…the orginal title of this article was:
Please Let Me Scream
[li]Published on November 16, 2016[/li][/ul]
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[FONT=inherit]Roy DonaldsonThriving on New Challenges[/FONT]
[FONT="] [I][B]Havila[/B][/I] has now stated there is no further contingency available if proposed restructuring is refused again; next stop, bankruptcy
[I][B]Swissco[/B][/I] has asked to move into Interim Judiciary Management
[I][B]Swiber –[/B][/I] well, let’s not discuss Swiber; but it’s not looking good even with Judiciary Management
[I][B]Olympic Offshore[/B][/I] has continually been given more time to restructure but to-date there is no resolution
[I][B]Island Offshore[/B][/I] has also been given more time to restructure debt
[I][B]Tidewater[/B][/I] continually seeks Chapter 11 protection whilst not yet having entering into it.
[I][B]Farstad [/B][/I]- in my opinion one of the best management teams in the world, is still struggling to restructure with a current deadline I understand of 20th December. Merry Xmas Karl!
[I][B]Viking[/B][/I] has restructured and is apparently solvent until 2020 but unless something miraculous happens before then, it’s hard to see how they will remain so
[B]Seacors [/B]Charles Fabrikant is making more moves with [I][B]Gulfmark[/B][/I] than Ed Balls did in Strictly Come Dancing
[I][B]Eidesvik[/B][/I] today states there is little chance of repaying US$35m bond in Q3 2018 and may start to default
36% of [I][B]Norwegian bonds[/B][/I] are in default meaning there is more to come.
If you buy a house that has devalued and through unemployment you cannot pay the mortgage, the bank will sell the property for what they can get and then hold you liable for the rest. If you cannot pay, they make you bankrupt. Why should the OSV industry be any different? Of course, in some tragic cases, they are no different. But the majority of OSV operators have banks and investors who would rather ‘take a haircut’ in the short term to try to ensure their losses are not 100%. For financiers, securing 50% today and allowing reinvestment of funds elsewhere must surely be a better proposition than losing more over the longer term. I certainly would rather be looking [I]at [/I]the money than looking[I] for[/I] it.
For vessels with no further security, banks may look at a debt to equity swap but that is still high risk, dilutes the company and makes them part owners whilst waiting a very long time for a return on their investment - if at all.
The sensible solution for all, is for financiers to take what they can get now - even if it’s marginal. Nearly every operator are making a loss and without top-ups to working capital will inevitably run out of of cash. Vessel valuations are at 40% of what they were in 2014. But some are retaining high vessel values on the principle of visibility of earnings. But this will only defer or worse exacerbate the problem when the contract is eventually terminated, that is unless of course depreciation models are significantly accelerated and who has the balls to do that?
We increasingly hear of consolidation proposals. But with limited buy-outs or take-overs, consolidations will be few and far between. And even then, in such a fragmented industry, there will always be an operator in some far-off distant land ready to undercut. In my view, meaningful consolidations within the industry as a whole would only work if they were set up as cooperatives, for example in Norway where it has been mooted previously. But even there, Statoil would still have to comply with cabotage legislation elsewhere.
Let’s face facts. Delaying amortisation only delays the inevitable. Impairments have to be taken eventually. If the delay allowed is three years down the line, vessels will still have depreciated by a minimum of afurther 10% of today’s already low prices.
Oil will keep coming, it will keep flowing. But not at any price. Management costs for OSV operators will need to be lower, crewing costs will need to be lower, the whole enterprise needs to be leaner and fitter. For example, a focused company offering a low equity DP2 vessel for US$7k per day with willing employees should be able to make significant profit - and immediate sustainability for the industry. New US$40m vessels will have to wait their turn.
With OPEC meeting at the end of the month, oil prices will inevitably rise but even slight procrastination may also see them plummet. Either way, however, it will have no significant impact on the OSV operator. It will simply mean more or less income for the IOCs and oil producing countries.
We are in a new world and we must embrace it. I am afraid that those that bought new vessels between 2011 and 214 are in for impossibly challenging times unless they take significant impairments. And those that are still putting down deposits for new vessels in the belief that the operator will pay more of a charter rate for new steel are living in cloud cuckoo land. I am afraid these guys and their investors are doomed.
