One E(nor)MAS Chiyoda mess…


I hope the agreement Forland Shipping reached with EMAS Chiyoda was that if they didn’t get cash up front they were going to take their ship, with all the project equipment on board, and sail away. Let the lawyers fight out preferential creditor treatment once you have the money. Unlike Ocean Yield (“OY”) Forland are on a time charter and as a small operator they simply cannot afford to take the hit here because the more I look at this the more convinced I am that we are heading for an administration scenario here.

I read the EZRA and EMAS financial information this morning so you don’t have to… As a general rule when accounts are so byzantine I treat them with increasing scepticism… and with my Minsky debt hat on this morning I see why…

Before I bore you with some numbers, and therefore those who aren’t interested can switch off, just look at this from the ‘big picture’ scenario: EMAS Chiyoda charters the majority of its assets off either EZRA/EMAS and its associates or bareboat charters from OY or time charters from Forland. They have a cash problem and want the shareholders to participate in a fundraising while also seeking a creditor solution. What the EZRA/EMAS side want in effect, given their asset concentration through charters on the Lewek Constellation, the barges etc, is Chiyoda and NYK to fund 60% of these charters as well as providing a credible financing path to winning long-term projects. Fool me once it’s your fault, fool me twice it’s mine…

Chioyda paid USD 180m in April for a 50% stake to EZRA (USD 360m equity value) and of the consideration USD 30m was given as working capital to the company. Later EZRA sold a 10% stake to NYK for USD 36m (in order to keep the valuation constant I assume). For c. USD 186m the Japanese investors have ended up with a 60% share in a company with no work and some very expensive vessel charters to the seller of their “investment”… (imagine the hangover… pass the sake please it’s a bad morning…?)

Apart from that it’s all going swimmingly well… Or is it? I understand the work for BHP in Caribbean (Angostura) was a disaster financially. Having taken lump sum construction risk the weather and currents worked against them (read: poor tendering and the need to buy work) and BHP didn’t accept any variation orders. If correct this was surely part of the issue in the quick onset of these financial issues and will make fundraising even harder.

You can imagine the Japanese joint criteria for any further investment: they aren’t going to put more money in now until the sellers (and probably OY and Forland as well) take substantial reductions in the fixed cost base i.e. the vessels. But EZRA/EMAS can’t do that because they have their own financial problems. EZRA has provided guarantees for many of EMAS’s charters and EMAS, 75% owned by EZRA, is insolvent effectively if the assets were to be liquidated in the current market.  EMAS has announced it has reached a term sheet deal with its lenders, and given the PSV and AHTS exposure this is no surprise, but the equity in this business has in effect gone.  One of the minor highlights of interest from the most recent accounts is the split of EZRA/ EMAS originally generated goodwill of USD 154m via the transaction but EMAS has just written its equity down to USD 90m. On an asset base that big in an illiquid market like this that is within the margin of error and the line between insolvency and illiquidity becomes akin to taking a measuring stick to Lilliput. All that is solid melts into air

So in reality that leaves EZRA as the owner of Triyards and a minority shareholder in a bankrupt contractor which is the largest customer of its asset base.  On 31 August 2016 EZRA had debts due within 12 months of USD 1.1bn which mean they are long-term debts that have fallen current and the senior lenders understand how serious this is and EZRA states that if agreement cannot be reached with them it has a going concern issue (Net Debt to Equity having risen from 0.77 to 3.05 in one year). EZRA have negligible cash in relation to this and their biggest asset, the Lewek Constellation, wouldn’t be worth half of what they paid for it if it could be sold at all. And therein lies the problem in financing anything because even if you believed EMAS Chiyoda could be competitive in deepwater installation the shareholders are not going to inject capital at historic asset levels in today’s market given the risks, but without fresh capital into EMAS Chiyoda, EZRA cannot support its debt on the assets. The amount of money now required to make EMAS Chioyda a viable proposition in deepwater construction, where tens of millions are handed over in procurement and engineering prior to offshore execution, is I believe prohibitive to any rational investor. At the moment the CFO of any major project where EMAS Chiyoda has bid is calling up the tendering guys and telling them to throw that bid in the trash no matter how good the terms. This will takes weeks of financial stability to turn around not 60 days and will involve some serious write downs from the banks… so park that in the unlikely space.

