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.

Bibby Line Group unlikely to be riding to the rescue of The Black Knight (sheep)…

With apologies to Monty Python fans.

Black knight.jpg

The FT today had a great story last week about how hard the convenience store industry is:

The pressure on British corner shops has been highlighted by store chain Nisa, which revealed sales growth lagging the broader grocery market. The wholesaler on Friday reported that like-for-like sales increased 0.8 per cent in the six months to October 1, lower than the rate of inflation and the sector as a whole. However, overall revenues grew faster as it attracted new store owners. Kantar Worldpanel has reported that supermarket sales jumped 3.6 per cent in the 12 weeks to September 10.

This coincided with Bibby Line Group getting an extension to publishing their 2016 accounts until 30 Nov 2017. I also noticed that while BOHL has filed its 2016 accounts Bibby Offshore Limited (the UK business) hasn’t, a move I struggle to see as an oversight. Bibby Line Group is of course significantly exposed to the convenience store industry through it’s ownership of Costcutter and it is simply impossible to believe they have traded better than the market on average.

I understand that Bibby Line Group is set to report a substantial loss for the 2016 year and clearly the Bibby Offshore situation is related to their late filing of accounts.  A quick recap of Bibby Line Group’s 2015 KPI’s highlights why their support for Bibby Offshore has been verbal rather than financial:

BLG KPIs.png

Source: BLG 2015 Annual Accounts

In 2015 BLG managed to generate a mere £9m operating profit from £1.4bn in sales. That is a lot of effort for a rounding error. And that wasn’t a one-off as their graphic makes plain. In case you are wondering how a profit before tax was generated the Group P&L makes clear:

BLG consolidated P&L 2015.png

Basically £40m from asset and company sales. Without that BLG would have recorded an £11m loss before tax. 

I am not going to get into consolidated accounting here but the crucial thing for anyone expecting a rescue of Bibby Offshore from Bibby Line Group needs to see BLGs 2015 cash position and make a realistic assessment if it can be any bigger now than then?BLG Cash 2015

BLG had a mere £12m cash at the end of 2015 and as you can see from the KPIs above the business trajectory was not improving. Frankly it’s barely enough to pay for some expensive lawyers in Bishopsgate to tell you what to do. It is certainly nowhere near enough to buy a serious seat at the creditors table when you have a subsidiary that owes £175m and is burning through extraordinary amounts of cash (even assuming you had the inclination to do so). It is certainly not enough to risk a £10m guarantee to Barclays. 

Back in January BOHL claimed that Barclays were extending the RCF, then in May it became they would have to cash collatoralise this for a smaller amount, and still, 10 months later this facility, the core of the going concern assumption appears not to have been executed. This paragraph from the BOHL June 17 accounts make clear how how conditional this facility is:

BOHL Barclays RCF.png

It is therefore verging on absurd I think to suggest that BLG would then cash collatoralise a Barclays Revolver Credit Facility for c. £8.1m that would allow Bibby Offshore to make the next interest payment in December. This long awaited guarantee (that was reduced from an initial £30m to £8m), which would benefit the equity owners at the expense of the bondholders and would appear to be suspect at least,  appears to have been the only basis for the going concern assumption in the last BOHL accounts. This is a facility that has been in negotiation since January and is still subject to BLG Board approval! Unless BLG has had a cash infusion from somewhere in the ether in 2016 their ability to follow through and approve the Barclays RCF does not appear credible.

It also seems pretty obvious from the BLG accounts that the £20m dividend taken from Bibby Offshore in 2015 was used to pay loan notes and bank facilities owed at the Group level. The key to all this is the investment in subsidiaries:

BLG Investments 2015

Somewhere in that £153.8m is the equity value of Costcutter and Bibby Offshore (and Woodland Burial which bizzarely may be material for 2016). There is an enormous impairment charge coming one suspects, even more enormous if Bibby Offshore is not refinanced soon. The only reasonable assumption for the late filing of the BLG accounts is:

  1. BLG are in a disagreement with the auditor as to the value of BOHL and therefore more time is needed to resolve this
  2. BLG have cannot prepapre the accounts because the values of investments are so uncertain
  3. BLG are trying to hide something until the last possible moment

