22 Jul 2020

Proposed Renounceable Underwritten Rights Issue and Proposed Distribution in Specie of Shares by Holding Company – Additional Information in Response to Questions from SIAS


Unless otherwise defined, all terms and references used herein shall bear the same meanings 
ascribed to them herein and in the Company’s announcement (as defined below)

 

1. INTRODUCTION

The Directors refer to the announcement made by Sembcorp Marine Ltd (“SCM” or the “Company”) and Sembcorp Industries Ltd (“SCI”) dated 8 June 2020, in relation to the Proposed:

(A)        Renounceable Underwritten Rights Issue; and

(B)        Distribution in Specie by SCI.

 

2. RESPONSE TO QUESTIONS FROM SIAS

The Company has received certain questions from the Securities Investors Association (Singapore) (“SIAS”) in relation to the Transaction and has prepared and is releasing with this announcement, responses to the said questions.

For clarity, the Company has addressed questions that are directed to SCM. Questions directed to SCI have been answered by SCI, and we have included them here for easy reference. Questions directed to both SCI and SCM have been jointly answered by both companies. All questions and responses can also be found in a company announcement by SCI on the SGX.

For the ease of our Mandarin-speaking shareholders, we have also provided Chinese responses for reference. The Chinese responses are translated from the English responses. If there are any discrepancies or conflicts between the English and Chinese responses, please refer to the English responses.

 

By Order of the Board

Tan Yah Sze
Company Secretary
22 July 2020
Singapore


For the full PDF and Chinese version of this announcement, please click here

 

IMPORTANT NOTICE

This announcement is not for publication or distribution, directly or indirectly, in or into the United States (including its territories and possessions, any state of the United States and the District of Columbia), Canada or Japan. This announcement is not an offer of securities for sale into the United States, Canada or Japan. The provisional allotments of Rights Shares, the Rights Shares and the Excess Rights Shares referred to in the announcement (as defined below) or herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons (as such term is defined in Regulation S under the Securities Act), except pursuant to an applicable exemption from registration. No public offering of securities is being made in the United States.

This announcement is for information only and does not constitute or form part of any offer or invitation to sell or issue or subscribe for, or any solicitation of any offer to acquire, any Shares, Rights Shares or to take up any entitlements to Rights Shares in any jurisdiction in which such an offer or solicitation is unlawful. No person should acquire any Rights Shares except on the basis of the information contained in an offer information statement to be lodged by the Company with the Monetary Authority of Singapore.

This information contained in this announcement is not for release, publication or distribution to persons in the United States and should not be distributed, forwarded to or transmitted in or into any jurisdiction where to do so might constitute a violation of applicable securities laws or regulations. The issue, exercise or sale of Rights Shares and the acquisition or purchase of the Rights Shares are subject to specific legal or regulatory restrictions in certain jurisdictions. The Company assumes no responsibility in the event there is a violation by any person of such restrictions. The distribution of this announcement into jurisdictions other than Singapore may be restricted by law. Persons into whose possession this announcement and such other documents come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.



SCI and  SCM – 
Written Responses to SIAS’ Questions

22 July 2020

 

Questions to SCI

1.Currently, SCI is owed S$1.5 billion by SCM. If the proposal is approved, SCI subscribes up to S$1.5 billion of SCM Rights Shares and SCM uses the money raised to pay off its debt to SCI. Arguably, the economic effect is that SCI is writing off SCM’s debt. The proposal benefits SCI’s shareholders since they receive between 427 and 491 SCM shares without additional payment (pg 7 of SCI’s presentation), how does writing off the debt of a related party benefit SCI as a company?
 

The offshore and marine industry has seen a prolonged and severe downturn. In 2019, SCI extended a S$2 billion subordinated loan to SCM (of which S$1.5 billion has been drawn down) (“Subordinated Loan”) for its working capital and general corporate purposes. In 2020, the situation has been exacerbated by the COVID-19 pandemic and the sudden collapse in oil prices. In this difficult business environment, SCM expects losses to continue into the foreseeable quarters.

SCI and SCM believe that the proposed Rights Issue will address SCM’s critical liquidity needs and as such, is in the best interest of all SCM shareholders. This includes SCI as SCM’s largest shareholder.

SCI is not writing off the outstanding principal amount of S$1.5 billion in debt to SCM, but instead converting it into an equity stake in SCM via a subscription for SCM shares under the SCM Rights Issue. The settlement of the Subordinated Loan through the Rights Issue substantially recapitalises SCM’s business, materially reducing its debt servicing obligations, and putting it in a stronger position to ride out the current crisis as well as enhancing its competitiveness in the sector. This settlement also provides SCI with value in the form of SCM’s shares. There is value in these shares as they are publicly traded SCM shares which will be distributed to SCI shareholders.

