OCBC Asia Credit - Offshore Marine Sector - Many Moving Parts (11 Mar 2015) PDF

Asia Credit Research
Offshore Marine Sector: Many Moving Parts

Wednesday, 11 March 2015
Key Takeaways
We are expanding our coverage on the offshore marine sector. In this report,
we initiate coverage on ASL Marine Holdings, Otto Marine Limited, Pacific
Radiance Limited and Swissco Holdings Limited. The individual credit
reviews are provided in this report.
Though energy prices have made some recovery, times remain challenging.
We have seen order book pressure, order cancellations, falling fleet utilization
as well as worsening credit profiles.
Given that the sharp decline in energy prices occurred from November 2014
onwards, with capex reductions by oil majors announced only subsequently,
we can expect 1Q2015 performance to be weaker than 4Q2014 performance.
That said, for the majority of the issuers that we cover, management teams
are cognizant of the challenges they face. Most of them have managed
through prior energy cycles.
Healthy order books do offer some comfort in providing revenue clarity,

though order cancellations highlight the risk of clients walking away.
Ironically, several offshore marine players actually diversified into new
businesses as a response to the prior commodities slump in 2009.
A factor that needs to be considered would be the use of JVs. These may
bring liabilities off balance sheet, but due to corporate guarantees, the issuers
may still face liability.
Treasury Advisory
Corporate FX & Structured
Products
Tel: 6349-1888 / 1881
Interest Rate Derivatives
Tel: 6349-1899
Investments & Structured
Products
Tel: 6349-1886
GT Institutional Sales
Tel: 6349-1810
Issuer
Nick Wong Liang Mian, CFA
+65 6530-7348
NickWong@ocbc.com
Issuer
Ratings
Issue
Ezra Holdings Ltd

