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Learning From Swiber Holdings Limited: Is Cosco Corporation (Singapore) Limited Or Ezra Holdings Limited More At Risk?

Last Thursday, Swiber Holdings Limited (SGX: BGK), a services provider in the oil & gas industry, caught many investors by surprise when it filed an application to wind its business up.

The company then back-tracked on the liquidation announcement on Friday night by revealing that it has opted to place itself under judicial management instead.

Then just this morning, the company announced that its subsidiary, Swiber Capital Pte. Ltd, will be unable to pay an upcoming coupon payment for a S$150 million trust certificate (a type of loan) that carries a 6.5% annual interest.

Developments at Swiber thus far are an indication of the deep financial difficulties the company is facing. This got me thinking: What happened to Swiber and are there companies that have experienced something similar?

In my view, the story of Swiber’s fall had three key factors:

  • The company’s profits were declining – a profit of US$62 million in 2013 had become a loss of US$27 million in 2015.
  • The company had been generating negative free cash flow for many years. If we look back over the last five years, the company had negative free cash flow in each year from 2011 to 2014. The shortfall in cash was financed largely by debt.
  • As a result, Swiber’s debt level rose significantly. Its total debt to equity ratio nearly doubled from 111% in 2011 to 190% in the last 12 months. Meanwhile, its interest coverage ratio (earnings before interest & taxes divided by interest expense) fell drastically, from 3.9 in 2011 to just 1.2 in the last 12 months.

There are some other oil & gas companies that have seen similar trends as Swiber. So, are these companies headed for trouble too?

The tale of two companies

Two companies stood out above the rest during my search. They are Cosco Corporation (Singapore) Limited (SGX: F83) and Ezra Holdings Limited (SGX: 5DN).

Both companies have seen their profits decline over the past few years. Both have also been experiencing negative free cash flow. And, both have been dealing with their negative cash flow by piling on debt.

Right now, Cosco has a debt to equity ratio of 561% and has a negative interest coverage ratio (the company has a negative gross profit margin). According to its latest financials as of 31 March 2016, Cosco has S$4.5 billion in debt coming due by 31 March 2017 and yet it only has S$2.2 billion in cash. The company also spent more than S$180 million on interest expenses over the last 12 months.

Ezra has a debt to equity ratio of 151.8% and also has a negative interest coverage (this time, it’s because the company has a negative operating profit margin). Ezra’s latest financials are for the quarter ended 31 May 2016 and it shows the company having US$524 million in borrowings coming due by 31 May 2017; the company only has US$43.6 million in cash. Ezra also spent more than US$44.5 million on interest expenses over the last 12 months.

So as you can see, the financial pictures with Cosco and Ezra both look ugly and in certain ways, the numbers look worse for Cosco. Yet, I would be more worried over Ezra than Cosco.

This has to do with their parents. Cosco is a subsidiary of China Ocean Shipping Group, a state-owned enterprise in China. Ezra, on the other hand, counts its founder as its main shareholder and has no other major shareholders it can depend on for support during rough times. This likely means Cosco has more flexibility when it comes to obtaining capital to weather through the current storm.

Yes, Ezra does have a few options at hand. It can:

  • Secure bank loans to roll over the debt that is coming due
  • Renegotiate the terms of its debt
  • Sell its assets to pay off debt
  • Issue new bonds to roll over the debt that is coming due
  • Issue new shares to pay off debt that is coming due

But as Swiber has shown, it might not be as easy as it looks when it comes to raising capital. Right now, Ezra is at the mercy of its bankers, bondholders, and shareholders. Let’s see how it navigates through the storm.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.