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.

Like Facebook and Alphabet… Nautalis Marine Plc and First Bitcoin Capital Corp… a hot M&A tip…

a company for carrying out an undertaking of great advantage, but nobody is to know what it is

From the listing prospectus of a company issuing shares during the South Sea Bubble, c. 1720

On February 27th Grand Pacaraima Gold Corp., a mining corporation focused on Venezuela,  changed its name to First Bitcoin Capital Corp (“BITCF”) thus moving from a small penny listed Canadian mining corporation to being a small listed Canadian penny listed Bitcoin/Altcoin focused corporation (h/t Matt Levine). Similarly on 16th January Global Energy Development Plc changed its name to Nautalis Marine Plc, having been previously invested in E&P production in South America, in a related party transaction purchased potentially the worst 11 vessels in the entire global subsea fleet and continued their lay-up in Louisiana, and became a small cap listed offshore vessel owner (not operator as all the assets are in lay-up).

Global Energy/Nautalis entered into a complicated loan note, validated by advisors, although this opinion has not to my knowledge been made public, to complete this transaction in which the related parties released their interest in the vessels and thus exchanged a highly uncertain equity stake, in 11 of the oldest (and most operationally compromised) OSVs in the world, for fixed obligation loan notes. The company, having generously lent the related parties money to buy the vessels in the first place, then even more generously extended credit to purchase them back. Now the company seriously states it is looking for technology focused acquisitions to add value to their vessels… one of these was built in 1967…

BITCF is also fond of complicated transactions. BITCF has managed not only a share buyback but also a dividend in cryptocurrency: BITCF used XOM “the internet of money” to buy back ordinary shares, and then Tesla Coin (“TESLA”) to pay a dividend (BITCF owns 20% of TESLA). Unfortunately, the Securities and Exchange Commission appears to have had a sense of humour failure and has suspended trading in the shares, which is a shame because on mirth value alone I recommend reading the letter explaining this which states:

BITCF is extremely rare in this regard for an OTC company as most are dilution machines designed either to grow their company or unjustly enrich management and promoters. Our management has never sold one share of our stock in spite of the meteoric rise in price per share.

The reason we have been able to succeed without external funding is due to the fact that we early learned how to develop crypto assets on a shoe string, so to speak. This also resulted in our being able to pay off our debt which was owed to management with one of our created crypto currencies.

Clearly BITCF found mining for coins easier than finding gold. In a similar vein Global/Nautalis found buying decrepit DSVs, in a related party transaction, easier than foraging for oil. Both are essentially technology plays they claim, kind of like Facebook and Snap… I guess…

I often wonder these days why I am not involved in a cryptocurrency. Can life have meaning without one? I get The Bank of England shares doubts about the stability and role of this unit of account in a modern world… but really can a bank created to finance a government loan see the future?

I note that Nautalis seeks a niche a specialised offshore technology. I think the M&A bankers can already see the possibilities that I do?! DSV Coin? There are over 850 cryptocurrenciesalready (none of which carrying the symbol DSV that I am aware of?) and BITCF allows users to mine their own coins based on their own blockchain, (although the company itself has mined 20.7m of the potential 21.0m coins). How can you not want to invest in a company that issues the following statement:

the company intends to pay additional dividends in various crypto currencies that may include crypto exchange symbols $WEED $FLY $PRES, $HILL, $GARY, $BURN, $OTX and $KLC. We may also from time to time pay dividends in our own common shares in their crypto form which trades under the crypto symbol $BITCF on various foreign cryptocurrency exchanges.

$WEED coin listed on 3 exchanges during 3rd successful ICO (Initial Coin Offering).

WEED coin now trades on the OMNIDEX, COINQX and CRYPTOPIA https://www.cryptopia.co.nz/Exchange/?market=WEED_BTC

Similarly Nautalis (who also have some great promotional material) makes much of the of the fact that they are they are “unique”:

Nautalis Differentiation.png

That is my favourite slide ever. And I say that as an ex-management consultant who was virtually paid by the slide at one point and can make the cleverest idea into a meaningless deck of slides in an instant. They should have added a line “Number of offshore energy services companies with their entire fleet in lay-up – 1 (.001%)”, that is the only improvement I could suggest. I once had a boss who was a stickler for detail who would have crucified me for not explaining the correlatation/causation aspect of so few offshore companies and the need for the industry to have less capital as E&P spending decline… but maybe not if the slide was of this quality.

Nautalis have noticed a “massive” industry (one they also have limited experience in) and are therefore “targeting a niche market”… with 11/11  vessels in lay-up that is patently true! Nautalius note there are 10 000 companies…. and probably none with their entire fleet in lay-up either! It’s a veritable Cambrian explosion of wealth…

Nautalis Opportunity.png

These companies are made for each other. NautalisBITCF can issue the first cryptocurrency based on DSVs. As the oil market recovers the vessels can be scrapped to issue genuine metal tokens (“money”) in the blockchain, backed by actual ships: A quaint physical symbol of the past perhaps? Or you could short the ships (defintitely if I offered investment advice, which I don’t) and go long AltCoin, or DSVCoin, or whatever you could get away in an Initial Coin Offering.