I have stated before I believe, as does the market given current bond price levels, that the equity value in BOHL is zero. Accounts must reflect all events up to the signing date and if the equity value is zero then BLG looks likely to have to restate its 2016 accounts to reflect this, at the very least it will be a significant post-balance sheet date event that will require disclosure, but the net effect is the same. I don’t know the exact value of the investment in Bibby Offshore but it is surely north of £50m? A writedown of this scale would fundamentally transform the BLG financial position. It would also look extraordinary for BLG to support Bibby Offshore when the entity has no book equity (you could make an argument for option value maybe)? I don’t think BLG ever really believed how bad things were getting at BOHL, and never had any intention of actually having to approve the Barclays facility: BLG thought announcing it would buy them some time and a seat at the creditors table. Now as the denouement approaches the fallacy of this strategy is becoming all too apparent.

Because I have either missed something really obvious, and you should never completely rule that out (I missed Bibby selling the ROVs in Asia and getting USD 7-10m in my August prediction), or you are being asked to believe that (a) high profile hedge fund(s) are paying .28-.36 of the bond, which values Bibby Offshore at c. £55-60m, for a company losing money at operating profit at the rate of 100k per day for assets that you could liquidate for substantially less (the Sapphire and Polaris would be lucky to recover USD 30m in a fire sale and it might cost you USD 5-10m to get that). These assets are held in the BOHL accounts at £78m so if a hedge fund has brought in hoping to sell them for that I suspect someone is getting a much smaller bonus this Christmas than they were hoping for. As a general rule, and I admit I should know, buying assets for 60 and selling them for 30 is not a great investment proposition.

The idea just seems so fantastical to me I really can’t believe anyone would sanction such an investment but I was assured that this was apparently an asset play this morning by a shipbroker! Surely someone running institutional money can’t really believe that a 1999 build DSV and a 2003 build DSV, both well and truely of the previuous generation of DSVS, without ever having the hope of a mortgage again, could really be flipped for a profit in this market (or even the next one if it ever recovers)? If true, when the hedge funds involved realise they have been sold a total pup, and the consultants they employ make them aware of the cash burn rate to even stay at the table, you can expect the end to be brutally quick here. These investors would literally have got involved in an asset play without understanding the assets? But the only other option is to be paying £60m for a company that requires £10-15m more just to trade through to the next summer season, has minimal backlog, and a hugely loss making US office? It’s almost as nonsensical as buying the company for Sapphire and Polaris.

The strategy may make sense for an industrial buyer, who could strip out some of the costs as synergies and take a 15 year view on the assets, but it makes no sense for an investor who has to run the company as a standalone unit and needs an exit strategy.

Yet even more nonsensical still the Bibby Offshore back-up plan is apparently the parent company presented above as a “supportive shareholder”? The only way this shareholder could really appear to support the company would be to move out of the way,

I suspect EY are not just involved with Bibby Offshore, but also BLG, who to be clear are unlikely to have the going concern issue that BOHL clearly does, but may well have covenant and other issues associated with material balance sheet writedowns. The contrast between the Norwegian restructurings, most of which were EBITDA positive, and where the shareholders have contributed substantial new equity, could not be clearer.

The 2016 BLG accounts, published almost in 2018, promise to an interesting read.

 

[Disclosure of interest: I consult for companies in the subsea and alternative investment industry but I have no financial interest in Bibby Offshore Holdings Limited, the Bibby Offshore Bonds, nor am I advising any party who I believe to be trading in the bonds. These are my own views and I have not been paid or asked by anyone to write this blog post.]

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.]

Generational change coming in North Sea DSV market…

I was told DeepOcean has hired Jerry Starling to set up a diving department: this marks the start of the new competitive landscape that looks set to shape up the North Sea saturation diving market. DeepOcean have the perfect competitive position to break into diving with a large backlog of work from windfarms (increasingly at depths that make SAT diving profitable), excellent relations with an IRM customer base, and a very good operations department skilled at running complex vessels like the Maersk Connector. Clients know and like them and diving is just a fill-in service.

