This article first appeared in The Edge Financial Daily on April 29, 2019

KUALA LUMPUR: Finally, Bumi Armada Bhd has managed to restructure US$660 million (RM2.73 billion) worth of debts after over six months of waiting. The lenders now allow the group to delay the repayment dates, though at higher interest rates. Still, this gives breathing space to Asia’s largest floating production storage and offloading (FPSO) vessel operator.

The news lifted its share price. For those who bought the stock at its all-time low of 15 sen earlier this year, their investments would have near doubled when the stock hit its five-month high of 28 sen last Wednesday on the news.

This means that of its US$660 million loan, US$260 million will be due on April 23, 2021, while US$400 million will be due on April 23, 2024. The interest costs will be around RM40 million from May to December this year. This works out to an annualised interest cost  of RM68.57 million.

It is long-awaited positive news as the postponement of repayments will help to ease pressure on its cash flow, which is rather tight. But some pointed out that the terms, such as longer repayment period or less pressing interest charges, leave much to be desired.

Higher interest costs could be a concern, although Bumi Armada has been granted more time to repay debts.

Analysts estimate that the higher interest cost will eat into earnings by a further 12% to 15% in the financial year ending Dec 31, 2019 (FY19). The market consensus estimate of Bumi Armada’s net profit  for FY19 is RM250.9 million, according to Bloomberg.

Not yet blue sky

Some cautious analysts opine that the rebound on share price is mainly driven by the good news of its success in restructuring the debts.

However, the investing fraternity, by and large, still have reservations about the group’s prospects ahead simply because its short-term debts remain high at RM4.24 billion, excluding trade payables and accruals of RM1.05 billion. In addition, investors need to see concrete efforts to slash borrowings and improvements to its tight cash flow due to declining earnings.

Separately, AmInvestment Research said in a note dated April 24 that the group has not been able to tap into its US$1.5 billion euro-dominated medium-term note programme, which involves the same lenders in the recent debt restructuring.

The US$660 million loans that have been restructured are the revolving credit of RM1.24 billion and unsecured term loan of RM1.57 billion. The amount, however, is less than half of Bumi Armada’s RM7.06 billion of short-term debts as at end-2018. In short, Bumi Armada has more works to do in order to be rid of its debt woes.

Bumi Armada is believed to be in talks with lenders so that it can reclassify some of its short-term debts, which are due within a year, into long-term liabilities on its balance sheet.

Its short-term debt includes the RM925 million secured term loan under Armada Floating Gas Storage Malta Ltd, of which around RM180 million is being negotiated for reclassification into long-term debt.

The group also intends to reclassify the RM1.78 billion secured term loan under Armada Kraken Pte Ltd, plus RM1.5 billion sukuk Murabahah, into long-term debt as well.

If negotiations are successful, its short-term debt — including another RM30 million current sukuk Murabahah — will be reduced substantially to a more comfortable level of around RM775 million from over RM4 billion. Long-term debt will be at roughly RM9.5 billion. The group has deposits of RM1.22 billion in the banks.

Rightly, chief executive officer Leon Harland sees an urgent need to address the debt pressure. Asset sale to raise fresh cash is an option. Last week, Harland said the group’s next focus is to manage its operating costs and to conduct asset monetisation or “other structural improvements”.

“As part of this, the offshore marine services (OMS) assets together with certain FPO (floating production offloading) vessels, which are idle, will be disposed of assuming commercially acceptable sale terms can be obtained. Surplus funds from operations and part of the proceeds from certain strategic initiatives including monetisation of assets and new project financing will be used to repay the loans,” Harland said in a statement when announcing the loan restructuring.

Asset sale only at the right price, achievable?

Now, Bumi Armada is looking for buyers for some of its 44 offshore support vessels and three subsea construction (SC) vessels under the OMS segment.

Analysts agree that it is a logical move to divest idle assets to slash debts. But it might not be an easy feat to find a buyer who is willing to offer the ideal valuation given the current buyer market condition.

Bumi Armada already impaired the carrying value of these vessels in the last quarter, but an analyst with a local bank suggested that further discounts is likely. Average utilisation rate fell below 50% in FY18. Two of its SC vessels are still idle and are looking for jobs.

“I don’t think that segment can raise that much cash ... Sometimes you have no choice but to sell cash-generating assets,” said the analyst, who estimated that the group can raise around US$100 million from selling idle OMS vessels.

Its operating assets, such as FPSO Olombendo, which is currently chartered, is expected to be able to fetch good valuation — around RM1 billion for a 40% stake. But the management will need to weigh between the impact of selling an income-generative asset and the further squeeze on cash flow and loss of earnings.

Meanwhile, it is still awaiting the outcome of its US$283 million compensation claim for the earlier termination of FPSO Claire contract in Australia.

More surprises ahead?

Bumi Armada shares were among the top actively traded stocks on Bursa Malaysia last week. Despite the recent rally, the oil and gas stock is trading at a price-to-earnings ratio of 5.35 times its FY19 earnings estimate.

After last week’ announcement on the loan restructuring, Bloom-berg data showed that among 10 analysts, five have a “hold” call on Bumi Armada, two have a “buy” and three give it a “sell”. Target prices ranged from 10 sen to 47 sen, with an average of 25.5 sen. Most of them did not price in a “successful” restructuring prior to the announcement.

Operations-wise, the group has an order book of RM20.2 billion with a potential extension of RM10.3 billion.

However, apart from debt woes, there are enough issues to keep Bumi Armada’s management on their toes, such as the hiccups in   FPSO Kraken’s operations, and its high gearing of 2.7 times.

The restructuring of US$660 million could be a good start for the group, which has been plagued by high level of debts and dwindling job orders. That said, the same old question remains on whether Bumi Armada would need a recapitalisation exercise, as many of its peers have undertaken, to strengthen its financial muscle.