“Just because you don’t understand it doesn’t mean it isn’t so.”
― Lemony Snicket, The 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.