The settlement of SCM’s Subordinated Loan and the Proposed Distribution allows for a clean demerger of SCM, benefiting all SCI shareholders who will then have the flexibility to calibrate their holdings in both companies. The Proposed Distribution improves SCI’s balance sheet position and opens opportunities for more debt financing, thereby strengthening our ability to execute our strategies to drive profitability and growth. The resulting demerger would transform SCI into a focused Energy and Urban business that can compete and capture growth opportunities in these sectors.

2.Post transaction, the total borrowings of SCI is expected to decrease by S$2.9 billion (pg 10 of SCI presentation). However, pg 8 of SCI’s presentation states that the “demerger removes constraints on SCI’s balance sheet which consolidates SCM’s debt”. Arguably, the reduction of SCI’s debt post transaction is driven by accounting treatment rather than expected economic improvements to SCI’s business. Would management like to comment?
 

Last year, SCI extended a S$2 billion Subordinated Loan to SCM, of which S$1.5 billion has been drawn down. As a result of the proposed Transaction, SCI will no longer need to set aside the remaining commitment of S$0.5 billion under the Subordinated Loan as the remaining commitment will be cancelled.

A deconsolidation of SCM reduces SCI’s debt levels, improves leverage metrics and allows SCI to be more resilient. The improved debt position would open opportunities for more debt financing, thereby strengthening our ability to execute our strategies to drive profitability and growth. These are tangible benefits, not just accounting treatment.

We need to deepen our capabilities and reshape our portfolio for the global energy transition. New demand patterns emerging in the energy sector require us to focus on competing effectively and developing more sustainable business models. For example, population growth in Asia is driving rising demand for sustainable solutions that enable rapid industrialisation, urbanisation and electrification. With Singapore as our home base, SCI is well-placed to serve these Asian markets. With a less constrained balance sheet, we believe that SCI will be better placed to pursue some of these opportunities to deliver value and growth for our stakeholders.

3.Following Question 2, it can be argued that the expected improvements in EPS and ROE (pg 10 of SCI presentation) as well as improvements to ROA and net debt-to-EBITDA ratio (pg 9 of SCI presentation) are dependent on SCI not consolidating SCM’s debt. Again this is an outcome of accounting treatment. Can management discuss specific initiatives and/or projects, independent of accounting treatment, that will add real shareholder value?
 

You have rightly pointed out that the deconsolidation of SCM (as a whole and not only SCM’s debt) is expected to have these effects on the financial metrics of SCI as illustrated by the proforma ratios based on FY2019. These ratios provide the headroom for more resources to be made available, such as through the raising of more debt and clearly reflect the resilient underlying qualities and performance of our Energy and Urban businesses.

The Proposed Distribution would transform SCI into a focused Energy and Urban business and allow SCI to allocate capital and resources solely to these businesses.

SCI has a strong portfolio, anchored in sectors providing essential solutions and in growing markets, especially in Asia where there is a burgeoning demand for sustainable development. With increased strategic focus, we will be able to dedicate capital, resources and efforts to enhance the value of this portfolio and capture growth
opportunities.

One example is the renewable energy sector. SCI is one of Singapore’s largest homegrown renewable energy players, backed by strong market positions, project development capabilities and operations and maintenance expertise. With increased focus, SCI can concentrate our resources and efforts to leverage innovative technologies to compete and grow in this sector.

 

4.Page 9 of SCI’s presentation states that one of the benefits of the demerger is the enhancement of shareholder value as the merger transforms SCI into a focused energy and urban business. Can management provide specifics as to how much shareholder value is going to be improved because of this transformation (apart from the accounting treatment of not consolidating SCM’s debt)?
 

Apart from the expected improved returns and a stronger balance sheet, SCI believes that the demerger is an important step to deliver long-term value to our stakeholders, including our shareholders. The underlying performance of our Energy and Urban businesses remained resilient despite very challenging market conditions in the first half of 2020. The demerger will unlock shareholder value by delivering a clearer investment proposition to SCI shareholders. This may lead to a positive re-rating of SCI’s equity value and appeal to equity investors focused on the Energy and Urban space.

The creation of two focused companies (SCI and SCM) will allow each company to be in a stronger position to adapt to new and emerging market realities in their respective industry sectors.

