The Swiber Holdings Limited (SGX: BGK) episode has left DBS Group Holdings Ltd (SGX: D05) in a pickle.
It all started in late July this year when Swiber surprised the market by filing an application to wind itself up. Then, came another surprise – the company changed its mind about winding up just a day later and decided to place itself under judicial management instead.
At the moment, Swiber is not out of the woods yet. As of 8 September 2016, the firm reported that it has received over US$230 million in outstanding claims. As for DBS Group’s role in this, Singapore’s largest bank revealed in its 2016 second-quarter earnings presentation that it has total exposure of S$721 million to Swiber as of 31 July 2016.
While the situation for Swiber looks dire, Piyush Gupta, the chief executive of DBS Group, recently cautioned against using Swiber as a bellwether for the oil and gas industry. He said during the bank’s second-quarter earnings presentation:
“Swiber is not representative of Singapore’s oil and gas industry. So, all of the analysis that has been done – saying hey, Swiber means the industry is this thing, is actually flawed for a simple reason.
The bulk of the Singapore oil and gas industry are people who own vessels and then, they charter out the vessels for servicing. They charter vessels to move people up and down, to move supplies up and down, to go and service the platform, go and service the oil rig – a large part of that is production activity.
So, the rigs are there, oil is being produced, somebody’s got to go and maintain the rigs. So, the bulk of it is that you own the vessels and you charter out the vessels. What that also means for the banking industry is that the bulk of the financing is secured. Financing vessels which have value.”
In Gupta’s opinion, the bulk of Singapore’s oil and gas industry revolves around vessel owners and the chartering of vessels. He went on saying that Swiber’s business is different from most of the other players in Singapore’s oil and gas industry:
“Swiber is one of a handful of names in Singapore which do a different business. And that is a contracting business. So, what they do is that they go and actually work to lay the pipeline, build the platform – and they are a contractor.
The best way to think about them is exactly as you hire a contractor to do your house. A maincon [main contractor]. They are the maincon who comes and do this thing.”
Gupta further explained Swiber’s business and how DBS Group fits in:
“So, typically they get a project – they have to go and procure the supplies, they first have to issue performance bonds. Like a contractor does.
They will issue letters of credit, procure the supplies, they will go and hire people, they will go to the site, they will lay the pipe, they build the platform, they invoice, the invoices are either disputed or there will be a variation order, the invoices are then get accepted, the company will then pay the receivables over a period of time.
So, typically, this end-to-end contract will take two to three years for them to get it done. The nature of Swiber’s business is therefore quite unusual and dissimilar to our general exposures. Because we finance them in doing this contract work.”
Gupta also went into detail on how DBS Group manages its Swiber accounts. In essence, the bank isolates the different accounts when helping to manage Swiber’s financing needs:
“They have been a client for a long time. They get this projects, we isolate the project or that customer. We set up accounts for them only for this thing. This is not a checking account. We help them issue the performance bond. And we issue the letter of credit to buy the stuff they need to buy and then we help to finance the receivables from their end customer.
And all of this is in a separate dedicated account. So, the money comes in from the customers, and goes out to the payables.”
Gupta also touched on the two key risks that the bank has taken for Swiber:
“Because of the nature of this, it is generally intended to be low risk because really, you are winding up in taking only two risks. You are taking execution risk, you are taking a risk on the company to finish the contract. Exactly, as you take on any contractor for a house.
And you are taking counterparty risk. That end customer is not somebody who is going to default and is going to pay on the contract.”
In summary, Gupta gave his take on how Swiber is different from most of Singapore’s oil and gas industry. He also explained the role that DBS Group played, and the risks taken for this case. Investors will have to decide if his argument holds water.
The Swiber episode is likely to drag on for some time. It’s worth noting that DBS Group has a S$7 billion exposure to the Others category (this includes support services) in the oil & gas industry.
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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.