The link here as always is investment bubbles: BITCF are hoping to ride the wave up whereas Nautlis Plc appear to have timed spectacularly badly the offshore oil services downturn. The one thing you can guarantee here is that that those Nautalis vessels won’t dive again (unless they are sinking), or in the case of the barge lay pipe, and anyone not taking seigniorage on “money” issued by BITCF is unlikely to get a return…

DSV valuations in an uncertain world: Love isn’t all you need… Credible commitment is more important…

“Residual valuation in shipping and offshore scares the shit out of me”

Investment Banker in a recent conversation

 

“Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

 

The FT recently published this Short View about how the bottom may have been reached for rig companies and that there may be upside from here. The first thing I noted was how high rig utilisation was, the OSV fleet would kill for that level, and yet still the fleet is struggling to maintain profitability (graph not in the electronic edition but currently about 65%). The degree of operational leverage is a sign of how broken the risk model is for the offshore sector as a whole. A correction will be needed going forward for new investment in kit going forward and the obvious point to meet is in contract length. Banks simply are not going to lend $500m on a rig that will be going on a three year contract. Multi- operator, longer-term, contracts will be the norm to get to 7G rigs I suspect (no one needs to make a 6G rig ever again I suspect). The article states:

No wonder. Daily rental rates for even the most sophisticated deepwater rigs have tumbled 70 per cent, back to prices not seen since 2004. Miserly capital spending by the major oil companies, down more than half to $40bn in the two years to 2016, has not helped. Adding to this lack of investment from its customers is a bubble of new builds, which is only slowly deflating.

Understandably, the market is showing little faith in the underlying value of these rig operators. US and Norwegian operators trade at just 20 per cent of their stated book values. The market value of US-listed Atwood Oceanics suggests its rigs are worth no more than its constituent steel, according to Fearnley Securities.

What the article doesn’t make clear, but every OSV investor understands, is that in order to access more than the value of the steel rigs and OSVs have very high running costs. The market is making a logical discount because if you cannot fund the OpEx until operating it above cash break even or a sale then steel is all you will get: it’s the liquidity discount to a solvency problem. That tension between future realisable value and the option value/cost of getting there is at the core of current valuation problems.

The OSV fleet is struggling with utilisation levels that are well under 50% for most asset classes and even some relatively new vessels (Seven Navica) are so unsellable (to E&P customers I don’t think Subsea 7 is a seller of the asset) they have been laid-up.  From a valuation perspective nothing intrigues me more than the North Sea DSV fleet: The global fleet is limited to between 18-24 vessels, depending on how your criteria, and with a limited number companies who can utilise the vessels, they provide a near perfect natural experiment for asset prices in an illiquid market.

North Sea class DSVs need to be valued from an Asset Specific perspective: in economic terms this means the value of the asset declines significantly when the DSV leaves the North Sea region. Economists define this risk as “Hold Up” risk. In both the BOHL and Harkand/Nor case this risk was passed to bondholders, owners of fixed debt obligations with no managerial involvement in the business and few contractual obligations as to how the business was run.

The question, as both companies face fundraising challenges, is what are the DSVs worth? Is there an “price” for the asset unique from the structure that allows it to operate?

In the last BOHL accounts (30 June 2017) the value of the Polaris and Sapphire is £74m. I am sure there is a reputable broker who has given them this number, on a willing buyer/ willing seller basis. The problem of course is that in a distress situation, and when you are going through cash at c.£1m per week and you have less than £7m left it is a distress capital raise, what is a willing seller? No one I know in the shipbroking community really believes they could get £74m for those vessels and indeed if they could they bondholders should jump at the chance of a near 40% recovery of par. A fire-sale would bring a figure a quantum below this.

Sapphire is the harder of the two assets to value: the vessel is in lay-up, has worked less than 20 days this year, and despite being the best DSV in the Gulf of Mexico hasn’t allowed BOHL to develop meaningful market share (which is why the Nor Da Vinci going to Trinidad needs to be kept in context). Let’s assume that 1/3 of the £74m is the Sapphire… How do you justify £24m for a vessel that cannot even earn its OpEx and indeed has so little work the best option is warm-stack? The running costs on these sort of vessels is close to £10k per day normally, over 10% of the capital value of the asset not including a dry dock allowance etc? Moving the vessel back to the North Sea would cost $500k including fuel.  The only answer is potential future residual value. If BOHL really believed the asset was worth £24m they should have approached the bondholders and agreed a proportionate writedown and sold the asset… but I think everyone knows that the asset is essentially unsellable in the current market, and certainly for nowhere near the number book value implies. Vard, Keppel, and China Merchants certainly do… The only recent DSV sale was the Swiber Atlantis that had a broker valuation of USD 40-44m in 2014 and went for c. USD 10m to NPCC and that was not an anomaly on recent transaction multiples. If the Sapphire isn’t purchased as part of a broader asset purchase she may not return to the North Sea and her value is extremely uncertain – see how little work the Swordfish has had.

Polaris has a different, but related, valuation problem. In order to access the North Sea day rate that would make the vessel worth say a £50m valuation you need a certain amount of infrastructure and that costs at c.£5-8m per annum (c.£14k -22k per day), and that is way above the margin one of two DSVs is making yet you are exposed to the running costs of £10k per day. Utilisation for the BOHL fleet has been between 29%-46% this year and the market is primarily spot with little forward commitment from the customer base. So an investor is being asked to go long on a £50m asset, with high OpEx and infrastructure requirements, and no backlog and a market upturn needed as well? In order to invest in a proposition like that you normally need increasing returns to scale not decreasing returns that a depreciable asset offers you.

This link between the asset specificity of DSV and the complementary nature of the infrastructure required to support it is the core valuation of these assets. Ignoring the costs of the support infrastructure from the ability of the asset to generate the work is like doing a DCF valuation of a company and then forgetting to subtract the debt obligation from the implied equity value: without the ability to trade in the North Sea the asset must compete in the rest-of-the-world market, and apart from a bigger crane and deck-space the vessels have no advantage.

It is this inability to see this, and refusal to accept that because of this there is no spot market for North Sea class DSVs, that has led to the Nor position in my humble opinion. The shareholders of the vessels are caught in the irreconcilable position of wanting the vessels to be valued at a “North Sea Price”, but unable or unwilling to commit to the expenditure to make this credible. It would of course be economic madness to do so, but it’s just as mad to pretend that without doing so the values might revert to the historically implied levels of depreciated book value.

The Nor owners issued a prospectus as part of the capital raising in Nov 2016 and made clear the running costs of the vessels were c. USD 370k per month per vessel for crewing and c. USD 90k per month for SAT system maintenance. In their last accounts they claimed the vessels value at c. USD 60m each. Given Nor raised USD 15m in Nov last year, and expected to have one vessel on a 365 contract ay US 15k per day by March, they are so far behind this they cannot catch-up at current market rates.

Again, these vessels, even at the book values registered, require more than 10% of their capital value annually just to keep the option alive of capturing that value. That is a very expensive option when the payoff is so uncertain. If you are out on your assumption of the final sale value by 10% then you have wasted an entire year’s option premium and on a discounted basis hugely diluted your potential returns (i.e. this is very risky). Supposedly 25 year assets you spend more than 2.5x their asset values to keep the residual value option alive.

Three factors are crucial for the valuation of these assets:

  • The gap between the present earning potential and the possible future value is speculation. You can craft an extremely complicated investment thesis but it’s just a hypothesis. The “sellers” of these assets, unsurprisingly, believe they hold something of great future value the market simply doesn’t recognise at the moment. Sometimes this goes right, as it did for John Paulson in the subprime mortgage market (in this case a short position obviously) and other times it didn’t as owners of Mississippi Company shares found to their discomfort. We are back to the “Greater Fool Theory” of DSV valuation.One share.png
  • Debt: In the good old days you could finance these assets with debt so the equity check, certainly relative to the risk was small. In reality now, for all but the most blue-chip borrowers, bank loan books are closed for such specialist assets. And the problem is the blue-chip borrowers have (more than) enough DSVs. The Bibby and Nor DSVs are becoming old vessels: Polaris (1999) will never get a loan against it again I would venture and the Sapphire (2005) has the same problem. The Nor vessels are 2011 builds and are very close to the 8 year threshold of most shipping banks. As a general rule, like a house, if you can’t get a mortgage the vessel is worth less, substantially so in these cases because all diving companies are making less money so their ability to find equity for vessels is reduced. Banks and other lenders have worked out that the price volatility on these assets is huge and the only thing more unsellable that a new DSV is an old DSV. It will take a generation for internal risk models to reset.
  • You need a large amount of liquidity to signal that you have the commitment to see this through. At the moment neither Bibby or Nor have this. From easily obtainable public information any potential counterparty can see a far more rational strategy is to wait, the choice of substitutes is large and the problems of the seller greater than your potential upside.

Of course, the answer to liquidity concerns, as any central banker since Bagehot has realised, is to flood the market with liquidity. Bibby Line Group for example could remove their restrictions on the RCF and simply say they have approved it (quite why Barclays will agree to this arrangement is beyond me: the reputational risk for them foreclosing is huge). As the shareholder Bibby Line Group could tell the market what they are doing, in Mario Monti’s words, “whatever it takes”. Of course, Mario Monti can print “high powered money” which is not something Bibby Line Group can, and that credibility deficit is well understood by the market. A central bank cannot go bankrupt (and here) whereas a commitment from BLG to underwrite BOHL to the tune of £62m per annum would threaten the financial position of the parent.

I have a theory, untestable in a statistically significant sense but seemingly observable (e.g. Standard Drilling, the rig market in general), that excessive liquidity, especially among alternative asset managers and special situation funds, is destroying the price discovery mechanism in oil and gas (and probably other markets as well).  I accept that this maybe because I am excessively pessimistic, but when your entire gamble is on residual value in an oversupplied market, how can you not be? In offshore this is plain to see as the Nor buyers again work out how to value the assets for their second “super senior” or is that “super super senior” tranche, or however they plan to fund their ongoing operations. The Bibby question will have to be resolved imminently.

At some point potential investors will have the revolutionary notion that the assets should be valued under reasonable cash flow assumptions that reflect the huge increase in supply of the competitive asset base and lower demand volumes. Such a price is substantially lower than build cost, and therein lies the correction mechanism because new assets will not be built, in the North Sea DSV case for a considerable period of time. Both the Bibby and the Nor bondholders, possessors of theoretically fixed payment obligations secured on illiquid and specialised assets will be key to the market correction. Yes this value is likely to be substantially below implied book/depreciated value… but that is the price signal not to build any more! Economics is a brutal discipline as well as a dismal one (and clearly not one Chinese yards have encountered much).

How these existing assets are financed will provide an insight into the current market “price discovery” mechanism. For Nor the percentage of the asset effectively that the new cash demands, and the fixed rate of return for further liquidity, will highlight a degree of market pessimism or optimism over the future residual value. If you have to supply another USD 15m to keep the two vessels in the spot charter market for another 12 or 15 months how much asset exposure do you need to make it work? Will the Nor vessels really be worth $60m in a few years if you have to spend USD 7.5 per annum to realize that? What IRR do you require on the $7.5m to take that risk? Somewhere between the pessimism of poor historic utilisation and declining structural conditions and the inherent liquidity and optimism of the distressed debt investors lies a deal.

The Bibby valuation is more binary: either the company raises capital that sees the assets tied to the frameworks of their infrastructure, and implicit cross-subsidisation of both, or the assets are exposed to the pure vessel sale and purchase market. The latter scenario will see a brutal price discovery mechanism as industrial buyers alone will be the bidders I suspect.

Shipbroker valuations work well for liquid markets. The brokers have a very good knowledge of what buyers and sellers are willing to pay and I believe they are accurate. I have severe doubts for illiquid markets, particularly those erring down, that brokers, like rating agencies, have the right economic incentives to provide a broad enough range of the possibilities.

Although the question regarding the North Sea DSVs wasn’t rhetorical it is clear what I think: unless you are prepared to commit to the North Sea in a credible manner a North Sea DSV is worth only what it can earn in the rest-of-the-world with maybe a small option premium in case the market booms and the very long run nature of the supply curve. The longer this doesn’t happen the less that option is valued at and the more expensive it is to keep.