UW
EZRASP 5 '15
Ezra Holdings Ltd
UW
EZRASP 4.875 '18
Keppel Corp Ltd
N
KEPSP 3.1 '20
Keppel Corp Ltd
N
KEPSP 3.145 '22
Keppel Corp Ltd
N
KEPSP 3.8 '27c22
Keppel Corp Ltd
N
KEPSP 4 '42
Nam Cheong Ltd
N
NCLSP 6 '15
Nam Cheong Ltd
N
NCLSP 5 '17
Sembcorp Industries Ltd
N
SCISP 3.7325 '20
N
SCISP 3.64 '24
N
SCISP 4.25 '25
ASL Marine Holdings Ltd
UW
ASLSP 4.75 '17
ASL Marine Holdings Ltd
UW
ASLSP 5.35 '18
Otto Marine Services Pte Ltd UW
OTMLSP 7 '16
Pacific Radiance Ltd
N
PACRA 4.3 '18
Swissco Holdings Ltd
N
SWCHSP 5.7 '18
Indicative prices from Bloomberg as of 11 March 2015
MATURITY PX_ASK
YAS_BOND_YLD
Bond
Ask
Ask
Rating
Maturity
Price
YTW
07/09/2015
24/04/2018
12/10/2020
14/02/2022
23/04/2027
07/09/2042
05/11/2015
28/08/2017
09/04/2020
27/05/2024
30/08/2025
28/03/2017
01/10/2018
01/08/2016
29/08/2018
16/04/2018
100.00
94.50
101.70
100.70
102.50
99.00
102.50
102.00
104.50
102.50
106.00
98.05
97.00
94.00
95.00
95.00
4.994 OW
6.867 N
2.769 UW
3.032 UW
3.401 N
4.060 N
2.060 N
4.134 OW
2.775 UW
3.322 UW
3.558 N
5.778 N
6.306 N
11.822 UW
5.920 OW
7.547 N
11 March 2015
Monthly Credit View
ASL Marine Holdings Limited: Credit Review
Mind the Gap
Revenue reversal: For 2QFY2015 (ending December 2014), ASL Marine Holdings (ASL) reported
negative S$21.1mn in revenue. This was due to the rescission of shipbuilding contracts for two offshore
support vessels. As revenue was previously recognized on these contracts (via the percentage of completion
method), ASL had to reverse S$95.0mn of shipbuilding revenue. Excluding these reversals, shipbuilding
revenue would have been S$5.8mn, while total adjusted revenue would have been S$76.0mn for the quarter
(a decline of 20.3% y/y).
Weakness seen across segments: Regardless of the revenue reversal, the quarter would have still been
soft.
1. Shipbuilding revenue (excluding the reversals) declined 94% y/y to S$5.8mn. The management
attributed this to lower percentage-of-completion revenue recognized as most projects were either in the
final stages or at the beginning of the construction. A gross loss of S$4.9mn was generated by the
segment for the quarter, due to both the reversal of gross profits recognized in prior years as well as
heightened costs from subcontractors due to more complex shipbuilding projects.
2. Shiprepair and conversion saw revenue decline 21.3% y/y to S$43.0mn. This was attributed to fewer
high-value jobs being completed. Gross margins compressed from 19.1% (2QFY2014) to 13.0%
(2QFY2015) as well due to lower-margin projects undertaken.
3. Shipchartering revenues were stable, declining just 2% to S$17.7mn. This is partially due to OSVs
being just 24% of the segments revenue. However, gross margins have compressed sharply from
27.3% (2QFY2014) to 16.2% (2QFY2015). This was driven by higher depreciation expense from the
increase in vessels owned, as well as higher costs such as crew salaries and upkeep of vessels.
4. Engineering (the acquired VOSTA LMG business) which focuses on dredging products and
components saw revenue plunge 57.4% y/y to S$9.5mn. There was a slump in both new builds as well
as components ordered. Gross margins have decreased as well from 44.1% (2QFY2014) to 18.0%
(2QFY2015). Management expects the dredging market to remain tepid.
Execution issues need to be resolved: Given the cancellation of 3 OSVs worth ~S$150mn total over the
past year, management needs to provide more clarity with regards to what went wrong. It was stated by the
management that these vessels were relatively complicated, and that the design and equipment were
supplied by an external party. The first vessel (cancelled in 4QFY2014) was described by the management
to be a deep water Norwegian design and is of the DNV classification. Given the stress faced by deep water
assets (due to the high production costs) these OSVs may potentially be facing a soft market. Furthermore,
the poor macro environment may give customers an incentive to cancel orders should ASL Marine be unable
to deliver versus giving the firm more room / slack.
The utilization rates of the firms shipcharter vessels may also be an area to monitor. It was last disclosed at
~60%. About a third of charters are long-term. Finally, ASL moved into the build-to-stock (BTS) model at
the end of 2013, in which the building of vessels is started before actual orders have been made. During up
markets, ASL may have benefitted from better pricing from shorter delivery times, but during down markets
ASL will be bearing inventory risk. The firm has already stated that one of the reasons for the lower cash
inflow from operating activities in 1HFY2015 (S$12.7mn) relative to 1HFY2014 (S$31.3mn) was due to
higher work-in-progress under the firms BTS program.
Order book and business outlook: The shipbuilding order book (from external customers) has fallen from
S$299mn (1QFY2015) to S$270mn (2QFY2015). This was fair given that the two OSVs cancelled were
worth S$95mn. Management did guide that the sharp decline in commodity prices have led to fewer orders
secured. They also mentioned being more prudent in taking new orders to maintain margins and reduce risk
of order cancellations. The current shipbuilding order book is roughly 1x FY2013 and FY2014 shipbuilding
revenues. The shipcharter order book has also declined slightly from S$69mn (1QFY2015) to S$60mn
(2QFY2015). Aside from the order backlog, the management mentioned opportunities in dredging and port
construction business in Singapore and Malaysia. They also mentioned seeing interest in their non-offshore
Treasury Research & Strategy
11 March 2015
Monthly Credit View
related charter vessels.
Credit Profile: Net gearing currently stands at 112%, unchanged when compared to the end of FY2014.
Though the firm raised a further S$50mn in bonds from its MTN program during the period, the proceeds
from the bond issue was used to pay down ~S$30mn in short-term loans and S$20mn in trust receipts. In
fact, total borrowings have fallen by about S$2mn during the period. Net gearing was already at 92% at the
end of FY2013. This is in part due to ASLs business model. Gearing is high as ASL extends 10%/90% or
20%/80% payment terms to its shipbuilding customers. As of FY2014, shipbuilding generates the majority of
ASLs revenue. On a net debt / EBITDA basis, leverage is more challenging as it increased from 6.4x
(FY2014) to 9.8x (1HFY2015). This was due to the sharp fall in EBITDA resulting from the revenue
reversals. It should be noted that there has been minimal immediate cash impact as a result of the revenue
reversal. The two affected OSVs were shifted from construction work-in-progress to inventories. There may
be some impact on trade receivables or progress billings in excess of construction work-in-progress but
looking at the changes between 1QFY2015 and 1HFY2015 the changes were minimal. Looking forward,
ASL may get a hit if it sells the three OSVs at prices below their intended levels (though this will free up
liquidity). Alternatively, ASL could charter out these vessels and wait for a better opportunity to sell.
However, this would lock up capital, and current charter rates may not be attractive given the environment.
Liquidity Profile: The firms cash balance actually increased from $58.4mn (1QFY2015) to $68.3mn
(2QFY2015), which is prudent given the current market environment. EBITDA / Interest coverage has fallen
from 5.3x (FY2014) to 3.3x currently (due to the sharp slump in EBITDA). The firm is facing S$147.1mn in
unsecured debt maturities and S$175.7mn in secured debt maturities over the next 12 months (as of end
1HFY2015). Most of these relate to vessel financing. One positive aspect is that the firms bonds are not due
till March 2017 (S$100mn worth) and October 2018 (S$50mn worth).
Management remains aligned: One aspect to consider is that the founding Ang family controls about 61%
of ASLs outstanding shares. The Ang family occupy most of the management positions in the firm, and
given their significant stake, they should remain aligned with other stakeholders. The firm has been through
cycles (such as the oil slump of 2009 resulting from a severe global recession) and yet managed to stay
profitable through those tough times. This should give investors some comfort.
Recommendation: We initiate coverage on ASL with an Underweight issuer rating. The firms decision
regarding the three OSVs remains pending, we expect to see more pressure on the firms order book and
utilization of its charter vessels may be pressured due to the current environment. The engineering segment
looks to be weak in the near future as well. However, we are Neutral on both the ASLSP17s and
ASLSP18s. The bonds are both trading below 95c (on the bid side), while the bid-ask spread is wide,
reflecting the relative illiquidity of the market. We believe that the firm has some buffer before hard decisions
need to be made. We believe that 3QFY2015 to be more telling, with the firm re-orienting itself to the tough
environment.
Cpn Maturity
Amount
Issuer Name
(%)
Date
Issued (mn) Curr
ASL Marine Holdings Ltd 4.75 28/03/2017
100.0
SGD
ASL Marine Holdings Ltd 5.35 01/10/2018
50.0
SGD
YTW
ISIN
(bid / ask)
SG6Z90991217 7.5% / 5.8%
SG6TC3000008 7.3% / 6.3%
11 March 2015
Monthly Credit View
ASL Marine Holdings Limited

