Within the Ezra group, there were a number of puzzling investments and transactions. One was the JV between Ezra and the Chiyoda Corporation of Japan (with NYK joining later). Another was Ezra’s and EMAS Offshore’s relationship with Perisai Petroleum Teknologi Berhad, including the latter’s JV with Perisai. They also raise a number of disclosure issues.
Photo by Ray Bilcliff from Pexels
Underwater – The EMAS Chiyoda Subsea Joint Venture
The JV was said to have an implied value of US$1.25 billion. A binding agreement was concluded in September 2015 and in March 2016, Ezra and Chiyoda Corporation in Japan confirmed that Chiyoda had completed its investment into Ezra’s subsea services business, EMAS AMC, to form EMAS Chiyoda Subsea (ECS), a 50-50 JV.[1]
In June 2016, Ezra announced that it was selling 10% of its 50% stake in ECS to Nippon Yusen Kabushiki Kaisha (NYK) for US$36 million while Chiyoda would sell 15% of its 50% stake.[2] The price at which Chiyoda would sell its stake to NYK was not disclosed, but Ezra would incur a net loss attributable to the sale shares of approximately US$6.652 million.
Further, each of the JV partners was to provide shareholder loans to ECS immediately after completion, but these loans were not proportionate to the shareholdings. EMAS AMC was to provide a loan of US$36 million, which was the amount of the sale consideration, while Chiyoda would provide US$11.67 million and NYK US$8.33 million. Ezra said that the transaction would provide benefits from partnership and synergies and help unlock shareholder value.[3] Three days later, the company announced that it had entered into a binding agreement, although the transaction was subject to the approval of Ezra’s shareholders. The transaction was completed in September 2016.[4]
In July 2016, Ezra had announced that an ECS and LTHE consortium had won a US$1.6 billion contract from Saudi Aramco.[5] However, within about nine months of the formation of ECS, signs of trouble had emerged. On 20 December 2016, Ezra announced that ECS was in discussion with various parties on its financial obligations.[6]
Then came some startling revelations. Following a series of media articles about the ECS JV partners – Chiyoda and NYK – taking massive impairments of their stakes in ECS and a claim for arbitration against ECS for US$14.7 million, Ezra issued a “clarification” announcement on 3 February 2017. It disclosed that the “Company’s investments in, shareholder loans to and the inter-company balances owed by the ECS Group amounted to US$170 million and the full amount may have to be written down after the Company’s assessment. The ECS Group had recorded a net current liability position of US$887,220,000 for the financial year ended 31 August 2016”. [7]
According to a report, Chiyoda and NYK revealed writedowns totalling S$635 million. It was also reported that the effects of the dire situation were felt as far as Houston, where the workforce was cut by half to about 200 within a year and employees feared losing their jobs. The Houston operation, which provides offshore energy services, was searching for clients, but the Japanese investors cut off additional funding, apparently losing confidence in a recovery in offshore drilling anytime soon.[8]
UK-based offshore operator Bibby Offshore also filed a case in the Texas Southern District Court against ECS in January 2017. Receivables from ECS to Bibby Offshore were US$14.7 million from the US$18.1 million worth of contracts performed in Trinidad in 2016. ECS had withdrawn from an agreement to mediate on 12 January 2017. Bibby Offshore was granted the control of subsea vessel Lewek Express by the court.[9] Despite ECS arguing that the vessel was not owned by the company, the judge ruled that the vessel’s registered owner, Ocean Lion Shipping Ltd, is a Hong Kong holding company owned entirely, or substantially, by Ezra Holdings.[10]
Why were the problems at ECS not disclosed earlier? How did it end up in that situation when the ink on the joint venture agreement had barely dried, having been completed only five months earlier? Why was the disclosure about possible full impairment of the US$170 million total amount invested in or owed by ECS not disclosed until the media articles had raised concerns? Why was the dispute involving Bibby Offshore not disclosed earlier?
The company said that “the Board wishes to clarify that the Company has no dispute with Bibby Offshore…Bibby Offshore’s claims are against ECS, which the company does not control”. That cannot be an excuse for non-disclosure as ECS is after all a major JV of the company.[11]
With mounting claims and civil suits against ECS, it eventually filed for Chapter 11 protection on 27 February 2017.[12] The JV had sunk in less than a year.
Unrelated to ECS, the same “clarification announcement” issued on 3 February also said that a subsidiary of EMAS AMC had defaulted on payment of charter hire for October 2016 but that the vessel owner had agreed not to pursue repayment and had not called upon Ezra as guarantor to repay.[13] However, ten hours later, the company issued another “clarification announcement” that the vessel owner did not agree not to pursue repayment but had instead made demands on the company as guarantor to make payment.[14]
Why was the default in charter hire not disclosed in October 2016? On what basis did the earlier clarification announcement say that the vessel owner was not pursuing repayment which necessitated the issue of another clarification announcement made only after the trading halt was lifted?
