Swiber - Sale and Leaseback

Swiber has announced the details of its sale and leaseback with R.S. Platou Finans Shipping A.S., a company which is domiciled in Norway and which specialises in offshore and marine related financing schemes. This is a follow up to the original announcement on March 28, 2007 which mentioned the sale and leaseback but did not provide the numbers.

The company's subsidiary Swiber Engineering Limited has signed 5 Memoranda of Understanding to sell 5 vessels (one pipelay barge and 4 AHTS) to various companies under R.S. Platou for a consideration of US$87.5 million. Since the book value of the 5 vessels is only US$58.4 million, Swiber will thus recognize an extraordinary gain of US$29.1 million in its books. As to when this gain will be recognized, I believe it is when the transaction has been substantially concluded (i.e. when the vessels have been built and delivered to the buyer, thus triggering the condition for the remainder of the payment). This gain will therefore be progressively recognized as the announcement states that the vessels will be delivered over a period of time, with the pipelay starting from July 2007.

A quick comparison with another listed company which had this arrangement is Ezra Holdings Limited, of which I am also vested. A quick check on the history shows that they had 2 such sale and leaseback deals. One was announced on July 19, 2006 and the deal was worth US$181.3 million, all conditions were essentially similar. The other announcement was made some time back in March 2005 and consisted of the sale and leaseback of 4 vessels. In both cases, an exceptional gain was recognized and the company was able to lighten its balance sheet, improve leverage and obtain cash for future vessel acquisitions.

Back to Swiber; this is the first in what will probably be a series of transactions aimed to securitize its vessels and to lighten its balance sheet in order to keep it asset-light. The immediate effects of this arrangement, from my point of view, is that Swiber gets the 10-20% downpayment in CASH for their working capital purposes. This is essentially the part of the deal which I like, the fact that cash is coming in first so that it can be deployed for other uses. The profit is exceptional in nature and thus will not affect valuations as it is non-recurring by nature. However, gearing can be reduced immediately with the inflow of cash and this means that the company can improve their Balance Sheet position. Also, as more deals and contracts come its way, the company will be able to use its improved cash flow position to pay off the bareboat charter expenses relating to the operating leases on its vessels which have been securitized. The S&L lasts about 7-8 years and there is typically a bargain purchase option to buy back the vessel at a nominal fee, after the usage of the vessels during this period. It is a win-win situation for both the lessor and the lessee. The lessor will get to enjoy recurring lease income for 7-8 years, while the lessee will free its balance sheet and obtain cash for deployment to expand its fleet.

The transaction also has financial effects such as increasing the NTA and EPS of the company. NTA will rise to US 21.18 cents as the company will recognize a cash inflow, but this is because it did not take into account operating lease expenses relating to the charter of the vessels, which would have a reducing effect on NTA (it states this as US cents 18.01). As for the increase in EPS, this is purely due to the exceptional profit and should not get shareholders too excited. One good thing I noted is that the company has no share options and no convertible debt in place, thus there will be no possible dilutive impact on EPS in future periods. As its share capital base is only 369 million shares, the exceptional gain adds about 11.91 Singapore cents to EPS (assuming exchange rate of US$1 to S$1.51).

An EGM has to be held and shareholder's approval sought for this as it constitutes a major transaction. It will be interesting to query Management more on the probable charter income from the vessels, and to ask how they will be deployed. Also, it is prudent at this stage to seek more clarification on the additional 10 vessels which are coming in FY 2007, and to ask if they will be financed in a similar fashion. At the same time, Management should make known its plans for the 2nd wave of vessel expansion, assuming buoyant conditions remain in the oil and gas sector.

All these announcements are coming fast and furious before the release of the 1Q 2007 results on Monday 14th May, 2007. Expect some price support in the near-term as the recently announced US$21.3 million contract has boosted Swiber's order book, as it is their first contract since the major Brunei Shell deal. Shareholders (such as myself) would keep our fingers crossed that they can clinch a major deal in Qatar or some other part of the Middle East.