Rational to suspend trading: Ezion has not triggered any event of default on any of its existing loans. The decision to halt trading last Friday (11th August) and to suspend trading subsequently on Monday (14th August) was based on the likelihood of share price swings following debt repayment negotiation with banks and bond holders. Therefore, management took such an action to protect shareholder’s interests.
A further drop in utilization rate and charter rate: As of Jun-17, total fleet size was 26, out of which 14 was under operation (previous 15 vessels by 4Q16). Recently, there were 2 vessels deployed in Saudi Arabia and China respectively, and another 1 vessel was on-site within China’s border waiting to be changed the flag. The group had some disputes with a supplier regarding payment terms on one vessel that still remains in the shipyard. Clients are persistently asking for lower charter rates. Current charter rates are not tenable for a sustainable operation, according to management. Ezion is expected to have 5 to 6 more vessels in service by early 2018.
Concerns over a liquidity crunch
At the moment, the group is confronting a liquidity crunch with loans from banks and bond holders due the next couple of months, and capex for upgrading and modification. With confidence so low, as Ezion was settling its bond payments, banks raised the concern that they are de facto subsidising bond holders. Worth noting that Ezion generated US$24mn operating cash flows in 1H17. However, all this cash was channelled towards its capital expenditure of US$23mn. Ezion has a capex budget of US$100mn in FY17.
We estimate the total amount of debt on due in next 18 months to be around US$419mn. This compares with cash on hand as of 1H17 of only US$93mn. There is a funding gap of c.US$374mn, if we include planned capex (Figure 1).
Management mentioned that there would be a round table discussion with all related banks. The preliminary assessment is that the ongoing support from banks must be unanimous. At this juncture, some banks’ loans are backed by well-performing assets while others’ are not, so the group will face challenges dealing with such discrepancies.
Trading has been suspended without any timeframe for resumption. Our previous recommendation is no longer applicable.