COLUMN | Hunger Pangs: Pacific Radiance and ENAV; Ezion update [Offshore Accounts]

Two heavily indebted, Singapore-based companies, Pacific Radiance and Ezion Holdings, both announced progress with their restructurings last month, and both have committed to what they declare is an “asset-light” strategy of pure ship management.

One of the players sees its founding family take back control and get a stake in the company that is buying its vessels. The other has struck a deal with a newly-established Taiwanese company, which raises as many questions as it answers…

Pacific Radiance sells up

After three years of trying to find a way to restructure its US$397 million in bank debt and US$76 million in unpaid notes, with US$69 million in accrued interest and US$441 million in accumulated losses at the end of last year, Singapore-based OSV owner Pacific Radiance finally announced a breakthrough deal here on June 30.

One caveat is the deal is “non-binding,” which, of course, means it could still fail along the way, like others in the past (here). But Pacific Radiance is at pains to stress that the new deal has the support of its major lenders, and there are no alternatives.

Several shipbrokers reporting on the deal in their monthly reports breathlessly described it as transformative for the offshore industry. We disagree.

Who’s the winner?

The buyer of Pacific Radiance’s fleet of over thirty OSVs, tugs and barges, and two dive support vessels is not Allianz Marine of the UAE, nor is it an investment house named after an oak tree. Instead, ENAV Offshore of Mexico and Houston has finally revealed itself as the white knight that will at last rescue Pacific Radiance from insolvency.

Note that the capitalisation and hyphenation of ENAV’s name seems to change over time, so we will use the version used in Pacific Radiance’s press release.

ENAV’s nice pair

Headed by Emas Offshore’s former COO, Mike Wallace, also formerly of Trico, Hornbeck and Seabed Geosolutions, ENAV acquired its first offshore vessel in December 2019. Delivery ceremony photos are here. There were rumours in the market in 2019 that Mike Wallace was representing a fabulously rich investment fund with hundreds of millions to spend on modern offshore assets. So far this thesis remains unproven.

ENAV now owns a fleet that it claims is “the most modern fleet in the world.” Unfortunately, this appears to be a fleet of just two vessels: the MMC887 design, made in China, newbuild resale, DP2 PSVs Enav Saguaro and Enav Peregrina. These are on charter in the Mexico and Trinidad, respectively. The depth of the pockets of ENAV’s backers has not yet been tested.

Friends forever (well, since 2019)

The co-operation with Pacific Radiance goes back to 2019, as well. In November of that year ENAV and Pacific Radiance formed a technical management agreement, whereby Pacific Radiance would “initially operate” the first deliveries of the new ENAV Offshore fleet under the Pacific Radiance Document of Compliance.

The new deal continues this relationship, with ENAV buying the entire Pacific Radiance fleet for an unnamed price, with Pacific Radiance continuing to act as ship manager.

But as with any deal involving Pacific Radiance, there are complications.

The complications

Initially, it looked as if ENAV would buy the loans on the vessels from Pacific Radiance’s banks. Now ENAV buys the vessels with the loans still secured on them, and then ENAV settles the debt with the banks. Since ENAV is not a public company, we don’t know at what prices the mortgages will be discharged. The banks and Pacific Radiance are curiously silent on this point.

In 2019 when the aborted Allianz deal was announced, Pacific Radiance’s banks had been willing to write down the company’s debt by 60 per cent. We guess that the discount today, post-Covid, will be higher. Perhaps the banks will even get equity in the ENAV-controlled company that buys the ships. From the data in the public domain, we don’t know.

Pang family comes out stronger

What’s strange, though, is that the deal both cements the Pang family’s control of Pacific Radiance, and gives them a shareholding in ENAV and a board seat there, paid for by a loan from ENAV. Talk about having your cake and eating it.

One of the clauses of the deal is that the Pangs must retain control of Pacific Radiance for the ship management agreement with ENAV to be valid. Note that Pacific Radiance key management is defined as just Pacific Radiance Chairman Pang Yoke Min and his two sons. The agreement states that the “key management will be issued shares and warrants in the share capital of the company, so as to maintain their control of the company.”

There’s no mention of the Pang family paying anything for the warrants. So, control of the company will return to the founding dynasty for free or a token amount (it seems), and the remaining creditors will be paid off via a court-mandated scheme of arrangement. The shareholders are expected to approve this return of control of the Pangs at an extraordinary general meeting.

Indeed, it would be extraordinary to gift control of a public listed company to its management during a restructuring. “Details… will be announced in due course,” the stock exchange announcement concludes.

