![COLUMN | Disorderly dissolution? Vroon, Bourbon and DOF face uncertain futures whilst the UK beefs up its naval capacities with subsea vessel acquisitions [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F230206-Offshore-Accounts.jpg?w=480&auto=format%2Ccompress&fit=max)
King Henry VIII of England is most famous for two things: 1) having six wives and 2) "dissolving" the monasteries. The latter was especially chaotic, being characterised by a grab of religious land and property to enrich the king, as abbeys and priories with centuries of tradition and thousands of acres of valuable farmland were signed over to the crown in five turbulent years between 1536 and 1541, or sold to the highest bidder to raise cash for Henry. The monks and nuns were expelled from their homes and places of work and worship, books and manuscripts from the monastic libraries were ripped apart for their precious bindings, others were sold off by the cartload at auction, whilst valuable lead was stripped from the monastic roofs, and many buildings were demolished for their stones. Subtle it wasn't.
Despite the surging charter rates at the moment, three offshore companies are facing uncertain futures as their creditors try to work out how to extract value from the companies they now control. Like Henry VIII, portly bankers and bondholders in silken robes eye ships for sale as unctuous shipbrokers circle, offering tonnage for sale to the highest bidder. This raises the prospect of the dissolution and dismemberment of three of the finest companies in offshore operations – Vroon, DOF, and Bourbon – at a time when the market has never been better in eight years.
Vroon first began offshore activities with the provision of platform supply vessels (PSVs) on the Dutch shelf in 1964, less than a decade after Tidewater had created the workboat industry in 1956 in the USA, with the launch of Ebb Tide, the world's first purpose-built offshore support vessel (OSV). For over one hundred years, the Vroon family have been amongst the largest shipowners in the Netherlands.
The group has been famous for its safety culture and commitment to crew welfare. Last October, the company announced that all crewmembers on board Vroon-managed vessels were able to benefit from unlimited free internet use. This free access would be available 24/7 to seafarers in both the offshore and deepsea fleets, Vroon said.
Unfortunately, the company has long struggled with an excessive debt burden at a group level, where the OSV fleet of 40 ships sits alongside a fleet of 14 livestock carriers, an emergency response rescue vessel (ERRV) business with 34 North Sea standby vessels, and 18 bitumen and product tankers. In January, Vroon announced that a group of banks would take control of the company in a debt-for-equity swap, reducing group debt from US$1.1 billion to just US$400 million. The ERRVs, livestock carriers, and tankers were deemed part of the core of "New Vroon".
This deal came at a price, however, ousting the Vroon family from control. Vroon's CEO Herman Marks also announced he was stepping aside as part of the deal. Coco Vroon had previously resigned as CEO to make way for Mr Marks after first agreement with the company's lenders in 2018. Now, in 2023, Mr Vroon loses his family stake in the business and Vroon's CFO, Rob Schuyt, becomes interim chief executive for the company.
The banks announced that they planned to sell what was described as a "US$330 million" OSV fleet, a valuation that looks very low given the current market. The fleet is listed here and includes two DP2 walk to work vessels (VOS Start and VOS Stone, built in 2017 and could easily be worth over US$40 million each), three small subsea vessels (easily worth another US$100 million together, by my reckoning), six lovely, large PX121 design PSVs (each US$20 million, built between 2015 and 2018), eleven other PSVs (built between 2008 and 2016, including two UT755 LN design units and two Damen 7216 units), as well as 16 small anchor handlers of around 60 tonnes bollard pull. The fleet operates primarily in the North Sea, the Mediterranean, and South East Asia.
Despite reassurances from the company that it is business as usual, clearly it is not so when the company is no longer controlled by a family, but by a consortium of financial institutions. Ownership by banks is rarely good for a business, as banks are typically better at managing the certainties of spreadsheets rather than complex strategy or constantly changing operations. They also rarely display any of the human touches and empathy that characterised the Vroon family's ethos towards its seafarers.
The situation is complicated by the fact that different vessels are controlled by different banks, each with their own credit committees, internal governance, and financial objectives. The dissolution of Vroon therefore has the potential to get very messy, very quickly.
