TW+ Roundtable: The offshore crisis

With another harsh year underway in the offshore sector, TW+ gathers six experts in Oslo to discuss the challenges ahead for owners in an industry marred by illiquidity and insolvency, and whether today’s restructurings are sustainable. Story: Darrin Griggs. Photography: Skjalg Bohmer Vold

The deep offshore shipping crisis has bludgeoned owners, gutting values and revenue, wiping out equity and leaving even industry leaders bloody, bruised and defaulting on debt.

With up to 60% of the world’s offshore owners thought to be in the hands of banks, you have to look back 30 years to find a comparable downturn for offshore support vessels (OSVs).

With the turmoil as backdrop, TW+ hosted a roundtable discussion on restructurings with a respected US owner, Charles Fabrikant, chief executive of Seacor Holdings, two veteran advisers and three specialist Norwegian lawyers, who have been fighting in the restructuring trenches.

Joining Fabrikant on the panel in Oslo were 42-year bankruptcy specialist Aage Figenschou; AlixPartners managing director Albert Stein; Wikborg Rein partner Kaare Christian Tapper; BA-HR partner Richard Sjoqvist; and Thommessen partner Jo Rodin. Since 2015, these five together have handled about 40 offshore restructuring cases personally, their firms more than 90, for clients among all the stakeholders in the process, including owners, banks and bondholders.

Offshore work has been plentiful, at least for advisers and lawyers. US corporate law firm Haynes & Boone lists 118 companies in its Oilfield Services Bankruptcy Tracker between 2015 and 2017 for North America. Total debt administered comes to almost $21bn, which includes Toisa but excludes Ezra. 

Oil-service bonds on the Norwegian market set a record for defaults in 2015 and 2016, according to Stamdata, the database for the Nordic Trustee. In January, Nordic high-yield energy bonds had hit a default rate of 38.42%, with a default volume of NOK 41.7bn ($4.85bn) out of a total outstanding amount of NOK 108.5bn.

3b0e638db5862e9c7a6f48830e9b5dcd Seacor's Charles Fabrikant at the TW+ Offshore Roundtable in Oslo  Photo: Skjalg Bohmer Vold

Stamdata shows 42 defaults and 28 continuations in 2016 for individual oil & gas services securities — up from 51 in 2015 and just nine in 2014. Some groups have up to three or four bonds, so the company count is much lower than the number of defaults.

The last really big year for Nordic oil & gas bond defaults and continuations was 2009, when there were 63. Sjoqvist says that downturn was down to a lot of bad assets, bad quality and bad management. 

“Perhaps the market wasn’t that bad. But now, from 2014 to 2016, the downturn of the market has even led to good assets and good companies coming into trouble,” he said. “There is a significant difference between those companies in trouble in 2009 and those who are in trouble at this stage.”

Even with the number of offshore bankruptcies and restructurings, today’s situation is not historically unprecedented. Offshore is an asset-intense business that attracts speculative capital. But for a more apt comparison, the panellists agree it is best to look way back to the industry downturn of the mid-1980s.

Fabrikant and Figenschou, two offshore veterans, say the basic shape, size and scope of the offshore market has changed significantly over the decades, complicating today’s restructurings.

One way to see the difference is to look at oil companies’ exploration & production (E&P) spending, which ultimately drives the sector. Global E&P was just below $100bn in 1985, before budgets were cut by 31% in 1986 and again by 6% in 1987. E&P spending was just above $680bn in 2014 but shrank by 40% in the following two years. Adjusting for inflation, the spending increase over 32 years was around 230%.

4220889ee9a0f895bc4698aa64bf052d Bankruptcy specialist Aage Figenschou makes a point during the debate   Photo: Skjalg Bøhmer Vold

In that time, offshore shipowners’ balance sheets have become much more complex. There was no bond market for shipping back then, says Figenschou, and lending was mostly bank debt and yard financing.

Three decades ago, there were no specialist advisers for restructuring. “Private equity money was not wading in and out in droves, which can have the effect of a bull in a china shop,” he added.

From the operator’s point of view, Fabrikant says the OSV industry today is more fragmented than in the 1980s and “less Euro-US centric”. Singapore has gone from a handful of companies to becoming a major factor in terms of vessel ownership and banking.

But for all the details that have changed, much has stayed the same.

“There is nothing new about industry leaders being in trouble,” said Fabrikant. “Zapata and Tidewater were in trouble in the 1980s, and they were the product, at least in some cases, of the mergers with the Gulf fleet and other companies.

“In my opinion, it is not really all that new. It is just maybe more extensive because the industry is bigger, there are more players, more geographically spread out.”

Fabrikant says there is now more activity in more regions and jurisdictions, making it harder to track vessels and repossess them. The complexity, diversity and expense of OSVs have also risen, creating new vessel types and more subcategories of operators.

