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The going-concern issue is becoming a problem in Singapore. Ezra Holdings Ltd., an oil-services company, was the latest to indicate it faces debt hurdles that require a restructuring. Under Singapore law, as in the US, that could mean a stay on interest payments until creditors and shareholders agree on a balance sheet that allows the company to keep operating and eventually to pay most of its dues. Specialized courts and judges also should lead to better outcomes, which is partly why the city-state is trying to become a regional hub for restructuring.
This doesn’t always work. While the legal system is well-versed in the challenges of debt defaults, creditors are new to the game. In their enthusiasm to get a result, bondholders and banks are pushing companies into liquidation, the worst outcome for all stakeholders. Another oil-services firm, Swiber Holdings Ltd., has started liquidating a unit because creditors so far have failed to agree on an amicable restructuring.
A container-shipping company, Rickmers Maritime, perhaps is the best example of what’s going on. It offered noteholders a plan to replace 60 percent of the value of their bonds for shares in the company and change the maturity of the remaining amount to 2023, with a rising rate that started at 2.7 percent and maxed out at 5.2 percent. That compares with the original coupon on the bonds of 8.875 percent, with a 2018 maturity. In December, two-thirds of the bondholders voted against the proposal.
It’s all about capital structure. Secured lenders get first dibs, as they can claim any amount raised from selling assets that were backing loans. Next come unsecured claims, both loans and bonds. Shareholders are left with what remains, which might be nothing.
It’s unclear what kind of deal was being offered to Rickmers’s unsecured lenders, but since the December vote, the company agreed to sell at least two of its vessels to repay secured loans.
It’s not as if this is the best scenario for the banks, either. Rickmers said the deal to sell one of the ships, the Kaethe C. Rickmers, requires an impairment of $31.6 million against book value. It’s hard to know the number on the balance sheet for that ship, but the discount on the sale was more than six times a previous impairment, when charter rates plunged by more than half. Even secured lenders suffer when assets are sold in a hurry.
The lesson, learned long ago by seasoned investors in distressed companies, is simple: Liquidations reduce the recovery value for everyone. But Singapore investors are neither focused on this nor experienced in it. Making matters worse, the great majority of bonds are held by private individuals, who are less likely to accept a deal that they see as giving them lower recovery. In the US, by contrast, corporate bonds are held mainly by funds and insurers. They have a much higher tolerance of losses because their portfolios are big and diversified. When stress is evident, they sell those notes to hedge funds that specialize in court restructurings. Losses can be deep, but the securities can be passed on to pros who can wait years to turn a profit. Banks in the U.S. are also more used to dealing with trouble, so they know it’s best to reach an agreement with the (less numerous and savvier) bondholders than to send the company into liquidation.
In Singapore, those making the best returns from the recent round of stress are institutions that specialize in liquidation and insolvency management, usually accounting firms.
For all its aspirations to become a role model for restructuring, Singapore will need to overcome the challenge of dealing with its own companies and investors. — Bloomberg
Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket