Deals and IPOs

London-based Subsea 7 in advanced talks for stake in Singapore's EMAS Chiyoda Subsea

Key Points
  • Recently submitted bankruptcy plan in the U.S.
  • Restructuring would help heavily-indebted firm

London-based offshore contractor Subsea 7 is in advanced talks to invest in Singapore's troubled EMAS Chiyoda Subsea, according to a recent plan of reorganization submitted to U.S. Bankruptcy Court.

The latest development represented a significant step forward for EMAS Chiyoda Subsea, which was forced to file for Chapter 11 bankruptcy protection in the U.S. in February, after a prolonged slump in global oil prices created unsustainable operating conditions in the ultra-competitive offshore and subsea construction market.

Alison M. Jones | Getty Images

The EMAS Chiyoda debtors have filed a joint chapter 11 plan of reorganization and a disclosure statement, which puts forward a complex preliminary proposal for the establishment of a newly formed entity, to be owned by a member of the Subsea 7 Group and designated by Subsea 7 to acquire the equity of the emerging debtors and assume certain liabilities.

The new entity would provide for the restructuring of a series of EMAS backed ventures, such as EMAS-AMC, EMAS Saudi Arabia, EMAS Chiyoda Subsea Services, EMAS Chiyoda Subsea Inc, and EMAS-AMC (Thailand).

The purchase price paid by the new entity will be used to fund the plan, including the payment of administrative, priority, and unsecured claims — however a disclosure statement approval motion has not been filed and most of the economics appear yet to be finalized.

No financial specifics were provided in the documents.

Other parts of the group, such as Lewek Constellation, EMAS Chiyoda Subsea Marine Base and Lewek Falcon Shipping would be liquidated if the plan were to be approved.

As the debtor-in-possession lenders, Chiyoda Corporation and Subsea 7 Finance are sponsors of the plan, but still retain the flexibility to consider alternative investors to assist in recovering the mounting claims and interests against the group.

Some of the claims are not expected to be paid in full.

"The debtors believe that the plan is in the best interests of creditors when compared to all reasonable alternatives," stated the filing to the Southern District of Texas division of the U.S. bankruptcy court.

Market headwinds

New details have also emerged about the financial fall of EMAS Chiyoda Subsea, which is a joint-venture run by fellow bankruptcy claimant Ezra Holdings (40 percent) as well as the Japanese-listed firms Chiyoda Corporation (35 percent) and Nippon Yusen Kabushiki Kaisha (25 percent).

The latest court documents point to a perfect storm of headwinds for the contractor that lead to its February bankruptcy filing and underscore the challenges in the sector.

Waning demand for its services and the consequential strain on its revenue and cash flow were a key factor that lead to its decline.

The documents also highlight that rising vessel operating costs and a tightening of credit conditions eventually resulted in the freezing of its various credit lines — limiting the cash available to meet its operating needs.

Furthermore, many of its charter agreements were entered into at a time when charter rates were considerably higher than they are today, which kept expenses high.

Despite the market headwinds, the company still had an order backlog with potential revenue in excess of more than $1 billion for its various worldwide projects at the end of 2016.

It's believed further discussions regarding the economics of the proposed plan are still being negotiated, and additional talks on the economics of the plan will be taking place this week.