The art of compromise – Offshore maritime restructuring

COVID-19 has had an adverse impact on many industries, numerous of which were already under pressure prior to the pandemic. The outbreak and the sustained effect has compounded already precarious positions that many businesses found themselves in. Businesses have had to rely on state level support and payment holidays from financiers and landlords to stay solvent.

The offshore shipping sector

A shipping sector that has struggled in recent years is the offshore oil and gas sector. Mild sector recovery during 2019 has evaporated as a direct result of the pandemic. Oil and gas prices reached record lows during 2020 with negative market sentiment anticipated for the short to medium term. The pandemic is likely to have accelerated the global energy supply peak, advancing the ongoing transition to alternative energy sources and new technologies.

The oil and gas decline is highlighted by Clarksons Offshore Intelligence, noting that a total of $33.6bn of offshore project capex had been committed across 35 projects during 2020, down c.70% compared with the full year 2019.

The offshore sector has an inherent disconnect, it is a sector with dependency on a single commodity product with a volatile price. Yet the infrastructure investments required to support the industry are long-term investments. Offshore vessels and rigs have extended useful economic lives of 20+ years and therefore sustainably financing these assets can be highly challenging. An understanding of market characteristics and a flexible approach to financing is essential if participating in the offshore sector.

The offshore sector outlook has resulted in companies and financiers having to come to the table to discuss restructuring as borrowers breach covenants and are unable to make scheduled repayments as they fall due.

Signs of recovery do exist within the sector. Two recent examples of successful restructuring processes are MMA Offshore and Bourbon Maritime, the former announced an $80m fully underwritten equity fundraise and debt restructuring in November 2020, providing a more sustainable capital structure for the company. The latter, Bourbon, in December 2020 announced the completion of its longstanding restructuring, relying on a debt-to-equity conversion, significant concessions from creditors and the raising of up to €150m in new capital.

With the Chinese economy powering back towards pre-COVID-19 levels, future demand for oil and gas will be dependent on the success of COVID-19 vaccines and worldwide immunisation programmes. Certain sub-sectors are seeing positive momentum at the moment, one sector in particular is offshore wind. According to the latest RenewableUK research, global offshore wind projects have grown by 47% since January 2019, despite the pandemic.

Business restructuring re-financing process

In circumstances where businesses reach the stage of financial distress, it is not uncommon for frustrations to build between companies and their respective financiers, especially in situations where the company experiences a lack of liquidity. Refinancing negotiations are often challenging and can result in difficult situations where financiers may face substantial write-downs and financial losses and enforcement action may be among the options considered.

A company’s management team will often need to revisit corporate strategy and prepare a revised business plan and restructuring proposal with a view to agreeing it with their financiers to avoid more drastic action being taken.

In order to achieve a mutually acceptable restructuring outcome, both the company and its financiers often appoint an independent third party to review the plan and assess its suitability and robustness.

When undertaking a restructuring exercise key areas of focus for the various stakeholders will include:

identifying key stakeholders and their relative position and influence;
reviewing market conditions (current and forecast);
identifying core and non-core operations;
establishing a robust corporate strategy and strengthening the management team if required;
estimating projected sustainable cash flows available to fund operations and service debt obligations;
assessing the business model and current/proposed financing structure;
considering sensitivity analysis and scenario planning; and
reviewing corporate governance and financial controls.

BDO - Independent financial advisory services

Typically, we would adopt a staged approach to any shipping advisory assignment, providing full transparency to all stakeholders of the restructuring exercise.

The BDO shipping advisory team and its partners can deliver the following services:

Financial and operational due diligence – including but not limited to, review of charter rates, utilisation levels, operating costs, contract backlog, pipeline analysis, etc
Independent vessel valuations
Tailored regional market review
Financial controls, reporting and governance review;
Business plan and restructuring proposal assessment – red flag reviews
Key assumption benchmarking
Identification of key drivers of successful financial performance
Financial modelling and sensitivity analysis
Advice on the structuring, negotiation and implementation of the restructuring proposal;
Recommendations in respect of alternative finance and restructuring options;
Guidance on covenants and the facility monitoring frameworks; and
Ongoing restructuring support and monitoring.

If you would like to find out more about the shipping and offshore maritime advisory team at BDO, please let us know or get in touch with Ryan Biscomb.