COLUMN | Singapore spin hits Cayman secrecy? Temasek, Keppel, Baluran and Kyanite’s US$2.9 billion drilling rig deal is very hard to follow [Offshore Accounts]

Photo: Keppel O&M
Photo: Keppel O&M

It's the biggest offshore rig deal of 2022, and it is the most confusing by far. The complexities of the deal scream out why more transparency is needed in corporate disclosure in Singapore, and in the Caribbean tax havens, which we discussed here.

Neither investors nor I should have to dig through footnotes, corporate filings, and databases in obscure jurisdictions to try to understand who now owns the ten jackup rigs and six floaters that Singapore-based Keppel Corporation's offshore fabrication subsidiary Keppel O&M has spun off into a new entity, imaginatively called the "Asset Co".

This deal has a value of close to US$3 billion (with a "b"), but is shrouded in mystery – or rather, it is disclosed by Keppel in a manner that leaves many obvious and important questions unanswered, including who are the ultimate investors in the fund that controls the company that will acquire the rigs, and regarding the terms of the IOUs Keppel has received from Asset Co.

Since Keppel, a publicly listed company ultimately controlled by the Singapore sovereign wealth fund, is effectively handing Asset Co's billions of dollars of rigs, some disclosure over the terms of the IOUs it is receiving in return, like the tenure and the interest rates applicable, might be considered polite.

But not in Singapore, apparently.

What is going on with Keppel and Asset Co? 

Keppel says these sixteen legacy rigs and the associated receivables (the money the companies that originally ordered the rigs owe to Keppel) will be sold to Asset Co this year. The Keppel press release from April 27 is here, and it states that the rig deal with Asset Co should be concluded by the end of 2022.

In return for selling the rigs to Asset Co, Keppel says it will receive a combination of shares in Asset Co, vendor notes, and perpetual securities worth SG$4.05 billion (US$2.9 billion).

Where's the cash? Oh… magic bean!

Note that no actual cash appears to be changing hands – rather like the boy Jack in the fairy tale Jack and the Beanstalk, Keppel appears to have handed its rigs over in exchange for a handful of magic beans – or, in this case, various financial instruments and IOUs.

Keppel will receive ten per cent ownership of Asset Co, and it seems Keppel will receive from Asset Co the IOUs for the exact value of the rigs as they are valued in Keppel's books today.

Note that nowhere does Keppel state that there will be any impairment on its book value for the rigs, or any discounts on the money owed by the owners of the rigs who defaulted and left the assets sitting alongside Keppel's yards, their bills unpaid.

So, Asset Co will strive to keep Keppel "whole" in financial parlance – Keppel will not lose money on the deal from an accounting point of view in its 2022 accounts. Instead, the rigs and the debts associated with them will be transferred to Asset Co, and Keppel will receive financial instruments worth exactly the same amount from Asset Co.

How convenient.

How much is Asset Co worth?

Nor does Keppel tell us how much its ten per cent stake in Asset Co might be worth. From the press release, Keppel appears to value its equity in Asset Co at exactly zero. Look carefully at the wording:

"Keppel has concurrently signed a definitive agreement with Baluran, an indirect wholly-owned subsidiary of ASM Connaught House Fund V, and Kyanite Investment Holdings, an indirect wholly-owned subsidiary of Temasek, for the sale of Keppel O&M's legacy completed and uncompleted rigs and the receivables associated with certain legacy rigs to a separate Asset Co.

"Baluran and Kyanite (the external investors) will respectively own 74.9 per cent and 15.1 per cent of Asset Co. Keppel will hold a 10 per cent equity interest in Asset Co and receive vendor notes and perpetual securities. The combined value of approximately SG$3.93 billion (US$2.82 billion) in vendor notes, approximately SG$0.12 billion (US$86 million) in perpetual securities and the 10 per cent equity interest in Asset Co is approximately SG$4.05 billion (US$2.9 billion)"

The SG$3.93 billion of vendor notes plus SG$0.12 billion of perpetual securities (which are bonds where the principle never needs to be repaid, very handy for removing refinancing risk) equals exactly SG$4.05 billion. This means that Keppel seems to assign a value of exactly zero for its ten per cent stake in Asset Co.


