Bibby Offshore restructuring: Latham and Watkins, York Capital, and DeepOcean/Triton…

Latham and Watkins, legal advisers to Bibby Offshore Holdings Limited in their restructuring, recently published a ‘thought leadership’ article on the transaction. It is a short read, and as an exercise in varying perceptions, well worthwhile if you followed the relatively shambolic proceeds that allowed the company to reach it’s current state.

I liked this line:

In early 2017, Bibby Offshore’s directors determined that the company’s capital structure had to be right-sized and that additional liquidity was required to meet the challenging market conditions facing the business.

This is a business that lost £1m a week in 2016 of actual cash. How early in 2017 did the directors determine the need for a change in the capital structure? As I noted in June 2017 paying the interest payment was irresponsible when the business needed new funding within the next few months. The fact is this transaction only started seriously in August, as testified by York claiming £200k per month for their efforts from that point (and public announcements by Bibby at that time), but by which time the business was insolvent in an accounting sense, only a going concern because they were in discussions about a transaction, and the restruucturing plan itself presented when the business was literally days away from administration as they were down to ~£2m cash.

The fact that Moodys downgraded Bibby Offshore Holdings Ltd in Nov 2016 could also have been a hint?

In fact in March 2017 the Chairman of BOHL (who later lost his job in part because of this fiasco) made this statement :

Mike Brown 23 March 2017

I guess it wasn’t that early in 2017 the Directors came to that realisation then? Like, “well positioned” apart from the fact they were running out of money? Or did they just decide to print something blatantly untrue in their statutory accounts?

Maybe this line from the CEO (25 March 2017):

CEO Bibby 25 March

This disclaimer “apart from losing £1m per week at operating cash flow level and we will therefore need to right-size the capital structure” should really have been added to make the Latham and Watkins story credible. Or maybe this one:

Bibby CEO March 2017

In case orders should increase rapidly?!!! Turnover in 2017 dropped 50% over the previous year and they obviously had to drawdown on the revolver! Surely this was obvious by the end of March (which most people calculate as nearly 25% of the way through the year)? The Bibby directors don’t sound like a group of proactively looking at a restructuring “early” in the year here. Reference to the Bibby shareholders putting money in is comedically short given the known financial position of the Group and how far underwater the equity was.

You literally cannot make this up (unless you are a lawyer I guess?).

Look, I get this is essentially a small marketing piece for Latham and Watkins (the vessel on pictured on their website isn’t even an offshore vessel, yet alone a Bibby Offshore one), and they are being diplomatic. But the truth is the Bibby restructuring was a highly uncontrolled event by a management team out of their depth and a shareholder unwilling to accept the reality of his financial situation. All the documents (since taken down) relating to the transaction were clearly drafted late in the process and reflected the power, and weakness, of York at that stage who was committed to a deal. The restructuring agreement contained wide ranging clauses designed in lieu of actual execution documents that would be drafted when more time was available. This is not a criticism of Latham and Watkins, to get a deal over the line at that stage, when it appears that Barclays had refused to extend the revolving credit facility and the much vaunted “supportive shareholder” was unwilling to put anything in, was creating a situation that would have led to an immediate administration, it is therefore a considerable achievement. But it was that close.

The reason I am going on about the past is that it is impossible to understand the dire current position of Bibby Offshore without understanding the context. I guess if you buy companies with zero due diligence you have to expect the occassional dud, and it is clear this is a bomb that has blown up in the investors face.

The crucial point is this say Latham and Watkins:

As echoed by Bloomberg’s comment on the transaction: “(….) this is about as fair of a deal for all creditors as I have seen. Parties may differ on what the future holds, but the terms of the restructuring are clear and equitable. This is a text-book restructuring (…)”.

The reason for this is clear: York and their co-investors dramatically overpaid. The rest of the creditors were happy because they couldn’t believe the terms that someone was putting money in at! The old saying that “if you don’t know who is getting screwed on a deal it’s you” is apt here. The only question now is how much money the Bibby investors lose and how quickly?

