making subsidiary(Reflect Geophysical), 2013 would have been loss making as well. In the past, when the company neededliquidity, it did dilutive rights offerings. For example, OTML raised US$60mn via issuing shares at S$0.08 pershare in May 2012, and raised a further US$49.5mn via issuing shares at S$0.05 per share in August 2013.Much of the rights issue were taken up by the majority shareholder.

Tenacious majority shareholder : Mr Yaw Chee Siew controls 61.5% of OTML. This provides a strongalignment of interest. Mr Yaw is part of the family that controls the Samling Group (the same group that

recently acquired United Engineer WBL’s car -dealership unit for S$455mn). The bonds have a change-of-control clause which will trigger should Mr Yaw’s direct and indirect shareholding in OTML fall below 30%. Itshould be noted that Mr Yaw has extended a US$30mn loan to OTML at 7% coupon, and it is due March2016. In all, the firm has ~US$43mn in liabilities directly and indirectly owed to Mr Yaw.

Recommendation : We initiate coverage on OTML with an Underweight issuer rating. The firm remains intransition, entering the weak macro environment while recovering from the challenges faced in 2011 and2012. Its ship chartering order book would likely face pressure as well given the deep water exposure.Operating cash flow net of capex has turned negative. Absolute levels of leverage remain high while liquidityis tight. The firm’s lifeline was the majority shareholder injecting capital the last few years. This however isnot something that we can anticipate nor take for granted. As such, we are also Underweight theOTML’16s. Investors would have received half a year’s coupon, reducing the amount invested by 3.5c. At acurrent bid of 90c, the loss assuming purchase at par (upon issue) would be 6.5c. It may make sense for

investors to take the cards off the table.

Issuer NameCpn(%)

MaturityDate

AmountIssued (mn) Curr ISIN

YTW (bid / ask)

Otto Marine Services Pte Ltd 7 01/08/2016 70.0 SGD SG6SC2000001 15.2% / 11.8% Indicative prices from Bloomberg as of 11 March 2015





Otto Marine LimitedTable 1: Summary financials

Year ended 31th December FY2012 FY2013 FY2014


Revenue 374.4 512.0 355.9EBITDA -54.9 -21.0 13.0EBIT -77.3 -43.9 -18.6Gross interest expense 34.3 33.8 33.6Profit before tax -111.5 15.4 -39.2Net income -103.1 14.1 -41.5Balance sheet (USD mn)

Cash and equivalents 46.8 48.0 29.6

Total assets 1,177.8 1,281.7 1,213.5Gross debt 674.3 640.7 538.6Net debt 627.5 592.6 509.0Total equity 222.9 304.0 260.6

Total capitalization 897.2 944.6 799.2Net capitalization 850.3 896.6 769.6Cash flow (USD mn)

Funds from operations (FFO) -80.7 37.0 -9.9CFO 62.1 114.9 36.9Capex & acquisitions 64.3 78.6 76.8Dividends 0.0 0.0 3.3

Adjusted FOCF -2.2 36.3 -39.8Disposals 44.9 35.4 8.9Free Cash Flow (FCF) 42.7 71.7 -34.3Key ratios

EBITDA margin (%) -14.7 -4.1 3.6

Net margin (%) -27.5 2.7 -11.6Gross debt/EBITDA (x) -12.3 -30.5 41.5Net debt/EBITDA (x) -11.4 -28.2 39.2Gross debt/equity (x) 3.03 2.11 2.07Net debt/equity (x) 2.82 1.95 1.95Gross debt/total capitalization (%) 75.2 67.8 67.4Net debt/net capitalization (%) 73.8 66.1 66.1FCF/gross debt (%) 6.3 11.2 -6.4FFO/gross interest (x) -2.4 1.1 -0.3EBITDA/gross interest (x) -1.6 -0.6 0.4


