“Cashed in” options for contract extensions are not being exercised and tenders for new contracts are few and far between. For many offshore vessel and rig owners, the contract backlog is shrinking and cash flow evaporating, leaving few places for a highly leveraged oil service company to hide.
Offshore vessels and rigs are CAPEX-intensive investments and most owners will have secured external take-out financing in order to bring their unit to the market, either through debt or bond financing or a combination of both. The financial covenants imposed by lenders are likely to be strict and, where project finance is in place, the security package will be all-encompassing. For oil service companies, the time to re-visit the financial model and to start scrutinising loan terms may be fast approaching. If the outcome of that analysis is a possible default lurking on the horizon, this should be the time to start preparing a strategy to steer the company through the challenging market conditions.
A golden rule in these situations is that there is always a better chance of succeeding in negotiations with creditors before a default has occurred and at a time when there are viable options for resolving the funding crisis. Generally, private negotiations and commercial solutions are much easier to deal with than trying to rescue something from a formal administration process.
From the company's perspective the preparations for such negotiations are key, and the following are some of the main elements that must be carefully considered and analysed: (i) what type of default (including cross-defaults) may occur short-term, and will the company be capable of remedying any such default; (ii) who are the different stakeholders (shareholders, financiers, clients, suppliers) and what is their exposure and likely agenda; (iii) if a default occurs, are the financiers likely to choose to enforce their security (including the mortgage over the vessel/rig) or will this in reality be deemed (a) too cumbersome, time-consuming and costly (depending on the relevant country of operation) and/or (b) will the actual expected sales price in the prevailing market be deemed too low to provide for an acceptable level of recovery; and (iv) depending on jurisdiction, is any formal administration/rehabilitation scheme or even filing for bankruptcy a possibility or will it be deemed as a threat to stakeholders?
The company will also need to be able to convince perhaps less experienced lenders that the current market conditions are part of a recognised cycle in offshore activity and that the underlying long-term fundamentals remain strong. In particular the lenders will need to be satisfied that the offshore vessel or rig has proven operational capabilities, and that it is expected to be competitive and attractive as soon as the market returns to an upward cycle.
Once the homework has been done, the management team, together with its financial and legal advisers, will need to put together a restructuring plan involving all stakeholders. The best prospect of success occurs when the plan adopts a rule-of-thumb approach that spreads contributions evenly, creates a shared future upside, and is open and transparent and willing to allow creditors to become involved on the management side if they require this as a condition for continued support. It is essential to create a level of trust between the participants, based on a good and open dialogue with all parties involved and allowing sufficient time for everyone to do their due diligence and properly assess the options presented.
There is no guaranteed recipe for ensuring a successful restructuring, but it is important to remember that shipping and offshore cycles are well-known and the need to restructure or to make adjustments to offshore projects in distress is not something new to the industry. Most experienced players understand the need to maintain investments through market cycles. If a company is aware that a breach of one or more of its material contract obligations is likely, then preparing for re-negotiation of terms and trying to achieve a solution that allows the company to continue as a going concern has a very limited downside. In most jurisdictions the directors of a company will also have a formal duty to try to improve the company's financial conditions.
A combination of difficult market conditions caused by falling oil prices and cutbacks in investment spending means that this is no time to hide. Where restructuring is likely to be needed, companies should start making preparations for discussions with major creditors and other stakeholders without delay.
Contributed by Birgitte Karlsen and Rob Jardine-Brown (Wikborg Rein LLP)
Birgitte Karlsen, Partner, Wikborg Rein LLP, [email protected] / +44 75 2507 1742
Rob Jardine-Brown, Partner, Wikborg Rein LLP, [email protected] / +44 77 8572 2147
Next Friday Wikborg Rein will take look at restructuring in the offshore sector from a lenders perspective.
Copyright © 2024. All rights reserved. Seatrade, a trading name of Informa Markets (UK) Limited. Add Seatrade Maritime News to your Google News feed.