Figure 1: Revenue breakdown by business line FY2014
Table 1: Summary financials

Year ended 30th June
FY2013
FY2014
1H2015
Income statement (USD mn)
Engineering
11%
Shipcharter
14%
Revenue
465.4
509.8
47.4
EBITDA
99.3
73.1
24.0
EBIT
60.2
26.3
1.1
Gross interest expense
11.0
13.8
7.4
Profit before tax
55.2
26.1
3.7
Net income
44.5
22.1
4.5
88.2
73.2
68.3
Total assets
1,124.8
1,216.9
1,183.1
Gross debt
462.7
539.1
538.3
Net debt
374.4
465.9
470.0
Total equity
405.5
416.5
421.0
Total capitalization
868.2
955.6
959.3
Shipbuilding
Shiprepair and conversion
Net capitalization
779.9
882.4
891.0
Shipchartering
Engineering
83.6
68.9
27.5
-112.1
27.6
12.7
94.3
113.2
27.8
Balance sheet (USD mn)

Cash and equivalents
Cash flow (USD mn)

Funds from operations (FFO)
CFO
Capex & acquisitions
Dividends
7.3
8.4
4.2
-85.6
-15.0
26.4
8.4
49.4
-187.4
-85.6
30.2
EBITDA margin (%)
21.3
14.3
50.7
Net margin (%)
9.6
4.3
9.6
Gross debt/EBITDA (x)
4.7
7.4
11.2
Disposals
Free Cash Flow (FCF)
Shiprepair
and
conversion
20%
Source: Company
-206.4
Adjusted FOCF
Shipbuilding
55%
Figure 2: Gross profit breakdown by business line - FY2014
Engineering
-2%
Shipbuilding
7%
Key ratios
Shipcharter
14%
Shiprepair
and
conversion
48%
Net debt/EBITDA (x)
3.8
6.4
9.8
Gross debt/equity (x)
1.14
1.29
1.28
Net debt/equity (x)
0.92
1.12
1.12
Gross debt/total capitalization (%)
53.3
56.4
56.1
Net debt/net capitalization (%)
48.0
52.8
52.7
FCF/gross debt (%)
-40.5
-15.9
5.6
Shipbuilding
Shiprepair and conversion
FFO/gross interest (x)
7.6
5.0
3.7
Shipchartering
Engineering
EBITDA/gross interest (x)
9.0
5.3
3.3
Source: Company, OCBC estimates
Figure 3: Debt maturity profile

Amounts in USD mn
Amount repayable in one year or
less, or on demand
Secured
Unsecured
Amount repayable after one year
Secured
Unsecured
Total
Source: Company
Figure 4: Net debt/net capitalization

