Swiber bonds

After paying for the maturing bonds, Swiber’s debt remains at $551m. (see table). Assuming that all the bonds were issued at $250k per unit, it would meant that each bondholder held more than one unit of bond in all the tranches that had been issued. It could even be possible that some shareholders held bonds in several tranches.

For example, if the $100m bond that was issued on 10 April 2014 were to slice in units of $250,000 each, it would mean that there were 400 units available for sale. Assuming that all units were treated equally (pari passu) and given that there were only 268 bondholders for that tranche, it means that the bond holders hold an average of 1.49 units. This means that each bondholder had bought either one or two units of bonds for that tranche on average. In other words, their exposure is $250k and $500k. It may even possible that some bondholders hold three units or more. The same goes for the bond that that was issued on 18 April 2013, which averaged about 2.36 units per bondholder, meaning that each bondholder invested $500k or $750k. For the other issues, comparatively fewer bondholders could mean that they are corporate bondholders such insurance companies, finance companies or fund managers investing on behalf of their clients.

Given the relatively short tenor, it is likely that these bonds were bought with the intent to hold them till maturity. In other words, it would mean that there is no ‘supply’ in the secondary market. Similarly, I do believe that buyers are not quick to buy these bonds because there were many in the market with somewhat high yields at that time, including REITs and perpetual bonds. Furthermore, the quantum of $250k per unit may have put many potential bondholders off from buying these corporate bonds. In other words, there was not likely to be too much liquidity. The bid and offer prices are likely to be far apart. To certain extent, each new bond issue appeared to show higher promise than the previous ones such as offering shorter tenor or higher coupon rate. This might be a tell-tale sign of initial trouble. It may mean that the banks, often come in as secured lenders, were no longer as supportable, and the company has no choice but to tap on unsecured lenders via bond issues. In order to sell well, the conditions had to be extremely favourable to the bondholders. The yield of 6% to 7% looked extremely enticing in view that the banks were paying an interest of less than 1%. The shorter and shorter tenors would mean that the maturity dates would be clustered around the financial year 2017 and this would put a lot of pressure on the company going forward.

Perhaps many people might have overlooked one critical point. For the industry to continue to flourish, the oil price must stay consistently above a certain level. My take was that it should be around $75/$80 per barrel. (Even DBS CEO mentioned in TODAY, Tuesday 9 Aug that ”even at US$40-$45, many are cancelling contracts.”) Unfortunately, oil price level is not within their control. The high yield of 6%-7% could have probably blinded all the financial risks that potential bondholders are likely to shoulder. The promise of higher return made it a very easy sell for the bank relationship managers. Unfortunately, that high yield could be an indication that the company is taking on higher risks and therefore it has to promise bondholders of a higher return to match the risk. Unfortunately for the industry, the oil price has been dropping significantly and is currently languishing around $40 per barrel causing many contracts for offshore oil exploration to be cancelled or, in the best case, delayed. The cake is no longer sufficient to feed all the peripheral businesses surrounding the offshore marine industry.  Even if the oil price were to climb back to $50/$60 level, it is expected that shale oil drillers will be very active to recover their developmental costs for the last few years. This is likely to keep a lid on the oil price making it difficult for offshore drillers industry to re-enter the market.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.


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