But the real significance in economic terms of this is that it signals how the structure of the market no longer provides the profitability it used to. Quite simply a shortage of North Sea class DSVs, and the high fixed cost commitment to either a charter or ownership of one of these vessels, combined with the investment in location specific infrastructure that is expensive, provided a classic “barrier to entry” for North Sea diving that simply didn’t exist anywhere else. Over time these very high margins were noticed by vessel owners, who built new tonnage, and investors (like LDC and Oaktree) who added capacity, meaning even by 2014 margins were declining. Pretenders tried to imitate but either didn’t have the capital (Bluestream with the Toisa Paladin) or infratsructure (Mermaid/ KD Diving/ Mermaid Endurer).

While these very high margins made it sensible for these companies to invest in this business DeepOcean and to a lesser extent Boskalis were working away at the less sexy end of the market in trenching, ROVs, widfarm work under civils contracts. This work looked low margin in comparison but was completely countercyclical.

And then demand crashed and everyone got left with some very expensive vessels and not enough work as the IRM market declined more than people thought and the construction DSVs came down to take maintenance market share. First Harkand folded and now it appears almost certain Bibby Offshore will as well. Both have suffered for the same reason: if you pay c. $100-150m for a North Sea class dive vessel (or take on financial asset exposure to the same amount) you need 250-270 days utilisation to break even at around USD 150-180k per day. Since 2015 there has been nothing like that sort of utilisation, especially for the smaller players.

The market was bid down in 2016/ 2017  by reducing the day rates to effectively cash OpEx only with no return for the vessel. When you have the balance sheet of Subsea 7 and TechnipFMC this is sustainable for a while as effectively the equity portion of your balance sheet adjusts to reflect this. When you are highly leveraged with an undiversified business model, as both Harkand and Bibby Offshore were, that isn’t an option.

The loss is being taken on asset values, eventually DSVs will be mean reverting assets i.e. their value will be derived from the cash flow they generate and this implies a substantial reduction from the book value of some vessels. It is for this reason that I don’t think much has changed for the Nor bondholders: the two DSVs will only generate a minimal number of days work for the foreseeable future, with a high operating cost (including SAT maintenance), and as recent work has shown potentially long transit times. The capital value of such assets isn’t USD 60m and the really interesting thing will be how the next liquidity issue for the bonds is priced?

JS is close to The Contracts Department, who run the Nor vessels, but there has never been a better choice of DSVs. It would be hard to see DeepOcean going for two DSVs in one season so while this is better than nothing for the Nor bondholders it is very hard to see this being the “get out of jail card” they have been looking for. DeepOcean know the market well enough not to overpay for a vessel and it is highly likely they could get a risk based charter from Nor that would be lucky to be even cash flow even in one year. Given that the Atlantis needs serious crane work and a major thruster repair (at least) to get it working there would appear to be no way to avoid another cash call.

But it will be a different story for DeepOcean. They will gain a vessel on an extremely attractive charter and ease themselves into the SAT diving market with an OpEx margin and the vessel risk guaranteed. They will choose from Nor, Vard, Toisa, China Merchants (unlikely I agree), Keppel, and potentially the Topaz in terms of tonnage. DO will then drop a chartered vessel and try for maybe 180 days SAT diving in years 1 and 2, more if they get lucky. But the charter rate to support that, and therefore the capital value of the asset, isn’t USD 110m per vessel, or more for the Vard/ Keppel etc. DeepOcean’s shareholders don’t need to, and aren’t in the business of, helping distressed vessel sellers.

I have made my comments on McDermott and Bosklis before and see no need to repeat myself again. My view is that Boslalis with windfarm work are better placed than MDR to either buy Bibby Offshore or expand organically, as I am not close to McDermott I have no idea how aggressively they will chase this. But there is no doubt with substantial UK dredging, cable lay, and now Gardline Boskalis appear to have the most synergies for any deal.

The Bibby Offshore results were made public this week and I don’t want to say much. This blog was never meant to be anything other than my thoughts on how I had become involved in a credit bubble and other random thoughts.

My own view, as I have said many times before, is that Bibby Offshore will not survive this. The problems involved in a recapitalization are intractable and restructuring is more likely, with a trade sale of certain assets being the most likely outcome, and certainly in the bondholders’ best economic interests should a competitve auction be established. It gives me no pleasure to write this because my time at BOHL was an enormous learning experience and for the most part enjoyable.