On a positive note for the stalwart operator, it seems inevitable that shipbuilding will fall away for a few years and the second hand market will improve. This will put some order and ‘normality’ back into the system. Such buoyancy will be enormously valuable in stabilising supply and demand in assets but it will not bring a return to the ‘good old days’ until at least 2025, in my opinion.
I read constantly of bond debt due for maturity but with no explanation of how it will be repaid, especially as the assets secured against today are only 40% of original value. Bilateral debt is a little better but what is lost is that many operators have a minimum of a 30% bullet payment of the full debt on maturity. Hence if a company borrowed US$350m in 2015 they will have to repay around US$150m in 2022 to actually own the vessels. If today’s value is 40%, what might it drop to in 2022? With no or limited profits or means to finance, the task seems impossible.
Finally, my favourite: perpetual bonds. An interest coupon is paid, but as they have no firm maturity date, these bonds have no repayment commitment. Under IFRS rules, as with Senior Notes, they are referred to as equity, not debt. And so they make no difference to the all important covenant of Nett Interest Bearing Debt to EBITDA. Nonetheless, these bonds surely still represent a future debt liability to the company?
Eidesvik are a focused operator with 25 of the most modern vessels in the industry; many of which have fuel-saving LNG ability, yet they freely admit that they face significant challenges in 2018 when they have to meet a US$35m bond maturity. Those of us with our fingers on the weak OSV pulse will know of fragmented fleets world-wide with bond repayments of up to ten times that liability in the same period. And yet, and yet… despite the clear and ever-increasing financial threats facing the bulk of the industry – as the list above indicates – there are too many ostriches still with heads buried deep in the sand. At best, investors are still being told by some that the company is facing challenges; but at worst, finances are well under control covenant’s are being met and there is enough cash in the bank to see us through this crisis, but they still speak of restructuring.
I would never wish the industry harm; it is my life’s blood. But I believe it is not far short of criminal as we are seeing in Singapore (amnd other areas) for some in the industry to continue to hide the reality of the situation from the investors. These operators are doing the industry as a whole no favours. It is vital that everyone meets their true debt head on. Renegotiate, renegotiate, renegotiate. What’s happening to the OSV industry today makes me want to cry in despair; but it’s the long-necked scammers that make me want to scream.
Here are a couple of good comments; there are more at Linkedin
Larry RigdonDirector at Professional Rental Tools, LLC[FONT=inherit]RoyI have just been in Singapore and Singapore, Inc. is alive and well. The banks are hoping the OSV and drilling rig owners will see a turn around and the banks don’t want to take the assets and have the cost of layup. The Government is not pushing the banks to act because they don’t want to have to deal with weakened banks going forward after taking huge write-off. T[FONT=inherit]he Owners are just going with the flow of largesse offered by the banks and hoping for a miracle to occur. All in all, a symbiotic relationship among the Owners, Banks and Government.Norway Inc. is not dissimilar.The public companies without effective Government support are doomed because the Singapore Inc and Norway Inc. companies are going to be able to operate at or below cash flow breakeven for as along as the existing symbiotic relationship provide on-going debt relief! I agree with you analysis generally, but making a lot of money at $7,000 per day with any OSV today is simply not possible! Must be a typo in your text.Hope you are doing well. It has been a few years since I last saw you in Baku.[/FONT]
Roy DonaldsonThriving on New Challenges[FONT=inherit]Larry long time and great to hear from you. I have to rise to you superior knowledge and I accept that I should not be so regionalised in my comments however I heard on a conference call today from a CEO of a well know global operator that this is a cyclical downturn in the same way we witnessed 1985, 97 and 08 with significant improvements coming in mid 2017, I just cannot[FONT=inherit] agree to that I think that the solutions to todays problems will be as much welfare as they are economically driven. This is far more severe and different, we will see support in some districts and specifically the welfare states of Singapore, Norway etc. I still believe this down turn will have more lasting effects especially when it comes to vessel values.[/FONT]