SCI is well-positioned to capture growth opportunities arising from the megatrends that shape the world today including urbanisation, electrification and decarbonisation.

 

Questions to SCM

1. Page 5 of SCM’s presentation shows that SCI currently owns 61.0% of SCM. On page 13 of SCM’s presentation, it is also stated that SCI has provided an irrevocable undertaking to vote in favour of the Rights Issue. Since a simple majority of 50% is required, does this not suggest that even if ALL SCM’s public shareholders vote against the proposal, it will still be approved? Would management like to clarify how this proposal, as presently structured, gives SCM’s public shareholders any actual say in the matter?
 

SCM shareholders are being asked to vote on two Resolutions, as set out in the table below.

As the Whitewash Resolution and the Rights Issue Resolution are inter-conditional, the Rights Issue will not proceed if the Whitewash Resolution is not approved.

While SCI has provided an irrevocable undertaking to vote in favour of the Rights Issue, the independent shareholders (which we assume to be the “public shareholders” referred to in question 1 above) of SCM will be the only parties voting on the Whitewash Resolution. As such, the independent shareholders of SCM will have the deciding say in whether the Rights Issue will proceed.

As a result of the SCI Distribution, Temasek will become a direct shareholder of SCM, and the Temasek Concert Party Group will hold more than 30% of SCM. As such, the Temasek Concert Party Group will be required to make a mandatory take-over offer for SCM. A waiver of a take-over obligation (Whitewash Waiver) has already been granted by the Securities Industry Council, conditional upon, among other things, the Whitewash Resolution being approved at the EGM.

It is a condition of the Whitewash Waiver that the Temasek Concert Party Group (including SCI) and parties not independent of them abstain from voting on the Whitewash Resolution. The Whitewash Resolution will therefore require the approval of a simple majority from the independent shareholders of SCM who are voting.

As such, it is important that all shareholders exercise their right to vote, by submitting their Proxy Forms to appoint the Chairman of the EGM to vote on their behalf at the virtual EGM.

2.Following Question 1, would SCI’s management consider abstaining from voting on the Rights Issue?
 

The Boards and Management teams of both SCI and SCM believe that SCI should be able to demonstrate its commitment to any equity fundraising exercise by SCM as this will give confidence to SCM’s independent shareholders that SCM’s largest shareholder (i.e., SCI) is supportive of the recapitalisation exercise.

It is important to note, as outlined above, that the inter-conditionality of the Transaction requires all Resolutions to be approved for the Transaction to proceed. As such, the Transaction will proceed only if the approval of the independent shareholders of SCM is obtained for the Whitewash Resolution, regardless of the outcome of the Rights Issue Resolution.

We would also mention that all of the SCI directors who hold shares in SCM will be abstaining from voting on the Whitewash Resolution.

3.Interest rates have fallen substantially in recent months. Would SCM consider refinancing its outstanding debt rather than raising fresh funds from SCM’s public shareholders?
 

SCM Group’s current balance sheet is already highly geared. Obtaining support from banks to maintain our current loan facilities is already challenging. To request banks to provide additional loan facilities is therefore not realistic and also unlikely to be sufficient to meet our liquidity needs.

Refinancing the SCM Group’s outstanding debt will not raise fresh funds for SCM. It just extends the maturity of existing debt which has been drawn down.

Continuing to add debt is not a long-term solution as this would further burden SCM Group’s balance sheet with higher gearing and interest payments, at a time when our cash flow and financial flexibility continue to be constrained by the challenging market dynamics and outlook.

Coupled with the urgency of the situation due to profound structural changes in the oil and gas sector, intensifying international competition, the recent sudden collapse in oil prices and supply chain disruptions due to COVID-19, the SCM Board and Management have considered various financing options and believe that the proposed Rights Issue is the most optimal and lasting solution and is in the best interests of SCM’s shareholders.

This proposed Rights Issue will meet the critical need to strengthen our balance sheet, improve our liquidity position to ride out the current industry downturn, help the SCM Group compete for new high-value projects and ensure long-term viability. The S$1.5 billion Subordinated Loan from SCI in 2019 (the “Subordinated Loan”) will be converted into equity in SCM, forming a permanent source of capital for us. We will also raise additional cash of approximately S$0.6 billion to fund our ongoing operations.

4.Page 8 of SCM’s presentation states that S$0.6b will be used for “working capital and general corporate purposes, including debt servicing”. Arguably some of this money should be invested in new initiatives/projects that improve SCM’s long-term capabilities. How does improvement in working capital and using the money for general corporate purposes lead to a “strong long-term future as a global leader in innovation engineering solutions for the Offshore and Marine and energy industries, with an increasing focus on clean energy” as stated in pg 11 of SCM’s presentation?
 

