Bibby bond restructuring…

Photo: The Bibby Topaz idle in Aberdeen Harbour yesterday.

The Bibby restructuring is a big deal. In 2003 Bibby purchased the Aquamarine and on the back of an offshore oil boom attempted to build an international EPIC contractor. One of the major themes of this blog is excessive leverage and as I have consistently argued, since around this time last year, the debt load Bibby Offshore was always going to require a financial restructuring. It was obvious at this point last year when they were clearly on course for their £52m operating loss, and it has just got progressively worse this year and frankly they have left it far too long before taking any action.

The proposed Bibby bondholder led restructuring  as I understand it is:

  • Bibby Offshore gets a capital injection of GBP 40m
  • Bondholders take a 50% haircut on the debt and take 50% of the business (presumably this means they subscribe to 50% of the new equity i.e. £20m)

I don’t think this is a starter for a number of reasons but I also think it shows how little, if the rumours are true of a small US/London fund buying in, they actually know what they have brought. But this is surely the opening gambit here that promises to be quite a public conglagration for an organisation that values secrecy for all but the most optimistic news. However, with the next interest payment scheduled for Dec 14 it also promises to move quickly from here.

The key to this is cash. Here is the BOHL cash flow statement from the most recent results (Q2 2017):

BOHL Q2 CF 2017.pngBOHL had sales of £37m over the first six months of the year (a 30% drop on 2016) and it cost them in cash terms £60m to get those sales. That is a totally unsustainable business model. BOHL is on target for less than £80m in sales in 2017, down from £155m in 2016, while at the same time its administration expenses rose by nearly £2m! (I actually had to double check that before I wrote it). They are actually on target to spend a full 20% more in admin this year than last year when their sales were nearly 50% higher (excluding one-offs). Let that sink in. This for a business that lost £52m at operating profit last year, something management and the directors must have been well aware of from at least June 16.

So on the current run rate the bondholder proposal requires that £40m of operating expenditure just to do £80m in sales. Sooner or later businesses like this run into a cash constraint. The cash flow statement above makes clear: the problem isn’t the interest payments (a mere £6.9m), although they don’t help, this is an operational problem not a financial problem. This is not a stable platform on which you can base a recovery story.

I also struggle to see why the bondholders would only want 50% of the business when in a few weeks, when Bibby Offshore defaults on the December interest payment, they will own 100% of the business? The bond is secured on the assets and a share pledge as security: If BOHL cannot make the interest payments the bondholders own the company. I can only think this is some clever ruse to flush out the fact that Bibby Line Group don’t have £20m for their 50%, and even if they did wouldn’t do it as an equity injection because the bondholders would have to paid £87.5m before the equity had any value?

To be clear here is the cash position of Bibby Line Group in their most recent accounts:

BLG Cash 2016

BLG isn’t spending 100% of its available cash to bailout the bondholders here even if they wanted to. And the only previous offering from BLG was an unapproved facility that would have diluted the bondholders security interest (and potentially led to a legal claim for doing so). There is therefore no reason to believe there is any willingness at BLG level to support Bibby Offshore and every financial reason to see they cannot. Bibby Offshore is simply too big for Bibby Line Group to save. I actually partly wonder if this offer isn’t a shot across the bow of management by the bondholders to make sure they don’t use the Barclays facility as outlined (not that I thought Barclays would ever agree to it) as it simply adds more debt to a business that so transparently needs less and delays the inevitable.

I was surprised the auditors signed off the asset values at the last accounts (2016) but there is a problem now for Group because the BOHL assets are 20% of the total Group asset base and DSVs values have fallen percipitously in the last year. I see these asset values as the core problem moving forward because they disconnection between the cash they can earn and the values owners wish them to present is just so large, but the cash required to trade to a time when the owners believe the values will have come back is beyond them to supply.

