According to the bond prospectus Bibby Offshore (“BO”) is scheduled to handover interest of £6.56m to the creditors on June 15. Based on the last financials if they make this payment it will be the last before a default or restructuring event (next payment due Dec 15 2017).
In January BO claimed that they were close to finalising an agreement with the revolver bank (Barclays) to open up the facility with a contribution from Bibby Line Group. Given BO lost £52m in operating profit in 2016 that always looked unlikely and in the most recent financials that prospect has been quietly dropped in place of a much smaller facility from Group. Given that BO appears to be going back c. £100k per day, excluding interest costs, the c.£9m would only buy BO 90 days time. £30m isn’t a lot of cash for a business that must need a minimum of £10-15m in working capital and had a net current asset movement of -£22m in the last quarter.
Talk last weekend of James Fisher buying the company for £1 missed the obvious point: why would James Fisher Plc want to owe the bondholders £175m + other fixed commitments (ROVs, offices etc)? Bibby and James Fisher go way back to the Ministry of Defence RORO PFI deal, but this was never on the cards.
The North Sea DSV market became the ultimate boom market symbol of the last oil upswing, the ultimate procyclical market where a short-term increase in day rates with a long-lead time, pushed up asset prices and leverage levels that were simply unable to cope with a slowdown. Harkand, owned by Oaktree really didn’t take that long to fold once day-rates slid. Vard are now sitting on an extremely expensive reminder of how illiquid the high-end DSV market is (although surely a DOF solution beckons?)
Now more than any other segment this is a niche market in crisis. Last week the Harkand/Nor bondholders took their latest dose of pain by informing suppliers that they will try and preserve funds by putting the vessels in lay-up. As I wrote here, and here, this was always a strategy of hope over reality and the only real surprise is how long it took the bondholders to accept this.
The last BO financials held the value of the Bibby Sapphire and Bibby Polaris at £107m, which equated nicely to the bonds trading at .60-.65 par. If the owners of these bonds really believe they could realise £100m for those two assets then they clearly haven’t been following the market or have any knowledge of it (which to be fair for a bondholder with a small position is understandable). The Nor bondholders recently wrote their vessels down to USD 58m, and they are considerably newer and higher spec than either of the Bibby vessels, although they appear to be extremely poorly maintained, and sitting in Blyth for 18 months without the dive system having worked will ensure a major refurb regardless of lay-up procedures. But just as importantly they can’t get anyone to buy them! Or even charter them! The “market”, for all but the most distressed transactions at concomitant prices, is non-existent.
But first let’s back up to a different time when the Bibby bond was sold and see that uses of the funds:
So BO actually didn’t get that much money to start with. BO borrowed £175m and only had £36m to invest to pay it back. Now the business was “underleveraged” in a sense before the issue, but only on turnover numbers, it still owed StanChart nearly £100m on vessels with no forward order book. The majority of the revenue is “spot” market, i,e. no commitment, and when you have such high running costs which the Olympic charters entailed, you need minimal debt in a downturn to survive. Still the stated plan was to expand the business, not silly in a time of market growth, but all the risk was taken in debt capital not equity. Everything needed to work perfectly.
The problem, as so often with offshore at the moment, was excessive leverage and insufficient equity. For 7.5%, at the same time Unicredit was paying 7.3% (admittedly on a EUR issue) the bondholders agreed to lend Bibby Offshore money, secured only on two depreciating assets, one of which was built in 1999 and by 2021 (when the bullet payment was due) would be at best 75% of the way through its economic life, for seven years with no amortising payments. I make no judgements at all, the prospectus lists every possible risk, both sides agreed a transaction and signed and the money changed hands. The utlimate risk was clear: a downturn in the maket would create significant challenges for this company with two of the older assets in the market (Deep Explorer and Seven Kestrel had been announced) that were not being paid down to reflect depreciated value. You can make a claim to go interest only on a house because if maintained they do increase in value (sometimes) in a real and nominal sense, it is very hard to argue that with a ship that has a finite life.
This was a classic case of using debt for what should have been equity risk and why the offshore sector is struggling with a balance sheet recession at the moment. The plan, clearly outlined in the prospectus, was to borrow money to charter ships to make even more money.
As you can see from the table above £100m went to Standard Chartered who had amortising mortgages on the vessels and were traded for interest only bonds at a higher interest rate. StanChart is a fairly conservative bank and the loans were probably around the 8 year tenor leaving the bank exposed to minimal capital risk at the end of the loan so BO actually cranked up the risk even more because instead of paying the vessels off it simply had the equivalent of an interest only mortgage. In the Minsky framework BO had moved from hedge financing (cash flows cover interest and principal) to speculative financing (cash flows cover interest only).
A quick look at the Bibby Line Group (“BLG”) financials reveal that Bibby Offshore is simply too big for Group to save. Yes BLG will be annoyed they may not have access to the capital markets they thought, but when your turnover £1.7bn for £40-50m profit then you are not bailing the bondholders out for £175m. The majority of the turnover is all from Costcutter that produces almost no margin. Group had long been concerned BO had grown too big for the overall portfolio for exactly this sort of reason, but debt is the heroin of the financial system and extraordinarily hard to turn down when thrust forwards on such seemingly attractive terms. Chartering ships when not amortising your own is the ultimate leverage strategy.
I realise the market was completely different when the bonds were issued but this just highlights how both sides willingly got into a deal they both realised was extremely risky. Since then revenue has more than halved at BO and it is hard to argue they are worse operationally (although the prospectus lists two COOs, which for a company of this size looks somewhat overmanaged, and sending a manager (ex-COO) to the US on an ex-pat package when you are weeks away from running out of money looks optimistic in the extreme). However, a structural solution will be required to bring the balance sheet into line with the new reality, and as the equity is worthless, a restructuring is a certainty. The major reason I think BLG is agreeing to the revolver (apart from the fact it ranks above the bonds so is in effect risk-free) is to gain a seat at the restructuring table.
Which brings us back to the vessel values and the bondholder options that are clearly inextricably linked. In the current market there is simply no way the Polaris will remain in the North Sea in an open sale process and even Sapphire is doubtful, in which case the comparable sale price is against Asian tonnage as this is as much cash as each asset could reasonably earn for the foreseeable future. That number is so far south of £100m I’d suggest any bondholder expecting that pull up a chair and grab a strong coffee before being rational about how much less.
The basic problem the Harkand/Nor bondholders never understood, which the BO bondholders maybe about to, is that without a certain amount of operational infrastructure it doesn’t matter how high-spec the vessel is it isn’t a North Sea asset. If you want to dive in the North Sea you need a financial commitment in excesss of the extremely specialised assets and these have a high cash burn rate if they are under-utilised. Failure to make this commitment just renders the “North Sea class DSV” a ROW DSV with higher OpEx and no chance to get extra revenue. That is likely to make bondholders look to cut their losses quickly once they understand the complexity and commitment involved.
(Disclosure: I resigned as a Director of Bibby Offshore Holdings Ltd in December 2012. The bond issue was well after my time).