As at 31/12/2014
% of debt
147.1
70.8
217.9
27.1%
13.0%
40.1%
175.7
150.0
325.7
32.3%
27.6%
59.9%
543.7
100.0%
52.7%
FY2014
1H2015
48.0%
FY2013
Source: Company
52.8%
11 March 2015
Monthly Credit View
Otto Marine Limited: Credit Review
Signs of Stress
Business Shift: Otto Marine Limited (OTML) increasingly generates most of its revenue from offshore
vessel chartering (2013: 52%, 2014: 68%). This is mainly at the expense of its shipyard business (2013:
43%, 2014: 23%). The balance subsea business is small at 9% of revenue. The shift in revenue is bad for
margins, as the offshore chartering segment currently has the worse gross margins. For 2014, though vessel
chartering was ~70% of revenue, it is only ~30% of gross profit. Looking forward, the firm intends to push
harder into the cabotage protected Indonesian market via its subsidiary, PT Go Marine.
Recent Performance: For 4Q2014, we estimate that revenue has slumped to US$69.9mn from
US$162.0mn, a decline of 56.9% y/y. For the quarter, we also estimate a loss before tax of ~US$45mn.
1.
2.
3.
Shipyard segment saw the sharpest deceleration in the quarter, generating just US$17.5mn (external
sales) in 4Q2014 compared to US$107.0mn in 4Q2013. Management explained that FY2013 was a
tough comp for the shipyard business as it saw the sale of two substantially completed vessels. The
segment gross margins (including internal sales) for the year actually improved from 5.3% (2013) to
6.6% (2014). However, COGS jumped sharply from US$56.3mn (9M2014) to US$99.3mn (2014). Part
of this was driven by the distinct increase in inter-segment sales (up ~US$23mn for the quarter). The
other reason was cost overruns, as mentioned by the management.
Offshore chartering estimated revenue for the quarter fell from US$46.3mn to US$45.3mn (external
sales) y/y. For the year, the decline of 8.2% y/y was also manageable. The management mentioned that
the decline was due to lower utilization resulting from the docking of vessels for periodic surveys. The
segment gross margins (including internal sales) for the year compressed sharply to 2.6% (2014) from
11.8% (2013). The management attributed this to lower utilization rates as well as greater depreciation
expense (some vessels joined the fleet only later in 2013).
Subsea services revenue grew sharply by 32.8% to US$31.0mn while gross margins improved to
23.7% (from 21.3% in 2013). This was due to higher charter rates as well as the addition of two more
vessels towards the end of 2014.
Profit warning: On the 10 Feb 2015, the firm released a profit warning for fiscal year 2014. Specifically, the
factors mentioned were 1) cost overrun for the construction of a vessel 2) low utilization and delayed charter
commencement for vessels. We have mentioned earlier how COGS jumped sharply in the shipyard
segment. Aside from the specific cost overrun due to one vessel, it is likely that the firm faces a decrease in
operating leverage due to the lower shipyard revenue. Regarding the challenges faced by the ship chartering
business, it should be noted that OTML has 3 high specification vessels capable of working in deep waters.
Given that the deep water market is more stressed currently (due to the high cost of production), these
vessels might find it hard to find charters, or good charter rates. It can be seen that the gross profit
attributable to the offshore chartering business actually fell from US$28.4mn (9M2014) to US$6.4mn (2014).
This sharp fall would have accounted for about half of the losses seen in 4Q2014. The firm has actually been
moving away from smaller OSVs (which might be more focused on shallow water markets). Ironically, the
shallow water market has been more defensive relative to deep water markets given current oil prices.
Order book deceleration: The offshore chartering order book declined from US$470mn (3Q2014) to
US$322mn (4Q2014). This is about 1.3x 2014 offshore chartering segment revenues. Given that offshore
charters are the largest revenue driver, coupled with the weak environment, order book growth trends will be
a good indicator of future performance.
Credit profile improvement: The credit profile for OTML has seen a sharp improvement in recent years,
with gross debt falling from US$674.3mn (2012) to US$538.6mn (2014). Net gearing fell as well from 282%
(2012) to 195% (2013). However, the improvement has halted in 2014 with net gearing held at 195%. It
actually deteriorated relative to 3Q14s 172%. This was due to the losses generated, reducing shareholders
equity, rather than any increase in debt. Leverage remains elevated on an absolute basis. The firm was able
to support its level of debt partially via asset disposals over the last few years (~US$40mn each in 2012 and
2013). Looking forward, we expect the pace of asset disposals to pick up (especially given the firms intent to
11 March 2015
Monthly Credit View
keep its charter vessels relatively new).
Liquidity remains tight: Operating cash flows net of capex & acquisitions swung back to negative in 2014.
EBITDA / interest coverage is only 0.4x due to weak EBITDA generation. The firm had US$29.6mn in cash
at the end of 2014. Comparatively, the firm has US$148.3mn in secured debt due in a year (most are likely
to be vessel financing) and a further US$15.5mn in unsecured debt due. The firms S$70mn in bonds are
due in August 2016.
The firm has been here before: It is worth noting that OTML only returned to profitability in 2013. Due
largely to order cancellations on new-build OSVs by Mosvold Supply, the firm lost US$56.1mn in 2011 and a
further US$113.7mn in 2012. In fact, if not for once-off gain from de-consolidating a loss-making subsidiary
(Reflect Geophysical), 2013 would have been loss making as well. In the past, when the company needed
liquidity, it did dilutive rights offerings. For example, OTML raised US$60mn via issuing shares at S$0.08 per
share in May 2012, and raised a further US$49.5mn via issuing shares at S$0.05 per share in August 2013.
Much of the rights issue were taken up by the majority shareholder.
Tenacious majority shareholder: Mr Yaw Chee Siew controls 61.5% of OTML. This provides a strong
alignment of interest. Mr Yaw is part of the family that controls the Samling Group (the same group that
recently acquired United Engineer WBLs car-dealership unit for S$455mn). The bonds have a change-ofcontrol clause which will trigger should Mr Yaws direct and indirect shareholding in OTML fall below 30%. It
should be noted that Mr Yaw has extended a US$30mn loan to OTML at 7% coupon, and it is due March
2016. In all, the firm has ~US$43mn in liabilities directly and indirectly owed to Mr Yaw.
Recommendation: We initiate coverage on OTML with an Underweight issuer rating. The firm remains in
transition, entering the weak macro environment while recovering from the challenges faced in 2011 and
2012. Its ship chartering order book would likely face pressure as well given the deep water exposure.
Operating cash flow net of capex has turned negative. Absolute levels of leverage remain high while liquidity
is tight. The firms lifeline was the majority shareholder injecting capital the last few years. This however is
not something that we can anticipate nor take for granted. As such, we are also Underweight the
OTML16s. Investors would have received half a years coupon, reducing the amount invested by 3.5c. At a
current bid of 90c, the loss assuming purchase at par (upon issue) would be 6.5c. It may make sense for
investors to take the cards off the table.
Cpn
Issuer Name
(%)
Otto Marine Services Pte Ltd
7
Maturity
Amount
Date
Issued (mn) Curr
01/08/2016
70.0
SGD
YTW
ISIN
(bid / ask)
SG6SC2000001 15.2% / 11.8%
11 March 2015
Monthly Credit View
Otto Marine Limited


Year ended 31th December
FY2012
FY2013
FY2014
Revenue
374.4
512.0
355.9
EBITDA
-54.9
-21.0
13.0
EBIT
-77.3
-43.9
-18.6
34.3
33.8
33.6
Profit before tax
-111.5
15.4
-39.2
Net income
-103.1
14.1
-41.5

46.8
48.0
29.6
Total assets
1,177.8
1,281.7
1,213.5
Gross debt
674.3
640.7
538.6
Net debt
627.5
592.6
509.0
Total equity
222.9
304.0
260.6
897.2
944.6
799.2
Net capitalization
850.3
896.6
769.6
Source: Company
Cash flow (USD mn)

-80.7
37.0
-9.9
CFO
62.1
114.9
36.9
64.3
78.6
76.8
Dividends
0.0
0.0
3.3
Adjusted FOCF
-2.2
36.3
-39.8
Disposals
44.9
35.4
8.9
42.7
71.7
-34.3
EBITDA margin (%)
-14.7
-4.1
3.6
Net margin (%)
-27.5
2.7
-11.6
-12.3
-30.5
41.5
Net debt/EBITDA (x)
-11.4
-28.2
39.2
3.03
2.11
2.07
Net debt/equity (x)
2.82
1.95
1.95
75.2
67.8
67.4
73.8
66.1
66.1
FCF/gross debt (%)
6.3
11.2
-6.4
-2.4
1.1
-0.3
-1.6
-0.6
0.4
Key ratios

Amounts in USD mn
less, or on demand
Secured
Unsecured
Secured
Unsecured
Total
Source: Company
Source: Company

As at 31/12/2014
% of debt
148.3
15.5
163.7
27.5%
2.9%
30.4%
285.4
89.4
374.9
53.0%
16.6%
69.6%
538.6
100.0%
11 March 2015
Monthly Credit View
Pacific Radiance Limited: Credit Review
Calm Waters for Now
Strategic focus: Pacific Radiance Limited (PACRA) continues to generate the bulk of its revenue in its
offshore support services business (the chartering of OSVs). This contributed 74.4% of 2014 revenues. If we
consider Alam Radiance Inc and PT Logindo (Alam and Logindo, two associate companies) as well,
PACRA is even more dependent on this particular business segment, as Alam and Logindo generate most of
their revenues from OSV chartering. In recent years, PACRA has made a strategic decision to penetrate
cabotage protected markets of Malaysia and Indonesia via its associate companies Alam and Logindo. Due
to limitations on the supply side, charter rates have held up well relative to freer markets. Though PACRA
controls ~130 OSVs, about half are owned outright by PACRA while majority of the balance are held via JVs
with Logindo and focused on the Indonesian market. PACRA also sells vessels to its associate, as a method
to keep its owned vessel new and relevant (~4 years old on average). The transactions are described as at
arms length, with third party valuators involved. Based on the last available disclosures, Logindos fleet is
distinctly older compared to PACRAs. Involvement in cabotage protected markets may provide some
stability given the weak energy outlook depressing demand and charter rates. For 2013 and 2014, JVs
contributed about ~US$12mn each year in profit to PACRA.
Fair recent performance: PACRA saw its 4Q2014 revenue fall 12.2% y/y to US$37.2mn. The offshore
support services business actually grew 12.1% y/y to US$29.7mn during the quarter (4Q2013: US$26.5mn).
The weakness was in its subsea business, which slumped sharply to US$5.0mn (4Q2013: US$12.1mn). The
management guided that the slump in revenue was due to the two diving support vessels (DSV) that
generate majority of segment revenue being dry-docked for enhancement works, in addition to being
underutilized in 2H2014. These DSVs saw high utilization rates of 81% in 2013. However, these DSVs
previously saw strong demand in field development work. Given that field development work would have
likely decelerated due to current low energy prices, the utilization and charter rates of these DSVs might be
pressured going forward.
Gross margin pressure: Gross margin declined sharply from 35.9% (4Q2013) to 8.8% (4Q2014). The
decline in profitability was driven by both the underperforming subsea business as well as soft conditions for
the offshore support services business. Excluding gains for asset disposals and share of gains from JVs, the
firm would have generated a pre-tax loss for the quarter. The pressure on full-year gross margin was entirely
due to 4Q2014. For 9M2014, gross margin was 35.7% (9M2013: 35.5%). For the year, net income increased
22.1% y/y to US$69.4mn, driven in part by US$18.9mn in additional disposal gains relative to 2013 (the firm
sold 8 vessels in 2014).
State of the order book: Unlike peers that disclose their current order book, the management chose to
disclose only selected order wins during their earnings release. For example, during 4Q14s earnings
announcement, the management mentioned US$200mn in new long-term charters for its fleet (it should be
noted that this number includes extensions). This would be ~1.5x of 2014 offshore support services revenue.
Future endeavours: The firm plans to build up its presence in other high-growth and protected markets. It
has set up JVs in Australia as well as Mexico. Their shipyard in Singapore is expected to be ready in early
2016, which would provide the firm with more control over its fleet maintenance program.
Capital commitments: The firm last disclosed (in its 2013 annual report) that it had US$281.5mn in capital
commitments. These are all related to the purchase and construction of vessels. The firm has also
mentioned the delivery of 18 wholly and jointly owned newbuilds between 2015 and 2016.
Credit profile is strong, but with caveats: The net gearing of the firm has consistently improved from
124% (2012) to 60% (2013) to 52% (2014). Net debt has been stable the last couple of years while
profitability increased shareholder equity. It should be noted that the firm does have contingent liabilities due
to its JVs. The firm last disclosed (in its 2013 annual report) US$92.4mn in contingent liabilities due to
corporate guarantees provided to its JVs and associates. This was an increase of 76% compared to 2012.
11 March 2015
Monthly Credit View
We will only know the extent of such contingent liabilities when the 2014 annual report is published. If we
assume that contingent liabilities are unchanged relative to 2013, and factor these in net gearing, net gearing
would increase to 74%. It should be noted that PACRAs largest JV, PT Logindo, of which PACRA owns
35%, recently did a SGD-denominated bond issue on 23 Jan 2015. The issue size was S$50mn, and was
backed by a SBLC from UOB. It is not yet clear what corporate guarantees PACRA provided, if any, to
support the deal.
Liquidity is acceptable: The firm ended 2014 with US$101.4mn in cash. Comparatively, it has US$51.9mn
in debt due over the next 12 months. Interest coverage is also fair at 5.7x. Operating cash flow net of capex
was US$24.5mn for 2014. It should be noted that the management was comfortable enough with the firms
liquidity profile to declare a dividend of US$21.8mn.
Links with Swiber Holdings: Mr Pang Yoke Min, the majority owner of PACRA (directly controlling 66.75%
of the stock), is also one of the largest shareholders of Swiber Holdings (Swiber). At the end of 2014, he
indirectly controlled 10.31% of Swiber. When Swiber Holdings announced its dilutive rights issue at the end
of 2014, Mr Pang joined Swiber insiders in underwriting half the share rights issued. PACRA had previously
declared Mr Pangs investments in Swiber to be passive investments. PACRA did state that it had transacted
with Swiber in the past, such as selling vessels to Swiber. Given Swibers current financial challenges, there
could be further strategic endeavours between Swiber and PACRA in the future.
Recommendation: We initiate coverage on PACRA with a Neutral issuer rating. Though absolute leverage
ratios are fair, we expect to see future deterioration given the weakness seen in 4Q2014 for both its offshore
support services as well as subsea businesses. There remains the uncertainty with regards to the corporate
guarantees it has provided to its JVs and associates as well. That said, we are Overweight the PACRA18s.
The firm entered the weak environment with a fairly strong balance sheet as well as cash balance. It also
has a manageable maturity profile. When compared to peers, the firms credit profile is distinctly stronger
(even though it may deteriorate in the future). The bond is trading at a discount at 95c (offer) and should
benefit from the pull to par. The YTM of 5.92% (~400bps above swaps) is attractive as well.
11 March 2015
Monthly Credit View
Pacific Radiance Limited


