Date: May 18, 2017
The Industry faces more issues than help, especially with local banks, when caught in a challenging economic climate
The raging and persistent turbulence in the maritime sector has not only destabilised many industry players but minority retail shareholders and noteholders as well, who have suffered as restructuring efforts have been lacklustre and futile.
It started with Swiber; Swissco; Rickmers and then Ezra. Spotlight is now on Marco Polo Marine and Nam Cheong. What do they have in common? In their heydays, they were market darlings – courted by banks, followed by analysts and loved by shareholders and bondholders with insatiable appetite to “invest” in their future and share the rewards.
Risks were far from their minds. What could have possibly gone wrong?
According to the 2017 Menon Report, Singapore, the world’s second largest port, is the top maritime capital, ranking number one in shipping, ports and logistics, and attractiveness and competitiveness, particularly due to its strategic geographical position and being a strategic centre for commercial management. This is the third time Singapore took pole position, after 2012 and 2015. In this latest survey, Singapore also scored high in maritime technology (second place) and financial and law (fourth place).
Oil & Gas (O&G) players could only thrive in this environment. Banks were ever ready to bankroll acquisitions, JVs, new yards, new vessels and related Capex. With relatively “easy” financing, these companies borrowed from generous lenders, with scant regard for soaring gearing levels. After all, banks were their benevolent financial “partners”.
All is well when macroeconomic indicators are positive, with active trading activities, high oil price and strong demand for shipping, logistics and oil exploration.
But, when the global economy becomes weak with trade becoming sluggish, the shipping industry moves into its cyclical low and oil price hits historical lows and stays persistently low, it is a perfect storm for the maritime industry.
Financing from banks slows or dries up. To compound the problem, customers take longer to pay or stop paying, more and more vessels become idle with limited charters, contracts for new vessels are delayed or cancelled, the list of bad news gets longer by the day.
In this context, let us consider some of the issues facing the industry:-
|1||Structural Imbalance in Asset Financing
The average lifespan of a ship ranges between 20 to 30 years, but typical financing for these multi-million-dollar assets by Singapore financial institutions averages only five years. In Europe, banks offer 10-12-year financing for these vessels.
Why are the local banks so conservative? Naturally, banks want to recover as much as they can. Not willing to take shaper cuts, which are inevitable under such circumstances, when companies are heading towards insolvency if no new funds are available to them. Banks should be open to innovative refinancing ideas that may require a longer time horizon for them to recover their debt, for instance, pegging the repayment to cash flows or even considering debt equity swaps.
It is a clear issue of short-term financing for long-term assets. At five years, when these vessels are at their embryonic stage of useful life, our banks in Singapore have practically disregarded the balance of their good two-decade useful lifespan.
Can this structural balance be corrected? Are there any compelling reasons why Singapore banks should be so much more risk-averse than their European counterparts? Otherwise, maritime players can only afford to operate in the up-cycle or hold huge cash balance for the down cycle lest they fall victim to crippling cashflow woes.
|2||Corporate Life Support from Government?
With many marine sector players floundering under heavy debt and bond defaults, the Singapore Government, through the Ministry of Trade and Industry announced, in November last year, two unprecedented sector-specific one-off measures to provide a lifeline to these players and to stabilize the beleaguered sector. The Singapore Government will take on 70% of risk for both schemes with the banks taking on the balance 30% risk. But, are the banks really taking the measured risk?
Both schemes provide vital working capital and financing to help marine and offshore firms – from shipyards to offshore services providers, as well as oil and gas equipment and services companies and their suppliers, viz:-
Both schemes are designed to provide much-needed financial assistance to facilitate business sustainability for companies in distress. But, companies will only get the badly-needed funds if only the banks are willing to share the burden and the risk of the balance 30%. Hence, on paper, this scheme looks good but, in practice, it is very much in the control of the banks. Are these measures too little and too late for some of them?
It is now almost six months since these lifeline measures had been introduced. How many companies have been resuscitated? Perhaps, the banks should be asked to account for the loans extended, and to how many and to which distressed companies.
|3||Standstills and Haircuts are Now Necessary Evils in Financial Restructuring
For these distressed companies to continue operating under current depressed economic conditions, they need to channel whatever limited financial resources available to them to working capital in order to stay afloat.
Creditors, including bank lenders and bondholders, must provide a temporary respite in allowing a standstill in interest payments and capital repayments, where applicable, when they become due.
In addition, haircuts are now a necessary evil so that the distressed companies can effectively restructure their debts and financing for business sustainability. This, I understand, are not favoured by the creditors. Otherwise, the demise of these companies could be a self-fulfilling eventuality, given the lack of financial resources.
|4||Banks – Financier or Undertaker?
