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 YINSON HOLDINGS BHD  YINSON (7293)’s expansion strategy pays off

WITH US$5.7 billion (RM23.9 billion) worth of new contract wins and crude oil prices currently above US$100 per barrel, the timing of Yinson Holdings Bhd’s RM1.1 billion rights issue seems favourable. If it succeeds in raising the funds, the cash call will be the largest for a Bursa Malaysia-listed company since Sapura Energy Bhd’s RM4 billion rights issue in 2018.

That is, if the excitement is not dampened by the slew of bad news involving some local oil and gas (O&G) companies that have ruined investor appetite for the sector.

The more prominent cases include Sapura Energy succumbing to liquidity issues again after that massive cash call about three years ago. The O&G giant is now engaging with a large number of creditors to restructure its whopping debts of some RM10 billion.

Another case is that of Serba Dinamik Holdings Bhd, whose former auditor raised a red flag on its financial accounts. The group’s officials are now in court for misrepresenting their stellar earnings in 2019.

Investors cannot help but see some similarities between Yinson’s case and that of other local O&G players that succumbed to their stretched balance sheets in the last few years.

Yinson’s perpetual bonds, including US$100 million paper that is due for redemption in October, are seen as a potential time bomb. The US$100 million perpetual paper, carries a coupon rate of 7.85%. If the group chooses not to redeem the tranche, there will be a steep 5% increase in the coupon rate to 12.85%.

The group has another tranche of US$120 million due exactly two years from now,  which also comes with the 5% step-up margin.

Additionally, it has RM2.36 billion worth of short-term debt, out of total debt of RM7.4 billion as at October 2021. Its total borrowings had risen to RM8.8 billion at end-February, according to its rights issue circular.

Yinson’s three tranches of perpetual bonds totalling RM1.85 billion, which are recognised as equity on its balance sheet, help to reduce its net gearing to 1.2 times. If perpetual bonds were considered borrowings, the group’s gearing ratio would be three times.

Addressing those concerns, Yinson’s group CEO Lim Chern Yuan says the company is “misunderstood” by investors. The 38-year-old chieftain stresses that such comparisons are not “apple to apple” as each company is in a different segment of the O&G industry and not serving the same clientele.

In an interview with The Edge, Lim, son of the founder Lim Han Weng, who has a controlling stake of 27.55% in Yinson, says the group has the financial capability to redeem the US$100 million perpetual security.  Should Yinson redeem the perpetual paper, this will be seen as one ticking bomb being removed for now.

Instead of comparing the group with its O&G peers, Yinson should be compared with power producers, as it manages its debt level against Ebitda (earnings before interest, taxes, depreciation and amortisation), says Lim. “People tend to lump O&G companies in a single group, but what we provide are services that are backed by the long-term charter of our FPSO [floating production storage and offloading] assets.

“At any point in time that we make capex investments, we make sure that our order book is backed by strong counterparties with strong contractual returns. That allows us to meet our financial commitments.”

He adds that the group just raised RM1 billion via an issue of bonds last year, giving it more cash flow.

The prolonged downturn in the O&G industry has demonstrated that project execution is crucial for a company’s survival despite having a sizeable order book. Any misstep could otherwise drag a company into deep financial trouble.

So far, Yinson seems to have managed its project execution well. Its latest project is Anna Nery — an FPSO with a capacity of 70,000 barrels per day (bpd) — which is serving Brazilian oil major Petrobras. The vessel is at the tail end of construction and due for first oil next year.

By then, Yinson will have six operating FPSOs and one floating storage production (FSO) vessel. Two FPSOs have contracts expiring this year, although current oil prices point to the likelihood of the contracts being renewed.

Yinson’s FPSOs in operation currently serve Italian giant Eni SpA, Sinopec’s unit Addax Petroleum, Japanese refiner Eneos Group’s exploration unit JX Nippon Oil & Gas Exploration, Nigerian outfit First E&P, and PetroVietnam.
Major shareholder undertaking

Yinson already has RM1.95 billion cash in hand. So, with the rights issue, that will be sufficient to fund the company’s existing capex commitments, says Lim.