Year ended 31st December
FY2012
FY2013
FY2014
Revenue
130.8
168.6
172.2
EBITDA
42.9
61.0
51.7
EBIT
18.9
36.0
23.8
11.5
13.1
9.1
Profit before tax
28.6
56.8
68.3
Net income
32.2
56.8
68.3

23.7
64.9
101.4
Total assets
570.8
745.9
839.5
Gross debt
279.3
292.9
328.1
Net debt
255.7
228.0
226.7
Total equity
206.4
377.5
431.9
485.7
670.4
760.1
Net capitalization
462.0
605.5
658.6
56.2
81.8
96.2
CFO
17.3
29.2
61.3
74.4
188.1
207.5
Dividends
0.0
7.1
11.4
Adjusted FOCF
-57.1
-159.0
-146.2
Disposals
79.3
79.0
169.1
22.2
-87.0
11.5
EBITDA margin (%)
32.8
36.2
30.0
Net margin (%)
24.6
33.7
39.7
6.5
4.8
6.3
Net debt/EBITDA (x)
6.0
3.7
4.4
1.35
0.78
0.76
Net debt/equity (x)
1.24
0.60
0.52
57.5
43.7
43.2
55.3
37.7
34.4
FCF/gross debt (%)
7.9
-29.7
3.5
4.9
6.3
10.6
3.7
4.7
5.7
Cash flow (USD mn)
Source: Company
Key ratios

Amounts in USD mn
less, or on demand
Secured
Unsecured
Secured
Unsecured
Total
Source: Company

As at 31/12/2014
% of debt
50.7
1.2
51.9
15.4%
0.4%
15.8%
201.5
74.8
276.3
61.4%
22.8%
84.2%
328.1
100.0%
10
11 March 2015
Monthly Credit View
Source: Company
Swissco Holdings Limited: Credit Review

