KrisEnergy faces Debt Covernant Stress, Bond Value Plunges

We are seeing more uncomfortable news in the oil and gas space after the Swiber holdings wind up news. And this may make the bond holders of oil and gas bonds more jittery the same way the bond holders of Swiber Bonds felt.

KrisEnergy, an oil and gas producer, have a debt facility coming on due in 2017, and it seems they are in danger of breaching their debt covenants.

Debt Covenants are certain terms and hurdles a borrower have to keep within the boundaries. Failure which, their interest cost either goes up dramatically, or that the lender have the right to call back the debt from the borrower. These are often represented as financial ratios. Typical financial ratios are maintaining a maximum debt to asset ratio, or a negative covenant to keep them from doing anything funny such as debt to EBITDA.

The bond in question is: KRISSP 6.250% 09Jun2017 Corp (SGD)

The size of the bond is SG$130 mil and issued by DBS Bank.

Keppel Corp owns 40% of KrisEnergy.

Seems that the EBITDAX suffered a hit. If we look at their capex going forward, the first half capex is as large as their EBITDAX. This means likely KrisEnergy need to take on more debt or have to fund it in other means.

KrisEnergy is looking at:

1. Equity Issuance
2. Equity Linked Instrument (i take it it means some preference shares)
3. Divestment of assets

Honestly, from the annual report, they do have 800 mil worth of exploration assets. Selling some may allow them to focus better. Perhaps mother Keppel Corp could issue some shareholder loans to tide over this period.

The problem for KrisEnergy is… if this downturn is 5 years or longer, how long could they play this game?

Will DBS Bank’s call the loan?

The about turn at Swiber winding up saga, makes me think whether it is in DBS’s interest to call back the loan if the covenant is breached. These companies will need to think out of the box to repay the loan. Come 2017, I wonder if there is anyone who will refinance KrisEnergy’s loans.

Being affiliated with Keppel, might mean KrisEnergy cannot do what Swiber did and show hand to see what DBS would do.

I felt with Keppel’s own cash flow struggles, they may not want to take KrisEnergy private, yet these assets might eventually be useful to them. Imagine if they get wind up and these assets get auction off for cheap.

Some KrisEnergy Data

The yields remain stable despite not earning much cash flow in its life since IPO (which makes you wonder why do we even consider buy and hold this company).

It is only when there are negative volatility in the oil price, that the market think the stability of these oil and gas company is under question that the yield to maturity starts spiking up.

Still the performance chart is interesting in that even till May 2016, the big coupon yield of the bond made up for the price fall in the bond. Bond holders were still positive.

However, there is the issue of short term volatility in performance, and then there are the tail end risk, where a huge part of your original capital may be impaired, in the even of a default from KrisEnergy.

The latter seems to be rearing its ugly head, from the rise in yield to maturity.

You need more returns to attract people to take more risk by investing in this bond.

There is higher risk here, so the buyers HOPE that there are higher returns.

KrisEnergy feels like Breadtalk to me. There is so much narrative on revenue, what they are going to do, without some cash flow and shareholder returns to show.

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