Interest rates are much lower than during the most comparable downturn in the 1980s. The London interbank offered rate (Libor) saw a 12-month rate of 11.06% in 1989, compared with a 12-month figure of 1.77% in April this year.

3e94f9549d8f1f183ed6db0447cf963f AlixPartners' Albert Stein in Oslo  Photo: Skjalg Bøhmer Vold

Despite lenders’ huge exposure, low interest rates mean the carrying cost is smaller and banks are better able to engage in “amend and extend” strategies to delay bankrupting companies and avoid heavy bank losses — for now. This delaying tactic is part of what some criticise as “kicking the can down the road”. It has become a pejorative catchphrase in today’s offshore sector.

Apart from low interest rates, other factors may be keeping the largest offshore lenders from pulling the trigger on bankruptcies. If a number of banks do foreclose on owners, a subsequent fire sale of assets would create a cascade effect in vessel values, which have already fallen off a cliff. It could have a spiralling impact on the whole OSV industry, especially in terms of leverage and minimum-value covenants in loans.

For large offshore lenders, such as DNB, there is also a clear disincentive for providing other companies with fire-sale assets. If a bank sells cheap ships, this might simply hurt many other companies in its own portfolio.

“The problem is that there are just too many vessels and too many rigs,” said Sjoqvist. “And whatever you do, if the bank sells cheaply, gives the ship over to someone else, it just ends up that that company can run those ships cheaper and compete with other companies where the bank is exposed and where the bank will just have more problems.

“So banks are not necessarily advantaged by trying to sell off in the secondary market, at least not those banks who are really big in this sector.”

All our panellists agree that the number one challenge is oversupply, which for platform supply vessels (PSVs) and anchor handling tug supply vessels works out to around 40% too many ships globally.

11a8808cf227e04ac514f671069d01a1 Wikborg Rein's Kaare Christian Tapper  Photo: Skjalg Bøhmer Vold

“The biggest challenge is to get some realism about what a sustainable level of tonnage is and to eliminate the incentive for people to game the system,” said Stein.

Figenschou added: “The biggest challenge for restructurings is to get all players to maybe reduce their ambitions a little bit in order to reach an amicable solution at an earlier stage than they have been doing so far.”

As Figenschou implies, the length of time for restructurings has indeed been protracted, and costly. In Norway, in the case of Havila Shipping, negotiations took 14 months and ended only when the banks finally gave bondholders an ultimatum to accept the deal or lose everything in a bankruptcy.

Havila’s legal and advisory bill for 14 months is believed to have been about NOK 100m. Ironically, this is nearly two- thirds of what the Saevik family holding company put into the plan, with NOK 118m in new equity and a loan of NOK 46m.

Some say Havila’s bill is relatively cheap but average costs can depend on the complexity of the situation, ranging from $150,000 for a special-purpose vehicle up to $100m for Seadrill-type scenario.

Another issue, especially for Norway, is the sustainability of current offshore restructurings. Most financial runways have been planned for about two years and many restructurings have not addressed underlying capital structures by reducing the debt of distressed companies.

These “amend and extend” strategies have introduced small amounts of new cash and granted standstill agreements on interest, while seeking to ensure enough capital is in place to keep an owner’s operations ticking over until a recovery.

This means a second round of offshore restructurings will probably occur in about 2019, given the length of many runways.

0f28aa1aa7eaf423c42a160302c49fea Panel member Richard Sjoqvist  Photo: Skjalg Bøhmer Vold

Although some recovery in activity is generally expected in 2019, it is likely to be predominantly for subsea players, as oil companies sanction new projects. Incremental demand for PSVs may not arrive until an offshore field is actually up and running, which could mean a time lag of three to four years.

Last year, Harald Serck-Hanssen, group executive vice-president of large corporates and international at DNB, told the Norwegian press that offshore restructurings would take years to accomplish and probably come in two rounds.

Related to this likely second round in 2019, Figenschou takes issue with what he describes as “symbolic money” — token amounts of fresh equity required for restructurings now.

In the example of the Farstad, Deep Sea and Solstad merger, NOK 650m of new money went into the equation for a combined entity with an eye-watering net debt of NOK 29bn. The financial runway for the merged company is estimated to last until about 2022.

“Why is it important for the banks to have the owner raise a symbolic amount of equity when it does not mend the shortcomings of the balance sheet?” asked Figenschou, pointing out that capital markets are not functioning for offshore.

“Right now, no financial investors want to touch this business, so that’s why I think asking for more equity now, when it must be at its most expensive, is one of the stupidest things you can do. That window will open later.

“None of the services companies, having gone through a restructuring, has a proper balance sheet by now. Some of them may have a sufficient balance sheet to survive until hopefully the market returns, but there will probably be lots more secondary restructurings in a few years.”