The proposal as outlined above would actually value Bibby Offshore at £127.5m – 40m equity + 87.5 debt- post restructuring for assets (DSVs and ROVs) that would be worth c. £50m on a very good day on the open market today. That debt load alone is more than 1 x Last Twelve Months Revenue! No one can seriously expect that money to be paid back, and it is backed by a 1999  build and 2003 build DSV that will never get debt against them again, so this is a business that will be effectively equity financed forever. If someone came to you today and said they wanted to raise £130m to buy Sapphire and Polaris and invest it in a business losing £2m per month (pre finance costs) you would think they were nuts, and in investment the rule is to ignore sunk costs.

In order to make those numbers work you would need some heroic assumptions about DSV day rates, currently between £95-130k, in the North Sea to fundamentally have a different view on the value of the asset base, and believe that a start-up US operation can suddenly change course in the face of continued market pressure (despite having the best DSV in the region last year and getting less than four weeks work). Somewhere, in an exceptionally nice office, someone must be starting to wonder at the enormity of what they have brought into. Because with the bonds trading as high as .37 of face value last week institutions have effectively been paying ~.7 for a claim of £87.5 in debt that they also have to fund with £20m for a 50% share of the equity (I am assuming). Or at an average cost of .35 Bibby Offshore was valued at £61.3m (i.e. total debt 35% of 175m) but then you need to put in another 65% /£40m just to keep trading? And that is simply to fund operating losses until the market returns? Its just not serious. There is no meaningful backlog here and it is 100% dependent on the market turning and customers continuing to use a contractor who would be known to be on life support financially.

To suggest that the Polaris and Sapphire could support secured debts more than 2 x their current asset value at the moment is again I think a heroic assumption.

All this points to the fact that someone started building a position in Bibby over the summer before the Q2 results came out, and when they did in September they have started to panic. Bibby Offshore is performing materially worse in financial terms than in 2016 with significantly lower DSV utilisation at significantly lower rates because they are doing more air diving work. The DSV utilisation was 29% in 2017 versus 77% in 2016: a number that must have made bond investors more than a little nervous.

The other big mistake people seem to have made is not to understand that the frothy days of 2013/14 were driven by CAPEX not OPEX and until small scale shallow water construction returns there will be excess capacity in DSVs. There are almost no plans for this work, much of which used to be driven by small-cap E&P companies and their sources of financing are almost completely closed.

This is an absolute mess. Bibby Offshore has waited far too long to start discussions, making the June interest payment was absurd, and it would appear the bondholders are now being asked to put in more money than the assets are worth to keep a company trading with more debt than revenue. Its totally unsustainable. Clearly the EY led accelerated M&A effort has failed, as the equity has no value, and the company is in the process of being handed over to the bondholders, it’s just not everyone realises that yet.

The only viable model for the business would be a debt writedown to c. £30-40m and ~£20m equity injection and all that would be left was a 2 x DSV North Sea operation. The problem with this is it wouldn’t leave you with the right assets, there is no exit strategy for the investors, there is no guarantee the payout would be higher than a liquidation scenario, and it entails significant market risk. It would also appear to be hostile to management who have been increasingly shrill lately about their range of opportunities and have simply ignored economic, market, and finanial reality.

I am not saying a deal won’t be done: London is awash with dumb liquidity at the moment. I suspect someone got into this because they looked at the asset values in BOHL accounts and saw the discrepancy between those and the bond price and simply brought in without realising how inflated the vessel values were. Should this be the case the scale of the mess here is likely causing them to follow a “double-down” scenario that is simply illogical in financial terms, but it seems unlikely the other bondholders won’t request updated valuations before putting new money in and that is when the wheels will start to come off this completely as no shipbroker will issue a certificate to (notoriously litigious) investor groups that isn’t realistic. Sooner or later the grown-ups at credit committee will begin to take charge…

It is worth comparing the USD 15m Nor raised in November last year to support their liquidity for a year. That USD 15m represented what they hoped was 10-15% of the final asset value. Assuming the £40m is correct (and at less than 2017 annualised cash burn it must be a good approximation) Bibby is looking for 100% of the DSV value (on a good day) and still have another £87.5m owing?! Really? This can’t be serious.

I repeat my call that if Bibby Line Group wanted to be consistent to the values it espouses that it should guarantee all non-Director staff their contractual notice period. Such a meaningful gesture would be well received by those approaching the Christmas period with such massive uncertainty.

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