News that Toisa had gone into Chap 11 felt significant across the industry today I think because of their DSV exposure. On the face of it Toisa was just another mid-sezed operator, subscale in any one asset class, apart from dive vessels. Like a small Norwegian fishing boat owner the company had ridden the boom of offshore to end up with an enormous asset base exceeded only by its debts. This story also increasing the noteriety of the somewhat enigmatic owner.
Having been involved in negotiating a charter and purchase of a Toisa DSV I stuggle to feel sympathy for their collapse (as opposed to the Sealion team who were always extremely professional and nice guys). Times have changed since then, the bidding for the Polaris so hot betwen us and another party we each had 30 minutes to approve each round of day rate increases until the other side pulled out, this at 2200 at night UK time with each number feeling uncomfortably large. Callminopolous from NYC calling the shots and demanding we work on NY time. Such was the shortage of North Sea class DSVs, and the lack of spot market, we had no option. How times have changed…
In one of the great ironies of the “new normal” of offshore the only people who don’t seem to know there is no spot market for North Sea class DSVs own two and are keeping them tied up, fuly crewed, in Blyth in the hope of creating one! I digress… Toisa is big news because they went long, and were known for DSVs, and by going under they have shown that we are in unchartered territory for DSV ownership.
Which leads nicely on to Bibby/ EMAS. If there was any doubt that EMAS has a solvency problem, as opposed to a liquidity problem, the news today that Bibby was taking them to court for unpaid work and seeking to seize vessels for unpaid bills should put the question to rest. Bibby appears to have done USD 18m of diving and has only been paid for USD 3.5m. Let’s be clear what happened here: EMAS Chiyoda (“EMASC”) has taken lump sum construction risk on the Angostura development and this had a diving element. EMASC have contracted Bibby to do the diving, in all likelihood on a day-rate basis, and EMASC have underestimated how long it would take to do. You can take 10 or 15% off a dive contractor for some spurious reason, say the bell-runs were slow for example, but you can’t credibly claim an 80% reduction from your dive contractor. EMASC aren’t paying because they don’t have the money. You only take risk you can control in offshore, and lump sum exposure to dive time, when you don’t have the correct DSV for the weather and tidal flows (it needed the Bibby Sapphire not a modular system like the one on the Lewek Toucan) is risky, some might say crazy, but whatever it was they miscalculated and lost.
Its a sign of the current market that people are taking extraordinary commercial risk to win backlog and when this goes wrong, which it inevitably will sometimes, the already razor-thin margins are gone. The EMASC shareholders will surely be looking at the Angostura project in detail before they advance further funds.
And as we all know this comes right in the middle of an attempted refinancing. Chiyoda issued this statement today:
EMAS CHIYODA Subsea Limited (“ECS” registered in the U.K.; Chiyoda Share 35%) is engaged in subsea construction work and due to the current harsh business environment has been conducting a detailed review of its operating strategy. It is anticipated that current and future profitability of this affiliate will be much lower than planned.
If you buy a business in June and have to issue this in January I think you need to revisit the due diligence report. My contacts in Chiyoda tell me the mistake occured because the Japanese thought that there was a mistake in the DD report and the forecast losses were in Yen not dollars, the realisation of this not being the case coming as somewhat of a shock (that was a geeky finance joke but hey its my blog). But I seriously read this statement, acknowledging a USD 336m writeoff, as some form of corporate acceptance that they are not continuing with this. I love the dry PR speak “profitability… much lower than planned”… You think? I’d be interested in the variance analysis in the DD report of what was planned… It would make a smashing waterfall chart (maybe on a logarithmic scale?)
Paying Bibby USD 15m is material when you only paid USD 180m for 50% of the business. I think on any reasonable basis EMASC could have lost somewhere between USD 30-50m just on Angostura alone. If that is right then any hope of a major financial rescue for the company looks nigh on farcical as Chiyoda appears to be accepting.
Splash 247 appear to have spoken to EMAS Chiyoda regarding the vessel arrests and they issued an anodyne response but accepting this action was taking place to seize the vessels. I am no expert on maritime law but if this is the case it strikes me as a clever move on Bibby’s part: I think the mortgage holders on the vessels will have to assert their rights (who are the banks behind EMAS) and then clear Bibby out before they get the vessels back lien free (but this will very much depend on where they are seized). This will really throw a hand greande into the restructuring talks because if the banks won’t release the funds to Bibby they may have a problem getting clear title to the vessels, but if they do they will be preferring one creditor over another which is a big issue in administration.
Whatever the answer the game is surely nearly up here for EMAS. Its almost sad to watch. Like an elephant being downed leg-by-leg, slowly falling to the ground. EMAS and its affiliates are just not economically viable in this market. Seriously who is going to sign a major offshore construction project with this company?
Bibby simply cannot afford to write off USD 15m. I expect the majority of this cost had been taken when they released their cash figures for Sep 30 2016, although looking at schedule timings there may still have been another 30% to be made, say USD 5m. If so it only highlights what I have been saying for a while that a restructuring here is inevitable. Some sort of structural solution to getting out of their expensive US offices and the Borderlon dispute make this virtually a neccessity. The EMAS claim will be in the name of the US entity (Bibby Subsea Inc), I have no idea if it can be assigned but I suspect not, so Bibby need this resolved now.
Bibby have had to pay for divers and other project crew and given current vessel rates I would say that USD 18m was all cost (i.e. the vessel was bid at cost). The accounts for last year will have to be restated even if a majority of the costs were taken last year. Given Bibby was down to GBP 53m cash at Sep 30 last year, is probably going back c. GBP 4m per month over the winter, a c. GBP 12m writeoff for EMASC is going to hit hard. A business Bibby’s current size needs c. GBP 20m in working capital so we are not far off a change in the capital structure and corporate form here.
Quite how Bibby allowed EMASC to rack up such a debt is nearly beyond my comprehension, but unfortunately well within it. You have the most leverage when the DSV is in the field and you threaten to pull unless you are paid. The problem with that is it’s a nuclear option which makes a legal outcome virtually inevitable. You need to the judgement of Solomon to really order the vessel to leave the worksite, but for a company with GBP 53m in cash and going backwards rapidly, to lose GBP 12m to a single creditor needs a decent explanation. Barring some magic with this latest legal move I think that is the position they are in unfortunately because I don’t think EMASC have the money to pay them even if they want to (which they clearly don’t).
Toisa, EMAS, and Bibby share a common problem: too much debt. EMAS have compounded that by buying backlog in-order to get cash flow with poor contractual terms as well as low-prices. It’s a stunningly unattractive investment proposition for the Japanese or anyone else wanting an entry point into offshore.