Asia Credit Research

Ezra Holdings Limited: Credit Update

Tuesday, 01 September 2015
Events Galore

Busy August: Two key events occurred during August which we believe to be
positive for Ezras bondholders going forward. The first would be Ezra announcing
on 18/08/15 that it will be calling its SGD150mn in perpetual securities upon first
call come 18/09/15. The second would be the proposed JV with Chiyoda Corp
(6366 JP) for Ezras subsea division, which would infuse the group with new capital.

Calmer September: The month of September has always been a pivotal month for
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Ezra and the rest of the offshore marine sector under our coverage . There were 3
offshore marine issuers (Ezra, Ezion Holdings and Swiber Holdings) with their
perpetual securities reaching first call in September. The possibility of any of these
issuers not calling their perpetual securities (to preserve liquidity given the weak
environment) was always a risk, despite the announcements by management of
their intent to call. As it stands, all three issuers have given formal notice (they have
to give notice 30 days before the call date) of their intent to call their perpetual
securities reaching first call in September. This should serve as a positive catalyst
for the offshore marine sector in general. That said, Ezra does have a further
SGD225mn in bonds maturing in September.

Timely JV: Originally, Ezra intended to fund the redemption of its SGD150mn in
perpetual securities and SGD225mn in straight bonds with ~SGD200mn rights
issue and SGD200mn in convertible bonds. Though Ezra completed the rights
issue in July, given the weakness in equity markets, Ezra has yet to come to market
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with its proposed convertible bonds issue. We have noted previously that we
believe Ezra to have sufficient liquidity to redeem the EZRASP15s, the
EZRASP49s and the EZRASP16s even if the convertible bond deal is not done.
That said, given the continued weakness facing the offshore marine sector, any
injection of capital would be welcomed.

Terms of the deal: Ezra and Chiyoda have entered into a binding MOU, with
Chiyoda paying USD180mn cash in total for a 50% stake in Ezras subsea division.
Ezra will be restructuring its subsea division (currently EMAS AMC) into the new JV
company (NewCo). Out of the total consideration, Chiyoda will be paying Ezra
USD150mn outright, while injecting USD30mn into the NewCo. Ezra will also be
converting USD360mn in existing shareholder loans into NewCo equity. It should
be noted that the transaction consideration may be reduced by 50%, depending if
the NewCo subsequently takes up more of Ezras liabilities before completion date.
The cut-off date, defined as when Ezra and Chiyoda has to enter into a Share
Purchase Agreement, as well as incorporating the terms of the MOU into a
Shareholders Agreement, is 31/10/15. Chiyodas 2Q2015 financial results show
that Chiyoda has ~USD340mn in cash and ~USD700mn in short-term investments.
The firm is also in a net cash position, and continues to be profitable despite the

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OCBC Credit Research

Nick Wong Liang Mian, CFA
+65 6530-7348
NickWong@ocbc.com

OCBC Asia Credit Research Ezra Holdings Limited: Credit Update (03/06/15)
OCBC Asia Credit Research Offshore Marine Sector: Mixed Trends, More Clarity (27/05/15)
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OCBC Asia Credit Research Ezra Holdings Limited: Credit Update (16/07/15)
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challenging offshore marine EPC market. Based on this, Chiyoda has the resources
to complete the transaction.

Pro-forma Credit Profile: It is difficult to adjust Ezras balance sheet as some of

the terms of the deal are not firm (such as the contingent liabilities which Ezra may
still bear on behalf of the NewCo). In addition, the NewCo will be accounted for as a
50:50 JV hence EMAS AMC will be de-consolidated from Ezras balance sheet after
the transaction closes. For example, EMAS AMC had USD530mn in third-party
debt, which will be deconsolidated from Ezras balance sheet. Management
indicated that the USD150mn in proceeds from Chiyoda will be used to deleverage
Ezra (they have SGD225mn in bonds due in early September). They also indicated
that net gearing should fall from 1.2 (end-3QFY15) to 0.8 post the closing of the
transaction. A negative worth noting is that Ezras revenue will shrink sharply post
the completion of the transaction, given that the subsea division contributes
between 60 70% of Ezras total revenue. In addition, going forward, there may be
less information and clarity regarding the subsea division given that it will be off
balance sheet.

Recommendation: In general, we believe this transaction, should it come to

completion, to be a credit positive for Ezra. Ezra had originally sought to unlock
value in its subsea division via an IPO, but given the weak environment, this was a
herculean task. We also believe that Ezra is unlikely to continue with its convertible
bond issue, now that it is able to unlock some liquidity via this transaction. By going
into a JV, Ezra will be able to maintain some future upside from its subsea division.
Should the transaction go through, we will likely upgrade our current Underweight
issuer rating, which we will retain for now. This developments have also served to
strengthen our Overweight recommendations on the EZRASP16s, EZRASP18s
as well as the EZRASP49c15s. We will continue to keep our eye on the looming
bond maturity and perpetual call date come September, as well as on firmer
transaction details as we approach the completion date.

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Ezra Holdings Limited

Figure 1: Revenue breakdown by business 9MFY2015

Table 1: Summary financials

Year ended 31st August

FY2013

FY2014

9M2015

Revenue

1,262.1

1,488.4

1,013.7

EBITDA

63.4

141.8

82.8

EBIT

3.5

69.6

13.1

Gross interest expense

49.8

51.3

44.2

Profit before tax

92.3

74.7

77.0

Net income

53.6

45.3

51.5

Income statement (US$ mn)

Balance sheet (US$ mn)

Cash and equivalents

173.1

178.9

219.1

Total assets

2,926.7

3,363.0

3,834.6

Gross debt

1,285.8

1,551.9

1,830.2

Net debt

1,112.8

1,373.0

1,611.2

Total equity

1,139.9

1,185.8

1,352.4

Total capitalization

2,425.8

2,737.7

3,182.6

Net capitalization

2,252.7

2,558.8

2,963.5

113.5

117.4

121.2

7.3

140.1

137.4

248.8

327.4

236.4

0.0

0.0

25.2

Disposals

163.2

8.5

19.7

Dividends

5.3

5.4

11.0

Free Cash Flow (FCF)

-241.5

-187.3

-99.0

FCF adjusted

-83.6

-184.1

-65.1

EBITDA margin (%)

5.0

9.5

8.2

Net margin (%)

4.3

3.0

5.1

Gross debt to EBITDA (x)

20.3

10.9

16.6

Net debt to EBITDA (x)

17.6

9.7

14.6

Gross Debt to Equity (x)

1.13

1.31

1.35

Net Debt to Equity (x)

0.98

1.16

1.19

Gross debt/total capitalisation (%)

53.0

56.7

57.5

Net debt/net capitalisation (%)

49.4

53.7

54.4

Cash/current borrowings (x)

0.34

0.35

0.42

EBITDA/Total Interest (x)

1.3

2.8

1.9

Cash flow (US$ mn)

Funds from operations (FFO)
CFO
Capex
Acquisitions

Source: Company

Figure 2: Geographical breakdown FY2014

Key ratios

Source: Company, OCBC estimates

Source: Company

Figure 3: Debt maturity profile

Figure 4: Net gearing

Source: Company

Source: Company, OCBC estimates

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