Ezion Holdings - DBS Research 2017-11-10: All Eyes On Refinancing

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EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - All Eyes On Refinancing

Maintain FULLY VALUED; TP S$ 0.13, based on 0.15x FY17 book value. 

• 3Q17 reported a small loss of S$7.4m on low utilisation and charter rates. Cash balances further deteriorated to US$47m (from US$93m in 2Q17 and US$187m in 1Q17).
• Investors should wait for more clarity on refinancing outcome as a successful exercise will help Ezion pull through this prolonged downturn, and vice versa. Trading will remain suspended until further notice.

What to expect next. 

• Following three rounds of informal meetings with creditors, Ezion has fine-tuned its refinancing proposal on the consent solicitation exercise (CSE) on Nov 20. If > 75% approval is obtained from all six tranches of bond and PERP holders, Ezion will proceed to seek shareholders’ approval in Jan-2018.
• Successful refinancing a key to ride this downturn. Ezion continues to engage strategic shareholders that may contribute to company’s financial strength and/or business synergies. A successful refinancing exercise will minimise the repayment stress over the next 6 years, allowing management to focus on reshaping the business.

Valuation

• We value Ezion based on 0.15x FY17 book value (post 12% impairment), in line with valuation multiple of 0.1-0.2x ascribed to other highly geared SGX-listed asset owners in the O&G space, arriving at a target price of S$ 0.13.

Key Risks to Our View

• Overhang of debt restructuring. While it might be positive for the long run and Ezion stands a fair chance to pull through, the overhang remains until the completion of the exercise in several months’ time.

WHAT’S NEW - Earnings remained weak in 3Q 

Results highlights. 3Q in the red. 

• Ezion reported net loss of US$13.7m, dragged by forex loss of US$6.3m. Revenue fell 5% q-o-q while gross margin dipped to 2.6% from 9.8% a quarter ago.
• Four additional service rigs deployed, in the Middle East and China in 3Q, bringing its operating fleet to 18 units. Of these, three units are being used in the offshore oil and gas industry while one unit in the offshore windfarm industry. In addition, another five units are expected to come onstream by the end of next year.

Stronger enquiry level indicates growing demand. 

• In the past few months, Ezion has received more enquiries for its liftboats, which indicates stronger demand ahead. This could eventually translate to higher utilisation and day rates.
• Cash flow deteriorated further, with cash on hand halved qo-q to US$47m due largely to net debt repayment of US$47m during the quarter.

Looking for opportunities to dispose of undeployed assets.

• Ezion is exploring various options, including asset disposal, to reduce the burn rates of the Service Rigs and offshore logistics vessels that are currently not deployed. It may also cancel existing contracts with payment issues. 
• We believe Ezion will likely keep the more superior liftboats assets and dispose of the refurbished jackup rigs.

Potential impairment. 

• In view of this, management has cautioned that it is assessing the amount of impairment losses required for assets and receivables, to be finalised when it releases 4Q17 results.
• Earnings revision. We have lowered our FY17 net profit by ~US$10m factoring in the forex loss.

Refinancing exercise 

• Post completion of informal meetings with the bondholders, Ezion has announced its Consent Solicitation Exercise (CSE) statements and Notice of Meetings on SGX on 24 Oct.

Key details of the refinancing proposal for lenders: 

1. Pending final approval from the lenders for a 6-year refinancing proposal and this is conditional upon approval of security holders of all series (0003-008) under the CSE terms 
2. Minimal fixed principal repayments over the next 6 years 
3. Substantial reduction in interest rates – resulting in cost savings of up to US$30m p.a., implying up to 200bps rate cut 
4. Stapled warrants attached to portion of loans if they agree to interest rates below cost of funds 
5. Additional working capital line of up to US$100m 

Key details of the refinancing proposal for security holders (Series 003-007): 

1. Security holders are given two options 
2. Option A: new series with maturity in 7 years with full payment plus a redemption premium of 6% with additional redemption premium based on % increase in share price 
3. Option B: new series with maturity in 6 years with full payment plus conversion rights (5-year) at initial conversion price S$0.2763 (6 months VMAP) and re-set every 6 months, whichever higher.
4. Both carry coupon at 0.25% p.a. (vs 4.6-5.1% currently) 

Key details of the refinancing proposal for security holders (Series 008 PERPs): 

• Security holders are also given two options 
• Option C: new series with maturity in 10 years with full payment plus a redemption premium of 7.5%, with additional redemption premium based on % increase in share price.
• Option D: Amendment to terms. Added conversion rights (3-year) at initial conversion price of S$0.2763 (6 months VMAP) and re-set every 6 months, whichever higher.
• Coupon reduced to 0.25% p.a. (vs 7% currently) 

Early conversion pricing and bonus warrants. 

• For early conversion prior to 60 days and 6-months after new issuance, security holders enjoy early conversion pricing and bonus warrants.
• Early conversion before 60 days after the issuance of new Series enjoys 10% discount to initial conversion price and gets 50k bonus warrants for every S$50k conversion
• Early conversion after 60 days but before 6-month after the issuance of new Series gets 25k bonus warrants for every S$50k conversion
• The bonus warrants are exercisable within 24 months after issuance of new Series 

Deadlines:

• Early Consent Deadline: 15 Nov 2017, 5pm
• Submission of voting instruction form: 1) 18 Nov 2017, 9am-11am with half an hour interval each for Series 003-007; and 2) 19 Nov 2017, 11.30am for Series 008
• Meeting: 20 Nov 2017, 9am-11.30am with half an hour interval each for Series 003-008. 

Strategic Investors. 

• Ezion has also met several interested investors including funds and strategic partners who are keen to work with Ezion but conditional upon completion of the refinancing exercise. 
• Management cautions that the “White Knight” investors are not necessarily at an advantage to existing stakeholders at this stage given their stance to reduce the liabilities of Ezion significantly through some form of haircut.

What’s the impact? 

• Ezion will need to secure 75% approval for the CSE terms which is crucial for Ezion’s survivability.
• Based on the revised initial conversion price of approx 27.63 Scts (10% discount to 50% premium to last closing of 19.7 Scts), assuming full conversion of S$575m bonds + PERPs plus potential conversion from bank loans, share cap could slightly more than triple to ~6.2bn shares. BVPS could then be reduced from current S$0.82 (excl PERPs) to S$0.45. If we take a step further to assume 30% asset impairment or US$600m (approx. S$840m), BVPS would drop to S$0.31.

Pei Hwa HO CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-10

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