Figure 1: Revenue breakdown by business line –FY2014

Source: Company


Source: Company







374.9 69.6%

Total 538.6 100.0%

Source: Company







Pacific Radiance Limited: Credit Review

Calm Waters for Now

Strategic focus : Pacific Radiance Limited (“PACRA”) continues to generate the bulk of its revenue in itsoffshore support services business (the chartering of OSVs). This contributed 74.4% of 2014 revenues. If weconsider Alam Radiance Inc and PT Logindo ( “Alam” and “Logindo”, two associate companies) as well,PACRA is even more dependent on this particular business segment, as Alam and Logindo generate most oftheir revenues from OSV chartering. In recent years, PACRA has made a strategic decision to penetratecabotage protected markets of Malaysia and Indonesia via its associate companies Alam and Logindo. Dueto limitations on the supply side, charter rates have held up well relative to freer markets. Though PACRAcontrols ~130 OSVs, about half are owned outright by PACRA while majority of the balance are held via JVswith Logindo and focused on the Indonesian market. PACRA also sells vessels to its associate, as a methodto keep its owned vessel new and relevant (~4 years old on average). The transactions are described as at

arm’s length, with third party valuators involved. Based on the last available disclosures, Logindo’s fleet isdistinctly older compared to PACRA’s. Involvement in cabotage protected markets may provide somestability given the weak energy outlook depressing demand and charter rates. For 2013 and 2014, JVscontributed about ~US$12mn each year in profit to PACRA.

Fair recent performance : PACRA saw its 4Q2014 revenue fall 12.2% y/y to US$37.2mn. The offshoresupport services business actually grew 12.1% y/y to US$29.7mn during the quarter (4Q2013: US$26.5mn).The weakness was in its subsea business, which slumped sharply to US$5.0mn (4Q2013: US$12.1mn). Themanagement guided that the slump in revenue was due to the two diving support vessels ( “DSV”) thatgenerate majority of segment revenue being dry-docked for enhancement works, in addition to beingunderutilized in 2H2014. These DSVs saw high utilization rates of 81% in 2013. However, these DSVspreviously saw strong demand in field development work. Given that field development work would havelikely decelerated due to current low energy prices, the utilization and charter rates of these DSVs might be

pressured going forward. Gross margin pressure : Gross margin declined sharply from 35.9% (4Q2013) to 8.8% (4Q2014). The

decline in profitability was driven by both the underperforming subsea business as well as soft conditions forthe offshore support services business. Excluding gains for asset disposals and share of gains from JVs, thefirm would have generated a pre-tax loss for the quarter. The pressure on full-year gross margin was entirelydue to 4Q2014. For 9M2014, gross margin was 35.7% (9M2013: 35.5%). For the year, net income increased22.1% y/y to US$69.4mn, driven in part by US$18.9mn in additional disposal gains relative to 2013 (the firmsold 8 vessels in 2014).

State of the order book : Unlike peers that disclose their current order book, the management chose todisclose only selected order wins during their earnings release. For example, during 4Q14’s earningsannouncement, the management mentioned US$200mn in new long-term charters for its fleet (it should be

noted that this number includes extensions). This would be ~1.5x of 2014 offshore support services revenue.

Future endeavours : The firm plans to build up its presence in other high-growth and protected markets. Ithas set up JVs in Australia as well as Mexico. Their shipyard in Singapore is expected to be ready in early2016, which would provide the firm with more control over its fleet maintenance program.

Capital commitments : The firm last disclosed (in its 2013 annual report) that it had US$281.5mn in capitalcommitments. These are all related to the purchase and construction of vessels. The firm has alsomentioned the delivery of 18 wholly and jointly owned newbuilds between 2015 and 2016.

Credit profile is strong, but with caveats : The net gearing of the firm has consistently improved from124% (2012) to 60% (2013) to 52% (2014). Net debt has been stable the last couple of years whileprofitability increased shareholder equity. It should be noted that the firm does have contingent liabilities dueto its JVs. The firm last disclosed (in its 2013 annual report) US$92.4mn in contingent liabilities due tocorporate guarantees provided to its JVs and associates. This was an increase of 76% compared to 2012.





We will only know the extent of such contingent liabilities when the 2014 annual report is published. If weassume that contingent liabilities are unchanged relative to 2013, and factor these in net gearing, net gearingwould increase t o 74%. It should be noted that PACRA’s largest JV, PT Logindo, of which PACRA owns35%, recently did a SGD-denominated bond issue on 23 Jan 2015. The issue size was S$50mn, and wasbacked by a SBLC from UOB. It is not yet clear what corporate guarantees PACRA provided, if any, tosupport the deal.

