Charles Dickens offered only A Tale of Two Cities. This week, I offer a tale of no less than six restructurings, as the crisis in the offshore sector comes to a head. One seismic player heads for liquidation. Another is reinventing itself as a subsea mining and minerals play to, allegedly, power the green economy. One drilling company with five billion dollars of debt puts a subsidiary into Chapter Eleven, as another emerges from the same process with US$2 billion less debt. For 2021 in offshore, like Revolutionary Paris in 1789, we can say:
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…"
Unfortunately, when I said I would cover six restructurings, I lied. Polarcus isn't a restructuring. The company's lenders, headed by Norway's DNB Bank, Eksportfinans, and DVB Bank (here), have apparently decided to liquidate one of the dominant players in the marine seismic industry, which had 22 per cent market share. The creditors plan to sell off vessels in Polarcus' fleet of seven 12- and 14-streamer 3D ships at auction, and have fired all its staff.
This is a catastrophe, a winter of despair for the personnel, notified of losing their jobs en masse via email. Readers may recall that DNB Bank pulled the same stunt with Hermitage Offshore over the summer (here) and is now the proud owner of ten second-hand PSVs through a company called Pearl Bidco, which is presently being marketed by Remoy Shipping.
Undeterred by the failure to find a buyer for the bulk of the Hermitage fleet, DNB has struck again with the same gambit.
Polarcus' plight exemplifies the age of foolishness, where bankers prefer to liquidate a business rather than salvage value as a going concern through an orderly restructuring. The announcement has sparked panic amongst Polarcus' suppliers and service providers, which have spent the last few days slapping marine liens on the vessels, which will then make the lenders' ambitions for a quick, clean sales process a challenge.
I suspect that the Nordic banks may be in for a crash course of how ship arrests, import bonds, and maritime claims work in some exotic and unusual locales.
In Ernest Hemingway's novel The Sun Also Rises a character is asked how he went bankrupt. "Two ways," he answers. "Gradually, then suddenly."
So it was for Polarcus. Last June the company announced a wave of cost cutting in the face of the Covid downturn. Some 20 per cent of staff were laid off, mainly through redundancies, whilst senior management took a 10 per cent permanent salary reduction with effect from October 1 last year. At June 30, the company had gross debt of US$416 million outstanding (as per page 22 of the investor presentation here), US$234 million of which was held via a bank facility, and was due for repayment between August 2022 and 2024.
In October, Polarcus announced its third quarter results (here), which showed a negative cash flow of US$2.6 million, but CEO Duncan Eley was at pains to stress his success in cost cutting and managing the shock of the 2020 downturn. The company was picking up new work, but had stacked two vessels, Polarcus Nadia and Polarcus Amani, in April 2015 and September 2020, respectively.
In late January, though, the situation deteriorated. The bank lenders issued notices of default and enforcement against Polarcus' subsidiaries, which owned six of the company's seismic vessels. The final vessel, Vyacheslav Tikhonov, is on long term bareboat to Sovcomflot in Russia and Polarcus' lenders do not hold any security in either this vessel or in the subsidiary that owns it. This ship should be able to continue operations – indeed, arresting a Russian flag ship on charter in the Russian Pacific to a Russian company might prove difficult even for the greediest and most short-sighted of Norwegian bankers.
The lenders have enforced share pledges over the Polarcus subsidiaries, and transferring all the issued shares in each them to a new company called Clearwater, which is controlled by the banks, and which sits outside of the Polarcus Group. The lenders have also replaced the directors of the subsidiaries with a nominee of their own.
When Polarcus announced this unsettling news to the market on January 26, it was at pains to explain that the lenders didn't intend to destroy the company:
"In parallel with their actions described above, the lenders have made it clear to the company that their intention is not to jeopardise or destabilise the Polarcus organisation. The lenders have intentionally not made any demand for payment from guarantors of the facility agreements (including the company) nor have the lenders sought to enforce any other collateral which they hold (though the lenders reserve their rights to do so). The lenders have confirmed that they are open to entering into a standstill period [that] will allow continued operations and awarded projects to be undertaken without disruption and discussions are underway in this regard."