A Convoluted Affair – Perisai Petroleum Teknologi
Perisai Petroleum Teknologi Berhad (Perisai) is a company listed on the Mainboard of Bursa Malaysia. It describes itself as a Malaysia-based upstream oil and gas service provider, offering offshore services and solutions covering offshore drilling, offshore production and offshore support.[15] It is accounted for as an associate of Ezra.
According to Perisai’s 2015 annual report, as at 31 March 2016, Ezra has deemed interest of 23.01% in Perisai made up of a 11.18% stake held by Ezra’s wholly-owned subsidiary HCM Logistics and a 11.83% held by EOL.[16] According to Perisai’s 2017 annual report, as of 29 September 2017, the stake had been reduced to 22.32% made up of 10.84% held by HCM Logistics and 11.48% held by EOL.[17] Between December 2015 and October 2016, Perisai had made private placements amounting to approximately 10% of the existing issued and paid-up capital.[18]
Disclosure of associate’s default
On 4 October 2016, Ezra and EOL announced that Perisai had defaulted on its S$125 million 6.875 percent notes due in 2016.[19] Earlier, on 22 August, Ezra had issued an announcement titled “Announcements relating to Perisai Petroleum Teknologi Berhad” with two attachments. The main announcement by Ezra made no mention about what those attachments were about but merely referred to the two attachments.[20] One attachment was about Perisai commencing discussions and engagement with holders of notes due on 3 October 2016 while the other was about Perisai receiving an extension of a charter relating to a contract.[21] EOL had issued a similar announcement.
Perisai had on 18 August 2016 announced that it was commencing discussions with noteholders.[22] Subsequently, on 9 September 2016, Perisai announced that it was commencing a consent solicitation process.[23] However, this was not disclosed by Ezra or EOL, which only disclosed again after Perisai announced on 3 October that the extraordinary resolution tabled at the meeting with noteholders had not been passed, and the notes and interest were immediately due.[24]
On 12 October 2016, Perisai announced that it had triggered the criteria for a Practice Note 17 (PN17) company because of the default and must comply with certain conditions, including submission of a regularisation plan. Perisai faces suspension in trading of its shares and delisting if it fails to exit the PN17 list.[25] On 13 October, it issued another announcement referring to the previous day’s announcement confirming that it was now a PN17 company.[26] Ezra and EOL only made a further announcement about the developments at Perisai after the close of trading on 13 October 2016. By that time, Perisai had already made five further announcements relating to its default and the triggering of the PN17 criteria.
Were the disclosures by Ezra and EOL adequate with respect to the default of Perisai?
The default of Perisai shone the light on a series of confusing announcements that shows the rather convoluted relationship between Perisai, Ezra and EOL, and possible breaches in the listing rules.
A transaction that never was[27]
On 16 December 2015, at 11.31 pm, EOL announced that it had entered into a letter of undertaking with Ezra, under which Ezra had undertaken to purchase the entire 12.13% stake that EOL held in Perisai. It explained that the 12.13% stake in Perisai arose out of a previous transaction when EOL sold its stake in a company to Perisai. It also mentioned that Ezra, through HCM Logistics, owned another 11.5% of Perisai’s shares. It said that after the transaction, “Ezra and HCM will indirectly own a total of 20.6% of Perisai”.
This was incorrect as they would own a total of 23.63% directly and indirectly. It seems that EOL was confused by the fact that at that time, Ezra owned 75.25% of EOL as shown in its 2015 annual report and therefore Ezra’s effective beneficial interest in Perisai through EOL was 9.13% (75.25% times 12.13%).
The announcement said: “The current value of EMAS 9.1% stake in Perisai based on its listing price is approximately MUSD 11. The agreed price for the Shares is MUSD 56, which equals a premium of approximately 500% compared to the current listing price. The purchase price is fixed and shall not be adjusted. The price has been determined based on the cost of EMAS’ investment at inception. The purpose of this transaction is to consolidate the interest in Perisai in a single entity at Ezra level.”
To avoid doubt, “MUSD” refers to US dollars in millions. The above announcement should have said 12.13% rather than 9.1% stake.
The announcement said that EOL had until 31 December 2016 to sell its stake to Ezra, subject to entering into definitive agreement.
Did the EOL and Ezra boards forget that their shareholders are different, and that this is a related party transaction? Why should Ezra be paying a 500% premium to buy the stake off EOL? What about the interest of Ezra’s shareholders?
For the board of EOL to approve such an announcement beggars belief. If the Ezra board had indeed agreed, I am sure its shareholders would love to know the reason. However, it is interesting that Ezra did not make any announcement about this proposed transaction.
Nothing further was heard about this transaction and it appears to have been quietly forgotten with no questions asked by the two stock exchanges on which it was listed (OSE and SGX). Between December 14 and 16 immediately preceding the announcement, EOL’s share price had fallen by 16%. Was there any intention for this transaction to be executed? Or was it made to support the share price of EOL?
