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Ezion restructures debt in struggle to survive

The Edge Singapore
The Edge Singapore • 5 min read
Ezion restructures debt in struggle to survive
(Oct 9): Analysts once thought that if any of the small- and mid-sized offshore and marine companies would avoid financial trouble, it would be Ezion Holdings. Now, the company is asking holders of its bonds and perpetual securities for permission to chan
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(Oct 9): Analysts once thought that if any of the small- and mid-sized offshore and marine companies would avoid financial trouble, it would be Ezion Holdings. Now, the company is asking holders of its bonds and perpetual securities for permission to change the terms of its obligations in order to stay afloat.

Investors holding five tranches of $475 million worth of bonds with coupons ranging from 4.6% to 5.1% that mature between 2018 and 2021 are being offered two choices.

The first is to extend the maturity of their bonds by seven years and reduce the coupon to 0.25%, and eventually get the bonds fully redeemed at a 5% premium.

The alternative choice entails holding on to the bonds for six years, and having the option to convert the bonds into new shares in tranches of $50,000 at anytime within the first five years. The initial conversion price will also be the minimum conversion price. This is likely to be 30.7 cents, versus Ezion’s last traded price of 19.7 cents. The conversion price will be reset every three months based on the volume weighted average price of the latest three months, subject to the minimum conversion price. If held to maturity, the bonds will be redeemed at par.

Meanwhile, Ezion has also offered holders of its $150 million worth of 7% perpetual securities two choices. The first is to reduce the coupon to 0.25% and wait 10 years to be repaid, instead of the current seven. The second option will enable holders of the perpetuals to convert them to equity with the same formula as the bonds, and at anytime within the first three years.

Chew Thiam Keng, founder and CEO of Ezion, says the debt restructuring is crucial for the company. “The banks themselves have agreed to term out their loans. The savings will be $30 million a year,” says Chew, who holds a 10.49% stake in Ezion.

“Part of the bank loans will be stapled with warrants. These are non-detachable. When the loan gets paid down, the warrant will go away. If [the creditor banks] convert the warrants, the loans will be cancelled,” he explains.

For 1H2017, Ezion’s interest cost amounted to US$16.67 million ($22.7 million) while earnings before interest, taxes, depreciation and amortisation (Ebitda) was just US$16.6 million. All in, operating and free cash flow was negative.

With the drastic cut in debt cost, interest on the bonds and perpetuals will fall from $30.97 million a year to just $1.44 million.

For 1H2017, the amount paid to lenders and noteholders, including repayments, was US$92 million, while net operating cash flow was US$126 million. The company had capital expenditure of US$32 million in 1H2017, resulting in cash outflow of US$124 million.

So, can Ezion survive? Much really depends on vessel charter rates.

“We have not seen any more dropping of the rates. We are cautiously optimistic that by 2H2018, we should see some recovery of rates,” Chew says. “Demand is returning. [Charter rates] may not go back to levels they were in the past, but we are cautiously optimistic of a recovery by 2H2018,” he adds.

Ezion has a fleet of 14 liftboats, 20 refurbished rigs and 45 offshore service vessels. The liftboats are relatively new and in demand as they service producing wells and are very versatile.

Ezion has just contracted out a further six liftboats, implying that the fleet utilisation rate will be 100% next year.

The problem Ezion faces is with its 20 service rigs. “The older rigs that we bought and refurbished, including the [ones obtained through a] joint venture with Swissco Holdings, were very old. The contractor we chartered them to did not receive money [from his customer] and so did not pay us. The collection [rate] is very poor, and the [charter] rates are very, very low in this category,” Chew gripes.

Ezion will now probably have to make provisions and reduce the current book value of US$1.37 billion for the 20 rigs. “Some of those units are really not viable and we may have to scrap them eventually,” Chew says. While the impairment will affect Ezion’s book value, it is unlikely to affect cash flow and Ebitda.

Ezion’s next step is to call for a “consent solicitation” exercise. This is to obtain permission from its bondholders to loosen existing covenants to change the terms of its outstanding bonds. The company needs approval from 75% of the bondholders by total value in the first formal meeting.

If it does not obtain 75%, the meeting will be adjourned and called again in 14 days. In this second meeting, the issuer needs only 25% of the value in attendance to approve the loosened covenants.

To pass the motion, the company needs 75% in value of the 25%.

Incidentally, the restructuring of its bank loans, which includes an additional line of US$100 million, is contingent upon the bondholders agreeing to looser covenants.

In the meantime, Ezion’s management has met with several potential investors, including funds and strategic investors. One strategic investor is keen to work with the company but would like to see the refinancing of lenders and notes completed first.

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