It was an announcement that caught the market by surprise. And, there might be a lesson in there for investors. On 28 July 2016, Swiber Holdings Limited (SGX: BGK) revealed that it had filed an application to wind itself up. Prior to that, Swiber stated it had received letters of demand for payments totaling US$25.9 million. To compound the issue, the services provider to the oil and gas industry also failed in a recent attempt to raise US$200 million from a preference share sale agreement. Then, came the next surprise. Swiber swiftly changed its mind about winding up and decided to place itself…
It was an announcement that caught the market by surprise. And, there might be a lesson in there for investors.
On 28 July 2016, Swiber Holdings Limited (SGX: BGK) revealed that it had filed an application to wind itself up. Prior to that, Swiber stated it had received letters of demand for payments totaling US$25.9 million. To compound the issue, the services provider to the oil and gas industry also failed in a recent attempt to raise US$200 million from a preference share sale agreement.
Then, came the next surprise. Swiber swiftly changed its mind about winding up and decided to place itself under judicial management instead. Interestingly, the judicial management decision came after Swiber had discussions with a “major financial creditor.”
The oil and gas conundrum
The oil and gas industry has been under pressure over the past year and a half and has dragged the banking sector in Singapore through the sludge as well.
As the Swiber debacle unfolded, DBS Group Holdings Ltd (SGX: D05), Singapore’s largest bank, revealed that it had about S$700 million worth of exposure to the oil and gas firm.
The swift implosion at Swiber caught DBS by surprise. In a recent press conference, DBS’s chief executive Piyush Gupta said that there was little indication the implosion would happen.
A tale of two different bank views
Earlier this year, Gupta had noted that the oil and gas support services sector – which Swiber belongs to – was under some stress.
But, Gupta said that 80% of loans DBS had extended to the sector were secured with assets with a loan-to-value (LTV) in the region of 50% to 60% of the assets’ latest appraised values. Gupta also cited an example of a liquidation of collateral where DBS was able to recover the full value of its loans. He said that the example gave him some assurance that the appraised values were realizable.
This assumption might be put to the test again at Swiber.
Elsewhere, Gupta’s counterpart at Oversea-Chinese Banking Corp Limited (SGX: O39) sounded less sanguine. At around the same time Gupta made his comments about the strength of DBS’s loans to the oil and gas support services sector, Samuel Tsien, OCBC’s chief executive, said that OCBC was trying hard to make sure that the vessels of the companies it had lent to remain employed.
In Tsien’s view, he would rather have the vessels be at work rather than have his borrowers be out of business and hence, liquidating their assets. OCBC thinks that having loans that are secured with assets may not be enough. Tsien was concerned that there might not be buyers for distressed assets in an oversupplied market.
So for investors interested in banks or oil & gas companies, will Gupta prove to be right in his assessment? Or will Tsien’s reasoning prevail?
I will take door number three, please
If you are feeling confused, there is at least one more person for company: The debacle makes my head spin.
To be sure, I can understand both Tsien’s and Gupta’s points of view. I appreciate each CEO’s reasoning. It is also within my ability to understand how banks operate. The same goes for oil and gas companies.
But understanding something does not mean I can make a good judgement on the situation. The range of possible outcomes are too difficult for me to judge.
As such, the best investment move for me is to avoid such questions altogether. I don’t feel like I have an edge in figuring out a situation like this.
Ergo, I would rather put the “Swibers” and “DBS-es” of the world into my “too hard” bucket. I think that investors should recognise that there is always a third door: You can choose to completely avoid particular companies if the understanding isn’t there. I would even argue that this should be the first question to be asked when looking at an investment opportunity for the first time.
The best investment lesson from the Swiber debacle might be the reminder that we always have choice of only investing in companies in which we can make good judgements on and avoiding those that we can’t.
For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.