 

[P.S. Around Bishopsgate there is a theory circulating that Blogs can have a disproportionate impact on DSV values a theory only the most paranoid and delusional could subscribe to. I have therefore chosen to ignore this at the present time. The substance of the message is more important than the form or location of its delivery.]

DSV economics and finance 101.

The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”
BNP Paribas press release, August 9,2007

 

I don’t want realism. I want magic!

TENNESSEE WILLIAMS, A Streetcar Named Desire

 

“Reality is that which, when you stop believing in it, doesn’t go away.”

Philip K Dick, I Hope I Shall Arrive Soon

 

Right now is the toughest DSV that has existed since a massive DSV rebuild programme began in earnest in 2000. At the moment Toisa are in restructuring talks, Bibby have not made money for at least two years, Harkand are no more, and a host of other smaller companies have gone bankrupt. The cause was that there was too little work at profitable rates.

Currently there is a vast inventory of North Sea class Dive Support vessels mounting up: 2 x Nor Offshore, 1 x Vard, 1 x Bibby Sapphire, various assets of Technip and Subsea 7, and various Toisa, for non-comprehensive list. In Asia the number of underutilised DSVs is so vast, and the competition so intense from PSVs with modular SAT systems, that the new normal is OpEx breakeven if you are lucky. Keppel have a USD 200m DSV that can’t be sold  and another Toisa DSV is in the production line in China . As in Europe intense price competition is stopping anyone of the dive companies making any money.

By any traditional measure of economic and financial analysis this is not a good time to launch a new DSV company, either as an owner, where the market is oversupplied and no owner can even get his book value back on the boats, or as a dive contractor where an excess of capacity is driving the price of work to its cost or less. It is worth noting that the new build Tasik DSV, with a 365 five year charter to Fugro, could not get takeout financing from the yard.

Into this maelstrom is coming Ultradeep Solutions (“UDS”),Flash Tekk Engineering, and a Chinese yard…

The distinction between the North Sea fleet and the rest of the world is important as everyone knows in the market the North Sea environmental conditions demand a higher specification vessel and therefore day rates have always been higher. The ROW has never chartered tonnage of the same cost because they don’t need too, older vessels traded out of the North Sea and finished their days in Asia or Africa for lower rates but trading on the higher spec and build quality.

UDS is building North Sea standard tonnage when both Harkand and Bibby, pure IRM and diving companies, could not operate similar, less expensive tonnage, profitably. That is a statement of fact. In order to operate in the North Sea you need a certain amount of infrastructure that I estimate at a minimum costs c. £5-8m per annum for two vessels, to cover things like bidding, HSE, business development, plus the vessel running costs (detailed below). Or you could just charter the vessels to someone willing to pay. There is no middle ground here. Nor Offshore recently tried and got zero utilisation, it is not a product anyone wants, or needs, to buy.

The problem is there are no charterers, and companies like Bibby, who despite their capital structure still offer a very good product, cannot even break even on the vessels: this should be a word of warning for companies seeking to enter. No owner wants to accept there has been a structural change in demand in the North Sea as it means writing off tens of millions of dollars on asset values. Like the financial crisis, which began nearly ten years ago today, everyone owning a DSV claims their assets are impossible to value fairly, what they mean is the price they would get isn’t one they are prepared to accept (cognitively even if they had to take it financially). Just like the financial crisis securities the vessels are used as collateral, when the risks of ownership of these assets cannot easily be assessed, as with DSVs now, their price falls and they become in effect untradeable at any price.

Anyone raising money for a high-end DSV at the moment needs to explain how even if they paid the yard delivered price only why they wouldn’t then go down the road to Vard and offer 10% less for theirs, then the Nor bondholders and offer them 20% less, and then Keppel and offer them 50% less, and then start the whole cycle again. These are extremely illiquid assets with very high holding costs and the option value doesn’t look great. Yes maybe, a big maybe, these Chinese built vessels are operationally better, but does that add anything for the client or a way to charge more? No.

At the moment the Nor Da Vinci is steaming to Trinidad for c. 35 days work for BP, and it takes 25 (ish) days in transit time to get there. This vessel is a near sister ship of the Ausana that UDS have taken on. Unless you believe that every single dive contractor/DSV owner in the world has forgotten to bid for certain jobs then you need to accept the market is suffering from chronic oversupply at the high end.  Nor raised USD 15m in Nov last year, ostensibly to keep the vessels trading in the North Sea, they are not taking the vessel to Trinidad because the crane wants to go sunbathing, it is the only work they can get. Nor will need to do a liquidity issue soon and decide where to position the vessels again this November. Every single job UDS go for will have people just as desperate as them to win work for years to come. The last Nor propospectus also made clear that crewing costs, on a near identical vessel to the Ausana, at safe manning level only, were USD 350k per vessel per month + c. 100k for the dive techs and maintenance. These are very expensive assets to hold an option on.

I don’t want to spend a lot of time on  UDS, I admire anyone setting up a company and making a go of it, but its really simple for me: either we are going to see the company raise literally hundreds of millions of dollars to pay for some DSVs and working capital, in a market when asset values are dropping and no one is making  break-even money, or the yard is going to have to subsidise the vessels and the working capital question becomes interesting. Because someone still needs to pickup the tab for the OpEx which is around USD 10k per vessel per day. 30k per day is c. USD 1m a month with some corporate overhead included and unexpected expenses included. That size of fundraising is institutional money and will leave a documentary trail. I can’t find anything yet which leads me to believe they are undercapitalised (I am happy to be proven wrong here). Raising that sort of money without any backlog at all will I believe be impossible in current financial markets. The return required for hedge funds and other alternative investors to get behind this simply cannot be demonstrated.

