Swiber Holdings Limited’s Painful Experience Shows The Importance Of Trust In Business

The Singapore stock market was treated to surprising news last Thursday when oil and gas services provider Swiber Holdings Limited (SGX: BGK) announced that it was going to liquidate its business.

Of course, we now know that the company has since back-tracked on its liquidation decision – it revealed last Friday that it has chosen to place itself under judicial management instead, after having talks with a major financial creditor.

In a separate announcement made on last Friday as well, Swiber said that it has been served various letters of demand that sum up to a total of US$50.5 million.

Swiber’s first announcement concerning a letter of demand was made on the evening of 8 July 2016; at that time, the claims amounted to ‘only’ US$4.76 million. A few more announcements on other letters of demand were subsequently made.

The appearance of the letters of demand – especially the first few – was initially puzzling to me for a few reasons.

First, Swiber announced just last month that it had secured US$215 million worth of projects in Qatar, Myanmar, and Vietnam. Its total order book as of 7 June 2016 stood at US$1.2 billion.

Second, Swiber is not an insolvent company, at least in accounting terms. As of 31 March 2016 (its latest financials), the company has total assets of US$1.99 billion and total liabilities of US$1.43 billion – this gives rise to equity of US$573 million.

Given the two reasons above, why did Swiber’s creditors take the drastic action of serving letters of demand? Upon further inspection, I realised that a few events could have caused some of Swiber’s creditors to lose trust in the company.

First, Swiber revealed on the morning of 8 July 2016 that it had not been able to make any progress on a major African contract worth US$710 million since the second-half of 2014 due to a fall in oil prices. There had been a delay of nearly two years for the project before Swiber revealed the development!

Second, the company revealed on 25 July 2016 that a US$21 million project in Vietnamese waters had been cancelled on 18 July 2016. Swiber did not make any announcements about it before 25 July because it deemed the contract’s value to be “immaterial.” Swiber only mentioned the cancellation of the Vietnam project after it was queried by stock market operator and regulator, Singapore Exchange Limited (SGX: S68).

It’s interesting to note that (1) Swiber’s first announcement on a letter of demand was on the evening of 8 July 2016, roughly 13 hours after it mentioned the African contract, and (2) the amounts claimed in the letters of demand started growing after the Vietnam contract cancellation was made known.

To the latter point, Swiber stated on 27 July 2016 that it had been served letters of demand for a total sum of US$25.9 million, up from the aforementioned US$4.76 million seen on 8 July 2016. And as mentioned, the claims served in the letters of demand to Swiber have since ballooned to US$50.5 million.

Given these, it’s a sign for me that trust is important in business – some of Swiber’s creditors likely had lost trust in the company, leading to the firm receiving more and more letters of demand.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange. The Motley Fool Singapore contributor Ong Kai Kiat doesn't own shares in any companies mentioned.