Background: Keppel O&M merger with SembMarine

The rig deal with Asset Co comes at the same time as Keppel will merge its fabrication yard business with Singapore compatriot Sembcorp Marine (SembMarine) and its loss-making fabrication yards. Keppel and Keppel's shareholders will own 56 per cent of the merged entity, and SembMarine shareholders 44 per cent. Parent Keppel Corporation will also receive SG$500 million (US$359 million) cash from Keppel's offshore division ahead of the deal.

Note that both Keppel and SembMarine are controlled by Temasek, Singapore's notoriously secretive sovereign wealth fund. Temasek, as a controlling shareholder of both companies, will abstain from voting on the merger proposal.

As Keppel and SembMarine floundered in the oil industry recession between 2015 and 2021, merging the yards to reduce competition in the face of pressure from Korean and Chinese competitors has only increased. In 2021, SembMarine reported a net loss US$842 million, whilst Keppel's offshore division lost US$55 million last year. Its results are now buried reported in a combined "Energy and Environment" segment in the Keppel Corporation annual report.

Unfortunately, Keppel faced the choice of either taking a large "mark to market" write-down on the value of its rigs and the associated receivables, or of selling the rigs before the deal with SembMarine closed. A huge write-down would inflict pain on the balance sheet of Keppel. So, a buyer was needed.

Given that the decision to exit rig building was taken amid much hullaballoo in January 2021, the fact that this deal has taken fifteen months to conclude tells us that there wasn't exactly a stampede of buyers at Keppel's doors for the rigs. Well, not at the US$3 billion price tag, anyway.

The entry of Asset Co to take the rigs off Keppel's hands is thus most timely.

A separate agreement will see the newly-merged company between Keppel O&M and Sembcorp Marine provide construction, berthing, and maintenance to Asset Co for the legacy rigs for an initial period of ten years, Keppel reported.

Keppel will be charging Asset Co for its quay space and services for the sixteen rigs. Or maybe Asset Co will just write more IOUs to be repaid at some point in the indeterminate future.

What is Asset Co buying?

The rigs are a mixed bag, as we covered in January 2021, when we highlighted that Keppel's supposed exit from rig building and rig owning would be long and arduous (here).

The Asset Co fleet is a litany of bad decisions for which nobody in Keppel has been held to account.

What is the Asset Co getting for its US$2.9 billion of value in sixteen rigs?

The five Borr Drilling rigs

There are five jackups that "troubled" and highly-indebted Borr Drilling has promised to buy in 2023. We covered the endless delays in payment, the endless delays in delivery for the rigs, and the endless concessions Keppel has made to Borr to kick the can down the road on these units here.

When Borr announced it was buying the five additional new rigs from Keppel FELS in May 2018, the published price tag was US$745 million, or US$149 million per rig. By 2021, Borr stated that it had US$892 million of liabilities to Keppel. These liabilities will now be transferred to the Asset Co.

The drilling market is improving, so maybe Borr can fulfil its contractual obligations.

The two ex-Awilco rigs

Two of the six floaters are the harsh-environment semi-subs that Norwegian rig-owner Awilco Drilling ordered for US$425 million apiece in 2018 and 2019. But Awilco and Keppel have now gone to arbitration over the cancellation of the contracts (See our coverage here.).

The cancellations left Awilco owning just two old semi-sub rigs, WilPhoenix and WilHunter, both built to the Enhanced Pacesetter design in the early 1980s. For 2021, Awilco lost US$52 million, announced it was liquidating its UK subsidiary after a tax dispute, and would be seeking a shareholder loan to funds its litigation with Keppel.

Awilco has already announced that the 1983-built WilHunter, which has been cold-stacked in Invergordon, Scotland, for six years, would be sold for scrap – sorry, recycling – a process that the company expected would be completed before the end of June.

Then, in the first week of this month, Awilco announced it has sold its final North Sea semi-sub, the forty-year-old veteran WilPhoenix, to the plug and abandonment specialist Well-Safe Solutions. Awilco said that Well-Safe will pay it US$15.5 million for the rig, and will take delivery of the unit on or around June 1. Even if Keppel wins the arbitration, it is not clear what Awilco could pay in damages or costs.