Commitment fees go out and back

Pacific Radiance has agreed to pay a commitment fee to ENAV for going ahead and completing the sale of the vessels. Then, if Pacific Radiance is successful at restructuring its existing liabilities via the proposed schemes of arrangement at its own cost, a portion of the commitment fee shall be refunded to Pacific Radiance.

Of course, in between the commitment fee cash leaving Pacific Radiance and the money returning to the company, the Pang family would be given warrants to take control of Pacific Radiance, so they would benefit from the refund disproportionately.

Pangs get seat on the new board

Additionally, the Pangs get 15 per cent of ENAV, and a board seat. Not the shareholders in Pacific Radiance, just the key management. And again, they pay out none of their own cash for this shareholding, as ENAV gives them a loan to buy the shares in the company.

This strikes me as rather unorthodox:

“ENAV will make available to the [Pang family members of Pacific Radiance’s key management] a loan to fund up to 100 per cent of [their] portion of [their] initial commitment to co-invest in the [company that will own the vessels]. The tenor of the loan is three (3) years, with interest chargeable on the loan. The [Pang family members] will pledge their shares in the new company to ENAV as security for the loan.”

If you thought that was generous to the Pang trio, there’s more.

“In addition, the PRL Key Management shall be entitled to receive investment returns (in the form of distributions) beyond their pro rata equity investment if certain performance indicators are met. Such investment returns will however not exceed 30 per cent of distributions made by the [new vessel owning subsidiary of ENAV] from time to time.”

This is a great deal for the Pangs, clearly, even if it is capped at “only” 30 per cent of the pay-out from the new company that will buy Pacific Radiance’s vessels, and even if they have to pledge their shares as security for the loan with which the shares will be purchased.

Game of chicken

The Pang family is playing chicken with the lenders and shareholders, as the press release makes clear. The offshore market sucks, they say, accept the deal, or get nothing:

“The board believes that it has exhausted all options… Without the debt restructuring plan, [Pacific Radiance] is likely to face liquidation and prospects for recovery for unsecured creditors and shareholders will be practically nil,” shareholders were warned.

A case of all and nothing. All the upsides to the Pangs, a stake in the new company for them funded by ENAV, and a board seat, whilst the existing shareholders see dilution at best.

Let’s see if the family can get this across the line after three years of trying and three years of the company’s stock being suspended on the Singapore Stock Exchange. I’d say they were incentivised to succeed.

Ezion follows the same “asset-light” model

One company with an even worse balance sheet than Pacific Radiance is its Singapore-based compatriot, Ezion Holdings, which had accumulated losses of US$2.3 billion by the end of 2020, and owed US$1.5 billion in debt and securities that were in default (here).

At the end of June, Ezion announced an update on its restricting plan, stating that it was now focused on “project and vessel management services while disposing of the fleet of assets in an orderly manner.”

Fleet disposal continues apace

Since the announcement of the restructuring plan in October 2020, Ezion announced that it has divested 31 of its liftboats, rigs, and barges. In June it announced the sale of the five self-ballastable barges Teras 3701, Teras 3702, Teras 3703, Teras 3705, and Teras 3717 to Hoe Ee Trading for a cash consideration of US$1.78 million each, totalling US$8.9 million, and the sale of the jackup rig Prime Exerter.

Ho Eee Trading was founded in 1983 but has no website. Additionally, Selective Marine Services bought Prime Exerter for US$750,001. Selective also doesn’t have a website.

Ezion’s lenders OCBC and Maybank took the proceeds of the sales. The remaining fleet held by Ezion is now just eight liftboats, two rigs, and one other vessel.

Strange contract

In June, Ezion was able to announce that it has good news on its transformation to an asset-light company. In this announcement, it declared that six months previously in December 2020, the company “was awarded a wind turbine and installation contract amounting to approximately US$83.4 million and expected to commence in September 2024 over one year.”

What is going on?

Reasons to wonder

This contract seems rather odd for a number of reasons.

Firstly, this big contract was awarded in December but not disclosed to the market and shareholders until June. Why?

Ezion has only US$67 million of plant and equipment on its books, so such a large contract might be deemed material.

Secondly, no details of the customer or the country of location are given, nor the equipment that will perform the work.

Thirdly, if the company is winding down its assets, with what equipment will it perform the work?

Indeed, how can Ezion be sure that it will even exist in 2024, given the fact that it is technically insolvent? In these circumstances, what kind of customer awards a contract four years hence to a company that has assets of only US$305 million, but liabilities of US$1.67 billion as of December 31, 2020?

So many reasons to wonder.

