Two days after publishing its 2019 results, Ezion Holdings Limited (“Ezion”) on 4 Mar announced details of the company’s scheme of arrangement (“SOA”). During a recent meeting with management, holders of the EZISP 0.250% 20Nov2023 Corp (SGD), EZISP 0.250% 20Nov2024 Corp (SGD) and EZISP 0.250% 20Nov2027 Corp (SGD) were briefed on the SOA and the company’s tentative transaction with Yinson Eden Pte Ltd.
Creditors may vote against the SOA, or choose between two options (A or B) if they support the SOA. Option A effectively represents a 70% haircut, with creditors exchanging their debt holdings for 10% of cash and 20% of equity. Ezion will pay 8% of the debt principal amount upfront, and 2% a year later. In addition, 20% of the debt owed to creditors are converted to shares at S$0.0387 apiece.
Scheme creditors voting for option B will convert their debt into a convertible perpetual security that pays an interest rate of 0.25% per annum. After ten years, the coupon rate on the perpetual security steps up to 0.5%. Investors may also convert their perps into shares at the conversion price of S$0.139 per share within the first five years from issuance. Ezion has the right to redeem any outstanding perpetual securities after ten years.
Restructuring agreement with Yinson
Market conditions have remained challenging since the completion of Ezion’s last restructuring exercise in 2018. A persistent oversupply of workboats and accommodation rigs pressured industry charter rates, leading to lower revenue and a series of asset impairments. In addition, Ezion was not able to re-deploy its fleet of liftboats due to a lack of access to funding, and the group ended 2019 in a substantially weaker financial position.
After seeking interest from various potential investors, the company eventually decided that a transaction with Yinson Holdings Berhad would be the best option for the group. Regarded as one of the top global players in the offshore production and support services sector, Yinson Holdings is investing in Ezion for an overall cash outlay of USD170m through Yinson Eden, its indirect wholly-owned subsidiary.
As part of the transaction with Ezion and its lenders, Yinson will subscribe to a USD20m convertible note that pays a fixed rate of 8.1% and own at least 63.46% of Ezion’s total share capital. Yinson will also take on USD482.3m of existing secured loans owned by Ezion. The debt assignment is conditional upon the completion of the Ezion-Yinson transaction and proposed SOA. In addition, Yinson will be granted an option by Ezion’s secured lenders to purchase certain pledged assets of the company, in the event that Ezion fails to secure the required approvals for its SOA.
Pursuant to Ezion’s agreement with Yinson and the SOA, the company is looking to write off USD740.9m of debt. Assuming a smooth clearance of all regulatory hurdles and stakeholder approvals, Ezion will reduce its total debt from USD1.6 billion to USD402.7m following its restructuring. Based on Ezion’s guidance and presentation, an illustration of debt movements contemplated in the company’s SOA is displayed in Figure 1.
Figure 1: Ezion’s debt restructuring plan
In a scenario where all scheme creditors elect option A as their preferred choice of compensation, the net asset position of the company will improve to USD310m from -USD867.4m as at 31 Dec 19. In the same manner, if all creditors select option B, Ezion guided that its net asset position will increase to USD384m. Correspondingly, the net tangible asset value per share in the two scenarios would be USD0.0098 (option A) and USD0.0143 (option B).
Company financials
Ezion reported total revenue of USD90.3m during 2019, down from USD118.7m during 2018. Gross profit dropped to -USD1.9m (2018: USD11.6m) and Ezion made a net loss of USD614.9m last year (2018: -USD344.3m). Meanwhile, annual financing costs more than doubled to USD111.8m due to an accelerated loan amortization recognition of USD64.9m during the fourth quarter (“4Q19”).
EBITDA, or earnings before interest, taxes, depreciation and amortization, was ~USD6.7m in 2019 and ~–USD13.9m in 4Q19. We added other operating expenses to our EBITDA estimate, mainly comprising of impairment losses and asset write-offs, including write-downs on loans to joint ventures and loss allowances for financial guarantees to joint ventures.
In the context of the company’s cash flows, net cash from operating activities remained positive in 4Q19 at USD10.6m despite lower revenue. Compared to the prior year, net operating cash flows increased from USD9.8m in 2018 to USD29.4m in 2019. However, operating cash flow before working capital changes was nearly unchanged at around USD22m in both 2018 and 2019.
Ezion’s cash flows were likely generated from five operational liftboats during the fourth quarter, which would likely drive total revenue moving forward. Last year, the vessel charterer booked USD17.1m of operating results from five liftboats. The company could have re-deployed the remaining seven boats but lacked working capital.
Segmental business disclosures for 2019 showed that liftboat finance expenses totaled USD47.3m, which exceeded the reported segment results of USD17.1m. However, finance expense will decline once creditors agree to the proposed debt write-off. With USD402.7m of borrowings on the restructured balance sheet, interest expense should be significantly lower, with an average interest rate of possibly around 3% (2018: 2.26-4.74%).