It has been said that banks are companies’ friendly benevolent financiers in good times but “undertakers” when the tide turns.
Whether this is a fair statement remains to be seen in the current financial crisis in the marine sector. How far are the banks willing to give-and-take as creditors? If they are unwilling to take a haircut, they are complicit in destroying our once robust marine sector.
As Singapore aspires to become a leading financial centre, the role of the banks have to be in sync with this overall objective as Singapore aims to attract international issuers of bonds and equity here.
|5||Judicial Management – Who Benefits?
Judicial management is a court-supervised administration process where a public accountant will be appointed as a judicial manager with the primary objective of coming up with a rescue plan for financially-distressed companies to be returned to financial health but they don’t come cheap. Unfortunately, more often than not, it is used as a means to sell off assets in a more controlled setting than liquidation – a form of slow liquidation.
It should be noted that, since judicial management was introduced in 1987, very few companies that were put under such judicial management had survived as going concerns! While our judicial management laws (which are in the process of being updated) are sound in theory, the evolution of the judicial management process and practice over the years has led to its current flawed state.
Senior lenders also often influence the company’s choice of judicial manager, which leaves that judicial manager in a position of potential conflict of interest. There is little or no direct day-to-day supervision to ensure that the judicial manager is acting objectively, in the best interests of the creditors as a body collective, and doing his/her job in reinvigorating the business.
Instead of trudging into the thick of complex and difficult negotiations with banks and trade creditors, noteholders, potential investors and even the regulators, in the hope of conceptualizing and executing a comprehensive debt restructuring plan, it is all too familiar a sight to see judicial managers selling off bits and pieces of the company’s business and assets (some of which are critical to the company’s survival) at distressed values, ultimately destroying value rather than preserving it. And all through the process, while shareholders see their equity reduced to zero, and while all creditors take haircuts on their debts, the judicial managers are the only ones who get their high fees paid in full.
It would be a worthwhile study to analyse who are the real beneficiaries of companies put under judicial management. The judicial manager who was paid handsome fees to manage businesses that they had no prior experience in managing? The larger creditors, usually the banks, who typically have stronger influence in the selection of the judicial manager? My bet is that the small creditors are the real losers, sharing the balance “financial crumbs”, if any. But then, the quick response by judicial managers could be that their actions are sanctioned by the law.
The failed experiment of judicial management in Singapore makes one question the benefits of such a so-call “creditor-in-possession” regime, as opposed to a “debtor-in-possession” regime such as the US Chapter 11 bankruptcy protection. One wonders whether the passing of Singapore’s new Chapter 11-styled insolvency laws (which is further described below) is an implicit acceptance of the shortcomings of judicial management.
|6||Our New Chapter 11-styled Insolvency Laws
The recent amendments to our insolvency laws are modelled after the powerful pro-debtor US Chapter 11 bankruptcy regime. The amendments have been passed by Parliament in March this year and are expected to come into effect soon.
Like Chapter 11, the new insolvency laws afford greater debtor protection, and introduces Chapter 11 concepts such as (i) enhanced moratorium protection, (ii) super-priority treatment for rescue financing, (iii) cram-down mechanism for dissenting class of creditors.
These changes, part of a series of legal reforms to make Singapore a more attractive global restructuring hub, are to be welcomed. A brave new course has been set. It remains to be seen whether the passengers on this journey, such as the banks and the professionals, embrace these changes or fight to hang on to the old.
|7||Liquidations Reduce Recovery Value for All Stakeholders
This is possibly the worst option and must surely be the last resort as no one wins! Whether the liquidation is managed by professional liquidators or the company, fire sales rarely fetch good value for asset sales.
In the recent round of management of distressed situations, the parties enjoying the best returns are said to be institutions specializing in liquidation and insolvency management.
From a country perspective, for Singapore to retain its pole position as a strategic maritime centre and from a sectoral perspective: for the marine sector to recover, all stakeholders must play their part in the recovery process in unity. This is especially so when we are trying to transform Singapore as a leading centre for international debt restructuring. We cannot turn the clock back for Swiber, Swissco or Rickmers; but the clock has started ticking for Marco Polo Marine and Nam Cheong. Of the 48 (out of 58) small to mid-cap maritime, offshore and engineering listcos on the Singapore Exchange as at the end of 2016, how many will be able to withstand this perfect storm? It is worthwhile for all stakeholders to note the motto: “United we stand, divided we fall”!
Founder, President & CEO
Securities Investors Association (Singapore)