In Transition
RTO complexities: Swissco Holdings Limited (SWCH) today is a different company when compared to
end-2013. In the past, Swissco generated a third of its revenue from vessel chartering, and the balance in
maritime services (the sourcing of equipment and vessels for customers). This changed when at the end of
February 2014, the merger of SWCH with Scott and English Energy (S&EE), a privately-held offshore rig
charterer, was announced. As S&EE shareholders became the majority shareholders of SWCH post the
transaction, the transaction is considered a reverse takeover (RTO). As a result, the financial statements
provided since the close of the transaction is actually S&EEs. As the transaction closed on the 30 Jul 2014,
3Q2014 statements only partially reflect the impact of the RTO. 4Q2014 was the first full quarter reflecting
the new SWCH.
JVs are the name of the game: S&EEs core business was in the chartering of rigs. This was done via 50%
JVs with other parties (for the initial four rigs that S&EE had, the JV partner was Ezion Holdings). These
were accounted for via equity accounting. As a result, S&EE had very minimal revenue as the bulk of its
income was recognized via share of profits of associates / JVs. Post the RTO, the bulk of SWCHs income is
generated via its rig chartering business. However, the bulk of the income was generated via JVs and
associate companies. As a result, the revenue for the segment is understated (relative to the income
generated). Since the RTO, SWCH has acquired four more drilling rigs and one more service rig (they
funded part of the acquisition using the proceeds from the S$100mn bond issued in October). Currently, out
of the fleet of nine rigs, SWCH majority owns two (and hence consolidates the revenue generated from these
two rigs on its income statement). These two rigs commenced their charters on 1 Oct 2014, and generated
US$11.4mn in revenue for the quarter.
Recent Performance: For 4Q2014, SWCH generated US$37.3mn in revenue and a loss before tax of
US$0.8mn. The loss was driven by ~US$23mn in Other Expenses recognized during the quarter, which
includes US$15.4mn in goodwill impairment (non-cash, resulted from the sharp deterioration to SWCHs
original business post the acquisition), US$5.3mn in MTM loss on an available-for-sale asset (it is the stock
of a Singapore listed O&M company) and US$2.3mn in acquisition expenses resulting from the RTO. The
performance for the vessel chartering segment was weak, declining 22.8% y/y to US$9.5mn. The
management has guided that utilization is ~65%, and that 2015 will see chartering pressure. The decline in
maritime services revenue was particularly sharp, falling from US$65.8mn (4Q2013) to US$16.1mn
(4Q2014). It should be noted that the revenue from maritime services can be lumpy as it relates to the sale
of vessels to customers. From August 2014 till end December 2014 (the period post the RTO), SWCH only
sold three vessels (of which one was done in 4Q2014). Given the souring of energy markets, the slump in
vessel demand is not unexpected. The management has mentioned that they stopped ordering vessels for
their own vessel chartering business, which would allow them some leeway to take into their fleet vessels
originally intended for sale.
Rig chartering to be driver: SWCHs future performance will be highly dependent on its rig chartering
business. For 2014, the segment generated US$28.9mn in profits after tax, helping to offset the losses
generated by the vessel chartering business (though the latter segment only factors the last 5 months of
2014). The rig chartering business is typically stable, as rigs have multiyear contracts (for SWCH, the
outstanding contracts range from 2 to 7 years, including options). However, it can be lumpy, as revenue halts
when rigs fall off charter or undergo surveys. The firms strategy is to invest in old jack-up rigs (shallow
waters focused). None of its rigs are built earlier than 1985. However, all of its rigs have been upgraded
recently (one was in 2007, while the rest was done post 2009) and all were certified upon purchase by the
firm. As the rigs are older, the cost to the firm is lower. Though charter rates are lower, it makes these rigs
more cost competitive when compared to newer rigs. Finally, the lower cost gives the firm more flexibility to
redeploy these rigs. For example, one of the service rigs the firm had was previously a drilling rig. The firm
chose to convert it to a service rig as it offers better operating income. The firm last disclosed a contract
value of US$710mn for its rigs (though part of it has already been realized). When questioned about
potential contract cancellations, the management stated that it is possible, but mitigated by SWCHs rigs
11
11 March 2015
Monthly Credit View
already low charter rates and high usage efficiency levels. The management alluded that there are other
(higher cost, lower efficiency) rigs that end clients are more likely to cut. The management has also
mentioned that they continue to work closely with end clients to discuss terms. The earliest of SWCHs rig
contract expiries are two rigs in 2016.
Distressed sales opportunity: The management believes that the current slump will help right the supply
imbalance in the jack-up rig market. Contract drillers are cold stacking rigs (which reduces supply, and are
costly to start up again) while speculative buyers of rigs are bearing losses. The premium new jack-up rig
market is facing significant pressure on its charter rates as owners have loans to service. That said, SWCH
believes that the market has more room to fall and will avoid considering the purchase of new rigs in the near
future.
Credit profile mixed: On an absolute basis, SWCHs net gearing has improved to 83% (4Q2014) from
104% (3Q2014). However, it should be noted that SWCH may be facing contingent liabilities from its JVs
going forward. It was last disclosed that Ezion was solely providing the corporate guarantees for the JV rigs
which SWCH jointly owns with Ezion. Ezion was paid a fee to do so. This may change going forward (we will
get more clarity when the annual report is published). As a mitigation, vessel / rig financing is typically 5
years and amortizing. The SWCH / Ezion JV rigs have been on contract since January 2013 and would have
paid down sizable parts of their principal. Should SWCH purchase more rigs outright (rather than via a JV),
leverage is likely to increase as well. The management has guided a target net gearing of 100%, though it
may go higher to the 120% - 130% region temporarily upon purchases. The management mentioned that
financing for rigs purchases remain available (at LTVs of 60 70%). The key is that these assets have to be
cash flow generating (on contracts). We believe that any future transactions (if any) will be sale and lease
back transactions.
Liquidity looks fair: The firm has US$38.6mn in cash at the end of 2014. Comparatively, it has US$61.3mn
in secured debt (mostly vessel financing) and US$10.7mn in unsecured debt due over the next 12 months.
The firm generated US$50.6mn in operating cash flow for 2014. Capex was steep at US$168.0mn, but most
of these were growth capex to purchase the rigs or to build vessels for sale / chartering. We expect 2015
capex to be distinctly lower given the current market conditions. The firm was comfortable enough with its
liquidity profile to declare US$13.4mn in dividends for 2014. It only has bonds maturing in April 2018.
Recommendation: We initiate coverage on SWCH with a Neutral issuer rating. Though longer term rig
contracts provide some comfort given the stable cash flows, we believe that we need to know more details
regarding the potential liabilities that the firm could be exposure to given that JVs hold majority of the rigs.
This clarity should be provided with the 2014 annual report. In addition, the current net gearing looks to be
lower that the managements intended target, which may indicate further growth capex potentially. We are
also Neutral the SWCH18s. The yield is attractive on both a spread (~570bps above swaps) as well as
absolute basis (over 7.5% for short-dated paper). There is no near-term maturity pressure as well. That said,
given that rig chartering will be the main driver of profits going forward, and that most of these assets are
held off balance sheet, we will be more bullish when more clarity is provided. In particular, the order backlog
for SWCHs more recently purchased rigs (the non-Ezion JV ones) is smaller and is an area that needs to be
monitored.
12
11 March 2015
Monthly Credit View
Swissco Holdings Limited