Ezion could use the USD40m of interim funding – USD20m from a revolving credit facility and USD20m from a convertible note – to re-deploy liftboats. If charter rates improve and more boats become deployable, the liftboat segment will turn profitable after the debt restructuring.
However, we do not expect a quick turnaround to profitability as EBITDA and operating cash flows were tepid in 2019. With a gross loss of USD1.9m in 4Q19, and taking into account our expectation of a weaker financial performance in 1Q20, we think Ezion may continue to report gross losses and decreased earnings this year before staging a recovery in 2021.
In 2018, Ezion projected a 50%-90% utilization rate for its fleet of liftboats in FY2020. Utilization rates were expected to increase to 80%-90% from FY2021, while cash flows could improve by 64%. However, charter rates have declined meaningfully in March, implying that Ezion may not be able to negotiate an attractive rate for any re-deployed liftboat. We estimate that charter rates in the first quarter of this year were possibly 30%-50% lower from 4Q19.
In the short term, the group’s financial profile will be affected by other ongoing corporate activities. On one hand, Ezion may boost liquidity through the divestment of non-core rigs and offshore support vessels (for example, management may offload USD14.9m of assets held for sale). On the other hand, the offshore vessel operator is facing a lawsuit regarding a failed vessel delivery in 2016. Whitesea Shipping & Supply (LLC) FZC claimed that an Ezion subsidiary breached contractual terms that resulted in a potential profit loss of USD100m.
We forecast Ezion’s EBITDA to grow to ~USD23m in 2020 and ~USD61m in 2021, based on an annual revenue of USD11m per liftboat and a group EBITDA margin of 50%. We expect five liftboats to remain in operation in 1H20 and seven to be deployed by the end of the year, increasing to eleven in 2021.
Recommended option for bondholders
Our recommendation to bondholders hinges on the future equity value of Ezion as both option A and B have a significant equity component. Recall that option B provides scheme creditors the right to convert their claims at a conversion price that is nearly 3.6x higher than the equity issuance price of option A, although option A entails a 70% principal haircut.
Referring to the market capitalization-to-EBITDA multiples of Nam Cheong Limited and Yinson Holdings Berhad on 24 March, we think that Ezion may resume trading at an EBITDA multiple between 0.6x and 6.5x. Nam Cheong Limited is arguably a better comparison to Ezion as both companies compete in the vessel chartering business at nearly the same revenue scale. Nam Cheong’s market valuation of 0.6x EBITDA suggests that Yinson may have overpaid for the Ezion deal as it values the company at 10.0x of 2020 EBITDA or 3.8x of 2021 EBITDA (both based on our estimates and using an implied equity value of USD229m). As a matter of fact, Ezion’s management did highlight at the meeting last week a very real prospect of Yinson abandoning the agreement.
If Ezion resumes trading at a 0.6x EBITDA multiple, the company’s shares may be valued between USD0.00044 and USD0.00052, depending on how scheme creditors choose between option A and option B. From another perspective, we argue that Ezion’s stock price will likely fall below the conversion prices of S$0.0387 for option A and S$0.139 for option B, as both are significantly higher than the projected net tangible asset per share figures mentioned earlier in this article.
Given our expectation of a diluted share price of less than USD0.01, we advise bondholders to choose option A in response to the proposed scheme of arrangement. In selecting option A, bondholders would at least receive back 10% of their investments. From our standpoint, receiving 10% cash (8% upfront) is better than being paid a 0.25% coupon for ten years. Even if the stock starts trading at a price of USD0.0143 – the estimated net tangible asset per share if all scheme creditors opt for option B – and continues appreciating at a rate of ~7% over the following ten years, the share price would only reach ~USD0.028 (S$0.0387) by the end of the decade.
The scenario that would lead us to recommend option B is to witness a share price of at least S$0.05 within five years. For this to happen, and assuming if Ezion’s shares open trading at Yinson’s subscription price of S$0.0317 – an optimistic assumption in our view – the share price needs to appreciate at a compounded annual rate of 10% for five years. At an assumed EBITDA multiple of 6.5x, it would require Ezion’s EBITDA to grow more than 50% every year for five years. Realistically speaking, we think these expectations are too rosy, especially in the current economic environment.
Noteholders may also choose to vote against the SOA, but that may cause Yinson to walk away from the transaction, and even compel Ezion to pursue insolvency proceedings. In the current market environment where there is little available credit, it may be difficult to negotiate for a better deal or find another willing buyer for the company. There are a number of other companies in the oil and gas support services sector that are hit hard by the recent plunge in energy prices and clamoring for cash. All things considered, we think the best decision for bondholders is option A.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
