Commodities

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.

DBS can expect some serious questioning when it announces quarterly earnings next week. Investors may want to ask exactly how deep Singapore's biggest lender is into the oil-rig business, and just how bad the situation is for borrowers.

The bank said in an e-mail Tuesday that it was offering financial support to Swiber shortly before the oil-services group filed for liquidation. It said that as of end-June, Swiber had major projects with strong counterparties, and no overdue payments. Swiber was also executing a restructuring plan that included bringing in a new investor to address its high debt levels by boosting equity, and was refinancing some of its vessels to raise cash, the bank said.

Off a Cliff
Swiber's Singapore-dollar bonds due October are implying a recovery rate of about 10 percent
Source: Bloomberg

The bank said in a filing last week that it had a S$700 million ($522 million) exposure to the Swiber group of companies and expected to recover roughly half, given some was secured by assets. That amount represents 92 percent of Swiber's $567 million in total equity at the end of the first quarter, the last time it reported its financial position. It also probably means that just over half of all the leases, borrowings and notes payable reported by Swiber were owed to DBS.

Any credit officer should balk at a lender being in charge of more than half the debt of an entire company. It gets worse, however, because on top of that, Swiber's debt had already become much larger than its equity, a sign the bank should have considered scaling back its exposure.

Warning Signs
As of March, Swiber's debt was almost twice its equity, and amounts owed overtook shareholder capital five years ago
Source: Bloomberg

Regulation requires that lenders assess a borrower's ability to repay debt periodically and consider obligations nonperforming if there's a belief that finances are strained, even if the company is still coughing up. It's unlikely that DBS considered Swiber a candidate for nonpayment or it wouldn't have kept lending. Yet, given the firm's financial position and state of the global oil market, it arguably should have.

The liquidation also raises the question of whether other Swibers may be lurking in DBS's balance sheet. The bank hasn't provided as much detail on its exposure to the industry as its competitors. In an e-mailed response to Gadfly today, it again highlighted that the additional financing provided to Swiber took the form of a bridging loan, which was to have been repaid upon the expected equity injection from the investor. "The investor failed to follow through on the equity injection per the investment agreement," it said.

OCBC said last week that a rise in soured loans was due to troubled oil and gas companies.

On DBS's last earnings call in May, an analyst asked Chief Executive Officer Piyush Gupta whether the increase in nonperforming assets that the bank reported then included any oil- and gas-related loans. Gupta's response was an emphatic no, and oil wasn't mentioned again the entire call.

Perhaps if Gupta had been more loquacious, things wouldn't have looked so bad when Swiber filed a winding-up petition. That's in the past now. But shareholders should aim to get a clearer view of where they stand to avoid any similar surprises in the future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net