SGD New Issue Review : Otto Marine 2 Year 7%

NEW ISSUE: OTTO MARINE SGD 2Y ISSUE

Issuer:  Otto Marine Services Pte. Ltd.
Guarantor: Otto Marine Limited
Status: Senior Unsecured Fixed Rate Notes
Format:  Reg S, Bearer, Section 274/275 of the SFA, issued off the S$500 million Multicurrency Medium Term Note Programme
Currency:  SGD
Issue Ratings: Unrated
Tenor:   2 years
Amount:  TBD
Initial Guidance:7% area
Payment:Semi-annual, actual/365 (fixed)
Financial Covenants:
1. Minimum Consolidated Total Equity of US$250,000,000
2. Maximum Consolidated Net Borrowings to Consolidated Total Equity of 2.5x
3. Maximum Consolidated Secured Debt to Consolidated Total Assets of 0.6x
4. Minimum Interest Coverage Ratio of 2.5x, subject to  Interest Reserve Account (see para 1 under Appendix of the draft Pricing  Supplement attached)
Interest Reserve  On Issue Date, to be funded with an amount equal to 1     Account: coupon payment. If the Guarantor does not meet the  required minimum Interest Coverage Ratio, the Guarantor  shall deposit an additional amount equal to 1 coupon  payment, which can be withdrawn once Interest Coverage Ratio is met. The Interest Reserve Account will be pledged
to the Trustee for the benefit of the Noteholders
(see para 1(iv) under Appendix of the draft Pricing  Supplement attached)
Redemption at Option of Noteholders upon Cessation or Suspension of Trading of Shares: At par, see para 2 under Appendix of the draft Pricing   Supplement attached
Redemption at Option of Noteholders upon Change of Control:  At par, in accordance with the Programme
Redemption for Taxation Reasons:    Yes, in accordance with the Programme
Details:  SGD250k denoms / Singapore Law / CDP / SGX-ST

– New Otto Marine SG 2yrs announced post successful SG roadshow.
– Initial price guidance: 7% area

Comps:
Vallianz 7.25 2016: 102.50, 6.07%

Credit Highlights:

– Otto Marine is an integrated offshore marine group with a core business of owning and operating a fleet of offshore support vessels (OSVs) (comprising PSVs, MPSVs, AHT/AHTS, accommodation work barges, utility/work maintenance vessels, tugs and barges), and a complementary shipyard in Batam, Indonesia.

– Young diversified fleet – Focused on supporting the entire oil and gas project life cycle through the ownership, chartering and management of OSVs. The group currently owns a fleet of 59 vessels, with an average age of below 5 years.

– Focus on high growth & cabotage-protected area – Key partnership with the GO Marine Group to develop strong local knowledge in markets like Indonesia and Malaysia gives greater access and allows the Group to capitalize on our growth.

– Access to Australian markets – Enjoys access to the Australian oil and gas markets through Go Marine’s wholly-owned subsidiary, Go Offshore Pty Ltd

– Healthy order book – The group has long term cashflow visibility from securing multi-year vessel charter contracts. As at 30 June 2014, the group’s offshore chartering orderbook stands at approximately US$400 million, with an average contract tenor of 3 to 5 years. In addition, the group’s healthy order book is strengthened by its long-term relationships with oil and gas majors and tier-1 oil and gas contractors.

– Favorable sector fundamentals – Oil and gas supply growth is expected to come from growing offshore production. Demand for OSVs will continue to grow as global offshore E&P capital expenditure increases.

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A nice headline to kick start a new bond issue for banks will only bring out the bonds on good news ! and their liability ends 2 weeks after settlement.

14 Jul 2014 :  Otto Marine wins US$404m worth of contracts in H1 2014 http://www.businesstimes.com.sg/breaking-news/singapore/otto-marine-wins-us404m-worth-contracts-h1-2014-20140714

USD 404 mio is more than their market capitalisation of SGD 312 mio, a number that has seen better times when their share price was trading at 47 cts back in 2010 (and 51 cts in 2008) instead of its 7 cts today.

Otto Marine had counted Stanchart as one of their substantial shareholders till 3Q13. Their share price dipped to a historical low back then as they fought a contract dispute which is the risk for such companies that depend on chartering and maintenance services as their main business.

Still they operate one of the largest shipyards in Batam and is majority owned by a Malaysian tycoon, Yaw Chee Siew (61.86%). Covered by only 2 analysts, one calling for overweight in their shares (note this analyst research company does not have a single underweight in his call list).

And they are heavily indebted indeed, even after divesting 2 vessels to bring that debt down last year. Financial leverage ratio of 4.5 times (Swiber is 4.4 times, Vallianz 4.6 times).

That is why the COVENANTS ! Because if we let them borrow up to the SG 500 million that their MTN programme allows, they would be up to their Eyeballs like OXLEY (11.3 times, God Forbid !).

This is how I see it.

When your operating income is running at 20 million (they just recently turned profitable again) and you run and issue say, 200 mio of bonds at 7%, that would make your interest expense 14 mio per annum just on the bonds alone, and there are other borrowings to take care of ?

Project and contract dependent services companies like Otto and Swiber and gang, all run that risk – when the projects overrun in cost and time and contracts get cancelled.

Yet, I better keep my mouth shut because Vallianz is 102.50 these days so there is absolutely no reason for Otto not come in under 7%, 10 times oversubscribed and happy investors all round. For the savvy investors, perhaps ask the lead banks to buy your Vallianz paper at 102.50 and snag some of the new Otto ? And lets see if a 250k or 500k order to sell Vallianz at 102.50 will move the bid lower or much much lower ?