Bankruptcy filing being mulled for top client of Keppel and SembMarine

Bankruptcy filing being mulled for top client of Keppel and SembMarine

AS investors of Sete Brasil - the largest single client at present for deep-water rigs being built at Sembcorp Marine (SembMarine) and Keppel Offshore & Marine (Keppel O&M) - meet to decide if the charter company of rigs should file for bankruptcy protection, a broker report suggested that the current woes mean only three out of six rigs for Keppel, and three out of seven rigs for SembMarine, will be built.

OCBC Investment Research also warned that if, at worst case, there is a complete cancellation of all the Sete rigs on order, there could be impairments for the rigs that Keppel and SembMarine are building for Sete, should they be marketed for sale to others subsequently as the rigs are unlikely to fetch the original contracted price of about US$800 million each.

Shares in Keppel Corporation, the parent of Keppel O&M, closed at S$5.82 on Thursday, down 41 Singapore cents or 6.6 per cent in heavy trading, while shares in SembMarine closed 10 cents lower at S$1.55.

The falls came as oil prices tumbled below US$33 a barrel, attributed to rising US energy stockpiles. Asian markets were also rattled by China's stock market turmoil and weak currency.

A Bloomberg article on Thursday said Sete Brasil's investors will meet this month to decide whether Sete Brasil will file for bankruptcy protection.

Bloomberg reported a source saying that under Brazilian law, the company might also avoid liquidation through a restructuring instead.

Sete Brasil has been dogged by a near two-year corruption investigation that also involved its only client, state-run oil producer Petrobras. The scandal has been among the factors that led to impeachment proceedings against Brazilian President Dilma Rousseff. Sete Brasil has now hit hard times after it failed to sew up long-term financing from state development bank BNDES amid allegations of kickbacks. Petrobras has also dropped overall investments.

OCBC's report noted that Keppel and SembMarine have collected 28 per cent and 40 per cent of the total contract value. The brokerage believes that Keppel will continue to build the first three rigs, and this would require US$1.3 billion in working capital.

This pushes its net gearing from 0.5 time now to about 0.65 time - while high, this is still below Keppel's investment-grade comfort level of one time. Asset sales would also help to manage gearing, it said.

OCBC said any provisions for doubtful debts from Sete would unlikely to be significant at this point in time, given that the projects are slightly cashflow negative currently, and should be one-off.

"However, the bearish sentiment caused by negative news would, by itself, be enough to drive the share price down significantly."

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