It is just not possible in this market, where extremely good operating companies are struggling for work for someone to know of jobs that everyone else forgot about. It’s just not possible in this market to deliver dive vessels tens of millions in cost more than local competitive vessels and claim that you are the only person who can make money and all that is stopping everyone else is negativity.

The fact of the matter is unless those UDS vessels work at North Sea rates, and UDS commits to the sort of infrastructure required to do this or finds a charterer, the vessels will never make money in an economic sense. And even then UDS would have to explain what they are going to do that Harkand and Bibby didn’t or can’t?  No one builds USD 150m dive vessels for Asia because people won’t pay for them. That doesn’t mean UDS won’t make money, owe the bank 1m you are in trouble, owe the bank 100m and they are. The yard has a problem here and needs these vessels to work if they are finished off as DSVs. But even if UDS come up with the vast amount of working capital required it doesn’t make the vessels economic units and that will be bad for the industry as whole.

We will see. I could be wrong… But sooner or later the cash flow constraint is going to bite here because the numbers are so big. If I was a supplier I’d really be hoping my contract was with the yard.

Boskalis holds all the cards, the importance of windfarms, and restructuring transactions…

I don’t need a watch, the time is now or never.

Lil Wayne

A couple of people have sent me emails asking some questions relating to my Bibby/ Boskalis post and it is easier to answer them once. Obviously this isn’t investment advice (and no one reading this is likely to own the minimum of GB 100k anyway) and is a general indication of events not specific advice. Deals never go the way anyone plans.

Firstly, under UK law a company is insolvent if the assets do not cover the debts or if it cannot pay its debts as they fall due. Should either of these circumstances occur the shareholders have lost control of the company and it is in effect run for the benefit of the creditors and at that point the debtholders can decide whether to call in administrators. Trading while insolvent is a very serious offence for the Directors as it increases creditor losses knowingly.

In Bibby Offshore’s case the only assets of note are the cash, DSVs, and ROVs which combined would come nowhere close to the value of the debts, and in fact Bibby is one of the few companies in the entire offshore industry not to have taken an impairment charge recently on vessel values, so everyone knows the GBP 100m book value is simply not real and the delta is a number like £50m not £2m. The next trading results will make it clear that without an immediate liquidity injection the company is unlikely to make the December interest payment and therefore the Directors now have a very limited window in which to gain funding (this is where is gets complex because a “highly confident” letter from a reputable financial institution may be enough to cover them for a bit but within a strict legal corridor). Given Bibby Offshore is operating at a loss in every geographic region, and has minimal backlog, and seems unable to meaningfully reduce its cost base, it is very unlikely to get this as any investor has to deal with the bondholders who realise they are going to take a substantial write-off here and have to work out how to minimise this loss. To all intents-and-purposes Bibby Offshore Holdings Ltd is controlled by the bondholders not the shareholders now, and it is their interests that are paramount. This can be seen from the BOHL balance sheet in March and the cash balance will be down at least around another £7-10m at best since then (excluding interest costs that have been paid).

BOHL Balance Sheet

BOHL Balance Sheet 20 June 2017

The only refinancing deal Bibby (BLG and BOHL) had been working on was a complex capital injection which required the bondholders to take a loss and work with new capital providers (such as M2 backer Alchemy) who would inject the funds for working capital and agree to pay the bondholders back less than the £175m but more than they would receive in a liquidation scenario. There is simply no realistic way the company could trade out of present situation even if the market recovered. The only conditonal funding from BLG was to back-up the revolver facility that essentially meant they got their money back before bondholders. I imagine this move went down badly with the bondholders.

The other things that seems to have been forgotten here is that the cash being burned is the creditors cash. If the bondholders can turn this spigot off then that money is available for distribution to them, so an option where they stop the cash burn at £15m in the bank is potentially an 8% increase in their recovery, which is meaningful when the only other option is watching it being burned on by a company with poor cost control who are seeking a free option on timing for their shareholder. The bondholders and their bankers will be remarkably unemotional when the first chance comes protect value. It is clear that the BOHL Directors  (and frankly at least one banker involved in the bond issue) failed to understand the seriousness of the 2016 financial result and the Non-Exec Directors at BOHL have performed particularly poorly. Making an interest payment in June, and then running into a liquidity issue now is not a market driven event. The backstop offered by BLG is insignificant in relation to the cash burn rate and reflects the lack of realism about the precarious nature of their situation.

Boskalis have therefore now made a price and pitched it to the “owners” of the company: the bondholders. The offer which I understand is for the bondholders to sell them certain assets of the company,  in-effect the North Sea Bibby Offshore, and leave the legal structure and debts with bondholders. These will be liquidated and generate a minimal recovery but that company will recieve the consideration for the assets it has sold and therefore the bondholders would be paid out of these funds. The price is c. £52m I have been led to believe which equates to the bondholders getting around 30% of the face value (par) of the bond. That means that any competing offer to control the company needs to give the bondholders the certainty of £52m (or whatever the final price agreed on is). Boskalis has wisely laid a marker in the ground, and with nearly €1bn cash on their balance sheet on the last reported financials, there is no doubt they can complete the transaction so the bondholders can bank this number.

It’s pony up with your money time if you are in the race to own these assets (the company will not be sold as the company has a legal obligation to pay the bondholders £175m which only liquidation or a restructuring agreement can extinguish). That sum of money, and the required OpEx for the company to trade through its losses for the next 12 months (say £20m), is so far beyond the capacity of Bibby Line Group to come up with up it might as well be a trillion, barring Sir Michael winning Euromillions twice in one week (and it needs to be next week).

So the only other question the bondholder advisers will be trying to answer now is can they can get a better offer… and who that might come from? I think the only credible bidder would be DeepOcean, as like Boskalis they have North Sea windfarm backlog and a customer base and chartered vessels they could hand back, to de-risk the asset OpEx. But DeepOcean are not as attractive for the bondholders as they are owned by a consortium of PE investors, and raising that sort of capital adds an execution risk to the deal,  one the bankers advising the bondholders will be acutely aware of. The worst case scenario for the bondholders is to lose a deal for accepting a higher price only to find the other side cannot deliver.

