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Indonesian Cabotage Regime: Implications for foreign owners, operators and financiers
Contributed by:
Norton Rose: Stephen Woods (Senior Associate, Singapore), Ben Rose (Partner, Singapore) and Susandarini (Partner, Jakarta).
In May 2011, broad cabotage rules applying to the Indonesian domestic sea carriage sector came into effect which significantly
increased the practical and compliance obstacles for vessel owners operating in Indonesian waters. A year on, estimates suggest a significant percentage of fleets operating in Indonesian waters have yet to fully catch up with the new regime. Many foreign vessel owners and operators have been relying on temporary exemptions to the rules whilst exploring ways to comply with the regime in a manner that lawfully mitigates the effect of the new restrictions.
Ezra and Swiber Place Out New Shares for Growth
On March 9, Ezra Holdings entered into a placement agreement with Credit Suisse and DBS in order to issue 110 million new shares at a price of SGD 1.10 per share, a discount of approximately 8.4% to the weighted average trading price of shares the day prior. The anticipated SGD 118.8 million (USD 94 million) in net proceeds would be set aside for general working capital and general corporate purposes and/or business opportunities, strategic investments, joint ventures and/or the paying down of existing debt and/or capital expenditure or acquisition of vessels. According to DNB Markets, while the share placement was priced fairly attractively for both the company and investors, existing shareholders would have to face dilution of 11%.
Meanwhile, fellow offshore services firm, Singapore listed Swiber Holdings, had also proposed to a placement of up to 101.07
million new shares at SGD 0.635 each six days after Ezra’s announcement. The placement price represented at a larger discount of 9.74% to the volume weighted average trading price the day prior. The anticipated net proceeds of SGD 62.5 million (USD 49 million) would be used to finance the general working capital requirements of the group. Religare Capital Markets (Singapore) is the appointed placement agent.
China Rongsheng Mulls Over MTNs
Last Wednesday, China’s largest private shipbuilder, China Rongsheng Heavy Industries, announced plans to issue RMB 3.6 billion (USD 570 million) medium term notes to fund its general working capital requirements and repay part of its loans with higher interest rates. The first tranche of three year RMB 2 billion is expected to be issued on March 28, and will pay investors a fixed annual coupon, determined after bookbuilding. The notes are underwritten by Minsheng Bank and are rated AA by China Lianhe Credit Rating Company.
China Rongsheng recently reported 2011 net profit of RMB1.72 billion (USD 272 million) against gross revenue of RMB 15.9 billion (USD 2.5 billion). Deutsche Bank’s analyst Kevin Chong pointed out in his recent report that there has been a significant increase in group receivables from RMB 328 million (USD 52 million) in FY10 to RMB 3.6 billion (USD 571 million) in FY11. This is a cause for alarm as 91% of the receivables are overdue, underlying risk of provisions for doubtful debts in future. Cash and cash equivalents balance fell to RMB 6.3 billion at the end of 2011, compared to RMB 10.4 billion a year ago while group net gearing increased from 49% in FY10 to 122% in FY11.
Defaults and Bankruptcies
The global shipping industry has been grabbing headlines lately, unfortunately for less admirable reasons. As the industry continues to grapple with depressed freight rates due to overcapacity across all shipping segments, continued high bunker prices and the pertinent problem of reduced lending from the traditional ship financiers, bankruptcies are expected to accelerate for the rest of 2012. “It’s amazing to see how both the borrowers and lenders allowed themselves to run out of cash,” commented a restructuring expert at a recent Marine Money conference in Hamburg.
Within a span of two weeks, both Berlian Laju Tanker and Humpuss Sea Transport have filed for protection orders from the courts in New York, under Chapter 15 of the United States Bankruptcy Code. The filings would allow both companies to halt legal proceedings in the United States and ensure their vessels can ply safely through ports in the United States without any threat of arrest. In Berlian Laju Tanker’s case, a number of its subsidiaries had already secured protection on March 12, under Section 210(10) of the Singapore Companies Act, thus securing a three-month stay on creditor actions and preventing ships from being impounded in Singapore. The court protection however does not extend beyond Singapore jurisdiction, which led to BLT’s Chapter 15 petition in New York to shield assets within US jurisdiction.
Time will tell
It has been a long time coming, and we all suspect it has been going on for the last year or two, but in the last six months shipping bankruptcies and restructurings have become more public and more talked about. And it is likely that such will continue with more companies, small and large, having to surrender, amicably or not, their vessels to their lenders. The question is, what does the lender do next?
Such a situation will not be, or should not be, unexpected to the lender. Situations which end in default and judicial auction are often a long time in the making and the bank should have plenty time to put together a team consisting of legal advice, vessel manager and internal “trouble shooters” to at least take possession of the vessel, handle the immediate crew situation, keep it insured, and handle a swift auction procedure. But now, as proud owner of a vessel with clean title, what next for the bank?
