The recent filing for liquidation by Swiber Holdings, an oil and gas business listed on the Singapore Stock Exchange, sent jitters through the stock and credit markets. Banks and bondholders are staring at potentially huge losses as they are unlikey to recover their unsecured loans.
What caught many market watchers by surprise was that there appeared to be no obvious signs of distress prior to the surprise announcement. In fact its bankers lent the group more than US$140M just weeks ago.
What caused the company to go under and were there any warning signs that could forewarn investors of such a potential threat?
Firstly, based on the group’s latest audited balance sheet as at 31 December 2015, total equity was US$575M whereas total liabilities were US$1,429M. The means that the leverage ratio was (1429/575) or 2.49. In other words, for every dollar that shareholders contributed to fund the business, it borrowed another two dollars and forty-nine cents. Hence the group was highly geared. A highly geared company would be vunerable if business performance turned out to be poor or unpredictable as the massive amount of loans need to be serviced promptly and regularly. It turned out to be the case as the oil and gas down cylce brought profit attributable to owners of the company from US$16.4M in 2014 to a loss of (US$27.4M) in 2015, with no sign of abating in 2016.
Secondly, the group generated just US$95M net cash from operating activities in 2015, out of revenue of US$833M. To arrive at that net cash generated, the group had paid off US$49M in interest expense alone. The end result was that the group had only cash balance of just US$93M at the end of 2015, which was not pledged with banks. On the other hand, it had short term bank borrowings of US$232M and short term notes payables of US$214M, which it had to repay in the next 12 months, not to mention trade payables of US$247M, amongst other current liabilities. All these point to one thing-the group needed external financing urgently to pay its short term creditors. Unfortunately, the planned preference shares placement to a private equity fund of US$200M fell through, exacerbating the liquidity crisis.
Thirdly, the current ratio, calculated using current assets to divide by current liabilities, fell from 1.59 to 1.14 from 2014 to 2015. Of particular concern, the quick ratio fell below one to 0.89 in 2015, from 1.30 in 2014. Both of these adverse developments in trends showed a deteriorating liquidity position, which means the group risked running out of cash to pay its short term creditors based on its 31 December 2015 audited financial statements.
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