I don’t see McDermott (or someone like them) entering the race. Although they are the largest diving contractor in the world now, the North Sea is expensive, and as Bibby have shown perhaps not even profitable for a third player. McDermott want to get the 105 working in the North Sea, but having Boskalis or DeepOcean owning the Bibby DSVs gets them covered on that front without being exposed to the OpEx risk which they have no work in the region to cover so would be starting from scratch. DOF won’t want assets that old and would only be buying backlog of which there isn’t much.

Without any material backlog I don’t see any private equity bidder coming in period. It leaves them 100% exposed to execution risk and market recovery and the very real possibility of losing everything, and to be clear they would have to offer the bondholders something at least as good as £50m cash. Also for the bondholders advisers’ PE companies require due diligence and conditonal closing clauses that they simply don’t want to take execution risk on.

Such competing theories may also be irrelevant: last week (as I noted here) a large buyer of the Bibby bonds sent the price up. If that buyer was Boskalis, and I suspect it is, they may now own enough bonds to dominate (or at least block) the restructuring talks anyway and any competing proposals would be a waste of time. In that case all that is going on here is the protocols required to close this as a deal. In such a scenario Boskalis have probably also reached out to Barclays, who as owner of the revolver just want their money back quickly and will work on any constructive financed proposal to get out rather than risk having to recover their funds from a liquidator. The inability of BLG/BOHL and Barclays to agree a deal that was outlined in the 2016 YE results shows you exactly where Barclays are with this and they are an important stakeholder. It would also highlight this was essentially a hostile offer because the Bibby Town Hall recently, where Sir Michael reassured the staff about their solution, would not have taken place (or would have had a different tone).

So this could happen very quickly because the bondholders now have the certainty of a number and a credible counterparty, and the only internal/competing proposal is not “fully financed” in investment venacular i.e. the BLG shareholders don’t have an investor or an agreement in principal with the bondholders to renounce a proportion of their debts. My broad understanding, and only lawyers can answer these questions definitively, is that the bondholders and Barclays are within their rights now to call in the administrators, or will definitively be able to when results are due in the next few days. The vessels must have been revalued now so there is no place to hide and brokers giving valuations will be aware of their position so will be extremely realistic. The bondholder advisers then will simply seek irrevocable undertakings from the majority of bondholders to back the Boskalis deal, this would save the execution risk of a bondholder vote and this may have already been done, then agree a final deal with Boskalis. The they will call in the administrators with the deal being done at the same time. In legal terms it would all happen in a couple of hours as the major agreements will have been prengotiated and documented and the firm may have a small period in administration while the execution period vests (e.g. formal bondholder vote and Boskalis will seek to novate contracts for work).

This isn’t meant to be a definitive guide as to what will happen but it is a likely scenario and the final version will not be too different. There are numerous specific legal hurdles that must be covered and all insolvencies are different (I am also not a restructuring expert but I have been involved in some so this is broad rather than specific guidance), but I don’t believe the path will be materially different from the one I have outlined unless Boskalis pull out (and they have no reason to here because they are in control of this process).

Boskalis and DeepOcean show how much the market has changed since the oil and gas work dropped and how building up from a low cost windfarm environment has allowed them to take advantage of these opportunities. Both firms have the backlog and work that will allow them to trade the DSVs as peak SAT assets in the North Sea summer, doing diving work and minor project work only and the core maintenance work that Bibby used to do almost exclusively.

Windfarm work in the UK is getting deeper, some of the newer installations are at a depth of 60m which is pure SAT diving work, and work that was is on the margin of SAT or air diving can be carried out by  the Sapphire and Polaris economically given the purchase price. Without that base of windfarm work to spread the OpEx over it is very hard to see how a third major 2 vessel SAT diving player could survive in the UK North Sea because it is clear the Technip and Subsea 7 will protect market share aggressively in a quiet period for oil and gas. DOF Subsea could be expected to bid more aggressively but there is no certainty here as a few staff moves lately make it clear they are backing away a bit.

That will leave Technip and Subsea 7 to the major construction projects and who will hopefully be able to introduce some pricing sanity. Boskalis will do the lower end IRM work that Bibby used to specialise in, keep the cost base at an appropriate level, and yet still support companies like McDermott who need DSV support for SURF work but don’t have commit to running a DSV fleet.. This is a microcosm for how the whole offshore contractting industry will adapt to lower for maybe forever.

As I have said before in The New Offshore all that matters is: liquidity (a derivative of backog), strategy, and execution.

Bibby to Boskalis looks likely…

I have been told by mutliple credible people now that Boskalis are negotiating directly with the Bibby Offshore bondholders to purchase certain assets of the company that would in effect be the refinancing of the company. Booskalis are pitching at around .30 which values Bibby Offshore at c.£52m if true. For that they would get the Sapphire, Polaris, and all intellectual property etc and simply collapse the North Sea business into their current operations. The rest will be left for the creditors who will make a minimal recovery.

Despite the fact the bonds have recently traded at .39 if I was a bondholder I would jump at this offer and be running to find a pen to sign. The only other option is likely to involve them putting money in or a hugely dilutive liquidity issue (like the Nor Offshore one). Instead this is clean and well above any possible recovery they would get in a liquidation event.

