Reflecting on Singapore's Financial Woes

No surprises here – it's been a hard 2016, and we are in for a rough 2017, as sector-wide stresses continue to pound shipping and offshore players globally. There are few places to hide, especially with intra-sector investments and ownership. Singapore has not been spared. 

In August 2016, a survey carried by Singapore’s Business Times (which drew on data released on Bloomberg) showed the precarious financial state of many of Singapore’s shipping and offshore listed firms. The figures were ominous, but showed what we already knew – that shipping and offshore companies are badly over-leveraged. Of the 14 companies polled, 12 have short-term debt of over S$100m, 10 have negative/low cash flow, and nearly all are highly geared. For many shipping and offshore companies the reality of the new market equilibrium is setting in. 

Globally, seasoned players like OW Bunker and Hanjin have bowed, dragging many in their wake. In Singapore, Swiber Holdings (which operates construction vessels to support the oil industry), an ex-darling of the stock market has caved, Rickmers Maritime (which operates container ships) who has asked bondholders for a 60 percent haircut have been told “no” and an acceleration of payment has been demanded. It is possible that this could be the death knell, as it puts an end to any possible rehabilitation of the trust. 

Marco Polo Marine (provider of barges and tugs for coal, steel scrap and iron ores) is counting itself lucky as bondholders approved its proposal to delay paying S$50 million of securities initially due in October and previously announced that there may be a substantial doubt about the group’s ability to continue as a going concern due to growing financial difficulties (which it later clarified via a subsequent announcement, although it is uncertain if market jitters have been allayed by such announcement). 

Shipyards like Sembcorp Marine and Keppel Corp have seen profits tumble. Solid players like Ezra Holdings (an integrated offshore support provider) are also holding talks on potential fundraising. And the going will only get tougher next year with record debt falling due.

It is perhaps time to reflect on what went wrong – how did we get from boom to gloom? In the last couple of years, the shipping and offshore industry saw a rapid surge in growth built on record oil prices and, importantly, easy credit…a boom/bubble. Bond issuances were de rigeur and bankers were churning these out as quickly as the investors could devour them. Banks continued to lavishly support working capital and capital expenditure. Debt was freely used to grow (in many instances) bad businesses with diminishing revenues. Players (that ordinarily would not have survived the evolutionary race) had easy access to debt for investment based on growth which they could neither manage nor sustain. 

The plunge in oil prices was merely the catalyst that triggered the industry downturn. In fairness, this is not a “Singapore” problem – this scenario has been replayed around the world.

Is there any good in all this bad? This crisis forces us to relook at how business is done in the shipping and offshore market and is certainly a good time for market recalibration. There are anxious attempts by companies to pre-empt liquidation outcomes. 

But it is quite apparent that some companies will not (and perhaps are not meant to) survive this shake up. Some segments will survive better than others – it is no secret that lenders are steering clear from the offshore market in general, but still the bigger offshore projects such as drill ships and FPSOs that are on long term contracts may have brighter prospects. And dry bulk is…dry. 

There are also good pickings for less established investors previously (like the Chinese leasing houses) who are now in good position to invest into distressed assets such as larger container ships, LNG/LPG carriers and the higher value ships. Consolidation and merger and acquisition activities may also see an increase as stronger players take over the fledging ones. 

For most, board and management decisions are already under increased scrutiny from stakeholders and regulators alike. Proper balance sheet restructuring is required – reductions in borrowing, repayment of existing debt, and new equity raising – in order to ensure companies are in a good position to respond when economic conditions improve in the future. 

This may not sit well with some, and indeed many investors are going to lose money. Those companies that do not have sufficient financial buffers are bound to suffer and will probably close down – but this should be viewed as the market attuning itself to the new commercial reality. 

In order for restructurings to succeed, investors and creditors need to practice forbearance, banks will still need to continue provide liquidity (albeit cautiously) to only the most “worthy” players and causes, and investors will need to continue investing (whilst being more selective regarding the businesses they invest in). 

The commercial realities of today’s market make for grim reading but without this, even the most earnest of companies will not make it through the downturn. In exchange for continued support from investors, creditors, and bankers, companies (and their management) will also have to shape up. If possible, management should start engaging financial advisers (very) early, talk (and keep talking) to creditors, and look at all restructuring options in good faith. 

Nothing is gained by management being in denial and giving “vague” propositions and disclosures to stakeholders about “plans” to restructure their existing debt obligations. Cold hard truths will be needed and for some liquidation is not just one of a few options option - they will have no choice but to liquidate because any rehabilitation efforts will be useless. 

Management teams will also need to admit that they may be part of the problem. Staff reductions will probably be required as part of wider cost-cutting measures and senior leaders who have been caught short may need to move on. Competitiveness must be secured and this necessarily means trimming excesses in order to align business fundamentals with the market. 

If we learnt anything from the banking crisis, it was that investors and shareholders will not have much time for bonus payments as considerable losses mount. But this will have to be finely balanced with the need to retain and motivate good staff and management as their experience is integral to keeping any company afloat.

Detailed corrective plans are necessary to assure stakeholders, who are now facing significantly higher risks, that there will be improved long term structures to assure their returns. Many are still trying to find the right balance between risk management and reaping returns. Unfortunately in any investment in any sector there is risk as well as reward… and we are now seeing a considerable downside.  

How we come out of it and who will be left standing will depend greatly on the performance of industry leaders, the patience of creditors, and the oversight of the regulators.  

June Ho is a Partner at Wikborg Rein's Singapore office.