Perisai Petroleum's bond default is symptomatic of financial strains across much of Southeast Asia's oil & gas service industry. Singapore banks are exposed to credit risks emanating from the sector, but are well-placed to withstand potential losses, says Fitch Ratings.
Perisai Petroleum, a Malaysian offshore oil & gas service provider, defaulted on bonds worth S$125 million (US$90 million) on 3 October after bondholders rejected the company's restructuring plans. Perisai has other debt - worth around MYR791m (US$260 million) at end-June 2016 - with major Singaporean and Malaysian banks likely to be among the main creditors.
The combined oil & gas exposure of Singapore's three rated banks - DBS, OCBC and UOB - was S$51.3 billion at end-June 2016. This represented 55% of their combined core equity Tier 1 (CET1) capital. This may seem high, although the majority of their oil & gas exposure is collateralized. Furthermore, only S$17 billion of this exposure is to the more vulnerable subsector of offshore support services, accounting for 18% of banks' CET1 capital.
The weighted-average NPL ratio for these three banks remained low at 1.23%, but we expect this to rise modestly as more oil & gas-related NPLs emerge.
Fitch believes Singapore banks are securely positioned to withstand further asset-quality deterioration, given their disciplined underwriting standards and healthy provision buffers of just over 100% (as a proportion of NPLs).
Adequate profitability, sound funding and liquidity positions, and strong capitalization also support Singapore banks' 'AA-' ratings, which we affirmed in May with Stable Outlooks.
Perisai's case is far from isolated. A number of other regional oil & gas service companies have also run into trouble this year. Swiber Holdings filed for creditor protection in July, leading DBS to classify S$651 million of its S$721 million exposure to the troubled group as non-performing, with the remainder expected to be classified in the third quarter.
Swissco Holdings on 4 October appointed Ernst & Young to assist in the refinancing and restructuring of S$100 million worth of bonds due in 2018. The others in various stages of debt reorganization include AusGroup and Marco Polo Marine.
Fitch had expected the credit metrics of south-east Asian oil and gas issuers to deteriorate this year. The sector is on negative outlook, and we have made multi-notch downgrades on the ratings of oilfield-service companies in the region.
Upstream oil producers are still actively looking to reduce costs despite recent rises in oil prices to just over US$50/bbl. Oil & gas service companies have been at the sharp end of the negative effects from investment cuts by oil producers, as well as cost-reductions that have led to lower day-rates for equipment, machinery and services.
Small operators like Perisai are especially vulnerable. Larger companies that have more diversified revenue streams or strong balance sheets are better placed to withstand the investment cutbacks.