Liquidity is acceptable : The firm ended 2014 with US$101.4mn in cash. Comparatively, it has US$51.9mnin debt due over the next 12 months. Interest coverage is also fair at 5.7x. Operating cash flow net of capexwas US$24.5mn for 2014. It should be noted that the management was comfortable enough with the firm’sliquidity profile to declare a dividend of US$21.8mn.

Links with Swiber Holdings : Mr Pang Yoke Min, the majority owner of PACRA (directly controlling 66.75%of the stock), is also one of the largest shareholders of Swiber Holdings (“Swiber”). At the end of 2014, heindirectly controlled 10.31% of Swiber. When Swiber Holdings announced its dilutive rights issue at the endof 2014, Mr Pang joined Swiber insiders in underwriting half the share rights issued. PACRA had previouslydeclared Mr Pang’s investments in Swiber to be passive investments. PACRA did state that it had transactedwith Swiber in the past, such as selling vessels to Swiber. Given Swib er’s current financial challenges, there

could be further strategic endeavours between Swiber and PACRA in the future. Recommendation : We initiate coverage on PACRA with a Neutral issuer rating. Though absolute leverage

ratios are fair, we expect to see future deterioration given the weakness seen in 4Q2014 for both its offshoresupport services as well as subsea businesses. There remains the uncertainty with regards to the corporateguarantees it has provided to its JVs and associates as well. That said, we are Overweight the PACRA ’18s.The firm entered the weak environment with a fairly strong balance sheet as well as cash balance. It alsohas a manageable maturity profile. When compared to peers, the firm’s credit profile is distinctly stronger(even though it may deteriorate in the future). The bond is trading at a discount at 95c (offer) and shouldbenefit from the pull to par. The YTM of 5.92% (~400bps above swaps) is attractive as well.






Pacific Radiance LimitedTable 1: Summary financials

Year ended 31st December FY2012 FY2013 FY2014


Revenue 130.8 168.6 172.2EBITDA 42.9 61.0 51.7EBIT 18.9 36.0 23.8Gross interest expense 11.5 13.1 9.1Profit before tax 28.6 56.8 68.3

Net income 32.2 56.8 68.3Balance sheet (USD mn)

Cash and equivalents 23.7 64.9 101.4Total assets 570.8 745.9 839.5Gross debt 279.3 292.9 328.1Net debt 255.7 228.0 226.7Total equity 206.4 377.5 431.9Total capitalization 485.7 670.4 760.1

Net capitalization 462.0 605.5 658.6Cash flow (USD mn)

Funds from operations (FFO) 56.2 81.8 96.2CFO 17.3 29.2 61.3Capex & acquisitions 74.4 188.1 207.5Dividends 0.0 7.1 11.4

Adjusted FOCF -57.1 -159.0 -146.2

Disposals 79.3 79.0 169.1Free Cash Flow (FCF) 22.2 -87.0 11.5Key ratios

EBITDA margin (%) 32.8 36.2 30.0Net margin (%) 24.6 33.7 39.7Gross debt/EBITDA (x) 6.5 4.8 6.3Net debt/EBITDA (x) 6.0 3.7 4.4Gross debt/equity (x) 1.35 0.78 0.76Net debt/equity (x) 1.24 0.60 0.52Gross debt/total capitalization (%) 57.5 43.7 43.2Net debt/net capitalization (%) 55.3 37.7 34.4FCF/gross debt (%) 7.9 -29.7 3.5FFO/gross interest (x) 4.9 6.3 10.6EBITDA/gross interest (x) 3.7 4.7 5.7



Source: Company


Source: Company







276.3 84.2%

Total 328.1 100.0%






Source: Company Source: Company, OCBC estimates

Swissco Holdings Limited: Credit Review

In Transition

RTO complexities : Swissco Holdings Limited (“ SWCH ”) today is a different company when compared toend-2013. In the past, Swissco generated a third of its revenue from vessel chartering, and the balance inmaritime services (the sourcing of equipment and vessels for customers). This changed when at the end ofFebruary 2014, the merger of SWCH with Scott and English Energy (“S&EE”), a privately -held offshore rigcharterer, was announced. As S&EE shareholders became the majority shareholders of SWCH post thetransaction, the transaction is considered a reverse takeover ( “RTO ”). As a result, the financial statementsprovided since the close of the transaction is actually S&EE’s. As the tr ansaction closed on the 30 Jul 2014,3Q2014 statements only partially reflect the impact of the RTO. 4Q2014 was the first full quarter reflectingthe “new” S WCH.

