Wednesday, 17 July 2024
Moody's report: Swiber default warns of potential underprovisioning, a credit negative
On 2 August, 2016, Swiber Holdings Ltd. (Swiber, unrated), a large Singapore offshore oil services company, defaulted on its coupon payment after announcing days earlier that it had filed to be placed under judicial management. Also, on 29 July 2016, DBS Bank Ltd (DBS, Aa1/Aa1 negative, aa3) revealed that it would increase provisioning for loan losses to half of its SGD700 million exposure to Swiber.
These developments are credit negative as the 50% provisioning level in this case far exceeds the three Singapore banks' current loss experience of around 20% on their oil and gas loans. This situation indicates that the current provisioning they make on their oil and gas exposures could prove inadequate, and that the current low credit costs on their oil and gas exposures will rise faster than we had anticipated. The three large Singapore banks are the main sources of financing for offshore services companies in Singapore.
The substantial upward revision to DBS' provisioning for its Swiber exposure is an indication that the current deterioration in the oil and gas industries could have a far stronger bottomline impact on the banks than previously expected or that suggested by reported asset metrics so far.
Our analysis of Swiber's listed peers suggests that Swiber is representative of the weak financial state currently prevalent in the broad oil and gas industry. Under these circumstances, we cannot rule out the risk of a broader default of a loss severity akin to Swiber.
We highlight this risk with a stress test calibrated to this latest incident. Under a severe stress scenario in which we assume a loss given default (LGD) of 50%, as implied by DBS' latest provisioning on its Swiber exposure, and a probability of default (PD) of 50% on the banks' oil and gas exposures, we conclude that the additional loan loss provision required could amount to 42%-58% of the banks’ 2H 2016 pre-provision income (PPI). This is much higher than 10%-19% under a moderate case of 33% PD and LGD.
Among the three Singapore banks, DBS, which has the highest exposure to the oil and gas services sector, would be the worst hit under our severe stress scenario, with close to 60% of its 2H 2016 pre-provision income eroded by loan loss provisions and a full point increase in its NPL ratio. The other two, namely Oversea-Chinese Banking Corporation Limited (OCBC, Aa1/Aa1 negative, aa3) and United Overseas Bank Limited (UOB, Aa1/Aa1 negative, aa3), would see losses of 40-50%.
Re-disseminated by The Asian Banker
