Shipping, Oil and Gas industries – Where is the light?

The shipping and oil and gas industry
are in dire straits.
Hanjin Shipping – No longer too big
to fail!
The biggest news lately is the
collapse of Hanjin Shipping leaving so many ships, cargo and crew stranded
globally. Even the state-owned company is clearly “not too big to fail”. Korean
government decided not to inject anymore capital in the mismanaged company
burdened with >$5 billion in debt.
Hanjin’s collapse is considered by some analysts to
have the same detrimental impacts in the shipping industry liken to that of
Lehman’s brother’s to the financial industry. Almost over 80 ships are released
into the market now. Clearly there are no signs of any short-term recovery due
to the over-supply.
So do you think Temasek made the
right decision to sell NOL?
Oil and Gas – long harsh winter
Almost two years of depressed oil
price has sent shivers down the spines of so many O&G / Offshore and Marine
related companies. While oil price rout is the main culprit in the 
beginning,  the biggest problem now is no longer the oil price
per se for many companies in Singapore. Just like the shipping industry, the main problem is the hugely oversupply of the
rigs and vessels.
Even if oil price is to soar for
whatever reasons, International Oil Companies (IOC), National Oil Companies
(NOC) will be prudent in their new Capital Expenditures (CAPEX) plans and Final
Investment Decisions (FID). The new projects trickled into the industry will not
be sufficient to absorb the largely oversupply of rigs and vessels, which were
mostly speculated during the height of the oil price as well as during periods
of unusually low interest rates after the GFC. Mind you, there are hundreds of
vessels and rigs combined now still stuck in the shipyards all over the world,
let alone the many more that are cold-stacked near-shore.
It could have been worst (or it will
be even worst!)
The biggest fallen stories so far are
still only the judicial management of Swiber and Technics.
Frankly, being in the industry, I
think it is under-stated. There are seriously more companies in trouble than what
is shown on the surface. We are only talking about the listed entities. How
about the private ones?
The single biggest key reason why
many O&G companies are still hanging on precariously is in my opinion, due
to the leniency of the banks. The question is how long can banks support more
and more debt-ridden and mismanaged companies?
Even Korean government is already
letting Hanjin go?
Borrow more to redeem what was already owed
One example of bank providing the
lifeline is shown in the company Mencast Holdings. The company
redeemed S$50 mil Fixed Rate Notes due this month. In order to redeem the “Notes” to avoid default, Mencast
borrowed more money.
According to announcement on SGX, on 19 August 2016
Mencast entered into the following banking facility agreements with UOB. 

1  
(i)  secured loan facility of up to S$50.0
million; and
2  
(ii)  secured facilities of up to S$24.9
million, comprising term loan facility, trade facility and money market credit
facility,  

The funds will be used for the redemption of the
outstanding bonds, refinancing of certain existing loan facilities, general
trade and working capital purposes.

Of course bank will not just lend.
There is a condition relating to each
of the Banking Facilities named
(the “Relevant Condition”) whereby a mandatory prepayment event may
occur if:

(i)  the controlling shareholder of the Company (who is also the
executive chairman and chief executive officer of the Company), Mr Sim Soon
Ngee Glenndle, fails to own and control, directly or indirectly, at least 10%
shareholding in the Company and certain subsidiaries; or

(ii)  Mr Sim Soon Ngee Glenndle loses management control of the
Company and certain subsidiaries.

The aggregate level of facilities which may be
affected by a breach of the Relevant Condition (including facilities which will
be affected as a result of cross defaults) is approximately S$74.9 million
(excluding interest) as at the date of the announcement. 

Earlier in June this year, Mencast was served a
Writ of Summons and a Statement of Claim by S & W Engineering Pte. Ltd. and
Mr Wong Chung Kang seeking a sum of S$2.35 million allegedly due from the
Company.

In another instance, Marco Polo
has also just convened an informal meeting
exploring various options
relating to the impending maturity of the S$50 mil Notes due 2016. They are in
discussion with the Noteholders to proceed with an exercise to solicit for
consent from the Noteholders for an extension of the maturity date of the
Notes.
Rife with Legal issues
During the good times, nobody really
bothers too much about the details of the terms and conditions. When times are
good, trust is easily established because everyone’s attention is only on
harvesting. During bad times like now, relationships or friendships are
forgotten. Many companies are already resorting to legal methods in any attempt
to keep oneself afloat. Ethics…..Nah…. It is all about survival!
Some examples of legal struggle as
follows:
Marco Polo Vs Sembmarine – Breach of
newbuiild rig contract?
Nam Cheong Vs Petra Offshore –
cancellation of newbuild vessel contract
Pacific Radiance Vs Chinese yard –
refund of installments for newbuild vessels contracts
Otto Marine Vs Hoe Leong – winding up
application for debts owed.
CAD is also involved now.
The hottest boardroom tussle recently
is involving SBI Offshore. The company has appointed new directors and
lodged a report with the Commercial Affairs Department (CAD) in relation to
possible breaches of securities laws and other offences related to transactions
involving a former associate company. Read : “SBI Offshore lodges report with CAD over possible
breaches of securities laws”

So the tunnel is dark, with no signs of light ahead in the short term. 

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