I could write a long post but the basic reason is very simple: the company borrowed too much money and the current shareholders simply do not have the financial resources to reverse this course or indeed (just as importantly) the economic rationale to do so. The bondholders lent them too much money, lending bullet repayment on depreciating assets is madness, maybe therein lies a solution, but I doubt it because the MSAs, systems etc have more value to a player growing organically than negotiating a massive writedown and capital injection for the bondholders.

No one in this market puts equity into a business behind £175m of debt and poor cash flow generation. No one will invest a super senior tranche because this isn’t simply a liquidity problem. The entity that has been created and the operating model is inherently uneconomic and the scale of change required too big and too risky for a private equity provider to follow it through in a way that would allow the company to remain independent (in my opinion).

Talk of BOHL lasting until 2018 is simply a fantasy to my mind and doesn’t reflect (again) the seriousness of the situation. Being down to £7.2m at June 30, after having gone through £62m cash in the last 12 months, and allowing a slower run rate loss now vessels have been redelivered/ entered lay-up, implies the cash would be down to about £5-6m now (allowing the 46% DSV utilisation BOHL stated). Someone really needs to explain why the June interest payment was made.

It is impossible to see the OpEx being funded by the RCF, and indeed without serious hope of a new investor, willing to be behind the revolver of £13.1m and agreeing a deal with the bondholders, and no backlog, the RCF offers no solution and only prolongs things.  As soon as those figures were published in SOR every CFO in ABZ told his project staff not to contract with BOHL as the credit risk is simply too great… its like a bank run that becomes self fulfilling.

It must be an extremely worrying time for the staff involved an my heart goes out to them (having been in that position once I can genuinely understand). One thing the Bibby Family/ BLG could do to minimise this is ensure all staff are paid their contractual notice period as under any reasonable financial/ legal assumptions the BOHL simply doesn’t have the money for these to be honoured and the legal structure would prevent them from being treated as preferred creditors.

A North Sea DSV market without Bibby Offshore turns the clock back 15 years. Two large integrated contractors will control the oil and gas construction market and two will dominate the IRM and windfarm market. They will meet in the middle on some jobs. But the overall industry will not return to the supernormal profits of earlier years due to persistent overcapacity of DSV tonnage and lower entry costs. Boskalis and DeepOcean are also likely to bring a degree of civils cost control to the industry that keeps margin depressed: it is a microcosm of the whole industry to my mind.

Who should a bondholder talk to?

[Reposted after a version control issue in the original post. Apologies].

“Judgement does not come suddenly; the proceedings gradually merge into the judgement.”

Franz Kafka, The Trial

Right now the Bibby Offshore Holdings Ltd bonds are trading in the mid .30 range implying the company will default on its obligations and that owners of the bonds are interested in what they will get paid out at in the event of credit event. On June 27 Standard and Poors lowered their credit rating to CCC- (negative outlook). For those unsure of what this means here is the definition:

An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

That ranking is “Poor (high default risk)” below “speculative” which is a B grade. The last Moody’s report I can find (Nov 2016) is even lower “Caa (Highly Speculative)” and one above an actual default. So this is well telegraphed and understood and followed by professional investors.

So the market understands completely that there will be an event of default here. For the avoidance of doubt default covers any of the following events:

  • A missed or delayed disbursement of interest and/or principal, including delayed payments made within a grace period;
  • Bankruptcy, administration, legal receivership, or other legal blocks (perhaps by regulators) to the timely payment of interest and/or principal; or
  • A distressed exchange occurs where: (i) the issuer offers debt holders a new security or package of securities that amount to a diminished financial obligation (such as preferred or common stock, or debt with a lower coupon or par amount, lower seniority, or longer maturity); or (ii) the exchange had the apparent purpose of helping the borrower avoid default.

Just to be clear: even voluntarily agreeing a debt restructuring is an event of default. The original bond investors were professional investors who have a process and warning system for investments that go into default and know what they are doing. Much of the trading in the bonds over the last couple of months is likely to have been from the original investors selling out, as they are “long only” funds that want the interest payments, and in are moving more aggressive funds who specialise in complex workouts and default situations. For those who want a flavour of the aggression of some of these funds they can be seen by Elliot Capital Management, who has partnered with Siem in offshore, have a unit NML who sued Argentina in a complex default case:

NML Capital, a unit of Elliott Management Corp. — sued under a different and cleverer theory. Argentina’s defaulted bonds had a pari passu clause that said that the bonds would “at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.” After the default, Argentina had done a restructuring in which it exchanged many of those bonds for new bonds, which it then serviced normally, while continuing to stiff holdout creditors who refused the restructuring and kept the old bonds. NML sued in U.S. courts, claiming that the pari passu clause banned Argentina from paying interest on the new exchange bonds without also paying off the old holdout bonds in full: By paying the exchange bonds and not paying the holdout bonds, Argentina was violating its promise that the old bonds would “rank at least equally” with the new ones…

But the U.S. courts, to everyone’s surprise, sided with NML Capital, and Argentina couldn’t make payments on its new bonds, and it was forced to default again, and everyone was very sad, and ultimately Argentina solved the problem by settling with NML and its fellow holdouts for quite a ton of money.

Getting companies like this on the bond register marks the beginning of the end because they force a solution and .02 or .03 movement is a big deal for these investors and they are very aggressive to get their ends. Some of the original investors will ‘coat tail’ on the skills of the restructuring funds knowing their tactics can generate higher payouts.

I should also note here that in keeping with all bonds like this the BOHL bondholders have a “share pledge” as part of the security package that essentially means should a payment be missed the shares are delivered to the bondholders or the administrator. There is no dispute about this and one of the reasons the interest payment was made in June, when  the company should arguably have preserved the £7m cash, was to stop this security package being invoked.

The only questions about the BOHL default are how it plays out rather than if one will occur. There are three scenarios:

  1. Complete liquidation. Management and investors take no action and eventually the company simply runs out of money and administrators are called in when payments start failing. This is pretty unlikely.
  2. Recapitalisation led by the Bibby LIne Group: in this scenario BLG seek to remain in control of the company, they reach an agreement with the bondholders on the size of the writedown they will take, and new funds are injected (in this case from a new capital provider not BLG) . Should a new investor not be found bond investors would be required to contribute new funds to working capital. I think this is more unlikely than option 1 but it is being tried at the moment.
  3. An event of default where the bondholders enforce their rights and seek to maximise value and seek to sell the operations of the company while leaving the debts with “Oldco” (BOHL). Clearly to my mind the most likely scenario.

There are few other viable outcomes because BOHL did borrow £175m and cannot realistically pay it back ever, and certainly cannot pay it back as it is contractually obliged to.

Option 2 is clearly management and BLG’s preferred option. There are however a number of problems with it: the core one being that BLG don’t have enough money to compete with other proposals and as soon as the bondholders were approached about a writedown and a potential “funding gap” they had zero incentive not to invoke the share pledge and wipe the equity holders (BLG) out unless there was serious money on offer. The only offer that has been presented publicy is a neglible contribution to the revolver from BLG and I suspect this enraged the bondholders as should a default event occur this would see BLG recover funds before the bondholders, and indeed there was a question on the first conference call this year as to why this money wasn’t going in as equity? BLG/BOHL has been trying to interest some large US/London funds in a conditional deal whereby the bondholders take a writedown and they inject liquidity into the business and receive these funds first and at a higher rate but I don’t believe a Heads of Terms has been signed nor even a writedown percentage agreed in principal.

Another problem with this deal is the scale of the writedown needing to be taken. When the bond was issued there were four Bibby North Sea class DSVs working and now not even two are sufficiently, and the Sapphire is going into layup. A normalised earnings might be as low as £6-10m EBITDA for a standalone business which would imply maximum debt capacity of £24-60m (at a 4-6x range), probably the lesser as there is little contractual backlog, so the bondholders are likely to rank even a small cash offer significantly above the promise of a higher payout later. In reality a business with such cyclical cash flows really needs to be mainly equity financed, a position the bondholders will be acutely aware of should they be prepared to cut a deal.

By approaching the bondholders BLG/BOHL ensured the bondholders needed to make sure this was the best offer they could get. So when someone tells you that “bondholders categorically haven’t had” a discussion with the largest and most liquid industrial company in the offshore and dredging sector in Europe the question is more, why wouldn’t they have had this discussion? If all BLG/BOHL are offering is a writedown of debt and dilution of returns to their own securities, while making any further BLG cash guaranteed, why wouldn’t they sound out in the market who would give them a higher price?