Last year, Keppel and private equity-owned Dolphin Drilling reached an agreement whereby Dolphin would market the units for Keppel, and presumably now for Asset Co. This semi-sub duo might well be chartered by Dolphin in the North Sea, but the decision by Equinor not to extend the charter of the Transocean-owned harsh-environment semi-sub Transocean Equinox in the Norwegian sector and to redeliver the rig early has cast some doubt over this market segment.

Additionally, Transocean has the sister rig Transocean Spitsbergen coming off charter next January (See excellent Seeking Alpha analysis here.).

The two ADES bareboat jackups, going to Saudi Arabia

In April, we remarked on how Egyptian driller ADES had spent half a billion US dollars on a rig-buying spree (here), purchasing units from Maersk Drilling, Vantage and the creditors of Oro Negro of Mexico.

Then, at the end of last month, ADES announced it was buying two more jackups, the PPL Pacific Class 400 design Valaris 113 and Valaris 114 from, er, Valaris for US$125 million in total. The rigs were delivered in 2012 from SembMarine, and have been cold-stacked in the Philippines for six years now. Not surprisingly Valaris' chief executive Anton Dibowitz commented that the sale was, "highly accretive to our shareholders."

But that wasn't enough for the Public Investment Fund of Saudi Arabia, which controls ADES. On the back of record US$39.5 billion (with a "b") first quarter profits from the state oil company Saudi Aramco, which is providing cash for a splurge in offshore activity in the kingdom, ADES also announced that it would be bareboating two of Keppel's laid-up and abandoned jackup rigs. Keppel stated that the deal with ADES had a total contract price of US$97 million over five years, including contract preparation costs.

The two rigs will be chartered for five years by ADES, and Asset Co will receive the revenue from the transaction. This will bring around US$23,000 per day per rig for the company, which can be used to pay off the "vendor notes" held by Keppel.

The last jackups

The remaining jackups seem likely to be the legacies of Keppel's ill-fated decisions to accept orders from uncreditworthy owners, including Grupo R in Mexico, financial speculator Clearwater, Fecon of Russia, and TS Marine in China.

Due to Keppel's failure to provide accurate and transparent information on the exact composition of its legacy rig fleet to investors, it is not clear what jackup assets it will be transferring to the Asset Co. If you Google "legacy rigs" into the Keppel annual report for 2021, you get fifteen references to the term, but no firm numbers and names.

In April, Keppel did disclose that it had cancelled the contracts on one rig that was built for Clearwater and three that were built for Fecon, due to the former owners being in default on their payments for many years. These are part of the ten that go across to Asset Co.

The rest of the floaters, Can Do and all

Aside from the Awilco pair, one of the floaters Asset Co is buying is Can Do, the drillship Keppel ordered speculatively from itself to showcase its deepwater technology.

It has not been able to find a buyer for the unit, but as Saipem and Stena Drilling bareboat abandoned drillships from Korean yards, and as the Turkish state oil company TPAO adds a fourth unit to its fleet, optimism in the deepwater sector is rising.

However, it is unlikely that Keppel or the Asset Co will be able to sell the unit for its book value when Norway's Deep Value Driller has the former Bolette Dolphin, an abandoned seventh generation drillship of the GustoMSC 10000 design actively being touted for sale a price likely north of US$100 million.

Sete confusion

The other floaters are the legacies of Keppel's painful and expensive entanglement with crooked and now bankrupt Brazilian drilling contractor Sete, a torrid tale which we described here.

In October, Upstream reported here that a Keppel subsidiary would have full title and ownership to four of the Sete rigs, and shared ownership, for now, of the other two semi-subs, Urca and Frade.

It's not clear to me how four fully-owned rigs and two half-owned rigs mentioned in the settlement with Sete and its creditors in October became just three semi-subs in the deal with Asset Co today, but given the woefully inadequate disclosure permitted by the Singapore Stock Exchange, we can only guess.

Who is behind Baluran?

The biggest and the best example of the inadequate disclosure permitted under Singapore rules regards the ultimate investors in the fund that has 74.9 per cent ownership of Asset Co.

Filings point to a Cayman Islands-registered fund named after a volcano in Indonesia. The Cayman Islands is another self-governing British territory home of billions of dollars of assets but shrouded in secrecy, like the British Virgin Islands and the Turks and Caicos Islands.

We know from the Keppel release that it will own ten per cent of Asset Co, and that Temasek Holdings' subsidiary, Kyanite 15.1 per cent (a curiously specific number).

