Groundhog day for EZRA…

Another day and another trading halt for EZRA. This episode is now starting to make the SGX and its listing regulations look silly. There is no real market in these shares and there is no purpose in helping to create a market by stopping trading, then starting (with no real explanation) and then stopping (repeat indefinitely)… SGX and investors need a decent explanation now. The whole point of trading shares is to provide an ongoing market, not an optional time when management can dictate if they think the shares should be traded. EZRA and its affiliates have also been given far too much dispensation for a listed company around their “going concern” status and are at the risk of over trading. Either you are a going concern, and your shares should trade continuously and the Directors feel comfortable the company can meet its obligations, or you are not and the shares should be de-listed and you should be in administration. Small, extremely irregular, events that may induce a false market in the shares warrant a temporary suspension. But investors and capital markets are not well served by these sorts of events when it is clear to even the most economically illiterate that the EZRA group of companies has extensive financial problems.

Either EZRA and its associates have almost secured a funding deal, in which case the need to give a “highly confident” statement to SGX justifying the timing; or they haven’t, and administration is nigh, or an explanation of why it isn’t. Trade creditors are publicly stating they haven’t been paid and are taking legal action, clearly those involved in the creditor standstill, most publicly Ocean Yield and Forland, have lost confidence in this process and have bowed to the inevitable. Forland in particular is clearly looking to force the issue. The length of time now between announcements regarding creditor standstills but the lack of clarity (which speaks volumes) on any alternative funding plans makes it clear that there is no solution close.

I stated as far back as December that Forland and Ocean Yield are were getting their vessels back and this is now starting to happen. Ocean Yield clearly deciding a managed handover being an infinitely better option than simply allowing the vessels to be left in an uncontrolled environment when this credit event occurs.

The real issue here clearly appears to be the banks. I read with a mild degree of mirth this week that OCBC and DBS claimed the were collateralized on their outstanding loans. Its an interesting notion this because if DBS and OCBC really believe they can sell such specialist vessels as the Lewek Constellation for anything like book value they haven’t been told the truth. All potential buyers for it as a deep-water construction vessel have sufficient tonnage and in a declining market and only the deal of a life-time may induce them to buy more assets. Without getting into a technical details “deal of a lifetime” is nothing like book value for the banks.

The key is the carry cost of such future optionality the vessel provides, the running cost for the EZRA/ EMAS Chiyoda fleet is in the tens of millions each year and there is insufficient work on the books in all likelihood to even cover the basic operating expenses. Any new investor coming into this business is stuck with a very high cost base from day one. In the current market it is a stunningly bad investment proposition. In addition without a restructure there are sufficient trade creditors whose claims are starting to be significant. Bibby is in for USD 15m, I met the MD of another subcontractor last week who is owed USD 8m from July last year (and who then went and did more work for them in October which is now becoming due), and these are clearly the tip of the iceberg. (As an aside he told me the engineering he had seen coming out of Singapore was some of the worst he had ever seen).

I maintain my view that the only realistic solution here if EZRA is to survive is a massive debt-for-equity swap in conjunction with new equity. I wonder how realistic this is, especially as it seems clear now that EMAS Chiyoda has lost some real money on the projects it has actually won in the last year, but expecting sufficient new equity to come in and recapitalise these businesses on anything like the scale that would give them a financial runway to make it through to an industry upturn, seems unrealistic. The Ocean Yield and Forland moves also indicate that there is no real progress in this regard and it looks to me as if the banks are trying to deny the seriousness of the problem. But only the banks here can have sufficient future confidence in long-term asset values to provide sufficient liquidity for EZRA to trade through. Like a central bank, if they really believe their collateral is good, and this is a mere market event, then DBS and OCBC and others should follow the Bagehot dictum and lend freely on collateral that would be good quality in ordinary times.

Of course if DBS and OCBC do this they are taking equity risk and their shareholders will likely question management judgement. But there are no good options left. Offshore assets have been sold in distressed state for between .1 and .3 in the $1 implying writedowns and running costs of hundreds of millions are coming for the banks and it seems they really don’t want to accept this. The regulatory bodies should insist on using Swiber like-for-like transactions when OCBC and DBS report.



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