The London high-yield market will get a timely reminder that covenant light issues have real risks. The Bibby shareholders took a £39m dividend when the bond was issued and another £20m at the start of 2016, at that stage they must have known the order book was empty,  in the end the company lost £52m at the operating profit level that year. As I have said before at that stage this event, or if it doesn’t happen one similar, became only a matter of time. Bibby Offshore may not have created as much value as Bibby Line Group would have dreamed only a few years ago but they have still done okay out it, whereas bondholders who in effect lent a non-ammortising loan on depreciating assets at the peak of the market, have suffered severe losses. They should be thankful however because a Nor scenario that saw them taking delivery of the Polaris and Sapphire in this market would have seen losses I believe as high as 90-100%.

It will be very interesting to see what happens to the Topaz. I suspect Boskalis don’t need it and will seek a charter that is 100% risk based if at all. I could be wrong on this as they have substantial North Sea operations and windfarm backlog that could use the vessel in a support role. Either way Bibby will revert to a small UK 2 or 3 x North Sea DSV operation supporting the Boskalis operations in Europe with management 100% dominated by Boskalis.

Whether this is in effect a hostile offer or is supported by Bibby Line Group I don’t know. I would struggle to see it being friendly given it would wipe out BLGs equity entirely but it would be the best thing for the company and provide a degree of security or at least certainty for those involved. The bond requires, according to my broad reading, only that interest payments are current and that BOHL has £10m, so a struggle whereby the necessary administration is delayed for a situation that cannot be changed would help no one. Waiting until December for an interest payment that cannot be made (interest accruing at c. £35k per day), or for the cash covenant to be broken allowing the bondholders to act, would be disastrous for their postion. The only thing I am sure of here is that some very expensive lawyers from both sides will be reviewing the bond indenture very carefully.

A competing offer from private equity looks unlikely as they simply do not have the contract coverage Boskalis does to risk some overhead on the vessels. Boskalis can probably release some chartered tonnage and have the DSVs work as ROV vessels on some of their windfarm projects if needed. For Boskalis this is a very sensible acquisition that offers upside only for them really with very minimal risk on running costs.

This will not take long to play out. When the BOHL financials are released it will all become obvious because if the assets have been revalued at anything like market levels it won’t just be a liquidity issue but a solvency one forcing the Directors to protect the creditors, and highlighting how close they company is to running out of actual cash. Resolution by the end of August is my prediction here.

Backlog is essential for re-financing…

“Just because you don’t understand it doesn’t mean it isn’t so.”
― Lemony SnicketThe Blank Book

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

— Adam Smith (1776)

Subsea 7 purchased the remnants of EMAS Chiyoda last week in a tale that highlights how not getting your timing right can be an expensive mistake in subsea. Chiyoda have probably decided to stick to stuff they know something about this time.

Contrary to my earlier remarks I think the Subsea 7 is an okay defensive deal. The Gulf of Mexico is a growth deepwater market (one of the few) and the weakest one for Subsea 7, and in addition they bolster their position in the Middle East. Backlog for Subsea 7 was virtually static in the last quarter which highlights why they need to take such aggressive steps to prop it up, the downside is they have added to their fixed cost base at a time of declining demand and project margins. There is an outside risk as I have said before that the backlog was poorly tendered and there are integration risks associated with the delivery, but Subsea 7 is one of the world’s best engineering companies and probably consider this manageable.

But it was backlog that drove this more than any other consideration I would argue…

Another deal, Project Astra, is kicking around the distressed debt houses at the moment and this is a deal that comes with pipeline more than backlog: the refinancing of Bibby Offshore.  I think Bibby have left it extremely late to raise capital like this in what is actually a pretty complicated transaction. If executed as planned it will involve a substantial writedown of debt by the bondholders in addition to a liquidity issue. The real question is surely why an interest payment was made on June 15 almost simultaneously along with an IM seeking capital? Surely a business in control of this wouldn’t be paying bondholders interest while trying to organise a liquidity issue?

The answer is that far from Bibby Line Group (“BLG”) being a supportive shareholder they are actually the major problem here as this process starts the recognition that their equity value in Bibby Offshore Holdings Limited is worthless. BLG had every reason to try and believe, against all the available evidence in the market, that this was going to be a quiet year. After losing £52m at operating profit in 2016, having no visible backlog, and clearly no firm commitments for work, they instead sanctioned the Bibby Offshore ploughing forward into what is effectively a financial catastrophe. The BLG Portfolio Director is a chartered accountant and frankly should have known better: management wrapped up in the situation cannot pretend to be objective but that is what a Board, and financially literate Chairman, is for.

Instead, and clearly given the asymmetric nature of the payoff to BLG as shareholders, they sanctioned what can only best be described as bizarre financial decisions, all driven to try and protect the BLG shareholders against the interest of the creditors, which frankly from Sep/Oct 16 should have been the primary concern of the Directors. However, they are only human and when their employer is the shareholder it has placed the majority of the Executive Board in an invidious and conflicted situation.

Unless you are a full EPIC contractor subsea contracting is essentially a regional business and to justify the head-office an integration costs you need to add significant scale and value in the regions you are in. Bibby Offshore HQ offers none of this and new investors participating are merely prolonging this charade, like the Nor Offshore liquidity investors they will be buying something the literally do not understand.

In addition to the obvious and valid questions as to the structural market characteristics Bibby Offshore is involved in Bondholders, now presented with what is in effect an emergency liquidity issue or administration, must be wondering inter alia:

  • Why the ex-COO has been sent on an ex-pat package to Houston to build-up the business when they are facing an imminent liquidity crisis? (Fully loaded this must be close to USD 500k per annum including house, airfares etc? Madness).
  • Why they should pump liquidity into a North American operation that has no competitive advantage, no backlog, and having had the best DSV in the GoM this year has managed to win less than 40 days work?
  • Why the BOHL is holding the value of the DSVs on the balance sheet at over GBP 100m when it is clear that their fair value is worth considerably less? It would be interesting to see the disclaimers brokers have provided for this valuation because should the capital raised be insufficient to carry BOHL though to profitability the delta between those values and realised values are likely to be very sore points of contention by those who put money in this. The Nor Offshore and Vard vessels provide ample proof that these assets are effectively unsellable in the current market and if the have to sold down in Asia/Africa/GOM those two DSVs would be lucky to get USD 25m and substantially less for a quick sale
  • Why there is a Director of Innovation and Small Pools Initiative when the core UK diving business is going backwards massively in cash flow terms? Why in fact are there 3 separate Boards for such a small company? Has legal structure been confused with operational structure?
  • Why the CEO’s wife is running a “Business Excellence” Department when the overhead is well over GBP 20m per annum? It might sound like a minor deal but as the lay-offs have increased it has clearly become a huge issue for staff working inside the business and it is like a cancer on morale

These extra costs are in the millions a year and add to the air of unreality of the whole proposal.

