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8/23/2016

SingaporefeelsaftershockofSwiber'sfall,EconomyNews&TopStories

SingaporefeelsaftershockofSwiber'sfall,Economy
News&TopStories

JobsandGDPgrowthatstakeifmoreoffshoreservicesfirms
becomeinsolvent
ThreeweeksintothesuddencollapseofSwiberHoldingsthefirstmajorcasualtyofaprotractedslump
inoilpricesconcernsareemergingoverpossiblespilloverintothelocaleconomyasonefifthof
manufacturingemploymentislinkedtothebeleagueredoffshoreandmarine(O&M)industry.
Economistswarnthatinsolvenciesofoffshoreservicecompaniescanpotentiallyaffectthecountry's
grossdomesticproduct(GDP)asthesectoraccountsforupto11percentofmanufacturing's
contributiontoGDP,and20percentofmanufacturingemployment.Some88,000workersareinthe
O&Msector,andthatisoutofamanufacturingworkforceof421,000,accordingtotheEconomic
DevelopmentBoard's(EDB's)2014estimates.Thatfigurehasroughlydoubledsince2002.
AsmoreO&Mcompaniesdownsizeorgounder,employmentwilltakeadirecthit,andthoseleasingto
theindustrymayendupwithvacantproperties,andbestressedfrommortgageservicing.

SEEWHOISTALKINGABOUTSwiber
9:53AM23Aug2016
Last30days:
Risingprovisionsandwriteoffsmaybeonthecards.Singaporebanks'loanstotheoffshoresupport
servicesectorareat23percentoftotallending.Initslatestsecondquarterearningsreport,OCBC
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8/23/2016

SingaporefeelsaftershockofSwiber'sfall,EconomyNews&TopStories

recognisednewnonperformingassets(NPAs)ofabout$370millionforoilandgasexposure,whilethe
bulkofUOB's$802millionnewNPAscamefromthesector.
FACTORSBEHINDSWIBER'SFALL
Thattheoffshoresectorhasbeenstrugglingwithhistoricallydepressedoilpricesisnotnew.The
protracteddownturnhadledtofewerprojects,reducedprofitmarginsduetointensecompetitionamong
offshoreserviceprovidersandcollectiondifficulties.
ButtheseindustrywoesweremagnifiedinSwiber'scase.

STILLUSTRATION:MIEL

ItstroublesworsenedasaslowdowninexistingprojectsduetotheIndianmonsoonseasonwas
compoundedbyadearthofprojectsinSoutheastAsia.Asbanksstartedcuttingtheirexposuretotheoil
andgasindustryearlylastyearwhenoilpricestanked,Swiberbeganfacingdifficultiesraisingnewfunds
fromdebtandcapitalmarkets.
Compoundingthenightmare,US$466million(S$625million)inrevenuesfromseveralprojectsfailedto
materialiseinthesecondquarter,and$205millioninnoteredemptionsmoneyborrowedfrombond
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8/23/2016