An ideal solution would be a sale of the whole fleet, or at least the regional elements being sold as single entities, to maintain the continuity of client relations and employment for seafarers as well as keeping Vroon's respected shore management together.
Vroon as a whole might make an attractive business for a private equity business. North Star and Esvagt have already been purchased by private equity companies, but the ERRV business would be a more attractive model for such a buy-out on account of its relatively long term contracts and "revenue visibility" as the bankers call it, rather than the very volatile and often spot-based OSV business where contract lengths vary widely.
So far, no one big buyer has emerged, and as Tidewater, a serial acquirer, continues its absorption of Swire Pacific Offshore, acquired a year ago, there are few obvious candidates in the industry. The PSV fleet might be interesting for Borealis, but the container crash will have hit that investment entity hard, and small anchor handlers in Thailand, Egypt, and Italy are a world apart from the high-specification fleet Borealis has assembled out of Norway.
Indeed, the focus on cash flow by Vroon's new owners probably contributed to one of the strangest fixtures of the winter.
It is paradoxical that whilst international PSV rates have been surging, surpassing US$25,000 in Asia, the Middle East and West Africa, the North Sea has been suffering a very weak winter. High summer rates last year brought PSVs out of lay up, and the summer of 2023 is likely to be a bumper one, too. Unfortunately, today there is a surfeit of PSVs in Aberdeen as owners wait for the return of the good times. Brokers Westshore reported that Vroon has fixed the PX121 design PSV VOS Patriot for just £3,995 (US$4,810) per day on February 2 to UK operator Enquest.
This fixture is shocking in a number of ways. VOS Patriot is a modern, diesel-electric vessel built in 2017 with 850 square metres of clear deck and a DP2 system. The PX121 is recognised as one of the most fuel-efficient and innovative designs in the sector. Newbuild resale PX121s are being touted around US$22 million apiece. However, the £3,995 day rate is clearly far below cash operating cost.
This fixture acts as a warning. The offshore market is coming back fast, but if a major player like Vroon is run for "safe fixtures" at low rates so that bankers minimise off-hire risk, this can act as a drag on the whole market. Oil companies will love chartering from Vroon until the fleet is sold. A cautious, spreadsheet-driven management at a time when rates are surging is exactly from whom the purchasing departments in Shell, ExxonMobil, and Total will want to contract.
The sooner Vroon finds a competent buyer and a long-term home for its OSV fleet, the better.
Last week, we looked at the spectacular failure of DOF's "rebel shareholders" here. No sooner had the piece run than, on Thursday, February 2, the Hordaland district court in Norway resolved to begin bankruptcy proceedings against DOF, which has debts of around US$2.5 billion. This bankruptcy process would see the company's entire existing share capital lost.
DOF creditors' made the request to begin bankruptcy proceedings after DOF's board of directors failed to secure a majority vote in favour of the latest (final?) restructuring plan last week. That plan would have given the current owners 3.75 per cent of the shares in the restructured company, down from four per cent in November, when the vocal shareholder activists emerged claiming they could get a better deal. So far, they have significantly failed in this objective.
As at Vroon, the creditors and the court administrator say that the process implementing the restructuring will mean that vessel operations and business for the DOF Group's subsidiaries will remain completely unaffected by the bankruptcy of the parent company, DOF ASA. But, as at Vroon, brokers are circulating lists of vessels for sale, and it is clear that further asset sales are likely.
"Such alternative implementation of the agreed financial restructuring has been structured to avoid any interruption to the ongoing operations of the group and to avoid losses for the group's customers, suppliers, and other trade creditors," DOF reported the Norwegian stock exchange last week. "Consequently, no other creditors than the financial creditors, nor any of the employees of the Group, are to be affected by such alternative implementation of the financial restructuring."
Like Vroon, DOF has a long and glorious history. The business was founded in 1981 by Helge Møgster, who stands to lose his entire stake in the business in the restructuring, as Coco Vroon has done. His Møgster Offshore is currently the largest shareholder in DOF. Like Vroon, the fleet is large and diverse, with PSVs, AHTS, and a big subsea element, including some of the highest specification light construction vessels in the industry, and more than 70 remotely operated vehicles (ROVs) and autonomous underwater vehicles (AUVs).
