Bibby and EMAS restructuring… you can’t borrow your way out and the Bezzle…

The end is nigh. What a mess.

Firstly, I was wrong in my previous post. Obviously, if Bibby Offshore (“Bibby”) was trying to arrest vessels owned by EZRA/EMAS they wouldn’t have a valid claim as EMAS Chiyoda (“EMASC”) only charters in the vessels. I should have thought of that. In which case the entire USD 15m is as good as gone with this announcement.

Secondly, this announcement essentially confirms that EMASC is not a viable business. When all three shareholders write the value of their loans and equity to zero they are confirming numerically what has been obvious for some time. I note that the statement from EMAS states that Forland hasn’t yet called on the EMAS guarantee, I think we can safely assume that isn’t because they have no intention of doing it, merely they are playing for time like everyone else here, hoping against all reality that someone has missed something and there is a magic solution here.

These carefully worded PR statements belie the chaos that is occurring behind the scenes. Bankers and lawyers pouring over documents and contracts, finance departments frantically trying to put together models and cash balances under various scenarios that show some hope. I feel for the EMAS staff here who must be under huge pressure. Various credit committees escalating the issue at the bank because calling time on a default this big is a very senior decision…

Apart from size there is one very obvious difference between Bibby and EMAS: the industrial logic of a core business. Both have borrowed too much money to have any hope of redemption under their current capital structures, but Bibby has a good business trapped under a mountain of debt and the same cannot be said of EMAS.

The core Bibby business, North Sea saturation diving  (mainly UKCS but also Denmark and Netherlands), is very good. Bibby delivers a good product and has a team of some very capable people, who day-in and day-out safely put divers on the seabed and deliver essentially a good service. The issue is the capital structure and an internationalization strategy, that although unlucky with timing simply hasn’t worked, and the EMASC write-off is likely to be the nail in the coffin for it.

But the whole point of a restructuring is to take a business with a poor capital structure and a sound business and fix it: this is the way the creditors get the best payoff. The logical solution here is for Bibby to seek a structural solution that sees it exit the international businesses,  the majority of the ROV business, exit the onerous vessel charters, and return to being a UKCS saturation dive contractor with the Sapphire and Polaris fixed firm and the current risk-based arrangement with the Topaz. There is a core industrial logic to this but this business has no hope of generating enough cash to repay the bondholders their £175m (at par), pay Olympic for the vessels charters, and keep funding the US (and potentially settle the Borderlon claim).

Given discussions I have had in the City this week, an attempt to financially restructure the business is clearly underway. The first proposals I have had mentioned clearly do not reflect the gravity of the situation: one involved lending money against the Sapphire and Polaris, with the lenders on these assets becoming “super senior” to the bondholders (anyone from M&G reading this will appreciate the irony of the link). Someone even tried to suggest that they were going to unlock their revolver to cover short-term cash needs. Bearing in mind they have lost access to the revolver due to breaching the covenants quite why the lender would open this up and increase their exposure to the current capital structure is beyond me? I get the revolver bank is super-senior, but all that means is that if Bibby burn through that cash before the market recovers the bank is the proud owner of two North Sea class DSVs and cash at hand. Ask the Nor bondholders how well that works out… The problem here is too much debt, not too little or not enough access to it, and too little equity.

Bibby needs a major debt for equity swap, new working capital lines, and a fundamental pull-back to the North Sea market. The scale of this adjustment is so big, both financially and organisationally, that I understand why this isn’t the first option. But this will be the final solution here: everything else is economically irrational and eventually the brutal reality of the cash burn and strategic position will hit home. I have heard mentioned many times “won’t Group put more cash up?” In my experience BLG are extremely rational financial investors, and if you own a house over a mineshaft, where the mortgage is worth more than the house, and it’s a limited recourse deal (i.e. no Group guarantee), why would you keep the bank whole rather than walk away? Any new money going in would need to reflect the position of the business today not when the bonds were issued. Bibby doesn’t have a short-term financing problem it has a capital structure issue because the business is, and will be, fundamentally smaller than when the bonds were issued. Revenue has dropped by more than 50% so it simply cannot earn enough to satisfy all the creditors and there are no reasonable assumptions one can make about the size and timing of a market turnaround that would make this a short-term financing issue rather than a longer term capital structure issue.

EMAS on the other hand, have no industrial logic behind them at all. They timed the move into deepwater spectacularly badly and there are plenty of companies that will fill the void when they are gone. EMAS was a financing proposition looking for an industrial strategy, it relied on a boom market and constant acquisitions and financial engineering to appear as if value was being created in lieu of cash. Markets can remain irrational longer than you can remain solvent the Great Man is said to noted,  in this case however for EMAS the market demand for oil services moved back to a lower, more rational level, and their strategy reflected the “greater fool theory“. The industry as a whole needs EMAS to collapse to start to restore the supply/demand balance. There is simply no investment case here: they have no backlog, no distinct competitive advantage, a wall of competitors with extensive financial resources and years of experience, and no credible core market. I don’t know exactly how this is going to play out but I know the end result with great clarity.

EMAS, and the bubble that surrounded it in Singapore, is best summed up by Galbraith (to be clear I am not yet suggesting anything criminal has taken place it is more the mentality although it clearly applies to Swiber):

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”

 

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