This article first appeared in The Edge Malaysia Weekly on March 4, 2019 - March 10, 2019

IT is well known that Bumi Armada Bhd, tycoon Ananda Krishnan’s flagship, is financially stressed. Judging by the latest quarterly numbers, things seem to be getting worse and the company’s creditors are probably equally stressed, if not more so.

Asia’s biggest offshore support vessel (OSV) operator last Friday announced a massive net loss of RM1.26 billion for the fourth quarter ended Dec 31, 2018 (4QFY2018), an amount bigger than its market capitalisation of RM1.027 billion. The loss was not much of a surprise as some impairment was expected, but the quantum did cause jaws to drop.

Bumi Armada booked a total impairment of RM1.3 billion, which dragged the group into an operating loss of RM1.18 billion in 4QFY2018. And that has caused a domino effect on its balance sheet due to a breach of covenant on its sukuk murabahah.

The group explains in the notes accompanying its results that the net loss is due to the impairment of a floating production storage offshore (FPSO) unit called Armada Kraken and certain OSVs, and net allowance for impairment losses.

The asset impairment could be seen by some as a kitchen sinking exercise to clean up the balance sheet, and these are considered non-cash flow items, hence, it might not be a cause for concern. Sadly, this is unlikely to be the case for Bumi Armada.

It is understood that management has revealed to analysts that a big chunk of the impairment was due to the long downtime caused by the malfunction of the generator on board Armada Kraken. As a result, the FPSO in the North Sea is not generating as much income as it should.

This is not the first impairment on Armada Kraken. The group booked in US$119 million (RM478.9 million) on the FPSO in 2QFY2018. The three companies — EnQuest Heather Ltd, EnQuest ENS Ltd and Nautical Petroleum Ltd — that had chartered the unit declined to accept the FPSO because certain requirements stated in the contract were not met at that time.

As a result, Armada Kraken Pte Ltd (AKPL), the subsidiary that owns the FPSO, had to pay penalties over the duration of the firm charter period — a 25-year contract that covers eight years from June 2017 to June 2025, and 17 annual options to renew until June 2042.

Armada Kraken was supposed to be the lifesaver to turn around Bumi Armada when the charter contract commenced but it has not been smooth sailing for the FPSO in the North Sea.

Debt woes not going away

Bumi Armada’s current liabilities swelled to RM8.77 billion as at end-2018 from RM6.64 billion a year earlier.

The sharp rise, which is not a good sign, was mainly because the group had not met the financial covenant of net debt over earnings before interest, taxes, depreciation and amortisation (Ebitda) for the sukuk murabahah in FY2018. Accordingly, non-current borrowings of RM1.499 billion have been reclassified into current liabilities as at Dec 31, 2018. This includes non-cash impairment expenses recognised during the year.

“The group is seeking indulgence from the sukuk holders for the covenant breach,” says Bumi Armada.

The sukuk murabahah is the latest addition to Bumi Armada’s current liabilities.

The other two big items are RM1.78 billion in debt related to Armada Kraken that remains classified as current liabilities due to AKPL’s non-compliance with the loan. In particular, the Armada Kraken FPSO project did not achieve final acceptance by the scheduled date.

Due to that non-compliance, project creditors have the right to issue a notice for full prepayment of the loan. But, so far, the banks have not issued such a notice.

In addition, the group has not met the financial covenant of net debt over Ebitda of unsecured term loans amounting to RM1.578 billion.  

Bumi Armada says it is in discussions with lenders to refinance the unsecured term loans via a long-term loan.

Seeking refinancing is Bumi Armada’s immediate task, failing which the group would have to undertake a recapitalisation exercise if the banks are reluctant to lend.

Silver lining to a dark cloud?

Bumi Armada told analysts at the briefing that the talks with bankers on the US$380 million debt refinancing have been “positive”. However, the discussions will be delayed further to early April instead of this month.

“The negotiations with Bumi Armada’s financiers have been extended from 1QFY2019 to the next quarter, which appears uncertain to us even though management has expressed confidence in reaching a resolution,” writes AmResearch analyst Alex Goh in his results review last Friday.

The balance sheet risk has weighed on Bumi Armada’s share price, which is currently trading at its historical low level. The stock closed at 17.5 sen last Friday, compared to its net asset per share of 57 sen as at end-2018.

Bumi Armada has stretched its balance sheet to the limit. The group’s gearing ratio is more than two times. For FY2018, it generated operating cash flow of RM1.067 billion, a decent amount, but debt repayments were higher at RM1.366 billion — a sign of the tight cash flow problem it is facing.

The conclusion of the refinancing will be a big catalyst for Bumi Armada. Also, it has an order book of RM20.2 billion. Some analysts have been betting on these with “buy” recommendations, with the view that it is hard to believe that an Ananda-related company would fail to resolve its debt refinancing.

At the present low share price, it might not be a wise idea to make a cash call, say some analysts. Others are of the view that the tycoon might have no choice but to hive off some assets to raise fresh capital. In doing so, the group might have to dispose of the assets at discount prices in the current soft market.

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