One company celebrating three years since its own massive structuring is Bourbon, which is owned by a consortium of French banks, known as Société Phocéenne de Participations (SPP). Just as at Vroon and DOF, the debt-for-equity swap saw founder Jacques de Chateauvieux being booted from the company and losing all his shares.
On January 10, 2020, SPP, owned by the French banks with 75 per cent of Bourbon's debt, acquired all of Bourbon's assets (including the Bourbon brands) and became the Bourbon Group's new controlling shareholder. Alongside SPP, ICBCL of China and Standard Chartered Bank emerged with stakes of approximately 18 per cent and 10 per cent, respectively.
The banks' control followed a familiar path. Some assets were sold, as owners like MCT in Athens snapped up anchor handlers from lay-up and reactivated them to compete with Bourbon's own fleet. In October 2020, Bourbon sold its entire harbour towage and salvage business Les Abeilles to the Econocom group, and the company was split into three "core" activities: Marine and Logistics, Mobility, and Subsea Services. Each of the standalone units was set up for easy sale as a viable business in its own right.
But so far, no division has been sold, presumably because the size of the divisions is too much for a trade buyer, and until the last year, investment interest in offshore has been "muted". As the market has risen, the new owners of Bourbon have even suspended sales of the company's laid-up vessels, some of which have been languishing deadship for eight years now.
As a result, Bourbon sits in an uneasy place: restructured, but dead in the water. There has been some investment in new crewboats for the Mobility division, which faces stiff competition from Bambini, Promar, Peschaud, and Petroservices in its core West African markets. There have been efforts to diversify into offshore wind support using Bourbon's strong financial connections to the French business elite to portray itself as a national champion in this area, although my money would be on Louis Dreyfus Armateurs to emerge as dominant in the service operations vessel (SOV) space in France.
Perhaps an IPO is a possibility, but I wouldn't rule out a private equity deal for the Mobility division. For subsea, perhaps the French government could be a buyer of some of the vessels. Why?
Whereas banks are selling, western governments are now buying in subsea as a national security priority. It's unusual for the UK government to be following in the footsteps of John Fredriksen, but that's what's happened in the subsea construction vessel space. No, Rishi Sunak hasn't made a late bid for tanker owner Euronav, but UK Defence Secretary Ben Wallace did announce the acquisition of two subsea vessels for the defence of the realm; Topaz Tangaroa for US$84 million from P&O Maritime of the UAE, and Island Crown from Norway's Island Offshore.
As we reported in December, one of Mr Fredriksen's companies bought two abandoned light construction vessels originally ordered by Toisa in China. Chinese state companies had been operating the vessels domestically since 2021. Renaming the vessels Edda Sphynx and Edda Savannah, he placed the duo under the management of Østensjø Rederi. Sphynx arrived in Norway just before Christmas and Savannah followed just after New Year.
Here is proof that where Mr Fredriksen leads, even world leaders follow!
Indeed, UK Prime Minister Rishi Sunak wrote a surprisingly serious and actually quite well-researched paper on the need for the UK to have the naval capability to protects its subsea cables, when he was a backbench MP in 2017.
The dramatic destruction of both of the Nordstream gas pipelines running in the Baltic Sea from Russia to Germany in September last year highlighted the risk to subsea infrastructure, as co-ordinated bombings blasted apart the billion dollar pipelines. The Royal Navy claims the attack was the work of the Russian government – and indeed, the nonchalant response of the Kremlin to the Nordstream attack, compared to its vociferous reaction to the Ukrainian attack on the Crimean bridge a few weeks later, suggests that this may indeed be the case.
Closer to home, in October, the UK experienced a smaller scale accident that revealed the vulnerability of fibre-optic cables as well as pipelines. The Shetland Islands north of Scotland were cut off from communications when the subsea data cable connecting the islands to the mainland was accidentally ripped apart. An errant trawler was apparently responsible – just as well it wasn't the Russians, as this would require a NATO response…
Subsea threats require subsea-capable vessels to defend the pipelines, data cables, and electricity interconnectors that connect and power the world. Enter the navies with their chequebooks.
