Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

THE financial position of upstream oil and gas contractor Sapura Energy Bhd seems to be getting more dire as the weeks pass. Once the darling of investors with its impressive fleet, it could now fall into the Practice Note 17 category of financially distressed companies.

As debt mounts on Sapura Energy’s books, its creditors filed for winding up petitions against its subsidiaries recently, after they missed payment schedules from as early as 2020.

But the group will be able to keep creditors at bay for the time being. On March 10, the High Court granted an order under Section 366 of the Companies Act that will allow Sapura and its 22 subsidiaries to summon meetings with creditors to consider and approve a proposed scheme of arrangement and compromise as part of its debt restructuring plan.

It also secured a restraining order to prevent its creditors from filing liquidation claims.

The debt in question is massive, amounting to some RM10 billion.

Part of the proposed scheme of arrangement would see creditors and lenders being paid in full but on a staggered basis and in various forms.

Out of every RM1 in liabilities owed, roughly 25 sen will be refinanced. Another 20 sen will be converted into perpetual non-tradable in-kind notes with a 5% coupon per annum. The perpetual paper is convertible into ordinary shares of Sapura Energy in its fourth year.

The remaining 55 sen will be converted into perpetual non-tradable zero-coupon notes issued by Sapura Energy, which will then be converted into shares in its subsidiaries, namely Sapura Drilling Sdn Bhd, Sapura Technology Solutions Sdn Bhd and Sapura Geosciences Sdn Bhd, in the fourth year.

The obvious next question is whether the lenders taking part in the scheme of arrangement would see large provisions that could drag down earnings in the upcoming quarters.

The financiers involved in the multi-currency facilities (MCF) agreement are Maybank Islamic Bank Bhd, CIMB Bank Bhd, RHB Bank Bhd, AmBank Islamic Bhd, Export-Import Bank of Malaysia Bhd, United Overseas Bank Ltd, ING Bank, Standard Chartered Bank and Sumitomo Mitsui Banking Corp.

Analysts contacted by The Edge say they do not think the troubles at Sapura Energy would significantly impact the banks involved.

“Sapura is not a new account and the development is not fresh per se. They [banks] have been putting in provisions even before this [latest development]. So the level of provisions should be sufficient,” says Hong Leong Investment Bank analyst Chan Jit Hoong.

He adds that the banking sector has cut down its exposure to oil and gas companies since the last downturn.

Although there are no granular details on the amount of provisions that have been made by the four listed banks involved in the MCF agreement, it is worth noting that as a total of gross loans, the exposure to the oil and gas sector is relatively small.

Maybank’s exposure is the highest among the four at 2.6%, followed by CIMB Group at 2.3%, AMMB Holdings at 2% and RHB Bank at 1.9%.

Similarly, MIDF Research opines that the banks would have been aware of the risks and were likely to have provided sufficient overlays beforehand, especially for companies within the oil and gas sector.

“We might see an uptick in credit costs within the next quarter, but certainly, it is no cause for alarm,” added the research outfit.

Notably, AMMB Holdings in its third quarter ended Dec 31, 2021, reported a higher net impairment charge of RM337 million, compared with RM174 million in the previous quarter, owing to a higher overlay provision for oil and gas exposure.

While the banking group did not name the company that required a higher loan provision, it is understood that a large portion of it was made for lending attributed to Serba Dinamik Holdings Bhd.

However, the banking sector’s loan loss provisions have declined by more than 50% year on year to RM1.7 billion in 4Q2021, says CIMB-CGS Research in a report. This was the lowest quarterly loan loss provisioning since the outbreak of Covid-19 in 1Q2020. “The steep decline in 4Q2021 loan loss provisioning was also partly due to the high base a year ago, as the total loan loss provisioning of RM4.54 billion in 4Q2020 was an all-time high for the sector,” adds the report.

RHB Research also said in a report last week that lumpy provisions should be fairly limited moving forward, as banks have made quite a bit of provisioning over the last two years.

It added that CIMB Group guided for more provisions in 1Q2022, in relation to the double crediting of customers in late 2021. The research house also believes that the industry will see residual provisions from AMMB in relation to its oil and gas exposure.

 

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