DeepOcean was another company with a lot of IRM type work but managed a successful refinancing. Management and staff all took a pay cut and built up a huge backlog in renewables and IRM work prior to seeking a refinancing. Potential investors there face execution risk on project delivery but can model with some certainty the top-line. The same just isn’t true at Bibby although the cost base can be shown with a  great deal of accuracy and there management have taken no pay cuts and the cost cutting doesn’t seem to have reflected the seriousness of the downturn.

No one should blame the management but rather a supine and ineffective Board that have allowed this situation to develop. None of the potential investors I have spoken to look like putting money in. It makes much more sense to try and “pre-pack” the business from administration than go through the complexity of a renegotiating with the bondholders and getting a byzantine capital structure in place in which they do not share all of the upside.

The reason all these issues collide of course is a classic agent-principal conflict: In a market where activity has declined so markedly to raise money to invest in developing new markets is verging on the absurd. Bibby Offshore is losing money in Norway and the US, has a minor ROV operation in Singapore which is unprofitable most of the time, and has seen a significant decline in the core UK diving business. The logical strategy is therefore to strip it back to basics, but that means the people negotiating the fundraising would be out of a job and therefore the strategy they have devised, not surprisingly, is more of the same and hope the market turns. This has suited the shareholder for the reasons outlined above.

Like so many companies grappling with The New Offshore Bibby is a very different company to the one that raised cash in 2014. Back then there were 4 North Sea class DSVs all working at very high rates in addition to the CSVs (and two DSVs were chartered adding extra leverage). Now not even 2 DSVs are close to break-even utilisation and the CSV time charter costs are well above any expected revenue. Returning the Olympic CSVs will cut the cash burn but merely reinforces the fact that the business no longer has an asset base that offers any realistic prospect of the bondholders being made whole (the drop in the bond price in the last few weeks confirming they now realise this).

It is in-short a mess, and one the BLG Portfolio Director and NED more than others should be placing their hand in the air to take responsibility for. It was obvious when the £52m operating loss was announced that a restructuring was needed, particularly in light of what was happening in Norway, and leaving it this late to raise funds. To pretend a fundamental structural change is not required, is simply irresponsible.

I had five years at Bibby Offshore, 4 of those were the most rewarding of my professional career to date. It gives me no pleasure to write this but I can’t help feeling the path that has been taken here risks seeing people not getting paid one month while on the BLG website will be a big article about how they sponsored a mountain walk to Kenya and highlighting their credentials as a good corporate citizen. But it is also true by the end I did have an issue with the strategy, which when you are notionally in charge of it becomes a big issue. The company shareholders insisted on a 50% of net profit dividend strategy, which in a capital-intensive industry when you were growing that quickly meant there was constant working capital pressure yet alone expansion capital. Yet every year at the strategy planning meetings we were expected to present ambitious growth plans where capital was no object, except it always was. Over the years the farce built up that when multiplied by easy credit has not worked out well. What this translated to at the Bibby Offshore level was a management team who wanted to build another Technip without anything like the resources needed to realistically accomplish this.

I used to constantly try and explain the benefits of “plain vanilla equity” but it was simply not what the shareholders wanted and it was clear at Group that they were already concerned about the size of Bibby Offshore in relation to the overall holding company. This culture of unrealistic planning has formed the basis of which constantly missing numbers hasn’t sent the right warning signal to the Board about the scale of the impending losses in the business despite it being blatantly obvious to ex-employees.

What the BLG shareholders wanted was to do everything on borrowed money, which is fine if it’s your business. But this attitude led to the Olympic charters and fatefully the bond, which in itself was a dividend recap taking GBP 37m out, and it of course left the business woefully undercapitalised in all but the best of conditions.

Bibby Offshore as a company would have had the best chance of surviving this downturn if it had approached the bondholders early about the scale of the problem, stopped making interest payments and saving the cash, had a meaningful contribution from the shareholders at a place in the capital structure that was risk capital, and approached Olympic about massively reducing the charter rates while extending the period of commitment (this would have been complex but the banks were realising 2 years ago they needed deals like this as Deepsea Supply showed). These are the hallmarks of all the successful restructurings that have been done. Instead for the benefit of the shareholders they took a massive gamble that the market would comeback and had a spreadsheet showing it was theoretically possible in the face of common sense. The consequences of this are now coming home.

Bondholders of course only have themselves to blame, The Bibby bond was a covenant light issue and was essentially bullet redemption on depreciating fixed assets, a risk all financial investors know deep down is just gambling. Confident in the mistaken view that BLG would step in the bonds have held up unnaturally in pricing for an eon while the company continued to burn through cash at a rate that should have worried any serious investor. They have now been presented with a nuclear scenario where they must put something in or face potentially nearly a total write-off of their investment, a quick look at the Nor bonds and asset situation only strengthening Bibby’s hand.

London is awash with distress credit investors at the moment who are long on funds. Many are traders and hopeful of entering a position with a quick exit to someone else, and they may get this deal away with people like this. But it is a very hard sell because unlike DeepOcean there is no backlog only pipeline, and one is bankable and the other is not.