Looks like the lenders were perhaps being a little economical with the truth. On February 2, they pulled the plug on the Polarcus business. The banks ordered Polarcus to cease operations and to sail six of the company's vessels to a safe port to prepare them for sale. Polarcus said that it will be terminating all of its employees.
On February 9, liquidators were appointed in the Cayman Islands — a sad end for a leading player in marine seismic.
But what value will the banks gain from a liquidation? Polarcus had a backlog of US$130 million of contracted work. Its third quarter cash burn was nasty, but not catastrophic.
The marine seismic acquisition fleet currently operates at around 50 per cent utilisation worldwide. The evidence from the deepwater drilling business, another segment that has operated at around 50 per cent utilisation for the last five years, is that buyers for specialised assets at present are few and far between. Ten-year-old rigs are being scrapped for literally cents on the dollar, or converted to rocket launching stations for Bitcoin billionaires.
I would expect DNB to burn more than US$2.5 million on the six vessels in the next quarter as they try to pay off the creditors that have claims on the ships, they pay the crew and for fuel, and try to arrange an auction.
Will there be buyers? None of the players in the seismic space are cashed up. This is a highly specialised business with sensitive equipment that requires sophisticated marketing and commercial acumen, and technical expertise to maintain and operate. The behaviour of the banks to date suggest that they have neither.
I wouldn't be surprised if US$243 million of bank debt becomes a check for US$6 million from scrap merchants in India or Bangladesh, valuing the ships at a million dollars apiece as raw steel, or that the banks end up holding the assets themselves waiting for the market to improve. The only significant value will be striking a sale deal with the bareboat charters of Vyacheslav Tikhonov.
What a tragedy, the needless destruction of value by banks that seem to prefer the nuclear option to salvaging value from the bad lending decisions of years past. Our condolences go out to all those at sea and ashore who have lost their jobs. Perhaps the liquidation of Polarcus will be a salutary lesson to other banks that the pain and losses inflicted by liquidation in specialised sectors simply aren't worth it.
Whilst rivals Pacific Drilling and Noble Corporation went quickly in and out of Chapter Eleven restructurings in 2020, and have emerged with their debt swapped for shares in the restructured companies, Seadrill's efforts to manage its US$5.7 billion dollar debt pile have proven more convoluted.
In December last year, Seadrill's 35 per cent owned affiliate Seadrill Partners filed for Chapter Eleven. Seadrill Partners owns four deepwater drillships, four semi-submersible rigs, and three tender assist rigs, which Seadrill as parent company markets and operates. Seadrill Partners has US$3.1 billion of debt. Market status updates from the company prior to the filing showed that the four semi-subs and three tender rigs were all idle.
Last weekend Seadrill put more of its subsidiaries into bankruptcy protection as Asia Offshore Drilling (AOD) filed in Houston to restructure its debts. Seadrill said that this was, "a protective measure to support Seadrill's broader comprehensive financial restructuring," by its wholly owned subsidiary, and that it would, "in no way affect the safe and efficient operation," of the three rigs concerned.
The company holds the jackups AOD I, AOD II, and, er, the imaginatively named AOD III, which are all on charter with Saudi Aramco to June 2022 and beyond at day rates of around US$75,000 apiece. What's not clear is why in September – just four months ago – Seadrill paid US$31 million in cash to buy Mermaid Maritime of Thailand's 33.76 per cent stake in AOD and take complete control of the company. This seems like a complete waste of cash given the current events in Houston.
As usual in an American bankruptcy filing, and unlike the calamitous scenes at Polarcus, AOD will continue to pay key trade creditors and its employees' wages and benefits without change or interruption.
Now that several subsidiaries are in Chapter Eleven, we wondered how long before the rest of the company followed them. Not long, it turned out. On the evening of February 10, Seadrill announced (here) that it was also filing for bankruptcy protection in Houston. Seadrill said it had, "approximately US$650m in cash and does not require debtor-in-possession financing."