One of the great mysteries of this deal is why York, charging £200k per month for their competence and skill, allowed the business not to go through an administration process (which they would have controlled as the largest creditor), and emerge via a pre-pack debt free. The business had virtually no backlog, and as has happened in the Norwegian restructurings, trade creditors can be protected. By not doing this the business has been saddled with many of the historic obligations that now call into question the viability of the business. In particular the office space in Aberdeen and the US (both entered into at the peak of the market), residual liabilities to Olympic (the Ares redelivery costs are owing and the Olympic Bibby charter), and ROV leases and hangers, redundancy costs, Trinidad tax etc, all these costs must be paid for from current market revenues and rates which are significantly below levels when the contracts were entered into, by a business that is dramatically smaller in scale.

A quick look at the uses of the £50m rights issue shows Bibby Offshore to have solved its immediate financial problems but it has not solved the issues with its economic model. Without a substantial change in market conditions the business will require a further capital injection, potentially as early as later this year. This is a rough guide to how much cash Bibby Offshore currently has available:

Bibby 50m.png

I have made aload of assumptions here, I have, for example, no idea what the Latham and Watkins fee or EY fee is, but have made an esitmation based on London Big 4 rates. If anything I could have underplayed these, but the overall number will be correct within a few million, especially as trading losses are likely to have been higher. I haven’t included rebranding costs as York are hoping to flip this prior to dropping a 6 figure number on these. The point is this though: it is not exactly an impregnable balance sheet and unless market rates for DSVs rise substantially, and there is no indication they are doing so, it will not be enough to get to this time next year as a credible going concern. Bibby/ York realistically require victory in the (highly speculative) EMAS case for the business to have a viable financing strategy that can absorb trading losses for longer than the ~£20m they realistically have available.

I believe York confused a liquidity crisis for a solvency crisis and therefore acted as if all the business needed was a short-term cash facility. York appear desperate now to offload the business quickly to Triton/ DeepOcean. There are few other logical buyers and yet there are huge challenges if Triton/DeepOcean take on this risk. DeepOcean appear to be keeping the diving personnel on to give them some options in this area.

One challenge is contractual risk: Bibby Offshore recently won a large decomissioning job for Fairfield. I haven’t seen the exact specs, but it is probably ~30 days DSV work and ~120 days ROV work. Which is good… but … to win they have taken all weather risk, which is just gambling. They may have needed to in order to win the work, but that is taking an active decision to take risk that you cannot mitigate. It may all work out well and they could make a profit, but a bad summer and the boats will be bobbing around unpaid while they finish the work, and all to Bibby’s account. For a small loss-making, undercapitalised, contractor that is a disaster scenario. Anyone buying the company would be mad to take on this, literally, incalculable risk. Why not just wait and see what happens?

The problem for the seller is the longer the cash burn continues the weaker their position becomes and the harder raising, or justifying raising, capital will be. Bibby’s competitive position is significantly weaker than a year ago with Boskalis buying the Nor vessels. Bibby faces three very well capitalised companies who are clearly committed to the market. Any further fundraising for the company would recognise this, and the fact is that the Bibby fleet is older than comparative fleets.

There are very few investors who will continually inject new money into a micro-scale, loss making, niche business, competing against three global players with strong balance sheets, in an industry that requires vast quantities of CapEx , has over capacity issues on the supply side, with weak demand growth forecast, and a realistic chance of dropping from the #3 player to number #4. And that is exactly the scenario facing Triton/DeepOcean as well (they can capture some cost savings but how much do you pay for those when the order book is less than a year and your newest competitor has €1bn cash?).