If L&T ride to the rescue to protect the single Saudi contract it will be an assets only deal. In distress M&A you may be able to find a credible white knight to alleviate this concern but this isn’t likely here given the inter-relationships and the size of the debt obligations that need to be met. Either that or the Japanese have been the smartest guys in the room and they are just going to call the EZRA banks and offer to take the assets they want at pennies in the dollar and then inject some real equity into the “JV” and dilute EZRA out?

This brings us nicely to the problems of debt and as always therefore to Hyman Minsky. Minsky would have termed EZRA/EMAS a firm financed by Ponzi finance, not indicating criminality, but a firm that had to constantly keep borrowing to meet its debt obligations. Forland would have been categorised as a speculative firm, in that it had difficulty meeting payment obligation in the short term (although in such pro-cyclical asset industry the line between solvency and liquidity is very thin); most firms in offshore would fall into this category. OY however, even with re-delivered tonnage, would only be a hedge firm, able to meet cash expenses from income, the redelivery will hurt the dividend but isn’t fatal (and highlights again the quality of the management at OY).

Both EZRA/EMAS and Forland in their own way were able to grow on the back of a massive investment bubble. EZRA constantly grew by borrowing and creating little industrial value; the decision of lenders to allow it to build the Constellation, a vessel so outside its known technical parameters as a company and in relation to its balance sheet, was a sign of how far the market had peaked. It’s an amazing vessel but it takes more than offshore crew to make it work, the balance sheet and in-house competencies to generate regular work at the margin levels to pay for that vessel were never there. Much like a bank EMAS became an asymmetric payoff model except there will be no lender of last resort here (although whether OCBC and DBS are allowed to use a proportion of their exposure for liquidity purposes at MAS is a whole different story).

Forland was typical of the smaller end of the bubble where a small Norwegian ship owner was able to take on extreme leverage based on a counter party with very little equity and on a charter substantially less than the economic life of the asset. Provided everyone kept paying there was no problem. But as Minsky always stated it was the cash flows, the hard financing constraint, that started the reflexive cycle to asset prices…

Unless there was some pre-funding commitment as part of the original sale to the Japanese (which surely would have been invoked now) this refinancing just looks too hard. Too many players, too many different tranches of securities and agendas, and simply not enough time if there are cash flow problems now. And unlike Italian banks I can’t see three rounds of rights issues, each one ever more dilutive than the last, being a viable strategy here.

The Singaporean judicial management process just isn’t developed enough for this either being relatively new so this is going to be a mess which means that OY are getting the Lewek Connector back without a shadow of doubt and Forland will get the Lewek Inspector back as well.

As a wise New Zealand philosopher once remarked: if something is impossible it isn’t likely to happen…

5 thoughts on “One E(nor)MAS Chiyoda mess…

  1. One of the best articles I have read in a long while. Very interesting, given that I continue to question the acquisition of the Strategic Marine assets by Triyards Holdings Limited and the involvement of the MD of EZRA in the transaction.


  2. Where does the information come from about the projects, Angostura for example. This is all interesting, but I do not know if this is fact or skepticism?


      • Ok. So what are the thoughts from your contact at EMAS? Will the company survive? They seem to have been a strong competitor for the last few years and let’s all face it…In this market, everyone buys projects to keep untilzation up. Stating “the project was bought” doesn’t seem be factual if weather is to blame. Longer than expected weather delays on a lump sum project can make anyone lose money.

        I’m sorry for all the questions, but I’m eager to understand what is happening in the subsea construction world.


      • Sorry if you read above I’m clear I don’t think it will survive unless it receives finance on a non-market basis. If you bid lump sum and lose it is your fault. You should only take risk you can control.


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