The whole fiasco surrounding Swiber reminds of a slow contrast effect, not visible to human perception. People, investors, bankers, creditors do not notice extremely slow changes taking place until *wham* – A slap in the face takes place. This was pretty much what happened to Swiber Holdings.  That slap in the face happened to be an inability to pay off its bondholders in terms of coupon payment and eventual redemption. And on hindsight, I am glad to say that we were just bystanders on the sidelines looking on with compassion for the many investors and bondholders who got burnt as a result.

This reminds me of the frog in boiling water syndrome. If one were to put a live frog in boiling water, it feels the pain and danger to itself immediately and leaps out of the boiling water. But if one were to put a live frog into a pot of water and begin boiling it, the frog would just go along with what was happening, not noticing the small changes that are taking place to its surroundings. Eventually, the frog is boiled alive and dies. This is a great metaphor of explaining our inability to adjust and be aware of changes occurring in our world today. That awareness, incidentally, is what we need as investors.

 

Debt to equity

This is a screenshot from the 2015 annual report by Swiber Holdings.  In the notes to the financial statements, its reported net debt to equity ratio was 1.59 and 1.52 respectively for 2015 and 2014. I don’t think net debt to equity is a fair figure representative of its overall leverage undertaken because it reduces the total borrowings by the cash and cash equivalents amount. Since cash and cash equivalents is part of the equity portion of the balance sheet, why subtract it from overall borrowings anyway?

Is it an attempt to improve the debt to equity figure ? This is speculation on my part but one has to remember that management in general is a gamut of slightly dishonest to completely and outright fraudulent. I don’t believe that management is completely honest all the time. In fact most times, management is slightly dishonest. By and large, people, are mostly, self serving.  I mean, if you don’t have much debt , you would have no reason to report a net debt, which is debt less cash, as a percentage of equity.

If debt to equity is 10%, I believe management would report it as 0.1 . If debt is overly high, management would have the tendency to report a variation of the figure that looks better. I have seen this happening many a time. Back to the debt to equity figure. Without taking into account cash and cash equivalents, without subtracting the cash and cash equivalents from debt, debt to equity is approximately 1.8 for 2014 and 2015. A higher number it is.

From years prior to 2014 and 2015, the debt to equity figure was closer to 1.  So what that means specifically is that the company’s financial strength has deteriorated slowly and maybe, not noticeably. The smarter investors who realised what was going on got out in 2014 to 2015.

Let us work around this from a different angle. If the debt to equity ratio was approximately 1.8, then for every million dollars of equity, there would be 1.8 million of debt. With 1.8 million of debt,let us slap a 6% interest payment(Some of its bonds had a coupon rate of less than 6%. It also had senior securities at 9.75%)for the interest of simplicity on the indebted portion, interest payments would amount $108,000. Since return on equity was about 5% in 2014 alone, the after-tax return would be $50000 on 1 million dollars of equity, not sufficient to cover $108,000 of interest.

I don’t even know if EBITDA figures reported were real or not. (You have no idea how far management can go to faking reported figures) But ebitda figures were fairly stable over the years considering what was happening to the industry. One has to remember that this is not what you would consider a moated company by any means. Also EBITDA figures as a ratio to interest payments were declining from above 3 to less than 2. This is not good for a company whose earnings are cyclical, or affected by the fluctuating prices of a commodity. And of course, current ratio and quick ratio was not above a healthy 2 .

So what we have is falling revenues in  a capital intensive business. As a result, for their capital needs, Swiber had no choice but to increase its debt.  So one thing leads to another and without capital discipline, indebtedness inadvertently increases.

There are of course many other red flags. There are a myriad accounting tricks that management can employ but there are also a number of ways by which investors can spot these tricks. Please consider this is an oversimplification of the research process.

So most of us are not forensic accountants but with awareness of what is happening, by reading the filings and by inference, one would be able to sense impending danger. Be ever so skeptical! The only guard against ignorance is oneself!

We also attach a page out of Swiber’s website.

This is how it looks like.

If you could enlarge it and look at it. They are notices of changes in ownership. These notices are mostly insiders reducing their personal stakes within the company. These filings were in September 2015. They probably got out at around 20 cents after a decline from 80 cents and $1 levels about a year earlier. Insiders selling their stakes at low levels – Not a good thing. If the company had an intrinsic value greater than that of 20 cents per share, insiders would have been backing up the truck! Of course, insider sales are not a bad thing all the time. It is just something to consider in the grand scheme of things, especially for investors.

 

Dishonesty

Coming back to the idea of dishonesty among managers. Do not allow yourself to be swayed by what managers say within the annual reports. As an investor, one always has the right to disagree! With regards to Swiber holdings, in October 2016, SGX reprimanded the company for its blatant misleading of the public.

Apparently, Swiber announced in 2014 that “Swiber Breaks Into the West African Market with US$710 Million Field Development Award”. But the truth of the matter was Swiber had yet to sign a contract with its client and that the $710 million figure was only an indicative price, only to be confirmed upon feasibility studies. So in actuality, $710 million figure was not even awarded yet when the announcement was made. And did we mention, that $710 million figure is only “indicative”. This is how far management will go to deceive shareholders. I am not saying that all managers are like that but as investors, it is our hard earned money at work here and we have the right to be as discerning as we possibly can be.  Of course, there are also good guys out there. Good, honest, capable, industrious and intelligent management. We would just have to seek these guys out. But whatever it is, always always  go by the numbers and not rely on feeling or intution or believe in management completely, for that, is akin to gambling.

One reason I can think of  is that by announcing the $710 million award, management thought that they could get some last minute financing arrangement with other creditors or negotiate  better terms in its current financing arrangements.  These were desperate measures indeed by the company management.

The rest as they say is history. Most of the board is now currently under investigation by CAD.

 

 

 


kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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