The FPSO operator last December proposed a rights issue to raise RM1.1 billion to partly fund its seventh FPSO Maria Quitéria (which has a capacity of 100,000 bpd) — its second project with Petrobras in Brazil’s Parque das Baleias (PDB) field. Building the FPSO will require a capex of US$1.2 billion.

The investing fraternity had been guided on the rights issue even before Yinson secured the letter of intent (LoI) for the PDB project. The 22-year charter is worth an estimated US$5.2 billion.

For the rights issue, Yinson is sweetening the deal by attaching free warrants. In addition, the rights issue will be preceded by a one-for-one bonus issue.

The company plans to use more than RM700 million of the proceeds to fund the equity portion of the PDB FPSO, up from an initial guidance of at least RM441 million. It will also allocate at least RM280.4 million to repay part of its RM8.8 billion debt.

From RM6 at end-December 2021, Yinson’s share price had declined 18.3% to RM4.90 last Friday, partly due to its removal from the Securities Commission Malaysia’s shariah-compliant list for exceeding the debt-to-total assets ratio requirement of 33%. At its closing price last Friday, the group had a market capitalisation of RM5.4 billion.

However, Lim expresses confidence that the rights issue will be a success, citing the undertaking by the Lim family. Yinson’s other substantial shareholders include the Employees Provident Fund with 15.03%, and Kumpulan Wang Persaraan (Diperbadankan) with 9.03%.

Lim reiterates that Yinson’s PDB project, which requires a capex of US$1.2 billion, will yield good returns in the next 22 years.

“PDB [project] fits the criteria. The future of the FPSO market also fits the criteria. We see a very narrow bidders’ list, earnings going up and clients having more skin in the game by making more upfront payments to fund projects,” he says.

The group has a strong earnings track record. In the last five years, Yinson’s net profit has seen a compound annual growth rate (CAGR) of 12.45%, rising to RM315 million from RM197 million between the financial year ended Jan 31, 2017 (FY2017) and FY2021. In the same period, revenue grew to RM4.85 billion, from RM540 million, for a CAGR of 73.11%.
Entering exotic Brazilian market

Market research firm Energy Maritime Associates forecasts that the FPSO segment will peak in 2023, with up to 18 contracts awarded, and between seven and 13 to be given out each year up to 2026.

In addition to PDB, Yinson in February bagged its eighth FPSO contract worth US$505 million from Brazilian O&G operator Enauta Energia SA. Together with Anna Nery, Yinson will have three FPSOs in Brazil.

However, it is worth noting that the booming offshore market in Brazil — where half of the new FPSO contracts are — has had its fair share of casualties in the past. They include Sapura Energy, FPSO player Bumi Armada Bhd and even several oil majors and service providers, which faced difficulty operating in its deepwater and pre-salt geological conditions.

However, Yinson is confident that the same recipe that has helped it manage its financial commitments will allow the group to flourish in Brazil, where oil breakeven cost for national oil firm Petrobras is estimated at US$29 per barrel.

“For those who lost money, it was usually because of project execution — on local content requirements [parts of the asset must be built locally], as too many projects were awarded and the local capacity was all used up,” says Flemming Grønnegaard, CEO of Yinson’s offshore production division.

“Knowing that a lot of people have lost money [in Brazil] makes us keep our eyes open. We stay within our comfort zone, executing the projects 100% according to our standard execution philosophy, with zero local content [for PDB and Anna Nery],” says Grønnegaard who was present at the interview virtually.

Yinson was the sole bidder for the PDB contract and still won the job even after walking away twice owing to unfavourable rates. This, says Lim, was due to the absence of capacity by competitors to take on new jobs.

“Now the whole [FPSO] supply chain is booked. There are now no bids with more than three active bidders. It doesn’t get any better … and we entered the market with no legacy issues,” says Grønnegaard.