JVs are the name of the game : S&EE’s core business was in the chartering of rigs. This was done via 50%JVs with other parties (for the initial four rigs that S&EE had, the JV partner was Ezion Holdings). Thesewere accounted for via equity accounting. As a result, S&EE had very minimal revenue as the bulk of itsincome was recognized via share of profits of associates / JVs. Post the RTO, the bulk of SWCH ’s income isgenerated via its rig chartering business. However, the bulk of the income was generated via JVs andassociate companies. As a result, the revenue for the segment is understated (relative to the incomegenerated). Since the RTO, SWCH has acquired four more drilling rigs and one more service rig (theyfunded part of the acquisition using the proceeds from the S$100mn bond issued in October). Currently, outof the fleet of nine rigs, SWCH majority owns two (and hence consolidates the revenue generated from thesetwo rigs on its income statement). These two rigs commenced their charters on 1 Oct 2014, and generatedUS$11.4mn in revenue for the quarter.

Recent Performance : For 4Q2014, SWCH generated US$37.3mn in revenue and a loss before tax ofUS$0.8mn. The loss was driven by ~US$23mn in Other Expenses recognized during the quarter, whichincludes US$15.4mn in goodwill impairment (non-cash, resulted from the sharp deterioration to SWCH ’soriginal business post the acquisition), US$5.3mn in MTM loss on an available-for-sale asset (it is the stockof a Singapore listed O&M company) and US$2.3mn in acquisition expenses resulting from the RTO. Theperformance for the vessel chartering segment was weak, declining 22.8% y/y to US$9.5mn. Themanagement has guided that utilization is ~65%, and that 2015 will see chartering pressure. The decline inmaritime services revenue was particularly sharp, falling from US$65.8mn (4Q2013) to US$16.1mn(4Q2014). It should be noted that the revenue from maritime services can be lumpy as it relates to the saleof vessels to customers. From August 2014 till end December 2014 (the period post the RTO), SWCH onlysold three vessels (of which one was done in 4Q2014). Given the souring of energy markets, the slump invessel demand is not unexpected. The management has mentioned that they stopped ordering vessels fortheir own vessel chartering business, which would allow them some leeway to take into their fleet vessels

originally intended for sale. Rig chartering to be driver : SWCH ’s future performance will be highly dependent on its rig chartering

business. For 2014, the segment generated US$28.9mn in profits after tax, helping to offset the lossesgenerated by the vessel chartering business (though the latter segment only factors the last 5 months of2014). The rig chartering business is typically stable, as rigs have multiyear contracts (for SWCH, theoutstanding contracts range from 2 to 7 years, including options). However, it can be lumpy, as revenue haltswhen rigs fall off charter or undergo surveys. The firm’s strategy is to invest in old jack -up rigs (shallowwaters focused). None of its rigs are built earlier than 1985. However, all of its rigs have been upgradedrecently (one was in 2007, while the rest was done post 2009) and all were certified upon purchase by thefirm. As the rigs are older, the cost to the firm is lower. Though charter rates are lower, it makes these rigsmore cost competitive when compared to newer rigs. Finally, the lower cost gives the firm more flexibility toredeploy these rigs. For example, one of the service rigs the firm had was previously a drilling rig. The firm

chose to convert it to a service rig as it offers better operating income. The firm last disclosed a contractvalue of US$710mn for its rigs (though part of it has already been realized). When questioned aboutpotential contract cancellations, the management stated that it is possible, but mitigated by SWCH ’s rigs





already low charter rates and high usage efficiency levels. The management alluded that there are other(higher cost, lower efficiency) rigs that end clients are more likely to cut. The management has alsomentioned that they continue to work closely with end clients to discuss terms. The earliest of SWCH ’s rigcontract expiries are two rigs in 2016.

Distressed sales opportunity : The management believes that the current slump will help right the supplyimbalance in the jack-up rig market. Contract drillers are cold stacking rigs (which reduces supply, and arecostly to start up again) while speculative buyers of rigs are bearing losses. The premium new jack-up rigmarket is facing significant pressure on its charter rates as owners have loans to service. That said, SWCHbelieves that the market has more room to fall and will avoid considering the purchase of new rigs in the nearfuture.