SingaporefeelsaftershockofSwiber'sfall,EconomyNews&TopStories

holdersweredueinJuneandlastmonth.
Givencurrentconditionsandglobaleconomicuncertainty,andthelikelihoodthatoilprices
willremainmoribundinthenearterm,therollercoasterridepostSwiberseemsfarfromover.
This,andotherfactorsresultinginarapiddeteriorationinSwiber'sfinancesinthesecondquarter,was
whatpromptedittostepupitspushforadealwithinvestorAMTC,whichinturnledtoaseriesofevents
triggeringitscollapse.
WhatcatalysedSwiber'sdownfallwasitsdecisiontotaketwoloansfromitsprincipalbankerDBSa
US$85millionloantoredeemaS$130millionnotedueonJune6,andaUS$61millionloantoredeema
S$75millionnotedueonJuly6,observerssaid.ThisisespeciallyafterthesecuritySwibergaveforthe
US$61millionloaneffectivelyleftitwithoutanyworkingcapital.
ButitscollapsecouldhavebeendelayedoravertedhadLondonprivateequityfirmAMTCcomethrough.
OnJune9,AMTCagreedtobuyUS$200millionofpreferencesharesintheSwiberunit,Swiber
Investment.Thiswouldhaveprovidedcriticalfundsforthecompanytostayafloat.ButAMTC'sfunds
nevercame,despiterepeatedassurances.Thatprovedtobethefinalnailinthecoffin.
Now,industryobserversarequestioninghowmuchpressurehadbeenbroughttobearonSwibertotake
theloanstoredeemthetwobondsthatwere,toanextent,arrangedbyDBS."Hadthebondsbeen
allowedtogointodefault,itwouldhavehadaknockoneffectonbothDBSandSwiber,becausetheir
fortuneshadbecomesointertwined,"anobserversaid.
ThesorrysagaoverSwiberhasshakentheoilandgas,aswellasbanking,sectorstothecore.
"Theoilandgassectorneedstorecalibrate,relookitsbusinessfundamentals,asoilpricesaren't
expectedtorecoverquicklyanytimesoon,"anindustrysourcesaid.
"Thesectorwillsurvive,butithastodealwithitsdebtburdens,whichwereincurredmainlyatatime
whenoilwasmorethanUS$100abarrel.Seeingthatthecostsofextractionforoffshoreoilandgascan
rangebetweenUS$35andUS$75abarrel,arelookatthebusinessfundamentalsisimperativewhenoil
isnowbelowUS$50abarrel."
CONTAGIONEFFECT
EvenbeforeSwiber'sfall,thelocalO&Msectorhadalreadystartedseeingashakeoutasorderbooks
declinedandcontractdeliveriesweredeferredorcancelled.Acaseinpoint:OttoMarineinJunereceived
adelistingofferforitsshares.TechnicsOil&GasfiledforjudicialmanagementandLincEnergyhas
goneintovoluntaryadministration.AuditorsforKSEnergy,EMSEnergyandRHPetrogashave
expressedconcernsoverthesecompaniesasgoingconcerns.
"Withestimatedtotalborrowingsof$25billion($6.6billioninbondsand$18.3billioninbankborrowings)
andwithpeakbondmaturityin2017,theriskisformoredebtrestructuringfromissuersinthesector,"
MsKumSoekChing,headofSoutheastAsiaresearchandprivatebankingresearchatCreditSuisse,
warned.
"Withoverhalfthe$18.3billionsectorbankborrowingfrommidsizedservicecompanies,Singapore
bankscouldseeloanlossesrising,incontrasttothecurrentreassuringnarrativefrommanagementthat
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SingaporefeelsaftershockofSwiber'sfall,EconomyNews&TopStories

assetqualityremainsstable,"sheadded.
Swiber,nowunderjudicialmanagementafterinitiallyfilingforliquidation,couldstartarestructuringof
companiesinthesector,MsKumsaid."Asallbondsareofsmallissuesizes,thereislittlesecondary
marketliquidityafterthenewsbroke.Investorsinthesebondsnowhavetoadoptawaitandseeasbid
priceshavevanished.ItisdifficulttoputavalueonanyliquidationofhardassetsofSwiberinthecurrent
toughenvironment,"shenoted.
IfmoreoffshoremarinecompaniesfollowinthefootstepsofSwiber,thiswouldfurtherdentinvestor
confidenceinbothequitiesandbonds.
"Bankloansgrowthhasbeeninaslumpforaperiod,reflectingdragsfrombothgeneralcommerceand
transport/storageandcommunicationsindustries.Theimpactontheeconomymaynotbeeasily
quantifiable,"saidMsSelenaLing,headoftreasuryresearchandstrategyatOCBCBank.
THENEXTSWIBER?
Ofthe19Singaporelistedoffshoreservicecompanies,10recordednetlossesinthefirstquarterofthis
year,Moody'sInvestorsServicenoted.Theseaccountedformorethan60percentofthetotaldebt
assumedbythe19offshoreservicecompanies,itsaid.
Thereare18withnotesduein20162018,includingKrisEnergy,NamCheong,MarcoPoloMarineand
AusGroup,andthesecouldbeathigherriskofdefaultifexplorationandproductionactivitiesremain
suppressed,accordingtoCIMBResearch.
Asobserverscontinuetowatchforthe"nextSwiber",manyoilandgascompanieshavealreadybegun
negotiatingwithbankstorestructuretheirdebts,andtohaveloosercovenants.
"Onlythosethatrealisethatoilpricescouldbe'lowerforlonger',andarecuttingcostsandfindingnew
waystodeployassetswillsurvive,"saidMrKellyChia,seniorresearchanalystatBankJuliusBaer.
"Companieshopingforaquickreboundandborrowingtoinvestevenmore,ratherthancuttingcostand
waitingfortheindustrytoturnaround,couldfindthemselvesintrouble."
Swiber'sabruptcollapsehascausedbankstoscrutinisemorecloselyalltheircontractswithoilandgas
firms."Swiberisalessontonottakethingsforgranted.Banksarenowdoublecheckingoncollateral
againstvessels,lookingatpaymentterms,charterrates,projectfinancing,andgoingthrougheverything
withafinetoothcomb,"anindustryanalystsaid.
"Whilethebanksareverywellcapitalised,itistheirneartermprofitabilitythatworriesinvestors.They
arequestioninghowconservativebanksreallyare,howtheyclassifynonperformingloans,howgoodis
theirassetquality,andwhatisthepotentialofmorebaddebt,"henoted.
RISINGUNEMPLOYMENT
Afterthegreatfinancialcrisisof2008,rigbuilderssufferedadearthofordersin2009and2010,butthen
reboundedveryquicklyfrom2011asoilpricessurgedtoUS$70levelsandhelpedthemachievehigh
orderbooks.
"TheO&Mindustryweatheredthefinancialcrisisrelativelywellandthebankswerecomfortablewiththeir
positionsthen...Wethinkwhatcaughtmostofthembysurprise(thistime)wasthattheycouldnot
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SingaporefeelsaftershockofSwiber'sfall,EconomyNews&TopStories

