Singapore rig builders in dire straits as Sete Brasil mulls bankruptcy filing

All contracts are at risk of cancellation now.

Singapore's two largest rig builders are now more at risk than ever before. Sete Brasil, whose rig contracts make up over half of Keppel Corporation and Sembcorp Marine's order books, is reportedly mulling a bankruptcy filing on back of a high-profile corruption scandal and the crash in oil prices.

According to Maybank Kim Eng, the cancellation of almost all rig contracts is now a possibility and is no longer a far-fetched scenario.

“Up till now, the widely-held view was that Sete Brasil would scale down its 29-rig program to 15, of which 13 will be from Keppel and SMM, with deliveries over 2015-2020. Talks have been ongoing for Sete Brasil to restructure and secure financing. The prospects of Keppel and SMM receiving payments now look increasingly bleak,” said Maybank Kim Eng.

Maybank Kim Eng said that if all revenue recognition from Sete Brasil is stripped out, the resulting reduction in cashflows could raise Sembcorp Marine’s net gearing, while Keppel’s leverage ratio will remain steady thanks to its diversified income stream.

“Yet this is just the tip of the iceberg. If they need to make impairments to inventories, equity value will compress, leading to much higher gearings. These could trigger banking covenants forcing the companies to raise equity. Dividends will be cut,” said Maybank Kim Eng.