Songa Offshore announces debt restructuring; summons bondholders to approve amendments

Songa Offshore, the Cyprus-based offshore driller has announced plans to restructure its finances by offering a convertible bond of USD 100m with an option to upsize to USD 125m, raising fresh equity of up to USD 25m at NOK 0.15 per share, and amending the terms and conditions of existing bonds and loans. Further, the proposed refinancing includes a full conversion of the existing USD 150m convertible bond SONG06 to equity at NOK 0.176 per share. The plan also includes significant interest reductions, maturity extensions, covenant relief through 2Q18 and other amendments to SONG04, SONG05 and the Perestroika shareholder loan, as well as amendments to the company’s secured debt facilities. On 22 March 2016, the company has summoned bondholder’s meeting to be scheduled on 11 April 2016 to approve amendments. (For details refer refinancing term sheet)

USD 91.5m bridge bond: On 17 March 2016, the company announced a drawdown on the bridge bond of USD 91.5m, which will later be converted into the previously announced new convertible bond following the required resolutions by an extraordinary general meeting (EGM).  As mentioned in the company’s 4Q15 report, a liquidity gap had arisen due to lower than anticipated initial utilisation of Songa Equinox and Songa Endurance, delayed rig deliveries, and cash deposit requirements in the bank financing related to Songa Encourage and Songa Enabler.

Songa confident of gaining approval: The refinancing is subject to approval by sufficient majorities in the EGM and the respective bondholders′ meetings. The company stated that it has received irrevocable undertakings to vote in-favour of the proposed refinancing amounting to 71%, 72%, and 78% of the voting bonds in SONG04, SONG05, and SONG06 respectively. In addition, the company′s majority shareholder, Perestroika AS, and certain other shareholders, have confirmed that they will vote in favour of the required resolutions at the EGM.  The holders of shares and bonds issued by the company are likely to approve the restructuring as the entire offshore industry is struggling and can atleast recover their money when the market turns. While, rejecting the proposal could risk the future of the company resulting to significant losses to the holders.

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Fleet Status: Songa Equinox and Songa Endurance were delivered from DSME on 30 Jun 2015 and 24 Aug 2015 and commenced operations for Statoil on Troll field from 7 Dec 2015 and 31 Dec 2015, respectively. As reported by the company in its latest fleet status report dated 21 March 2016, both the rigs operated with an earnings efficiency of 98% for the last three weeks. Further, Songa Encourage is expected to arrive in Bergen on 15 March 2016 and commence drilling operations in April 2016. The delivery of Songa Enabler is expected to take place end of March and the rig is scheduled to commence drilling operations in August 2016 for Statoil. Songa Dee and Songa Delta are also contracted for Statoil until 3Q16 while Songa Trym is currently idle and is being marketed. All in all, the company has long term contracts with Statoil for four out of seven rigs and two rigs will be off contract after 3Q16, while, Songa Trym is warm stacked. Although, the company poses a high risk of customer concentration it has a strong order backlog of USD 5.9bn through firm contracts and USD 8.3bn in options.

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 Cat D Arbitration Case with DSME: Previously in July and November 2015, Songa had received arbitration notices regarding cost overruns in respect of the construction contracts for the CAT D rigs from DSME. In this regards, on 18 March 2016, Songa Offshore submitted its defence in the arbitrations and submitted counterclaims in respect of the rigs for the aggregate amount of USD 65.8m. The company further stated that DSME is solely responsible for the delays to the rigs and any attempt by DSME to recover cost overruns has no merit due to the turn-key nature of the construction contracts.

 FY15 results: Full year 2015 saw a modest rise of 3.8% YoY in revenue to USD 513m due to Songa Trym contract cancellation fee of USD 41.1m and revenue contribution from Songa Equinox from 7 Dec 2015.The company has closed offices in South Korea and Scotland, and plans to reduce 200 onshore jobs as part of its corporate restructuring program in light of depressed offshore drilling market, owing to falling crude prices. The company plans shift the support function from the offices in South Korea and Scotland to Norway, while the job cuts will save the around USD 30m annually.  Further, the management also plans to rightsize operating and staff organisations in Cyprus and Norway. FY15 adjusted EBITDA increased 43% YoY to USD 281m with corresponding margin increasing to 54.8% vs 39.7% last year. Operating cash flow in FY15 increased 240% YoY to USD 144m versus USD 42m last year largely due to aforementioned increase in adjusted EBITDA. However, humongous capital sending on the new builds delivery of USD 1.6bn resulted to a negative free cash of USD 1.5bn in FY15. Net debt increased to USD 2.2bn compared to USD 771m at end-FY14. As a result net leverage doubled to 7.91x vs 3.92x at end-FY14.

In conclusion: Songa offshore which is currently under a transformation phase should benefit from the proposed restructuring as it will cure the company’s liquidity needs and safeguard smooth operations of its drilling contracts for Statoil and will provide medium term stability by uniquely positioning  Songa Offshore compared to its peer contractors through the current market downturn.

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(Source: Songa Offshore; rsquaredanalytics)



Categories: Earnings, European Earnings

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