Photo from Value Investment Blog

Photo from Value Investment Blog

With the announcement on August 27, 2009 of Swiber’s issuance of a convertible bond (CB) of up to about US$78 million, with up-size option to raise a further US$22 million, I realized immediately that the Company’s cash position was in jeopardy and that my investment in the Company was becoming increasingly risky, which translated into an untenable situation of which I had to take action.

The terms of the CB are for a conversion price of S$1.20 per share, with the condition that the conversion price can be adjusted DOWN to S$1.08 if the average price falls below 90% of S$0.96 in the preceding 20 days prior to issue date. The conversion price reset can go as low as S$0.864, which means with each revision downwards in the conversion price, the potential dilution factor becomes ever larger. Total new shares converted without up-size option is 93.6 million, representing 18.5% of existing share capital of 507.76 million shares, and this can potentially increase with either the upside option being exercised or the revision in the conversion price. A dilution factor of 18.5% alone is already massive, but with the possibility of further dilution then I must say this is a bad deal for existing shareholders. Add to that the interest rate of 5% per annum payable semi-annually – this will increase their finance costs and reduce cash flows further for another 5 years. The worst part of the deal is that the funds are to be used for “working capital and general corporate requirements”, thus implying that there is no exact purpose for the fund raising (not for vessel fleet expansion, or for pre-emptive opportunities).

Considering that a share placement of about US$49 million was done (at 88 cents per share) just in June 2009, it is disappointing and highly suspicious as to why Management had decided to raise funds for a second time in less than 3 months. One of the immediate reasons which comes to mind is that the Company has cash flow problems and that their operating cash inflows are not enough to support both fleet expansion, working capital requirements and to pay interest on existing borrowings. This puts the situation in a whole new light and the issuance of this CB is (to me) an obvious sign of cash flow strain for Swiber, even though they had clearly and explicitly communicated just 6 months ago that they had enough cash raised from bank loans, internal funds and sale and leaseback transactions. Read more…

Related Article
Swiber – 1H 2009 Financial Review and Analysis