Previous announcements made by Keppel made it clear that Temasek and Kyanite would be responsible for "procuring" the third-party investor. They found Baluran.

Who is Baluran, this company willing to take on 74.9 per cent ownership of a brand-new company with liabilities of nearly US$3 billion? We don't know. Keppel's disclosure explains in a footnote that Baluran is a wholly-owned subsidiary of ASM Connaught House Fund V, and that, "ASM Connaught House Fund V, is managed by Argyle Street Management, and has TIH Investment Management, a wholly-owned subsidiary of SGX-Mainboard-listed TIH, as its investment advisor."

ASM Connaught House Fund V is seemingly registered in the Cayman Islands, so very little disclosure exists, other than an address in Georgetown, as to whom the investors in the fund now owning majority control of the rigs actually are.

Once again, we have suspicions ideas, but Cayman Islands secrecy means we have hit a brick wall.

What do we know?

On December 31, last year, TIH confirmed that it agreed to invest around US$6.5 million in ASM Connaught House Fund V, according to a Singapore stock exchange filing (here).

This filing confirmed that Argyle Street Management is a deemed controlling shareholder of TIH. TIH's annual report (here) shows that it made a profit of just under US$8 million for the full year 2021.

The founder of Argyle Street Management, Kin Chen, is a non-executive director of CITIC, the Chinese state-controlled investment fund, which is partially listed in Hong Kong. CITIC filings in Hong Kong indicated that Kin Chen owned just over fifty per cent of  Argyll Street Management Holdings, the ultimate parent company, in the past. Kin Chen is also Chairman of TIH, its Singapore affiliate.

The filings from TIH state that ASM Connaught House Fund V invests mainly in "illiquid special situations investments in Asia with a focus on high yielding structured lending offering downside protection."

Fund management sites report that Argyll Street Management had less than US$2 billion in assets under management in its entire portfolio in the final quarter of last year.

What we don't know

Investments don't get more illiquid than sixteen abandoned drilling rigs in Singapore and Brazil. By investing no cash whatsoever, it seems, Kin Chen and his ASM Connaught House Fund V have acquired control of sixteen rigs with a face value of nearly US$3 billion with little downside risk to them.

Will Asset Co be able to pay back the vendor notes and the perpetuals against which the rigs were purchased from Keppel, let alone pay dividends to ASM Connaught House Fund V and Kyanite? Did Keppel give away its rigs for a handful of beans? Is there any further equity or leverage associated with the deal?

We don't know, nor do we know the size of any fee Kyanite received from Keppel for the procurement of ASM Connaught House Fund V as a majority investor in Asset Co, nor do we know the fees TIH received for placing 74.9 per cent of Asset Co with the ASM fund.

This could be the deal of the decade for Kin Chen and Baluran if the Asset Co is able to flog the Keppel rigs for more than it acquired them. Otherwise, it may well prove yet another failed stratagem by Keppel to get its legacy rigs off its balance sheet.

Jack's handful of beans ultimately saw him claim a pot of gold at the top of the beanstalk. Keppel has a long way to go until its vendor notes and perpetuals are turned into cash. But I suspect the deal has already generated some lovely fees for some of the parties concerned.

Who knows?

Viking Supply Ships update

In February we reported (here) that Viking Supply Ships would likely have to cancel its contracts for four of its large anchor handlers to work in Russia. The company has now confirmed that the contracts are cancelled, via a press release last Friday (here).

It is not clear what action Sevnor and PXGEO will take on their Russian exposure, however.

Background Reading

The full Keppel Corp. 2021 annual report can be downloaded in its full 236-page PDF splendour here.

Temasek Holdings gives a once a year presentation on its results after it closes its books on its reporting year at the end of March. The 2021 report was presented in July last year here. It is very high level on the US$283 billion of assets held by the company on March 31, 2021, to be polite.

Awilco's investor presentation for the full year 2021 can be viewed here.

The IADC's Drilling Contractor magazine in 2019 had a completion status report on the six rigs that Sete was building at Keppel's yards in Brazil here, stating that Bracuhy and Portogalo are about 40 per cent and 21 per cent completed respectively, while those for Mangaratiba and Botinas were below ten per cent.

Wall Street Journal profile of Kin Chen is here.

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