Year ended 31st December
FY2012
FY2013
FY2014
Revenue
0.0
65.5
EBITDA
-0.5
21.3
EBIT
-0.5
11.5
1.1
4.7
Profit before tax
15.4
15.5
Net income
15.4
15.9

0.8
38.6
Total assets
45.9
548.3
Gross debt
0.0
250.8
Net debt
-0.8
212.1
Total equity
43.0
254.3
43.0
505.1
Net capitalization
42.2
466.4
15.4
25.7
CFO
-0.5
50.6
0.0
158.4
Dividends
0.0
0.0
Adjusted FOCF
-0.5
-107.8
Disposals
0.0
4.2
-0.5
-103.6
EBITDA margin (%)
32.5
Net margin (%)
24.3
0.0
11.8
Net debt/EBITDA (x)
1.5
10.0
0.00
0.99
Net debt/equity (x)
-0.02
0.83
0.0
49.6
-1.8
45.5
FCF/gross debt (%)
-41.3
13.4
5.4
-0.5
4.5
Cash flow (USD mn)
Source: Company
Key ratios

Amounts in USD mn
less, or on demand
Secured
Unsecured
Secured
Unsecured
Total
Source: Company
Source: Company

As at 31/12/2014
% of debt
61.3
10.7
72.0
24.5%
4.3%
28.7%
178.7
0.0
178.7
71.3%
0.0%
71.3%
250.8
100.0%
13
11 March 2015
Monthly Credit View
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OCBC Asia Credit - Offshore Marine Sector - Many Moving Parts (11 Mar 2015) PDF

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Asia Credit Research

Offshore Marine Sector: Many Moving Parts

Healthy order books do offer some comfort in providing revenue clarity,

Ezra Holdings Ltd

Monthly Credit View

ASL Marine Holdings Limited: Credit Review

Mind the Gap

Treasury Research & Strategy

Monthly Credit View

related charter vessels.

Indicative prices from Bloomberg as of 11 March 2015

Treasury Research & Strategy

Monthly Credit View

ASL Marine Holdings Limited

Table 1: Summary financials

Income statement (USD mn)

Gross interest expense

Profit before tax

Shiprepair and conversion

Balance sheet (USD mn)

Cash flow (USD mn)

EBITDA margin (%)

Net margin (%)

Gross debt/EBITDA (x)

Figure 2: Gross profit breakdown by business line - FY2014

Net debt/EBITDA (x)

Gross debt/equity (x)

Net debt/equity (x)

Gross debt/total capitalization (%)

Net debt/net capitalization (%)

FCF/gross debt (%)

Shiprepair and conversion

FFO/gross interest (x)

EBITDA/gross interest (x)

Source: Company, OCBC estimates

Figure 3: Debt maturity profile

Figure 4: Net debt/net capitalization

Treasury Research & Strategy

Source: Company, OCBC estimates

Monthly Credit View

Otto Marine Limited: Credit Review

Treasury Research & Strategy

Monthly Credit View

keep its charter vessels relatively new).

Indicative prices from Bloomberg as of 11 March 2015

Treasury Research & Strategy

Monthly Credit View

Otto Marine Limited

Table 1: Summary financials

Income statement (USD mn)

Gross interest expense

Profit before tax

Balance sheet (USD mn)

Cash flow (USD mn)

Capex & acquisitions

Free Cash Flow (FCF)

EBITDA margin (%)

Net margin (%)

Gross debt/EBITDA (x)

Net debt/EBITDA (x)

Gross debt/equity (x)

Net debt/equity (x)