Credit profile mixed : On an absolute basis, SWCH ’s net gearing has improved to 83% (4Q2014) from104% (3Q2014). However, it should be noted that SWCH may be facing contingent liabilities from its JVsgoing forward. It was last disclosed that Ezion was solely providing the corporate guarantees for the JV rigswhich SWCH jointly owns with Ezion. Ezion was paid a fee to do so. This may change going forward (we willget more clarity when the annual report is published). As a mitigation, vessel / rig financing is typically 5years and amortizing. The SWCH / Ezion JV rigs have been on contract since January 2013 and would have

paid down sizable parts of their principal. Should SWCH purchase more rigs outright (rather than via a JV),leverage is likely to increase as well. The management has guided a target net gearing of 100%, though itmay go higher to the 120% - 130% region temporarily upon purchases. The management mentioned thatfinancing for rigs purchases remain available (at LTVs of 60 – 70%). The key is that these assets have to becash flow generating (on contracts). We believe that any future transactions (if any) will be sale and leaseback transactions.

Liquidity looks fair : The firm has US$38.6mn in cash at the end of 2014. Comparatively, it has US$61.3mnin secured debt (mostly vessel financing) and US$10.7mn in unsecured debt due over the next 12 months.The firm generated US$50.6mn in operating cash flow for 2014. Capex was steep at US$168.0mn, but mostof these were growth capex to purchase the rigs or to build vessels for sale / chartering. We expect 2015capex to be distinctly lower given the current market conditions. The firm was comfortable enough with itsliquidity profile to declare US$13.4mn in dividends for 2014. It only has bonds maturing in April 2018.

Recommendation : We initiate coverage on SWCH with a Neutral issuer rating. Though longer term rigcontracts provide some comfort given the stable cash flows, we believe that we need to know more detailsregarding the potential liabilities that the firm could be exposure to given that JVs hold majority of the rigs.This clarity should be provided with the 2014 annual report. In addition, the current net gearing looks to belower that the management’s intended target, which may indicate further growth capex potentially. We arealso Neutral the SWCH ’18s. The yield is attractive on both a spread (~570bps above swaps) as well asabsolute basis (over 7.5% for short-dated paper). There is no near-term maturity pressure as well. That said,given that rig chartering will be the main driver of profits going forward, and that most of these assets areheld off balance sheet, we will be more bullish when more clarity is provided. In particular, the order backlogfor SWCH’s more recently purchased rigs (the non -Ezion JV ones) is smaller and is an area that needs to bemonitored.






Swissco Holdings LimitedTable 1: Summary financials

Year ended 31 st December FY2012 FY2013 FY2014


Revenue - 0.0 65.5EBITDA - -0.5 21.3EBIT - -0.5 11.5Gross interest expense - 1.1 4.7Profit before tax - 15.4 15.5Net income - 15.4 15.9Balance sheet (USD mn)

Cash and equivalents - 0.8 38.6

Total assets - 45.9 548.3Gross debt - 0.0 250.8Net debt - -0.8 212.1Total equity - 43.0 254.3

Total capitalization - 43.0 505.1Net capitalization - 42.2 466.4Cash flow (USD mn)

Funds from operations (FFO) - 15.4 25.7CFO - -0.5 50.6Capex & acquisitions - 0.0 158.4Dividends - 0.0 0.0

Adjusted FOCF - -0.5 -107.8Disposals - 0.0 4.2Free Cash Flow (FCF) - -0.5 -103.6Key ratios

EBITDA margin (%) - - 32.5

Net margin (%) - - 24.3Gross debt/EBITDA (x) - 0.0 11.8Net debt/EBITDA (x) - 1.5 10.0Gross debt/equity (x) - 0.00 0.99Net debt/equity (x) - -0.02 0.83Gross debt/total capitalization (%) - 0.0 49.6Net debt/net capitalization (%) - -1.8 45.5FCF/gross debt (%) - - -41.3FFO/gross interest (x) - 13.4 5.4EBITDA/gross interest (x) - -0.5 4.5



Source: Company


Source: Company







178.7 71.3%

Total 250.8 100.0%

Source: Company







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Documents

OCBC Asia Credit - Offshore Marine Sector - Many Moving Parts (11 Mar 2015).pdf