Taiwanese gold rush

Every company in South East Asia is in a frenzy over the prospects of the wind market in Taiwan. Swire Pacific Offshore has just reflagged some of its large PSVs to the Taiwanese flag. POSH has set up the POSH Kerry Renewables joint venture and has reflagged the 3,728kW anchor handling tug POSH Pahlawan to the Taiwanese registry. Fred Olsen Windcarrier (here) and Floatel International (here) have won big contracts there. MMA Offshore announced a triple vessel contract award in March (here) and an agreement with Worley to work together in the market.

Even Pacific Radiance highlighted “diversifying to [the] offshore wind farm space” as a strategic opportunity after it sells its fleet. Hung Hua Construction bought the subsea vessel Pacific Constructor as the first Taiwan-owned service operations vessel for the windfarm sector (here).

It’s a gold rush off Taiwan, and Ezion has now joined the stampeding herd, it claims.

Ezion’s mysterious client in Taiwan

In addition to the 2024 success with the wind farm installation vessel contract, Ezion’s restructuring press release announced an exciting second contract win:

“In March 2021, the group entered into a cooperation agreement with 特瑞 斯海事技術服務（股）公司 (“TRS”) to manage the works pertaining to the procurement, transportation and installation of the subsea foundations, subsea cables and offshore substations for the Taipower II Project for a fee of up to US$20 million and is expected to commence in July 2021 to 31 December 2025.”

We did some quick research on this mysterious TRS (here). It’s a very new company, registered in Taiwan only last October 2020. It has obviously done very well to win such a large contract with Taipower in such a short time.

TRS has the very familiar full-form name in English: Teras Marine Technology Service. And it also has a very familiar logo.

Wait. Didn’t Ezion itself have subsidiaries with the “Teras” name and that logo?

Why yes! The 2019 annual report (here) shows around thirty Ezion subsidiaries with Teras in their names. Indeed, the Taiwanese company states that in September 2020, it began “co-operation with Singapore Teras Offshore.”

Our questions

So, what is going on here? Who owns and manages Teras Marine Technology Service in Taiwan? Is this company in any way connected to the current or former directors and senior management of Ezion Holdings, or to Ezion itself?

If it is not connected, then why is it using the Teras name? And if it is connected, why isn’t the full disclosure given of a related party transaction in the Ezion restructuring update?

Duty to disclose remains

Whilst its shares are suspended, Ezion Holdings remains a public listed company, subject to Singapore Stock Exchange (SGX) rules. The stock exchange rules are clear (here):

“Under the existing listing rules, companies listed on the SGX are required to disclose all material information in respect thereof to their shareholders and the market in a timely manner. Regular updates are necessary for a more transparent market whereby investors are well informed of the listed company’s progress, or the lack thereof, in resolving the issues with a view to resume trading. Timely disclosure of material information is especially essential for shareholders of listed companies which have been suspended for a period of over twelve (12) months.”

One might have hoped Ezion’s results quarterly results announcements might throw some light on the situation. Unfortunately, on June 22, Ezion filed a request with the SGX to delay filing of both its first and second quarter results, and to delay its annual general meetings (here). The reason cited?

“The company requires further time to conclude its discussions with TRS, which in turn will affect its discussions with its lenders in relation to its ongoing support of the group.”

Is this TRS an associated company?

In May, one renewables website (here) ran a story stating that “Taiwan-based Teras Marine Services has teamed up with engineering consultancy K2 Management for designing offshore transformer stations and undersea cables as well as providing management services for an offshore wind farm being developed by state-run Taiwan Power Company (Taipower).

“Teras Marine is a joint venture established in October 2020 by Taiwan-based industrial PC maker iBASE Gaming and Singapore-based Teras Offshore, with iBASE holding a 52.8 per cent stake and company chairman Ben Liao assuming the chairmanship.” (our bold highlight)

If this press report is correct, and the names in English are not exactly the same, although the details with the Taipower contract appear similar, this suggests that the company that awarded the five-year contract to Ezion might be an associated company under SGX rules (here).

Disclosure matters

Pacific Radiance has been open and transparent in its reporting. The complicated transactions with ENAV and the Pang family management of Pacific Radiance are openly recorded for all to see.

Ezion’s disclosure in June on its new contract wins in Taiwan leave many questions open. We hope that more information will be forthcoming to throw more light onto the two contracts it says are worth more than US$100 million in revenue.

“Asset-light” shouldn’t mean “disclosure light.”

Background Reading

ENAV’s website is here.

Pacific Radiance’s 2020 annual report is here. It is titled “Staying resilient and resolute.”

MAC Offshore of the UAE has more details on the MMC 887 design PSVs it built in China here.

For Ezion’s previous ship management adventures, see our coverage of the sinking of the lift-boat Teras Lyza here.

The Teras Offshore website is here.