The company hopes to follow its peers and wipe clean its debts, saying, "the Chapter 11 cases are opened to facilitate a balance sheet restructuring [that] will enable Seadrill to continue to operate its modern fleet of drilling units. It is expected that this will lead to significant equitisation of debt, which is likely to result in minimal or no recovery for current shareholders."
This is consistent with what it has said in the past. In August, Reuters reported that Seadrill was warning its shareholders that in a Chapter Eleven filing at parent company level, they might get nothing (here). This probably explains the board's reluctance to take the plunge until now.
Whilst Seadrill has been what my grandmother would describe as "fannying around" in its restructuring, Diamond Offshore Drilling has joined the ranks of the restructured. On January 25, the company announced here that it was emerging from its Chapter Eleven process. The newly reformed driller will have shaken off over US$2.1 billion of debts. It will emerge with cash to fund its operations and will likely relist on the stock exchange.
"In addition," the company said, "certain holders of senior unsecured notes have agreed to invest up to US$110 million of new capital in the form of first lien, last out exit notes, while certain holders of revolving credit facility loans have agreed to provide exit financing facilities."
Rival rig owner Valaris too has announced here that it is also coming to the end of its Chapter Eleven process and the outlines of an agreement with its creditors are emerging. When it entered Chapter Eleven in August 2020, Valaris had around US$7 billion of debt.
This heaps the pressure on those drillers that have not restructured, principally Borr Drilling. We have expressed scepticism that Borr's shareholders will emerge from the drilling downturn with their equity intact here.
Boat owners in Norway have been much slower than rig owners to restructure, as Norwegian bankruptcy law offers little of the flexibility and understanding of the American Chapter Eleven process. Solstad Offshore was able to arrange a debt for equity deal in 2020, emerging with a new shareholder base, and billions of krone less debt (here).
Siem Offshore reported at the end of January (here) that it had finally reached terms with its European bank lenders, and in the first week of February its long-suffering bondholders approved the restructuring plan. Once again, the old shareholders were largely wiped out.
The company explained that restructuring involves the company's debt to be "reset" at US$268 million, down from US$1 billion. This reset debt of US$268 million is made up of two nearly equal shares of bond and secured bank debt. There will be a US$4 million cash payment to the holders of first series of outstanding bonds but, "the remainder of the claim and all of the second series," will be converted into equity in the restructured company.
As usual, the time the company has to pay its debts back was extended and the maturity for Siem's secured facilities is now due at December 31, 2024.
After the debt for equity swap, the existing shareholders of Siem Offshore, including Kristian Siem himself, will be significantly diluted. Siem Offshore estimated that the existing shares will only represent approximately four per cent of the company's equity, whilst the converted debt will represent approximately 96 per cent of the company's shares after restructuring.
However, upon completion of the restructuring, Siem Industries is expected to hold approximately 30 per cent of the shares, because it had managed to buy back much of the company's debt. So, the new dominant shareholder in the restructured company is, er, the same as the dominant shareholder in the unrestructured company.
I imagine the owners of Havila and Olympic are looking for similar ways to retain control of their heavily indebted OSV companies whilst wiping away their companies' debts.
The only fly in the proverbial ointment is Siem's Brazilian subsidiary.
"While the negotiations with the Brazilian banks continue," Siem said in its filing at the Oslo stock exchange, "the group is exploring alternative options with a view to consummate the restructuring without the consensual participation of BNDES and Banco do Brazil." Time will tell what that means.
The company's Brazilian fleet (here) consists of two PSVs, three FSIVs and two small oil spill response vessels, so in the greater scheme of Siem Offshore, it doesn't amount to much. Still, it would make a nice play for a new entrant into the market if the local banks would play nice, and the tonnage provides a ticket for Siem's foreign flag vessels to work in the country.
As we have seen with the complex collapse of Sete Brasil (here), Brazilian bankruptcy is a long and convoluted process. All parties will seek to avoid that outcome if they can.
