This Might Be Why Investors Should Avoid the Next Swiber Holdings Limited-like Company

The debacle involving the collapsed offshore support services provider Swiber Holdings Limited (SGX: BGK) has dragged on but unfortunately, it does not appear to be ending anytime soon.

According to a Business Times article published today, a syndicate of banks led by Singapore’s United Overseas Bank Ltd (SGX: U11) had seized three vessels belonging to Bukit Timah Offshore AS. In 2008, Bukit Timah Offshore was involved in a deal with Swiber involving the three vessels. The deal saw Bukit Timah Offshore buying the vessels from Swiber and then leasing it back for 10 years.

The Business Times reported that the seizure was to mitigate a debt default by Bukit Timah Offshore.

Twists and turns

Earlier this year, Overseas-Chinese Banking Corporation Limited’s (SGX: O39) chief executive, Samuel Tsien, explained why a default by borrowers is not the preferred option for banks. OCBC had no exposure to Swiber, but is still affected by unchartered vessels or rigs owned by other oil & gas companies that it has lent to. Tsien said:

“There is no point in leaving the vessels idle. We need to have the vessels to continue to be deployed, so that they can continue to generate the cash flow.

When the oil prices start to come down to US$30, there are more oil majors requesting for renegotiation of the charters. And when the oil price starts to drop below 30% [sic], the issue has deepened.

These are also compounded by the fact that some of the oil rigs which are in the shipyards, which are coming out to the market. So, from a supply side, it has actually increased as well.”

Banks such as OCBC and UOB may have extended loans to oil and gas companies that are secured with assets such as the aforementioned vessels. However, if there is an oversupply situation, buyers might not be willing to pay the right values for the vessels or rigs in the event that the assets fall into the hands of the banks after a default.

This situation might be playing out now.

The Business Times article also mentioned that two of the three arrested vessels from Bukit Timah offshore have seen their values cut in half since 2010. This new episode is another indication of how uncertain situations such as Swiber’s can play out.

This is also not the first twist in the tale that we have seen.

In October, during DBS Group Holdings Ltd’s (SGX: D05) 2016 third quarter earnings briefing, the bank’s chief executive, Piyush Gupta, said that Swiber had been able to engage a major customer to continue its projects despite being in judicial management. DBS Group, in this case, was a major lender to Swiber.

But, the aforementioned customer ended up stopping the project in mid-December.

Prevention might be the best policy

From all the above, investors can observe how complicated things can get for a company that is in financial difficulty, and how hairy a judicial management process can be.

There are multiple parties – banks, customers, suppliers, employees, managers, judicial managers – that can be pulling a company in different directions. From DBS Group’s experience, we can also see that it’s not as easy as just providing more money to Swiber to tide over tough times; a few months prior to Swiber’s collapse, DBS Group actually extended loans to Swiber to help it with bond redemptions.

The best thing for investors to do might be to avoid such situations altogether.

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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 United Overseas Bank. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.