Last month, Swiber Holdings Limited (SGX: BGK), a company that provides support services to the oil & gas industry, announced it was going to wind itself up before swiftly deciding to place itself under judicial management instead. The entire debacle caught the stock market by surprise. As one of Swiber’s lenders, Singapore’s largest bank DBS Group Holdings Ltd (SGX: D05) has been dragged into the mess. The bank revealed in its 2016 second-quarter earnings release that it has total exposure of S$721 million to the oil & gas company. The big question could be why DBS Group had committed so much to…
Last month, Swiber Holdings Limited (SGX: BGK), a company that provides support services to the oil & gas industry, announced it was going to wind itself up before swiftly deciding to place itself under judicial management instead. The entire debacle caught the stock market by surprise.
As one of Swiber’s lenders, Singapore’s largest bank DBS Group Holdings Ltd (SGX: D05) has been dragged into the mess. The bank revealed in its 2016 second-quarter earnings release that it has total exposure of S$721 million to the oil & gas company.
The big question could be why DBS Group had committed so much to Swiber.
Piyush Gupta, DBS Group’s chief executive, spent a sizable portion of time addressing the issue in the bank’s 2016 second-quarter earnings presentation. DBS Group’s Swiber exposure is summarized in the slide below:
Source: DBS Group’s earnings presentation
Gupta classified the bank’s Swiber exposure into three separate buckets.
The first bucket of around S$400 million was earmarked to finance Swiber’s working capital for two projects with one customer. Gupta said that the customer was also a client of DBS Group, and one that DBS Group knew well.
The second bucket, worth S$120 million, was for secured term loans for vessel and property that are related to the aforementioned project.
The third bucket (S$197 million for bond redemptions) is dicier because of the timing of the loans that were given to Swiber. By then, there were some indications that Swiber was struggling to raise more capital through the sale of preferential shares. But, Gupta believes that this is where the classic banker’s dilemma lies.
The classic banker’s dilemma
Gupta broke down the third bucket into two further pieces, namely a loan made in June and another loan handed out in July. His thoughts are summarized in the slide below:
Source: DBS Group’s earnings presentation
Gupta felt that the considerations for each loan were different. He explained the circumstances for the June loan:
“Now you think about the circumstances.
At the end of May, a client [Swiber] that we dealt with for the last ten years, where we think the business is viable, and comes to us and says – hey, this equity is coming – it’s going to be delayed by two weeks.
So, you have a choice at the end of May, so you default and let the customer collapse – or you say you know, this is the kind of bank we are, if it means two weeks to bridge to equity so that the customer can continue.
It is not an unreasonable thing to do. So, we did that.”
Back then in May, Swiber was working to raise equity capital and needed a bridge loan. Gupta felt that it was not unreasonable to extend a loan to Swiber so that it would be able to bridge the financing gap and continue with its project.
But, the real dilemma came with the July loan. Gupta explains:
“The circumstances of the second loan we did was different. By then, it was two weeks later, this equity was quite uncertain. At this stage, there was a different choice.”
In short, for the July loan, DBS Group faced a different problem. It was becoming clear that Swiber might not be successful in raising equity capital. DBS Group now faced a different question. Gupta gave his thoughts:
“You go back to the nature of exposure.
My exposure is linked to two projects. If this projects get completed, I can recover my entire 400 million bucks. If the project don’t get completed and the company folds under, I am out S$400 million bucks.”
The S$400 million Gupta was referring to was the initial loan extended to its long term client, Swiber, for the two projects that it undertook for one customer. On one hand, the projects were making good progress. Gupta said:
“So, the choice you have to make, at this stage, is do you want to get this projects completed or not. One project is 80% done. One project is 50% done. The customer says that these guys are doing a good job, we’ll get the project done.”
On the other hand, there was signs that Swiber was struggling to raise new capital. Therein lies the classic banker’s dilemma, according to Gupta. He summed up the situation in a few words:
“The classic banker’s dilemma. Do you put in some more money to recover more, or do you don’t put in the extra money to recover more?”
Let’s pause for a moment to reflect on the number of judgements a bank has to make.
It’s important for DBS Group investors to know that investing in a bank also means trusting the bank’s judgements. As Gupta frames it, not all decisions will be cut and dry. Dilemmas like the above could occur.
In this case, DBS Group decided to put in more money with the expectation that the projects will be ring fenced and completed. DBS Group felt it was the right way forward.
As an overarching statement, Gupta added:
“I am not ashamed of saying – this is the kind of bank we are, we don’t pull the plug on customers. If we think there is a reasonable basis for the customers to try and do the business, then we will try and help the customers do that business.”
Gupta has given his take on the situation. He also shared DBS Group’s philosophy. From there, investors will have to decide whether reasonable judgements were made by DBS Group in this case – and whether they are on board with the bank’s overarching view.
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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.