SCM Group recognises the need to optimise its resources in response to the challenging business outlook, while positioning itself to achieve sustainable growth over the long term.

Internally, workforce right-sizing is in progress and we have implemented salary cuts for all staff ranging from 15% to 5% for senior management and staff (except staff earning less than S$1,800/month). Our CEO has volunteered a 50% pay cut. We have also deferred all non-essential capital expenditure.

However, these measures will not be sufficient to meet our working capital needs as our cash flow and financial flexibility continue to be impacted by the wider industry and sectorial developments, such as the prolonged downturn in the oil and gas sector and COVID-19 disruption.

If approved, the Rights Issue will allow SCM Group to chart a new way forward by improving our cash position and strengthening the balance sheet. This brings both immediate and longer-term benefits and will enable us to fund ongoing commitments, help the Group compete for new high-value projects and ensure long-term viability.

Under ‘general corporate purposes’, SCM Group will also use some of the S$0.6 billion to fund its Research and Development efforts and further strengthen its core engineering and execution capabilities that will in turn drive future growth initiatives.

In the immediate term, completing our ongoing projects is our foremost operational task. To date, there has been no cancellation of any of our existing projects. The total contract value of these projects is S$6.5 billion. The work outstanding as at 30 June 2020 amounted to S$1.91 billion. In addition, our Repairs & Upgrades business has outstanding orders for execution totalling about S$280 million. We have also resumed discussions on several project opportunities and on 9 July, 2020, SCM, together with its consortium partner GE’s Grid Solutions, was appointed by RWE Renewables as the preferred supplier of the HVDC transmission system for the Sofia Offshore Wind Farm in the UK North Sea.

Over the longer term we will increasingly diversify into clean energy growth areas such as offshore wind and expand deeper into our established segments, such as the gas value chain. We will improve and transform our solutions through continuous R&D, supported by strategic investments in intellectual property, technologies and engineering and construction capabilities; and we will deliver industry-leading project executions.

As a result, SCM will be in a stronger position to achieve sustainable growth and have a long-term future as a global leader in innovative engineering solutions for the offshore, marine and energy industries.

5.Page 12 of SCM’s presentation states that after the Rights Issue, the loss per share drops from 6.57 cents to 0.67 cents. It can be argued that the main driver of the reduction of loss per share is because of the significantly increased number of outstanding shares and because SCI has written off SCM’s debt rather than any expected economic improvement to SCM’s business. Would management like to comment?
 

While the reduction of loss per share, post Rights Issue, is an accounting treatment and may be an outcome of the increased outstanding shares, the approval of the Rights Issue will also deliver real tangible financial benefits that will impact SCM Group’s future ability to re-gain profitability.

It is also important to note that SCI has not “written off” SCM’s debt. If a debt is written off, the party writing off the debt receives no consideration in return. In this Transaction, SCI receives SCM Rights Shares as consideration when SCI subscribes for the SCM Rights Issue by setting off the S$1.5 billion outstanding under its Subordinated Loan extended to SCM.

This will reduce SCM Group’s net gearing from 1.82x (as of 31 December 2019) to 0.45x on a pro forma basis, while our cash position will be improved by approximately S$0.6 billion. This will deleverage SCM Group and reduce our interest expense payable.

On the specifics of the loss per share drop highlighted, this is calculated on a post-tax basis as follows:

  • Assumed interest savings from debt repayment of S$1.5 billion and
  • Interest income arising from bank deposit of S$0.6 billion

As mentioned above, the Rights Issue is intended to meet the critical need to maintain sufficient liquidity to ride out the current industry downturn and the COVID-19 pandemic, and better position the Company for the future. If approved, the Rights Issue will improve the Company’s cash position, fund ongoing commitments, strengthen its balance sheet, help the SCM Group compete for new high-value projects and ensure long-term viability.

While the entire industry has been unexpectedly hit by the COVID-19 disruption and the industry downturn since 2015, SCM believes that the industry will recover in the foreseeable years. While oil and gas remain the dominant focus, the Company has proactively diversified its business and product segments towards the provision of clean energy solutions. With significant growth expected in the offshore wind market over the next 30 years, the Company will focus on gaining further traction in this segment. The Company’s diversification and expansion into the gas value chain, renewable energy and other clean solutions segments serves to (i) increasingly align its business with the global shift towards cleaner products and solutions and strengthen its market share, and (ii) build greater resilience by reducing its exposure to the volatility of the offshore oil and gas sector.