Nordstream's destruction and the Shetlands situation led to an urgent focus on subsea defence. So, the Royal Navy bought the UT766 CD design Island Crown, which is due to be converted later this year into a mothership for the Royal Navy's autonomous counter-mine warfare units. The UK Ministry of Defence (MOD) says the ship is likely to be based at Faslane in Scotland alongside Britain's Trident ballistic missile submarines. The 2013-built vessel will be renamed, managed by the Royal Fleet Auxiliary (RFA), and operated on mine countermeasures tasks around the UK and in European waters.
Last month, the 2019-built Topaz Tangaroa arrived in the historic Cammell Laird shipyard on Merseyside for conversion to a Multi-Role Ocean Surveillance (MROS) ship for the RFA. The Vard-designed 98-metre-long, DP2 vessel will be renamed RFA Proteus. The purchase was quickly executed, and the conversion will be speedy too.
The MOD says Proteus will be ready for service this summer, acting as a mothership for an array of ROVs and AUVs, a style of operation pioneered by Ocean Infinity in its wreck searches and the hunt for the lost aircraft of Malaysian Airlines Flight 370 in the Indian Ocean. The RFA vessel will be dedicated to safeguarding "critical seabed infrastructure" and maintaining underwater surveillance and seabed warfare roles.
A second MROS will eventually be constructed as a newbuild for the Royal Navy. It will be built to a tailor-made design and specification, which the navy says is currently in the concept phase.
Knowing the poor record of naval procurement and the weak performance of British shipyards with both commercial and military vessels, perhaps buying and refurbishing existing subsea and light construction vessels would make more sense. Of course, if the Royal Navy had embarked on the initiative in 2021, prices would have been half what they are today.
Where Britain leads, other western powers must surely follow. Japan, Australia, France, Canada, and most especially the United States are incredibly vulnerable to the disruption of their data cables. The modern world economy depends completely and utterly on a fragile network of submarine fibre-optic cables, which are vulnerable to sabotage and attack.
If you can read this piece, it is due only to these data carriers. I am no fan of Mr Sunak, but he nailed the case for creating the naval resources to defend the internet in his paper of 2017. It is bad enough that Russia and China censor content for their own citizens. Even worse is that the governments of these two countries are able to cut the sinews of the digital economy on the seabed for the rest of the world.
So, whilst banks are selling subsea assets with short-sighted, bean-counting zeal, expect western governments from Tokyo to Canberra to Ottawa, Washington, and Paris to be buying.
Bourbon, DOF, and Vroon should probably brace themselves from visits by naval inspectors.
And Australia, especially, might more urgently look at how its submarine communication cables are protected in the coming years rather than fixating on billions of dollars' worth of nuclear submarines that are a decade away from delivery and that will deliver much less "bang for the buck" than light construction vessels to protect against sneaky attacks on critical infrastructure.
It's a shame that Canberra is more focused on prestige and vanity projects rather than the humdrum task of protecting the internet and keeping data flowing around the world.
Background Reading
Watch Vroon's 2022 safety movie.
SPP is owned by BNP Paribas, Caisse Régionale de Crédit Agricole Mutuel Alpes Provence, Caisse Régionale de Crédit Agricole Mutuel de Paris et d'Ile de France, CM-CIC Investissement SCR, Crédit Lyonnais, Natixis and Société Générale.
Our coverage of Bourbon and DOF's flailing efforts at restructuring in December 2019 is here.
Check out SubmarineCableMap.com, which shows the 1.4 million kilometres of subsea data cables laid all over the world. It doesn't include oil and gas pipelines, nor electrical interconnector cables. Electrical interconnectors are increasingly important at distributing volatile wind-generated power around Europe and allowing countries dependent on renewables to access more reliable nuclear, hydro-electric, and fossil fuel power when wind and solar production is low. See Wikipedia's map of submarine high-voltage direct-current power cable projects in Europe, which leads the world in the size and number of these cables.
A few minutes reading Submarine Cable Frequently Asked Questions will kick-start your knowledge of fibre-optic data cables.
The Wikipedia page on the destruction of the Nordstream pipelines provides an excellent summary of the clandestine bombings on September 26, 2022.
