Banks need to take a hit too…

Gulfmark Offshore has launched a tender offer to purchase USD 300m in unsecured notes back at 52% of par value. The transaction is pre-funded and includes new equity. But to my mind surely this is the most realistic, market-driven, level of what the debt in more commodity type vessels is worth (and that means EV level as well the equity went a long time ago). As this is being funded with USD 100m secured loan and USD 50m equity they USD 156m consideration changes the balance sheet completely for Gulfmark as the notes represented 64% of LTL in September 16.

If accepted its another example of bondholders being realistic about asset values and recovery times and good corporate finance in getting more equity into a capital structure to provide recovery times. I don’t think the industry will recover until debt holders accept the fundamental proposition that the industry has overbuilt far too much capacity in most market segments for anything like a recovery to previous day rates and utilisation levels to ever occur.

Gulfmark is similar in size to EMAS Offshore (excluding the FPSOs which are going); although EMAS had higher debt on a slightly smaller number of vessels. Unrealistic banks and debt holders in Europe wish the market of 2013/14 is coming back and will save them but this just isn’t going to happen. There are too many vessels in lay-up particularly in the commodity PSV/ AHTS.

Even though the Gulfmark notes were unsecured 52% seems like a good marker for what asset sales could realistically be “worth”, if they really could be traded at all, in the current environment. Without a similar dose of commercial reality the long-term survival of EMAS seems less than assured. I think for some of the more specialist tonnage the recovery rates could well be less because the asset specificity is just so highly leveraged to expensive offshore construction with few other viable uses.

The contrast to Viking Supply is even more stark: the bondholders have been realistic and taken 50% of the bonds in shares and 50% redeemed at 35% of par; but the banks however have only changed maturity dates and amortisation schedules. For a fleet long on ICE class vessels this cannot be sustainable.

Because the industry issued so much high yield debt between 2003 and 2015: NOK 81n just to oil service companies according to some estimates there is a lot of this to burn through before the banks come under pressure. But I don’t see any change in the market coming until the banks start getting realistic about residual values, and therefore the par values of their current loans, and then they may start opening loan books again. When this happens offshore service companies can start financing again and liquidity will return to the vessel S&P market as demand slowly ebbs toward supply.  The market appears to be a long way off that happening.

[Disclosure of interest: I was involved as an  investor and Director of Odin Viking and took part in the initial stages of the Viking Supply restructuring].

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