foreseeoilpricesstayingsolowforthislong,"MrChiasaid.Thisprolongedslumphasledmostoil
majorstotrimcapitalexpenditureandcutcostslastyearandthisyear.Asaresult,theindustryhas
sufferedasignificantdropinwork.
Notsurprisingly,O&Mcompanieshavebeenslashingheadcountsince2014.Mostareservicesupport
providerssuchasvesselcharterers,engineeringprocurementandshipyards,andaredependentonoil
majors'upstreamactivities.
Keppelalonehasalreadytrimmed4,900workersfromitsoffshoremarinedivisionand670subcontract
staffinthefirsthalf,leavingthemwith25,300and24,430staffrespectively,MsLingnoted.
CreditanalystNickWongofOCBCBanksaid:"Whatfatcompaniescancuthasalreadyoccurred.Now
theyhavetobecarefultoavoidcuttingintomuscle,whichwouldhurtthemwhenthecycleturns.Iexpect
toseemorecostcutting,butatamoremeasuredpace."
Whiletheoilandgassectoraccountsforjust5or6percentofoverallGDP,economistssaidtheknock
oneffectsforothersectors,includingfinancialandbankingservicesandmanufacturing,areworrying.
"Thebankingsectorisalreadyinconsolidationmode,withmanyforeignbankscuttingdownonregional
activityduetoriskaversioninfinancialmarkets,theslowdowninChina,uncertaintiesinEuropeafter
Brexit,andsluggishUSgrowth.Ontopofthis,there'stheprotractedslumpinoilprices,"DBSeconomist
IrvinSeahnoted.
Whenoilpriceswerehighin2007and2008,themanufacturingsector,particularlytransportengineering
(whichincludesaerospace,landtransportandmarineoffshoreengineering),wasgrowingstrongly.
"AtitsworstinDecember2015,theO&Mindustrycontractedby42percent,analltimelowdueto
plungingoilprices.Forthepastfewmonths,theindustryhasbeencontractingby30percenton
average,worsethanthefinancialcrisisperiodwhengrowthwascontractingby20percentforseveral
months.Atleasttherigbuildersstillhadhealthyorderbooksduringthefinancialcrisis,"MrSeahnoted.
Givencurrentconditionsandglobaleconomicuncertainty,andthelikelihoodthatoilpriceswillremain
moribundinthenearterm,therollercoasterridepostSwiberseemsfarfromover.
AversionofthisarticleappearedintheprinteditionofTheStraitsTimesonAugust17,2016,withthe
headline'S'porefeelsaftershocksofSwiber'sfall'.PrintEdition|Subscribe

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