Some banks going the extra mile to help offshore sector

Singapore - Banks are proactively managing their exposure to the beleaguered offshore and marine (O&M) industry, working with their clients beyond debt restructuring to help them tide over the current market trough.

But the O&M sector may still see creditors adopt a less accommodating stance, especially if industry conditions further deteriorate, market watchers warn.

Lim Lian Hoon, managing director of global business advisory firm Alixpartners, noted that banks with larger exposure to the offshore oil-and-gas sector are naturally keen to help find a solution to the financial stress imposed on industry players by current low oil prices. For instance, DBS involvement, as a major creditor to Pacific Richfield Marine (PRM), in the sale of vessels in PRM's fleet, is a sign of how far bank lenders may go towards extending a helping hand instead of shutting the door on debt-ridden O&M players.

DvB Bank, a specialist in international transport finance, is likewise looking at allowing room for O&M players to "breathe for another two years before oil companies (are projected to) start spending again", managing director Geir Sjurseth said at the recent Marine Money's Offshore Finance Forum. The Singapore event was attended by major financial institutions and banks including ABN Amro, DBS, OCBC, Clifford Capital, and Sumitomo Mitsui Banking Corp.

Mr Sjurseth cautioned, however, that the industry is only "in Phase One of the downturn", adding: "I don't think we have seen the full storm yet."

This is perhaps why banks and other stakeholders have yet to display "aggressive attitudes" - as "this is not a good time to pull the rug (from under the O&M industry)", said Erik Stromso, head of Pareto Securities Asia Pte Ltd.

While it may be rational for banks - along with shareholders, bondholders and others in the same boat - to weather the storm together, there will still be others adopting more hardline approaches, as one senior bank official told The Business Times.

O&M players also should not be expecting any "free lunch" as extensions of any financial assistance would come with caveats. This is not least because tiding over the industry-wide financial crisis calls for tackling market fundamentals, going beyond demand destruction from low oil prices.

One issue calling for a structural rethink is the spare capacity that has developed across almost every sub-segment of the industry - rigs and offshore support vessels have been identified as the worst affected.

While such excesses can be mitigated somewhat by the scrapping of older tonnage - cold-stacking of rigs is one sign of this taking place - the process of rebalancing will involve digesting hundreds of newbuilds due to join the global O&M working fleet.

Banks have already moved to stop any further build-up in capacity, with extensions on existing and new loans conditional on no further newbuilds, BT has learnt.

This, however, adds to the hardship yards are facing, with no further upside from newbuild orders as bank financing and also support from export credit agencies dry up.

Yards are also hit by deferrals and cancellations of newbuild orders from the O&M sector. Some respite may be offered by enlarged pools of funds made available by offshore leasing business units of Chinese state-owned banks for the purchase of any distressed assets. These offshore leasing units are increasingly looking outside China for opportunities - but they are also seeking asset acquisitions at bargain prices.

Yards can consider injecting equity into O&M assets on order from owners now struggling to secure charters and take deliveries of their newbuilds, Pareto suggested.

Even so, what price these assets should command remains a question. A lack of benchmark pricing for O&M assets - unlike more commonly traded assets in conventional shipping - means the industry has to find a way to work through price differentials. This sets back not only the resale of O&M assets, but also any merger-and-acquisition deals.

DBS has leaned on its strong position in the local O&M sector to facilitate transactions involving PRM assets, although some would argue that the resale prices tied to these sales (said to be pegged at above US$10 million per vessel for shallow-water anchor handling tug supply vessels) are more likely the exception than the norm especially if the downturn persists.

Foreign financial institutions, including Pareto and DvB, have already called for the industry to look into provisions for asset impairments - likely a necessary evil going forward if the oil price slump or the supply glut in the sector persists.

For the troubled O&M industry, the silver lining would be for the oil market to bottom out soon. A poll conducted at the Marine Money conference showed that most believe oil prices could rebound to US$40-60 a barrel later this year. A rebound in the O&M market would be in sight once oil prices show signs of a steady recovery, even if they don't shoot back up to over US$100 a barrel, said one observer.

This article was first published on Feb 5, 2016.
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