Bumi Armada’s net gearing remains a major concern

The debt refinancing should help mitigate immediate default risks for the company over the longer term


Bumi Armada Bhd will continue to be dogged by high net gearing despite securing US$660 million (RM2.73 billion) to refinance its debt, according to Kenanga Investment Bank Bhd.

Its research analyst Steven Chan said the debt facility does not mitigate the company’s high borrowings which amounted to RM10.4 billion at the end of 2018, implying a 2.7 times net gearing ratio.

“Overall, although (the debt refinancing) should help mitigate immediate default risks over the longer term, its alarmingly high net gearing still remains a key concern,” he said in a research report yesterday.

In an exchange filing earlier this week, the offshore oil and gas service provider said it refinanced its US$380 million in unsecured term loans and US$280 million in revolving credit facilities into a single facility.

This consists of US$260 million and US$400 million in tranches which are repayable over two and five years respectively from the closing date of the facility agreement.

Chan said the refinanced tenure may be shorter than what the management had hoped for, while interest costs could also rise significantly following the refinancing.

Bumi Armada maintained its ‘Underperform’ rating with a 25 sen target price (TP) on a raised price-to-book (P/B) value ratio of 0.4 times on the removed near-term default risks, Chan said.

“We are still wary over its long-term prospects, although we expect (the debt refinancing) to serve as a temporary sentiment rerating,” he said.

“That said, the debt refinancing is, nonetheless, undeniably a positive, allowing the company to circumvent its borrowings default risk in the immediate term,” Chan said.

Chan said risks to the rating are higher than expected margins, and there’s a sudden surge in utilisation of the company’s offshore support vessels (OSV).

Investors were generally positive on the news of the debt refinancing, sending Bumi Armada’s shares up seven sen or 35% to close at 27 sen on Wednesday for a RM410.9 million gain in market value. It since closed 2.5 sen lower at 24.5 sen yesterday on profit-taking.

On a net basis, the Employees Provident Fund acquired a total of 760,000 new shares in Bumi Armada in April and holds an approximately 7.11% interest in the company today.

Its CEO Leon Harland said the refinancing of the group’s short-term corporate debt alleviates one of its major exposures, while the new facility better aligns the company’s debt with cashflow from its main business of floating production and operations.

Chan said the company will have to focus efforts on diligent cashflow management as well as on operations to meet upcoming debt obligations.

For the fiscal year ended Dec 31 last year, Bumi Armada raked up RM2.3 billion in net losses on impairments from its Armada Kraken Floating Production Storage and Offloading asset and select OSV vessels.

Excluding these impairments and their allowances, the company would have reported a RM216.5 million net profit.