For the ‘kick-the-can ideology’, Rodin counters that it is wrong to view this “as purely defensive from the banks’ perspective, in that they need to save themselves”. He says even a token amount of equity lashes owners “to the mast, so to speak” or helps attach industrial players to a plan.

“Most of the offshore entities have a key owner or family owners, holding 40%-55% of the shares, while the rest are on the stock exchange, unless it is a privately held company. In either case, it is unacceptable for the banks to simply allow the owners to go forward as majority owners without participating with new equity,” said Rodin.

8262ab0cd3c5d7508ec69beda093c821 Thommessen's Jo Rodin at the Roundtable  Photo: Skjalg Bøhmer Vold

“If the banks must participate with new loans and revised amortisation schedules and so on, this implies that the share capital is gone. It would, quite naturally, be unacceptable to give the shareholders a free ride in such a situation.”

Meanwhile, Fabrikant points to a big differences between the US and Norway, asking what the cost is to the OSV industry as a whole of keeping companies alive.

“The question is: are you restructuring to get an agreement among people, equity, debt and senior debt, in a failed company — which it is — or are you restructuring to create a company that can be viable? There is a big difference,” Fabrikant said.

“To the extent you don’t bring in fresh equity, which sets a real market value, it is just about whether the bonds get a little more than the senior debt, or how much longer does the senior debt kick the can down the road until the bonds get a chance to recover.”

Many nations in global offshore hubs (Australia, Brazil, the UK, US and Singapore) have tools that Norway is sorely missing — a scheme comparable to Chapter 11 bankruptcy protection.

In the US-style scheme, debtor-in- possession financing and the automatic stay of actions, among other items, are meant to help save value. In Norway, the choice is either out-of-court negotiations or outright liquidation.

Apart from bringing fresh equity for cash-strapped owners, the actual value of vessels has been a key point during discussions.

“Even if you can arrive at a mutual understanding of values, the job is only half done,” said Tapper. “I think that is actually the part that is easier to agree upon — how much have I lost and how much have you lost — in the case of bankruptcy. 

"You will have some differences of opinion but still, what’s difficult to determine is how to share the value that’s being created, through the restructuring. If there isn’t value through the restructuring, you might as well go into bankruptcy... In certain cases [of kicking the can] what you are doing is creating option value for the unsecured creditors and equity holders.

“So the creditor is going to ask: ‘What am I being paid to play?’, even if you agree on what is going to happen if the company goes into bankruptcy. And it is hard to agree on principles of fairness in that. It is different from time to time. That is my key takeaway from all these restructurings: there is no one way to do this. It is different every time.”

Offshore restructuring: Taking the heat out of negotiations

A battle of wills among offshore owners and creditors has been raging since 2015, with several restructuring negotiations dragging out longer than a year.

Owners have watched their life’s work teeter on the brink. Exhausted participants have worked 20-hour days over six-month stretches. Patience has evaporated and tempers have flared on all sides of the table.

So are there any rules that owners, bondholders and banks should follow for future negotiations? Eight major pointers emerged from the discussion among our panellists at the TW+ Offshore Roundtable.

1: Owners should expect to be the main drivers of their own restructuring process.

2: They should be upfront and transparent with creditors, because it is correct practice and helps foster trust. Aage Figenschou says a lack of trust is “poison to the process”, which is “all about psychology”.

3: Owners should start the process as early as possible. However, Albert Stein warns them not to go to banks without having a plan. “If you ask the banks for a plan, all they will say is: ‘Give us more money, sell assets and please pay down the debt as much as possible’.What kind of strategy is that?”

4: Owners should seek objectivity, perhaps hiring a chief restructuring officer. Fixing the problems may be better in the hands of someone who did not create them, and the restructuring officer can leave management freer to focus on safeguarding operations. Research into US Chapter 11 filings has shown that a company’s existing managers can be overly optimistic in estimating market recoveries, asset values and future cash flows.

5: Remember that equal treatment of stakeholders is crucial for any plan to pass. “Some of the friction with the bondholders circles back to two different perspectives on restructuring,” says Kaare Christian Tapper. “One is: ‘What do you get if this goes into bankruptcy?’, which in the case of bondholders is often zero. And ‘What should you get after a restructuring?’ If you enter the restructuring with the mindset that we are creating a bankruptcy scenario, you overlook the fact that bondholders want some kind of upside in this.”

6: Bondholders should have their own advisers, form committees and get involved. There are examples in which bondholders have been included late in negotiations and other occasions when they have remained on the sidelines. But they should be a part of the process, not an afterthought.

7: Banks should keep stakeholders’ motivations in mind. “Every request from a bank should carry some sort of economic realisation of what value you are actually buying and what you are actually giving,” says Stein.

8: All stakeholders should be orientated towards the reality of what is possible, and everyone is going to have to give up something to save value. “Yes, but if you have 10 banks in front of you, then you have eight realities,” says Jo Rodin.