We have a long track record of close to 60 years and a history of being profitable and generating dividends for our shareholders in the preceding 10-12 years prior to the industry downturn in 2015. We continue to seek shareholders’ support and understanding in riding through the industry downturn with us.

6.The proposed recapitalisation improves SCM’s financial health but it does not, on its own, improve shareholder value in the long-term. Would management like to provide details on how it intends to execute on “building a sustainable business model for the future” post transaction?
 

While our current priority is to ensure that we have adequate liquidity to sustain operations and ride through this industry downturn, on a strategic level, we will also optimise our resources in response to the business outlook. At the same time, the recapitalisation will allow us to build our order book to contribute positively to our profitability over the longer term, and better position ourselves for the industry recovery.

As mentioned above, we have implemented strategic initiatives and a focused strategy to further build/strengthen our core engineering and execution capabilities, and to return to profitability. The proposed recapitalisation will enable SCM Group to continue with our key strategies for competing globally:

  • Proactive diversification and expansion into new and existing markets;
  • Strategic strengthening of our yard capabilities; and
  • Innovation development through investment in intellectual property, technology and solutions that give us a differentiated edge.

While all our business segments have been affected by the current challenging business conditions, our Repairs & Upgrades segment, which generated revenue of over S$600 million in FY 2019, has remained profitable, and we will continue to grow this business segment.

SCM’s key business strategies as outlined above will fortify its resilience and competitive edge to ride through the current downturn and seize new opportunities when the industry recovers, especially in renewable energy and other green solutions. We are confident these strategies will boost SCM Group’s long-term financial viability and generate
sustainable returns for shareholders.

 

Questions to SCI and SCM

1.Why are SCI and SCM undertaking this corporate action now, given the poor economic conditions?
 

The Boards and Management teams of SCI and SCM believe that the proposed Transaction will meet SCM Group’s critical liquidity needs, strengthen the two companies’ financial positions and is in the best interests of their respective shareholders.

Both companies are keenly aware of the critical need to recapitalise SCM and have been exploring multiple options. The COVID-19 situation and the sudden drop in oil prices triggered the immediate need for funds and this Transaction was announced shortly afterwards.

The Transaction will enable SCI and SCM to better focus on their respective industries. With greater flexibility following the demerger, both companies can pursue their own sustainable growth paths on the back of changes to their industries in recent years.

If successful, both SCI and SCM will have strong shareholder bases to support the respective companies’ strategies and business models for the long term. Temasek (including holdings of its wholly-owned subsidiaries) will be a direct and significant shareholder of both SCI (approximately 49.3%) and SCM (stake exceeding 30%).

2.What other options did SCI and SCM explore? For example, was privatisation of SCM considered? Why is this Transaction the best option?
 

The Boards of SCI and SCM have considered various options, taking into account the urgency of the situation, and believe that an equity rights issue delivering a cash injection is critically needed to maintain sufficient liquidity for SCM Group to ride out the current industry downturn, strengthen its balance sheet and be better positioned for the recovery.

In general, privatisation or merger and acquisition (M&A) involves a change of share ownership but does not add capital to the company. Privatisation will therefore not achieve the objective of recapitalising SCM and providing the much-needed liquidity.

The Proposed Distribution also presents the best option to unlock shareholder value by transforming SCI into a focused business, while SCI shareholders also receive value in the form of SCM shares, with no cash outlay, which gives them investment flexibility.

3.What happens to the transaction, if any one of the resolutions is not passed? In that situation, do you have any contingency plan?
 

As the Rights Issue Resolution, Whitewash Resolution and SCI Distribution Resolution are inter-conditional, if any of the Resolutions is not approved, the Rights Issue and the Proposed Distribution will not proceed. SCI would retain its shareholdings in SCM, and the critical need to address SCM’s liquidity requirements will not be met.

If that were to happen, SCM’s strenuous efforts to recapitalise and strengthen its balance sheet will be negated and the critical need to address its liquidity requirements will fail. SCM Group would re-evaluate other financing options to obtain the critical funding we need.

However, compared to the Rights Issue, the availability, timing and transaction execution risks of alternative sources of funding are uncertain. Should these alternative funding sources be unavailable in time and/or in sufficient amount, SCM will likely be in financial stress. This explains the critical need for the Rights Issue and for the entire Transaction to proceed.

SCM Directors who are also shareholders of SCM have indicated that they intend to subscribe and pay for all their respective entitlements of Rights Shares in accordance with the terms and conditions of the Rights Issue.

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