Monday, August 27, 2007

Swiber – Inaugural Bond Issue of S$108.5 Million

On August 24, 2007, Swiber announced the completion of a successful bond placement through CitiCorp Investment Bank (“Citi”), raising a total of S$108.5 million as part of their S$300 million multi-currency medium term note programme established on July 20, 2007. This programme was established with the aim of raising funds for Swiber’s fleet expansion through debt, after utilizing the options of equity financing and sales and leaseback.

Terms of the Bond Issue and Financial Effects

The 3-year bonds are issued in two tranches: S$54 million was raised on a fixed-rate tranche with an interest rate of 4.34% per annum payable semi-annually, while the other S$54.5 million tranche has a floating interest rate which is 140 basis points (1.4%) above the 3-month Singapore Dollar Swap Offer rate and is payable quarterly. The bonds will mature on August 24, 2010 and will NOT be traded on the SGX-ST. After reading up a little on swaps (on HSBC website which was rather technical), I found that they are more versatile than fixed-rate loans in an increasing interest-rate environment; and that swaps are generally used to protect a company against adverse movements in interest rates. Upon further reading from the OCBC website, I found that the Swop Offer Rates (SOR) are fixed daily at 11 a.m. by the Association of Banks in Singapore and it will be based on the date of loan disbursement and NOT the underlying loan amount. Thus, thus rate will actually be fixed and reported in the Business Times after the day the funds are made available. In the absence of a fixed rate, I shall use an SOR rate of 3% (as SOR are supposed to be more flexible than fixed-rate loans, hence I used a lower %) and adjust it accordingly when the company makes further announcements.

From the numbers provided, the computation of the interest rate is as follows: for the fixed-rate tranche, the interest payable per annum is S$2.3436 million, which works out to S$1.1718 million every half-yearly. Since this tranche was taken up on August 24, 2007, the next interest installment payment would be on February 24, 2008 in FY 2008 (which will impact the 1Q FY 2008 results). For the floating-rate tranche, assuming a 3% SOR, the floating rate will be about 4.4% per annum. This works out to about S$2.398 million worth of interest payments per annum, which translates into about S$600,000 every quarter. The next interest installment for this tranche will be on November 24, 2007 and will thus impact the FY 2007 financials. The total interest payable per annum on the entire bond issue is about S$4.716 million (about US$3.1 million).

Based on Swiber’s balance sheet as at June 30, 2007, it shows that they have cash and bank balances of US$8.8 million, which is more than sufficient to service this bond issue. A quick check on their cash flow statement reveals that for 2Q 2007, there was US$2.9 million worth of operating cash inflows generated. If we annualized this, it would imply that Swiber generates about US$11.6 million worth of cash inflows from operations annually; more than enough to service the annual interest commitments for this bond issue. Also, please note that the operating cash flows for 2Q 2007 are not fully indicative of Swiber’s cash generating ability moving into the future, because as more contracts come into force, their operating cash inflows generation capability should also dramatically increase.Gearing will increase from 0.52 (using 2Q 2007 figures) to 1.73, which is a three-fold increase, as a result of the issuance of the bonds. This high gearing is a concern but in this industry, capex is a very important aspect of growing the business and the case was similar for Ezra Holdings Limited (though they preferred to use sale-and-leasebacks and equity issues rather tan debt). The advantage of debt is that it can offer a better rate than raising funds through equity, as investors will demand an equity risk premium to cover them in case the business does not grow as planned. I will be closely tracking Swiber’s gearing and cash flows in future periods to assess if the company can manage their debts well.

Outlook and Prospects

The fundamentals of Swiber have changed as a result of this bond issue, and moving forward, I have to see more contract wins in other regions in which they have not penetrated before in order to bolster my confidence in the company. As the CEO Mr.Raymond Goh mentioned, building the fleet is of course important, but this is based on the assumption that a stronger and larger fleet can help them to clinch contracts of higher value and also allow them to control costs well as they would not need to rely on third-party vessels.

As mentioned in Swiber’s press release, this is the first bond issue from an oil and gas services company and the only bond issue of significant size (not sure what their benchmark is !) from a local company since May 2007. The fact that the bond issue was attractively priced amid current “market volatility” and increased wariness due to the sub-prime mortgage issue in the USA serves to emphasize the confidence which asset managers and insurance companies have in the company. CitiCorp managed to make full use of a window of opportunity given by the Fed cutting bank lending rates by 50 basis points in order to price the bond issue more attractively, which attests to their expertise and experience. Moving forward, I see more synergies created as Swiber continues to work with CitiCorp on future debt issuances from their S$300 million dollar medium term note programme.

Swiber – Appointment of new VP of FSO Operations Mr. Ronald L. Schakosky

On August 22, 2007, Swiber announced yet another appointment of a senior management staff. This time, it was the vice-president of their Floating, Production and Offloading (“FSO”) division. He is Mr. Ronald L. Schakosky, a 59-year old American who has 25 years of experience in the oil and gas industry. His experience and knowledge lie in field engineering, field development, FSO and FPSO projects and operations and he is expected to “inject a new and innovative management style and perspective to the Group’s operations”. By this, it would imply that there should be a new approach to the old way of doing things and hopefully processes and projects will be reviewed and revamped to make them more cost-effective and efficient.

This latest announcement demonstrates Swiber’s commitment to improving their Management team, by hiring senior management personnel with vast experience in the oil and gas sector in order to boost the Group’s competencies and knowledge base. The good thing is that the Company strives to keep shareholders informed of such developments, which is another plus point in terms of voluntary corporate disclosure.

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