Singapore & Malaysia Are Drowning In Oil Debt

Bloomberg
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August 20, 2016

Oil Rig And Tanker Offshore Malaysia

by David Yong & Denise Wee (Bloomberg) Singaporean companies struggling to meet debt obligations as oil prices slump may get more support from the government if the economy deteriorates further, according to global auditing firm EY. UBS Group AG’s wealth management unit warns more defaults are possible.

“It’s possible that off-budget measures may be introduced, as the government has done previously, to help these businesses tide over the slowdown should economic conditions worsen,” said Chia Seng Chye, a tax partner at EY in Singapore. “The Singapore government is already encouraging businesses to innovate and transform against increasing headwinds.”

Singapore’s Finance Ministry foresaw troubles from the slide in commodity prices when it announced budget plans in March that included a loan assistance program to help ease cash strains at smaller businesses. The situation has since worsened, with energy industry cutbacks leading to default at oil-services provider Swiber Holdings Ltd. About 28 percent of the S$18 billion ($13.4 billion) in corporate bonds due over the next 18 months are from industries facing structural headwinds, UBS wrote in an Aug. 16 note to clients.

“In the absence of further bank support, refinancing this debt may prove difficult, potentially leading to more defaults over the next year,” analysts Devinda Paranathanthri and Clarissa Lee wrote. “The bond market is currently not open to issuers from troubled sectors such as oil and gas, industrials, transportation, and metals and mining.”

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Swiber, which offers engineering and other support services to offshore energy businesses, fell under interim judicial management earlier this month after running out of working capital. Marine-services peer Ezra Holdings Ltd. is considering bolstering its capital, while oil and gas producer KrisEnergy Ltd. has said its debt covenants could come under stress. A measure of bad loans in Singapore rose last year to the highest since 2009.

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The price of brent crude oil has halved in the past two years and was at about $50.80 a barrel on Friday in Singapore. It has rebounded about 87 percent from this year’s low of $27.10 in February.

 

Smaller businesses supporting major oil companies have experienced a downturn since 2015 and the government is engaging companies retrenching workers to place them in adjacent industries, the Ministry of Trade and Industry said.

“This approach aims to help the oil and gas sector become more competitive in the long run, especially in a new global operating environment of lower oil prices,” a ministry spokesperson said by e-mail on Aug. 18.

Budget Surplus

Singapore’s government — one of just 10 sovereigns to hold top credit ratings from all three major assessors — is targeting a 2016 budget surplus of S$3.45 billion, although it stands ready to “respond” to economic conditions, Finance Minister Heng Swee Keat said in March. It posted a deficit of S$4.88 billion in 2015.

The marine and offshore industry, which includes the world’s two biggest oil rig builders Keppel Corp. and Sembcorp Marine Ltd., provides about 19 percent of Singapore’s manufacturing jobs. Unemployment in the city rose to its highest level in more than two years in the second quarter, at 2.1 percent, as both companies slashed jobs.

Swiber’s default follows missed payments in the city by telecommunications provider PT Trikomsel Oke and seafood producer Pacific Andes Resources Development Ltd. Malaysian oil and gas company Perisai Petroleum Teknologi Bhd. said on Aug. 18 it’s seeking to engage holders of its S$125 million notes maturing on Oct. 3.

While policy support may lessen short-term pain, companies and investors should brace for losses, according to EY’s Chia.

“Based on what we have seen so far, it’s typically not the government’s policy to cover personal investment losses or compensate corporations and financial institutions for their commercial risks,” he said.

Malaysia

Bonds of a Malaysian offshore oil rig contractor have dropped to distressed levels, the latest sign that crude’s rebound this year hasn’t been enough to stave off pain in an industry beset by prices still about half their decade average.

Perisai Petroleum Teknologi Bhd, which contracts out drilling rigs and charters vessels for towing equipment, said on Thursday it will start discussions with holders of its Singapore dollar notes, without providing further details. Its S$125 million securities due Oct. 3 have dropped 17 cents this month to a record low 60 cents, according to prices from DBS Group Holdings Ltd.

Smaller Southeast Asian firms in the oil and gas industry are struggling along with global peers after a 49 percent collapse in oil prices in the past two years leaves them strapped for cash to pay off debt. In Singapore, Swiber Holdings Ltd. was placed under interim judicial management earlier this month and Kris Energy Ltd. said on Sunday it is exploring asset sales and refinancing as its debt covenants may come under stress.

Perisai had 36 million ringgit ($9 million) of cash and bank balances as of March 31, according to company results.

There was no immediate reply to questions e-mailed to Perisai.

©2016 Bloomberg News

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