For smaller counterparties, Yinson negotiated for clients to fund the capex requirement to build the vessels, as was the case with Enauta. This is the opposite of the situation in the 2000s, when there was plenty of competition, resulting in FPSO players settling for shorter-term contracts and taking up the residual risk of having to redeploy the vessels to recover the asset’s costs.

Things have indeed moved in favour of Yinson since its US$172 million purchase of Norwegian FPSO operator Fred Olsen Production ASA in 2013. The nine floating asset projects in hand are already bringing it much closer to its annual Ebitda target of US$500 million.

According to analysts, Yinson is also looking for potential bids in Ghana, where it already has an FPSO, as well as in Angola and Suriname, with potential contract awards this year and next.

With good management and good market timing, Yinson is reaping the benefits of a large addressable market internationally, having survived the previous decade’s downturn where others have stumbled. Being in the big boys’ game of serving the international upstream O&G majors can be as lucrative as it can be punishing.

With a two-year breather from concerns about the step-up coupon rate of its perpetuals for now, it will be interesting to see if it will be plain sailing for the group in Brazil and beyond.
‘Perps give flexibility to manage cash flow’

Yinson Holdings Bhd’s use of perpetual securities to fund the capital-intensive development stage of its floating production storage and offloading (FPSO) vessels may be seen as high risk by investors.

However, the financial instrument allows the group to dictate when to redeem the paper, thus providing the flexibility to allocate capital to other projects if needed, says chief strategy officer Daniel Bong.

In a nutshell, perpetual bonds (also known as perpetuals or perps) do not trigger a default when they are not redeemed by their call date. Instead, the coupon rate is increased. As such, these securities are recognised as equity and not debt on a company’s balance sheet, based on accounting rules.

Yinson has RM1.848 billion worth of perpetuals, namely a US$100 million issuance with a coupon rate of 7.85% due in October 2022, a US$120 million issuance with a coupon rate of 8.1% due in March 2024 and a RM950 million issuance of perpetual sukuk with a coupon rate of 6.8% due in 2033.

The perpetual bonds have a step-up coupon rate arrangement. There is a 500-basis-point (bp) increase in the coupon rate of the two US dollar-denominated perpetual bonds upon their first call date, while the ringgit-denominated sukuk has a scheduled 100bps rise.

Distributions made for the perpetuals, which amounted to RM139 million in the financial year ended Jan 31, 2021, does not appear in the group’s profit and loss statement due to the accounting treatment.

Bong says the group needs to raise money via debt paper or perpetuals when it wins big projects, mainly to fund the conversion of the vessel, as a large portion of the capital expenditure (capex) is front-loaded and there is no cash flow in the initial three years of the conversion.

“Even after completion, it takes a while for clients to stabilise their payment with us. So [the nature of perpetuals] gels very well, as they can be redeemed when the asset achieves stable operation and generates the cash flow that we can monetise,” he adds.

As the project gets closer to first oil, less expensive forms of borrowing with lower risks come into play, says Bong, such as a non-recourse loan for project financing, which is ring-fenced by cash flow from the project itself rather than guaranteed with Yinson’s other assets.

“We are very conservative that we usually hedge [our project financing] with interest rate swaps. To us, perpetual securities are an important element to beef up accounting equity, and the cash flow from these perpetuals are usually put into longer-term contracts that create many more multiples of returns,” he adds.

According to Bong, typically 90% of its perpetual issuance is subscribed by institutional investors, as opposed to the typical 75% for its straight bonds.

Yinson has an upcoming RM1.1 billion rights issue to fund 30% of the capex needed for its US$1.2 billion FPSO Maria Quitéria, with the remaining 70% to be funded by borrowings. As at Oct 30, 2021, the group’s balance sheet showed long-term liabilities of RM5.037 billion plus short-term debt of RM2.358 billion.

Apart from oil and gas, Yinson has also acquired stakes in two wind energy projects with a proposed capacity of 486mw, while in India it has renewable energy assets in operation and under construction totalling 460mw.

However, the company does not see itself raising more funds via perpetuals in the near future. “We think we have found the right balance between equity, debt and perpetuals,” says Bong.


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