Is a cash call on the cards for beleaguered SembMarine?

Asset impairment could reach up to $633m.

With the high net gearing in Sembcorp Marine’s (SMM) balance sheet, the market has been buzzing with speculation that a cash call may be on the horizon.

Investors can breathe easy, however, as a report by UOB Kay Hian asserts that SMM has sufficient debt headroom to manage impairments. Further, the firm has a low likelihood of breaching its financial covenant.

“Assuming no order surprises, or a special directive to raise cash, a cash call for SMM seems unnecessary,” notes UOB Kay Hian.

“The financial covenant on its MTN requires SMM to maintain a net gearing of 175% or lower, implying debt headroom of S$1.5b based on its 1Q16 financial position. This easily covers the shortfall of S$712m in our base case scenario,” it adds.

UOB Kay Hian notes that an alternative way to breach the 175% net gearing limit would be to slash shareholder’s equity, spelling losses/impairment of up to $1.1b. However, UOB Kay Hian estimates that asset impairment would reach $663m at the most.

On top of this, the risk of asset impairment shrinks as the oil market rebounds. Also, Sete Brasil is sufficiently provided for now at $329m.

Either way, UOB Kay Hian notes that SMM is unlikely to suffer through a hefty loss/impairment that would lower equity sufficiently and breach its financial covenant.