Also, in the last week of January, SeaBird Exploration, the Norwegian-listed seismic player, announced a net loss of US$3 million for the last quarter of 2020, a considerable improvement against the net loss of nearly US$12 million that the company had reported in the same period in 2019. Seabird first restructured in 2017 but has now announced a second attempt to sort itself out. Unlike Polarcus, its lenders seem willing to give it a chance.
SeaBird said that it had cut its operational costs by around 40 per cent during 2020, that it had reduced its workforce by around 65 per cent, and that it has embarked on "a complete corporate restructuring."
Surprisingly, this doesn't mean a move into wind turbine installation.
Instead, its new strategy involves a pivot to deep sea mining. SeaBird hopes that its subsidiary Green Minerals will be able to win licenses to mine marine minerals off Norway.
"We anticipate that Green Minerals will generate revenues of more than NOK4 billion (US$473 million) per year when the first production system is up and running," SeaBird said in its latest report to investors (here), without quite specifying when that would be, how the production system would work, or where exactly and what exactly the company would be mining to reach such huge revenue numbers. Details, details!
On January 22, the company announced that it has agreed to sell a total of 100,500 shares in Green Minerals to several buyers at a price of NOK20 (US$2.37) per share. Following the sale of the shares, SeaBird owns 76.8 per cent of Green Minerals and plans to list it on the Euronext Growth Oslo exchange.
"Green Minerals will be the only listed marine minerals company in the world, and provides SeaBird with a first mover advantage on the Norwegian Continental Shelf," said Ståle Rodahl, SeaBird executive chairman.
Anyone who lived through the 1990s dot-com boom should be a little sceptical of what "first mover advantage" means. But Mr Rodahl is a convert, even though he was completely silent on the expected investment in the project, and where the massive quantities of capital required to fund the mining equipment would come from. Mere details, details, again!
"We are truly excited by the response we have received from the market," Mr Rodahl continued, "not least from potential clients [that] are growing increasingly concerned about their ability to source the minerals necessary for the green shift. Minerals such as copper, cobalt and lithium are central to renewable technologies such as batteries, wind turbines and solar panels, but also the electric infrastructures for power distribution.
"Some of these metals are a source of concern due to uncertain future supply either due to inadequacy between future demand/supply projections or because of their current supply being limited to few countries. Take e.g. copper – the key enabler of electrical energy – where global demand is forecast to reach the same amount over the next 25 years as has been produced in the last 500 years. Production at onshore mines is also challenged by controversial working conditions and puts severe stress on resources and the environment. Marine minerals can boost the supply of these resources and open up new opportunities for environmental impact reduction."
Let's see how that plays out. It plays to the spirit of the age. Others have made the pitch, however, and already "first mover" Nautilus has gone bust. Needless to say, like Cadeler and Eneti, SeaBird plans to undertake a complete rebranding to reflect its new focus, which it will present at the Annual General Meeting in May. We can't wait to see what wonderful new name is concocted.
We covered seabed mining and the current industry leader DeepGreen here. This is a high capex, high risk business, which makes marine seismic acquisition look stable and consistent. We're truly excited at the opportunity to watch SeaBird soar higher — or not.
If Polarcus wasn't a restructuring, nor was the news here from Pacific Radiance, despite being headed "update on restructuring".
The Singapore-listed owner of OSVs is no longer the attention of a transaction. There is no restructuring to report. This announcement is the end of the complex deal planned with Allianz Marine of the UAE, and a mysterious, unnamed financier, which we tried to unpick here.
Pacific Radiance shares remain suspended. The company's debts remain massive, and it remains in standstill with its creditors.
But the company lives on. The Pang family continue to occupy the c-suite. Like Emas Offshore, like Swiber, Pacific Radiance's fate is unclear. If one can criticise Polarcus' banks for being too swift to liquidate the company, one can equally chide Singapore's dilatory process of judicial management, where very little seems to happen to restructure overly indebted companies. Instead, judicial managers roll over, moratoria are extended, and restructuring advisers like Nicky Tan claim their large monthly retainers.
Happy Lunar New Year.