The whole economic and market environment has changed. DSV rates look to be settling at £100-130k for the Boskalis/Bibby fleets (slightly higher for the Technip/SS7 new builds) and at that level I don’t think the business model, especially with historic obligations, works. Is there really room for four DSV companies in the North Sea market? in 2014 the Harkand boats worked in Africa to get utilisation. If not, do Bibby, currently operating at a trading loss, have a real plan to battle it out against 3 publicly listed giants, with no other plan than a market turnaround in day rates? Without CapEx work picking up the IRM space will be competitive for years.

The big surprise is how slow the inevitable restructuring has been. The US and Norwegian offices were closed within weeks (despite L&W claiming ” that it has a strong consolidated position from which to expand in the markets in which it operates”) but there are well over 200 people in Aberdeen! 3 vessels working have to cover not only the crew onboard but nearly 70 people onshore per vessel as well (and some very expensive consultants to boot at the moment). That is totally unsustainable and it is causing the company to burn through its much vaunted cash pile. The DOF Subsea ratio is 1 boat to 42 people.

Scale and legacy cost issues pervade the business: the Bibby office in Aberdeen, for example, must be at least £3.5m per annum, that means even with three vessels working 270 days each one needs c.to earn £4.4k per day just to pay for a proportionate share of it. And these three vessels still have to pay for the US office until they can get out of the ten year lease. The same for the ROV hanger. The same for the upcoming restructuring and redundancy costs. There are simply too few boats working to cover proportionately the expenses being incurred.

In addition Bibby Offshore has the least competitive asset base of any North Sea DSV contractor. The Bibby Polaris needs a fourth special survey next year. At 20 years old she is two generations behind the newer vessels (the Bibby ST and Tecnhip/SS7 newbuilds), the forward bell arrangement is awkward, and the carousel is not efficient. So even if someone paid the equivalent of £20m for the vessel, and assuming you got ten years of life out of it that means c.£7500 per day in depreciation if the vessel works 270 days a year, over and above running and financing cash costs. If the drydocks come in over budget you would be lucky to achieve even cash breakeven at current market rates. PE investors, like York, mainly talk cash, which is fine until you run into an asset with a finite life. Sell the vessel out of the North Sea and you would be lucky to get £10m, and it would cost you six months running costs to get that.

The Bibby Sapphire looks to have temporarily avoided the fate of layup and is currently at anchor in Aberdeen. Sapphire will dive some days this summer, but having an asset that is needed only 90-100 days a year, at £100-120k per day (less 50k for project crew), is not economic at more than a de minimus price when the full 365 costs are taken into account and dry-docks/surveys are needed. Yes, she can work as an ROV vessel as well, but in-case no one noticed the reason that companies like Reach, M2, and ROVOP are making money at the moment is that they get the boat for free (in an economic sense).

I get how the spreadsheet added up to £115m Bibby valuation that York led the investment at… it’s just the assumptions required to get there that I think are erroneous.

York don’t have a good track record in offshore. Cecon, which York gained control of via distressed bonds, was a disaster, and for many of the same reasons the Bibby Offshore: a fundamental misunderstanding of the asset base and business model of the acquisition. The rump of Cecon is Rever Offshore, which mainly consists of a rusting hulk in Romania (ironically named the Cecon Excellence originally), rapidly going nowhere. York may have made some money off the one  Cecon vessel sold to Fortress at the peak of the market… But transactions such as this saw York Capital Management lose a significant portion of assets under management in 2017:

…funds to see withdrawals included York Capital Management, which lost $6.10 billion [from $22.3bn to 16.2bn]. The fund posted negative 2015 performance of 14% and was flat in 2016, a year in which The Wall Street Journalreported fund CEO Jamie Dinan said he experienced “his most intense client interactions in years.” That can happen when dramatically underperforming benchmarks.

York must be hoping there is a hoping there is another financial buyer who knows even less about subsea than they do.  Triton/DeepOcean want to make sure that York’s one good investment in offshore, their minority position in DeepOcean, doesn’t go the way of their other investments in the sector by trying to take advantage of York’s … er … skills…

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