Institutions that used to lend to offshore vessel owners have given up on them, adding to their difficulties as shareholders are forced to take a hit and banks weigh up the consequences of taking action
The offshore support vessel market is emerging from hibernation mode, according to Pareto Securities CEO David Palmer, a mode in which it has been stuck for the last 18 months.
Life remains very difficult for vessel owners, not least because they are heavily indebted and finding access to new sources of funding – at least from conventional sources – is all but impossible. However, it is not just vessel owners that are suffering – so too are their shareholders.
“Banks and traditional investors have run away from offshore and see offshore services as a pariah industry,” Mr Palmer told OSJ. “We are deeply into a credit void that has crushed secondhand and newbuilding prices.
“The capital structure of the industry is being reconstructed. Banks are seeking to deleverage, recapitalise and take a more cautious risk policy and are struggling to deal with the overwhelming number of non-performing loans and new regulations.
“In restructurings, shareholders are becoming marginalised, and that comes at a high cost. Financial institutions are beginning to take appropriate haircuts and are prepared to share in what is needed to ensure a sustainable survival, but it is naïve to think that banks can solve all the problems,” Mr Palmer said.
“Although they need to lend money when the timing is right for new equity to enter the market, that is often when there is blood on the street. 2018 will see new OSV companies emerging.”
Mr Palmer said asset valuations are now much more realistic, with fair market values giving way to forced sale values and liquidation values extensively used. S&P visibility is improving as more secondhand deals are concluded – there were 113, a record, in 2017 – mostly at significant discounts to newbuild or replacement assets with vessel owners looking to divest or spin off older, non-core assets and yards looking to reduce inventory.
“The first rule for all operators in this situation is of course to survive. In any cyclical market, calling the bottom is difficult, and we are cautious about signalling a widespread international recovery. In 2017, forecasts of a recovery brought temporary relief as banks and creditors at least decided to be patient and flexible, take the necessary write-downs and look for more permanent signs of recovery.
“Unfortunately, the ‘lower for longer’ mindset has created more despondency, with distressed assets only presenting attractiveness to outside investors at what can best be described as laughable values. There is little doubt that a recovery is taking shape, but it could be painfully slow.”
Because of the dire financial situation in which owners find themselves, several corporate cadavers have been laid out in the last 12 months. The first real restructurings are being presented. However, not many companies have emerged with what can be described as significantly improved capital structures.
“The whole process will take years to complete and, in the case of many companies, will most likely go through multiple stages with multiple stakeholders in attempting to get liquidity runways through to 2020,” Mr Palmer said. “Most will require injections of new equity in exchange for haircuts and moratoriums.”
Only in the US, he said, have bankruptcy proceedings at companies such as GulfMark Offshore and Tidewater really improved companies’ finances. In March 2018, another well known American company, Harvey Gulf International Marine, also entered Chapter 11 proceedings. However, even in a bankruptcy scenario, adversarial relationships often lead to losses for everyone.
It is hardly surprising that banks have kicked the can down the road for so long rather than take drastic action and end up owning ships they don’t want. “In any restructuring, transparency, honesty and an acute awareness of real asset values will be the key to sustainability,” Mr Palmer concluded.