Conference Takeaways
Cold, wet and grey are the defining characteristics of Hamburg in winter and the same adjectives could well be used to describe the current mood of the shipping industry. At the recent Marine Money conference in Hamburg, there were concerns over the rapidly shrinking of the maritime clusters in Germany, the troubled KG market as well as the difficulties European banks are going through.
Is there a lack of finance or a lack of bankable deals? Bankers at the roundtable discussion appeared to agree that there is a lack of both, though there is a shared belief that there is sufficient finance available for growth areas in offshore, LNG and specialised tonnage. Increasing rates of default and tighter regulations will require banks to set aside more equity and affect their lending appetite for shipping. At the same time, banks are broadly cautious of the near term outlook of the shipping industry. Banks are bracing themselves for an increasing number of defaults, foreclosures and bankruptcies in 2012 as the industry continues to grapple with overcapacity, depressed freight rates and high bunker prices. Continue Reading
Bank of Communications Signs New Leasing Agreement with CSC Phoenix
Shenzhen listed CSC Phoenix, a subsidiary of state owned CSC Sinotrans Group, has executed a RMB 375 million (USD 59.3 million) sale and leaseback transaction with Bank of Communications Financial Leasing. The eight year lease agreement will involve seven vessels with the lease rates pegged to the five year People’s Bank of China lending rate. CSC Phoenix is expected to make quarterly lease payments of approximately RMB 15.4 million over the next eight years.
Last year, Bank of Communications Financial Leasing claimed that it had closed the first ever RMB cross border sale and leaseback transaction for a 16,500 dwt tanker for a Hong Kong incorporated subsidiary of Zhejiang Materials Industry Group (“ZMIG”), Calm Lake Shipping. The vessel is owned by a special purpose vehicle (“SPV”) incorporated in Yangshan Free Trade Port of Shanghai, set up by Bank of Communications Financial Leasing and is subsequently bareboat chartered to Calm Lake Shipping with the vessel flying the Marshall Islands flag. Built and delivered by Zhejiang Friendship Shipyard – a subsidiary of ZMIG, the vessel will be sub-chartered to French commodity trader Louis Dreyfus Commodities Suisse.
TeraSea Inks USD 53 million Buyer’s Credit from JBIC
TeraSea, a joint venture between Singapore listed Ezion Holdings and Seabridge Marine, has secured a USD 53 million export credit loan from Japan Bank of International Corporation (“JBIC”) and Sumitomo Mitsui Banking Corporation (“SMBC”). Nippon Export and Investment Insurance (“NEXI”) will provide a 6 year USD 26 million buyer’s credit insurance to cover the loan granted by SMBC. NEXI typically insures up to 95% of the lender’s commercial risks and up to 97.5% of political risks.
Proceeds of the facility will be used to fund the construction of two ocean towing/salvage tugs at Japanese shipbuilder Universal Shipping Corporation. These vessels are usually deployed to set up large off-shore platforms such as floating production storage and offloading (“FPSO”) or drilling rigs for oil/gas exploration projects.
Market Review: Shipping Bond Issuance Hit Record USD 8 billion
In the past, bonds were hardly seen as a typical source of ship finance. Bond issues by shipping companies were infrequent and were typically sold in relatively small tranches to complement larger bank debt facilities. But this picture has changed dramatically since 2009. In 2011, total shipping bond issues in Asia surged an astonishing 90% to USD 7.97 billion
from USD 4.12 billion in 2010, a figure that has exceeded the historical high of USD 7.81 billion recorded in 2009. The sharp rise in the volume of shipping bond issuance in Asia can be attributed to two main factors – material contraction in the banks’ appetite for shipping loans and the liquidity flush in Asia.
It is well-documented that many European banks are going through a difficult period, reducing and restructuring their shipping
loan portfolios. The lending capacity of these lenders will remain constrained by regulatory requirements and higher cost of funding. Tightening conditions for lending has prompted more companies to explore alternative sources of financing. The continual low interest rate environment and the abundance of in Asia have also encouraged fixed income investors to seek
alternative bond investments. Continue Reading
SK Shipping Plans KRW 150 billion Bonds
Shortly after STX Pan Ocean’s announcement to sell KRW 250 billion (USD 223.5 million) three year convertible bonds, another Korean shipping company is planning to tap the domestic bond market in a big way. SK Shipping plans to issue unsecured three year bonds of KRW 150 billion (USD 133 million), and out of which KRW 100 billion will be used to refinance existing bonds due in March with the remaining amount set aside for working capital. The bonds will pay investors an annual coupon rate of 5.1%.
Moving forward, SK Shipping is expected to add 16 more vessels including 5 VLCCs, 2 VLGCs and 9 dry bulkers.
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