On 28 July 2016, Swiber Holdings Limited (SGX: BGK) shocked the market when it 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. Then, came the next surprise. Swiber swiftly changed its mind about winding up and decided to place itself under judicial management instead. As one of Swiber’s lenders, Singapore’s largest bank DBS Group Holdings Ltd (SGX: D05) has been left with a bit of a pickle. Piyush Gupta, Chief Executive Officer of DBS Group, made a deep dive into the Swiber episode…
On 28 July 2016, Swiber Holdings Limited (SGX: BGK) shocked the market when it 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.
Then, came the next surprise. Swiber swiftly changed its mind about winding up and decided to place itself under judicial management instead.
As one of Swiber’s lenders, Singapore’s largest bank DBS Group Holdings Ltd (SGX: D05) has been left with a bit of a pickle.
Piyush Gupta, Chief Executive Officer of DBS Group, made a deep dive into the Swiber episode in the bank’s recent 2016 second-quarter earnings presentation. Here are five key points he made:
1. Swiber was not in the budget
Gupta started the conversation by discussing what DBS Group had disclosed prior to Swiber’s implosion. He highlighted two things the bank had revealed earlier in the year.
One, DBS Group had disclosed that it had a S$9 billion exposure under the category of “Others” in the Oil & Gas industry; the category is made up of companies that are mostly providing support services. Gupta also said that this piece consisted of 10 to 12 names with loans in the S$500 million to S$600 million range. Swiber was one of the names.
Second, Gupta had previously stated that any collapse of large oil and gas or offshore marine companies were not in DBS Group’s budget. As such, the Swiber case will be treated as a one-off event. DBS Group has been setting aside a substantial general provision cushion in advance so that it could absorb one-off events.
2. It is oil and gas but it is different
Gupta made an argument that Swiber’s experience is not representative of the oil and gas industry.
Swiber has been DBS Group’s client for a long time. Unlike most of the oil & gas industry, Gupta said that Swiber is best described as a contractor. Furthermore, the financing that DBS Group provided was based on two projects Swiber had with a customer that DBS Group also knows well.
Gupta said that the risk involved when dealing with Swiber was really about the company executing the two projects it had, and for the company’s customer to not default on payments.
With the risks in mind, Gupta thought it was not unreasonable to extend loans to Swiber.
3. Why Swiber was not a non-performing asset
Proactively, Gupta also addressed another key question: Why wasn’t Swiber classified as a non-performing asset (NPA)?
To start, he outlined DBS Group’s policy on non-performing assets. There are two ways of classifying NPA. The quantitative approach would be to earmark all loans overdue by 90 days as NPA. The qualitative approach, though, requires judgement. In the latter, DBS Group has to determine whether the business is still viable to be financed.
Gupta said that DBS Group’s approach is consistent with the industry. The bank is just one of the thirteen banks used by Swiber. As far as Gupta could tell, none of the other banks classified Swiber-related assets as NPA.
4. There were no signals of trouble
Gupta also said that Swiber had no overdue payments up till June. He added that Swiber had a trade payable duration of 48 days at the end of 2015 and had grown revenue by 15% in the same year. He noted too that Swiber had S$200 million in operating cash flow in 2015.
As such, he said that Swiber looked like it was doing well on every dimension up till the timeframe of this March and April.
5. The Swiber unravelling
Gupta said that the main problem was that Swiber imploded in six weeks, between the end of May and the middle of July.
Swiber started showing some trouble spots. He said that the company’s debt to equity had risen from 1.2 times two years ago to around 1.7 to 1.8 times at the beginning of this year. He said that this was not overly high, but was higher than the industry average. Secondly, Swiber had debt maturities coming up.
On the latter note, Swiber was working with a private equity firm to obtain S$200 million in financing through the issue of preferential shares. Unfortunately, the financing did not come through in time.
Gupta felt that there were no indications that Swiber would unravel so fast and chalked it up as “bankruptcy can happen.”
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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.