Offshore Energy Claims Oil & Gas Industry Losses Hill Dickinson LLP, Singapore 6 th Asian Claims Convention hosted by AICLA Caravelle Saigon Hotel Ho Chi Minh 19 21 April 2017 Chris Edwards Partner Singapore chris.edwards@hilldickinson.com T: +65 6576 4756 M: +65 9640 7007
What are we going to cover in this session? A detailed analysis of recent notable legal cases? The impact of the English Insurance Act 2015 on policy wordings in the offshore energy sector? 2
Instead: An overview of the nature of disputes and current litigation - reflecting market conditions in the offshore marine and energy sector. Positive Related Litigation disputes in a healthy market: arising from drilling, exploration, construction and hiring of vessels and rigs. Negative Related Litigation disputes in a depressed market: cancellation, defaults, non-payment, enforcement of third party guarantees, joint venture disputes, debt restructuring, Court protection from creditors. Currently very much in the cycle of Negative Related Litigation. 3
Is only the fall in the price of oil to blame? August 2016: Survey by the Singapore Business Times on Singapore s offshore listed companies. Of 14 companies listed, 12 had short term debt of over SGD 100 million. 10 had negative/ low cash flow. Nearly all highly geared. Rapid growth during the good times, with high levels of lending. In the current economic climate, balance sheets cannot meet debt/ bond commitments. boom to gloom 4
Swiber Holdings / Swiber Offshore Construction not the first, but the most high profile default. July 2016: Singapore Court grants an application to wind up the company and place it in provisional liquidation. Subsequently withdrawn. Companies placed into interim judicial management. Debts between 4 th and 26 th August 2016 increase from SGD 99 million to SGD 197 million. 6 th October figure is SGD 246.1 million Disputes arise from a termination of a contract offshore Vietnam, and between Swiber and Vallianz amounting to some USD 67 million. Investigations into financial disclosures in the run up to its downfall. 5
Examples of other defaults / changes in the market Technics Oil and Gas and Technics Offshore Engineering: Judicial management July 2016 Swissco: Judicial management November 2016. Originally an OSV operator, diversified into rigs in mid 2014. USD 147.5 million of debt with USD 1.2 million in cash. ASL Marine: January 2017 obtains approval to delay redeeming of SGD 105 million in bonds. Otto Marine : taken over by controlling shareholder and delisted from the Singapore stock exchange in October 2016. Currently restructuring bank loans worth around USD 300 million. KS Energy: April 2017, debt restructuring talks to roll over SGD 74.9 million in debt. 6
Divesting of Assets in the current market Pacific Richfield puts its 40 strong fleet up for sale as part of a restructuring exercise. Sembcorp Marine disposes of interest of Shanghai Guofeng Marine Engineering and Technology Co and divested itself of 30% stake in China s Cosco Shipyard Group. Keppel Corporation proposes sale of shipyard, Keppel Verolme, Rotterdam Disposal of non-core assets which may be sold at fire- sale prices. Deferring of rig deliveries affects Sembcorp Marine. 7
Current market conditions reveal the dangers of cross corporate guarantees EMAS Chiyoda Subsea ( ECS ) : joint venture Ezra Holdings (40 percent), Chiyoda Corporation (35 percent), NYK (25 percent). February 2017: ECS files in the Texas Bankruptcy Court for voluntary petition for reorganisation under Chapter 11 of the US Bankruptcy Code. Filing reveals that DBS Group Holdings has a USD 84.6 million exposure. Ezra Holdings provided guarantees on nearly USD 900 million in liabilities and loans of ECS. 8
Current market conditions reveal the dangers of cross corporate guarantees Cont d March 2017: Ezra Holdings files in the New York Bankruptcy Court for voluntary petition for reorganisation under Chapter 11 of the US Bankruptcy Code. Filing reveals that Ezra Holdings has unsecured loans of USD 272 million owed to DBS Bank;; USD 184 million owed to Overseas- Chinese Banking Corp and USD 108 million to a Singapore affiliate of HSBC. EMAS-AMC AS, Norway based wholly owned subsidiary placed under members voluntary liquidation in Norway. 9
