Will banks back Ezra in joint-venture 'writedown'?

The market is split over whether Ezra Holdings can manage to garner the required financial backing to pull through the crisis emerging from a potential US$170 million writedown tied to its subsea joint venture (JV).

Prior to the announced writedown, observers had pointed to possible discussions being held to pull in a new investor for the JV, Emas Chiyoda Subsea (ECS).

But the massive impairment has raised doubts over the viability of the JV.

Ezra also faces an uphill challenge in winning over support from its creditors to deleverage its balance sheet in order to ride through a liquidity crisis.

The listed offshore and marine group said on Feb 3 a US$170 million writedown comprising investment in shareholders' loans and inter-company balances owed by ECS and its subsidiaries may be on the table.

The group owns 40 per cent shareholding interest in ECS.

Ezra's announcement came after its JV partners, Chiyoda Corporation and Nippon Yusen Kabushiki Kaisha (NYK Line), on Jan 31 issued warnings against writedowns totalling 51 billion yen (S$638 million) on their stakes in and loans to ECS.

The Business Times has, however, learnt that a potential white knight investor had been identified for ECS before the Japanese partners issued their Jan 31 warnings.

Subsea intelligence provider Strategic Offshore in its Frontrunner newsletter dated Jan 16 flagged talk over a new shareholders' deal at ECS that will see a fresh cash injection.

Strategic Offshore suggested the likelihood of more support from the Japanese, taking into account NYK Line and Chiyoda "have only relatively recently" bought into ECS.

Strategic Offshore had linked Mitsubishi Corp, NYK Line and Chiyoda's major shareholder to this new shareholders' deal.

The subsea intelligence provider argued that ECS's significant backlog in Saudi Arabia and Ghana can easily justify a further cash injection from the Japanese, though restructuring of the subsea JV's cost base also had to be on the cards.

Ezra had declined comment when approached by BT for a response to this market talk.

Neither of the three named Japanese parties could be reached for comments as at press time.

But the announced writedown by the three ECS JV partners has stoked counter-arguments against any possible Japanese cash injections.

Jeremy Punnett of Stamford Maritime noted in a blog-post that with all three shareholders taking drastic writedowns, it can only suggest that ECS "is not a viable business".

In a follow-up interview with BT, Mr Punnett qualified his statement by explaining that "the cash burn of Ezra's subsea business is very high" and that for the holding company to have any hope at "pulling through this downturn, their bank lenders need to write off hundreds of millions of dollars in debt".

Ezra has over US$1 billion of secured and unsecured debt repayable in one year or less as at Aug 31, 2016.

This far outweighed the group's equity to controlling interest of US$232.98 million.

Considering Ezra's highly geared balance sheet, Mr Punnett questioned how Ezra can continue to finance its contribution to a high cash burn subsea business.

Of the nine vessels on ECS's operating fleet, the multi-purpose construction vessel, Lewek Constellation, alone "will probably burn US$15,000 to US$20,000 a day" and each of the smaller vessels "another US$7,000 to US$12,000 subject to the terms of their standing charter-in contracts where applicable", he said.

But others suggested Ezra and ECS may have already commenced cost restructuring in order to stay viable.

On the defaults on two bareboat charter payments laid up against Ezra's subsea business for instance, Strategic Offshore said that these could open up the necessary window for renegotiation on the vessel charter rates, which are "very high".

The two affected bareboat charters were separately fixed between Ezra's then subsea unit, Emas AMC (now known as ECS), and its two trade creditors, Forland Subsea AS and Ocean Yield ASA.

Ezra said a standstill agreement is in force on the bareboat charter for Lewek Connector with Ocean Yield ASA while Forland Subsea has agreed to a temporary arrangement for Lewek Inspector to complete its project off Congo.

Ezra's Feb 3 disclosure indicated that the group is "in regular discussions with a number of its substantial creditors and has had dialogues with its key stakeholders, including financial lenders and trade creditors", but did not elaborate on its cost or debt restructuring plan.

Mr Punnett said that behind what he termed as "carefully worded PR (public relations) statements", bankers and lawyers are probably poring over documents and contracts, and finance departments frantically trying to put together models and cash balances under various scenarios that show hope.

While the market waits on Ezra to provide further clarity on its next moves, one consensus emerged from diverging interpretations of what may be going on behind the scenes; that is, Ezra in its hunger for growth may have miscalculated either the timing or financial exposure of its entry into the top-end of the subsea business.

Strategic Offshore described that particular market segment as "a high-stakes game" with big returns that may be years off under a multi-year downturn brought on by the 2014 oil price collapse.

Shares in Ezra are scheduled to resume trading on Feb 6 after the lifting of a trading halt that has been in force since before the market opened on Feb 1.


This article was first published on February 6, 2017.
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