And I can assure you, that even though some discussions have been tentative, that is exactly what has been going on. This is a deal, in its many guises and possible forms, that is doing the rounds of the financial advisory firms all hoping for an angle on it. This will be a significant default in the London market (as opposed to Norway) and a large number of advisory firms and distressed debt investors are seeking to profit from it.

All the bond investors want now is to maximise their returns. A cash offer is better than anything but some of the new investors will happily put money in if this increases the likely future return. But fundraising becomes complex, expensive, and time consuming because the original bond investors who brought in still have rights and it is very hard to convince customers to sign up while the financing conditions are so uncertain.

So the bondholders are talking to anyone who will give them a higher payout potential. Indeed it would be a breach of their fiduciary obligations if they did not. They are not sitting there saying “we really like this management team who have had some bad luck” they are saying “how do we minimise our losses/ maximise value, all options are on the table and what is our exit route?”.

Anyone with the potential to help them gets a meeting and a serious hearing. A company with nearly €1bn in cash, current subsea investments in the North Sea, who took risk on a foray into Fugro, and has a strong UK business in dredging, get a big hearing. It is true McDermott is also likely to be part of the discussion along with DeepOcean and others (I have been told Hitec are putting no new money into OI so they are unlikely to do so).

For what its worth I think McDermott, without the windfarm work, and having seen how unprofitable the 2 x DSV UK Bibby Offshore business is, won’t want to risk GBP 20-30m in OpEx until they can sell some project work. But they have a lot of diving days in the Middle East/ Africa the vessels could cover to de-risk it. From a corporate perspective they would not want a loss making North Sea acquisition distracting investors from their very good Africa region story (into whom it would look likely to report). McDermott are a credible bidder, but their order book is less than they would like and should they win some big projects there is sufficient North Sea DSV tonnage for them to charter and commission relatively quickly should they not find a time charter availble (Nor, Toisa, Vard, Volstad) so I think they can achieve the same goal at a lower risk profile. But there is no doubt they are extremely credible as a bidder and the bondholders would be delighted to see a bidding war erupt between McDermott and Boskalis.

There could be others… my point is that the financial advisers to the bondholders serve their client the best when they generate the most options and ultimately get the best price, and to say they are not discussing this with credible transaction counterparties is absurd. Certainly every OSV company with some funds will have been called by investment bankers wondering if they are interested in the deal, waving a mandate letter in front of them, and claiming to have excellent contacts with the bondholders and their advisers. That is how financial markets work.

I know for a fact two big US private equity houses are running the slide rule over the deal. One I believe is working completely independently and is again in preliminary discussions with the bondholders. I just don’t see this going to private equity as BOHL has cash losses in all trading regions and has no backlog. PE don’t normally take 100% market risk with their money which is all this would be. I am least sure of this point because PE just have so much money at the moment that anything is possible, but this is at the very risky end of the spectrum. It would also be a 100% cash equity deal which is very rare when asset values are so uncertain.

The value of the business to an industrial player like Boskalis is the DSVs, systems, Master Service Agreements, project history etc. So there is value if contracts can be novated and the vessels can replace chartered in tonnage. As a general rule private equity houses struggle to compete when industrial companies can find synergies in an acquisition. My own view is that given their strategic position and stated plans, asset base, corporate development skills, track record, and a host of other factors, Boskalis are in the best position. But I am not close to this and it is an educated guess rather than having seen anything proprietary.

The one thing I am 100% certain of is that there is a seismic change coming to BOHL. Any new money simply isn’t funding a corporate centre to preside over three loss making regions. Loss making US office exposed to Borderlon claim and no competitive position? Gone. Loss making Norwegian office? Gone. Ex-pat jobs for the boys in Houston? Gone. Jobs for wives? Gone. Three separate Boards? Gone. The scale of these changes mean a change in legal form is also likely. These were part of a lifestyle business where the people benefitting weren’t supplying the capital and it is inconcievable that anyone supplying new money to fund the business, in whatever form it takes, would accept the current cost structure (as it would reply 100% on an improvement in day rates to make money). An industrial player will simply roll the business into their existing operations and take on really the UK projects teams and maybe not that much else. A PE player would send in a hit team of management consultants who would fundamentally transform the organisational structure.

All options, apart from the status quo, are currently very real.

(For the avoidance of doubt I have no financial interests at all in this position as someone asked me to clarify last week).

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.