Billionaire’s Bargain Reveals Risks for Offshore Oil Creditors

By Luca Casiraghi and Mikael Holter

(Bloomberg) — A bargain for shipping tycoon George Economou is bad news for creditors holding $24 billion of distressed offshore-drilling bonds.

The Greek billionaire snapped up a drillship called Cerrado for less than 10 percent of its 2011 new-build price, showing how a collapse in crude has driven down the value of offshore equipment. The industrywide slump, which stretches from helicopters to oil rigs, means lenders could end up holding collateral worth a lot less than they are owed.

“It’s shocking,” said Alex Brooks, an analyst at Canaccord Genuity Group Inc. in London. “Creditors can’t ignore anymore that the value of the assets on their loans and bonds may be lower than they previously thought.”

The sector’s financial cracks have spread in recent weeks, with Seadrill Ltd. seeking to restructure the largest debt load among offshore drillers, and Harkand Global Holdings Ltd., which is owned by Oaktree Capital Group LLC, defaulting. Helicopter operator CHC Group Ltd. has also followed rig owners Sete Brasil Participacoes SA, Hercules Offshore Inc. and Grupo Schahin into bankruptcy, as oil companies cut exploration and production.

“These are very demanding times,” said Kristin Holth, global head of shipping, offshore and logistics at DNB ASA, Norway’s biggest bank. “Liquidity will be the essential factor.”

Economou bought the Cerrado for $65 million through Ocean Rig UDW Inc., according to a statement last week. He’s chairman and chief executive officer of the New York-listed company. The vessel was sold by Schahin creditors, who seized it after the Brazilian driller filed for bankruptcy last year.

A spokesman for Ocean Rig didn’t reply to requests for comment on the deal, or to requests for an interview with Economou.

The Cerrado sale may “reverberate” across the offshore industry because it was the “first true acquisition” of an uncontracted drillship of its type during the downturn, Barclays Plc analysts led by J. David Anderson said in an April 25 note to clients. The vessel cost $680 million about five years ago, they said. Drillships are used to bore undersea oil wells.

“It’s bad news for rig operators who need to sell assets,” said Nordea Bank AB analyst Janne Kvernland. “The Cerrado deal may be used as a blueprint for similar fire-sales.”

Another drillship, the Deepsea Metro II, failed to draw any bids in an auction with a $175 million reserve price in March, according to an Evercore ISI research note. The final sale price, $210 million, is unrepresentative because the vessel was bought by a creditor, the Barclays analysts said.

Crude’s Tumble

Demand for drillships, rigs and helicopter services has slowed due to an about 60 percent tumble in crude prices since 2014. Only 325 offshore wells will be drilled worldwide this year, down from 410 last year and 595 in 2014, according to data compiled by Bloomberg Intelligence analyst Andrew Cosgrove. That’s caused rates for deepwater drillships to fall about 50 percent in the past two years to less than $300,000 a day, he said.

For companies and investors with cash, the slump may provide opportunities. The low price for Cerrado means the ship could generate an “attractive return of capital” at charter rates of little more than $200,000 a day, depending on upgrade costs, according to Fitch Ratings. Still, Ocean Rig faces a “challenge” finding a multiyear contract for the vessel because of the drilling slowdown, the ratings company said.

Distressed Rigs

Shipping billionaire John Fredriksen set up a company called Sandbox in December to buy rigs at distressed values, according to comments he made to Norwegian newspaper Dagens Naeringsliv in December. Oslo-based Pareto Securities AS approached investors with similar plans last year, two people familiar with the matter said at the time.

A spokesman for Fredriksen’s Seadrill declined to comment on offshore-equipment prices.

Such opportunities are little comfort to creditors holding discounted industry debt. Defaulted September 2022 bonds issued by Schahin, the former owner of the Cerrado, last traded at 14 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Deepsea Metro II’s previous owner told second-lien bondholders in March that they are unlikely to get any money back. The owner of a sister ship, the Deepsea Metro I, is in talks with holders of its October 2019 notes. The company has said interest payments may be missed. Calls to Odfjell Drilling Ltd., which helped set up the companies that originally bought the ships, weren’t answered.

“It’s getting increasingly tough for operators who can’t afford to keep ships out of contract,” said Clarksons Platou Securities AS credit analyst Eirik Rohmesmo. “In the event that ships are sold through a forced sale, there may be limited recovery for creditors.”

–With assistance from Michael Bellusci.

© 2016 Bloomberg L.P