Current market conditions reveal the dangers of cross corporate guarantees Cont d Vessel Lewek Champion detained by Huisman Equipment in Xiamen, China on February 18 th 2017;; Owners of the Lewek Champion terminate charter with Emas Offshore. Default on a payment of USD1.58 million. Ezra Holdings guarantees the bareboat charter and faces a claim for payment of a termination sum of USD 194.5 million. 10
A different approach to credit in the sector the banks just don t want to touch oil and gas reluctance to extend or restructure secured loans. credit review process for a new loan taking much longer as well as debt restructuring. increased focus upon the company s management and its shareholders;; whether the company has firm contracts and execution deliverables. DBS: a SGD 721 million exposure to Swiber and reported to have unsecured claims totalling USD 281.4 million with Ezra Holdings. strong inter-sector dependence through joint ventures and use of subsidiaries. 11
Assistance from the Singapore government Spring Singapore s bridging loan scheme: Borrow up to SGD 5 million for a maximum of 6 years. Maximum loan quantum of each borrower group SGD 15 million. International Enterprise Singapore s Internationalisation Finance Scheme. Maximum per borrower group SGD 70 million. Singapore government takes on 70 per cent of the risk share for both measures. Applications amounting to more than SGD 90 million of loans approved as of February 2017. Banks assisting clients to tap relevant government assistance schemes where possible. More than 100 companies have indicated interest in the scheme. 12
Conference Theme: THE INTERCONNECTED WORLD OF CLAIMS AN EXAMPLE Sete Brasil: established in 2011 to build own and operate a series of ultradeep-water drill ships and semi-submersibles to develop the pre-salt oil fields of Brazil s Atlantic coast, to be used by Petrobras. Petrobras cut the initial plan for 28 rigs down to 10 rigs. Keppel had 6 semi-submersible rig orders and Sembcorp 7 drill ships. April 2016, Sete Brasil filed for bankruptcy protection in Brazil. EIG Management a US Investment firm claims against Petrobras and names Keppel and Sembcorp as Defendants in proceedings in the US District Court of Columbia. 13
Conference Theme: THE INTERCONNECTED WORLD OF CLAIMS Cont d EIG alleges that the defendants took part in an unlawful conspiracy inducing EIG to invest over USD 221 million in Sete Brasil. Brazilian Authorities investigate: Operation Car Wash. Brazil s biggest corruption scandal. Allegations that agents of Keppel BrasFels (Zwi Skorniki) and Jurong Aracruz (Guilherme Esteves de Jesus) paid bribes on behalf of the companies. April 2017: the US Court dismisses claims against Keppel Corp and Sembcorp Marine and their subsidiaries. 14
How does the cycle of Negative Related Litigation potentially impact on insurance Claims? Less projects, more capacity a competitive insurance market. Benign claims market for the traditional types of cover (i.e. physical loss/damage). Insurance against non-payment (i.e. credit insurance) likely to become more difficult to obtain and enhanced due diligence by insurers. Prospects of subrogated recoveries may be prejudiced, particularly for unsecured creditors where the responsible company has used Court protection to ring-fence their assets from creditors. 15
Are there any bright spots? Sembcorp Marine Ltd: Growth prospects for offshore and marine industry remain positive in medium and long term. Q4 net profit SGD 34 million v. loss of SGD 537 million the previous year. Pressure on the big two to merge? Are the biggest / national players better placed to weather the storm?. Navig8 Group establishes a fleet of offshore support vessels through the acquisition of RK Offshore Management. Sees a unique opportunity... to extend its commercial and technical services to the offshore energy sector. Still opportunities in the Middle Eastern and African markets. 16
Are there any bright spots? Cont d Growth in LNG. In particular development of small-scale LNG facilities. Existing know-how can be adapted to meet project based requirements for both conventional and small-scale LNG infrastructure, transportation and distribution. MPA planning for LNG bunkering in the Port of Singapore. Greek shipowners are returning to the market to purchase second hand tonnage. A sure sign that for shipping at least, the worst is over? Who wins? As usual, the accountants and the lawyers 17
And Finally. 18