Leaky call and put options
A series of announcements by EOL highlighted the existence of call and put options that had been disclosed by EOL in the notes to its financial statements, including in note 8 of its 2015 annual report.[28] It turned out that the exercise conditions for the options were not as straightforward as conveyed by the notes.
EOL had entered into a JV with Perisai (PPT), which resulted from Perisai transferring a 49% equity interest in SJR Marine to EOL on 5 December 2012. SJR Marine owned a vessel (not a space one) called Enterprise 3. Under a supplementary agreement, the following terms were spelt out:[29]
“ (i) PPT grants the Company the right to acquire all of PPT’s remaining equity interest in SJR Marine (the “Call Option Shares”) from PPT, and the Company may exercise the Call Option at the Call Option Price at any time during the two year period from the completion date of the acquisition of the 49% equity interests in SJR Marine (“Completion Date”) (“Call Option Period”). The Call Option Price is fixed at the price equivalent to 51% of the net assets value of SJR Marine at the Completion Date;
(ii) In the event that Call Option is not exercised during the Call Option Period, it says “the parties shall use their best endeavours to procure SJR Marine to sell SJR Marine’s vessel, the Enterprise 3, to an interested third party within a period of 12 months from the expiry of the Call Option Period…on terms to be agreed by the parties. Where SJR Marine is unable to dispose of Enterprise 3 within the Enterprise 3 Disposal Period, PPT (Perisai) shall be entitled to exercise its right under the Put Option; and
(iii) The Company grants PPT the right (“Put Option”) to sell all of its remaining equity interest in SJR Marine (“Put Option Shares”) to the Company. The Company shall acquire the Put Option Shares at the Put Option Price which is equivalent to the Call Option Price. PPT may exercise the Put Option at any time within the period of one month prior to the expiry of the Enterprise 3 Disposal Period (“Put Option Period”). In the event that the Put Option is not exercised within the Put Option Period, PPT’s Put Option Rights shall lapse.”
The notes also said: “At the reporting date, management has assessed that the Call Option is out of the money”.
Based on the dates, the call option should have lapsed on 5 December 2014 and the put option by 5 December 2015. However, well into 2016, EOL and Perasai were still in dispute over options.
On 4 October 2016, EOL issued an announcement about the put option which gave Perisai the right to sell its 51% interest in SJR Marine to the company. It said the value of the put option was US$43 million. Note that this was 10 months after the put option should have lapsed but it was still worth US$43 million according to EOL. The announcement also said that “an indicative offer for financing from a financial institution to SJR Marine” had been received.[30]
On 26 November 2016, EOL announced that it and Perisai have reached an agreement to defer the exercise of the put option which would allow Perisai to exercise the put option “at any time after the close of business on 2 December 2016 but within the Put Option Period…In the event the Put Option is not exercised…within the Revised Put Option Period, the Put Option Rights will lapse.”
There was no explanation why EOL would agree to a one-year extension of the put option which could require it to pay US$43 million for the remaining 51% interest in SJ Marine. At that time, it was very clear that the industry was in trouble – and EOL was not exactly flushed with cash. Did it not satisfy certain conditions in the supplemental agreement which has now forced it to give a one-year extension?
On 1 December 2016, EOL announced that it had given a further extension to Perisai, to 8 December 2016.[31] On 8 December, another announcement said that EOL had issued a notice of termination of the original share sale agreement, various supplemental agreements and the shareholders’ agreement. It said the put option would be extinguished. It further added that Perisai was required to sell its 51% shares in SJR Marine to EOL on the 30th day from the receipt of the termination notice, based on the terms of the shareholder agreement and following its termination.[32]
Perisai disputed the EOL’s right to take the actions announced in the 8 December announcement, with the latter announcing on 13 December that Perisai was exercising the put option at the option price of US$43 million. EOL said it was disputing Perisai’s claims.[33] On 23 December, another announcement said that a settlement agreement had been reached, with EOL buying the put option shares, and paying US$20 million in cash and subject to completion, and total consideration of US$43 million and accrued deferred payment interest. This was subject to various conditions precedent.[34]
Nothing further was heard until 21 April 2017 and 24 May 2017 when EOL announced that Perisai needed more time.[35],[36] An announcement on 20 August 2017 said that EOL was seeking legal advice regarding an announcement by Perisai.[37] On 29 September 2017, EOL announced that the settlement agreement had lapsed and that it had paid US$1 to acquire the 51% of SJ Marine, but that Perisai had disputed the termination notice.[38]
In other words, there was a dispute over whether EOL would pay US$1 or US$43 million (plus interest) to buy the remaining 51% of SJ Marine which owned Enteprise 3, well after the put option should have expired. Even Spock may struggle with the logic of the dispute. The Chairman’s Message in EOL’s 2016 annual report dated 8 December 2017 indicates that settlement has not yet being reached.[39]
The annual report also indicates that Perisai owed EOL US$332,000 under “other receivables” while a joint venture with Perisai (presumably SJR Marine) owed US$8.455 million. It said that the company had commenced legal proceedings against the JV to recover the receivables but that it had provided in full the remaining amounts due. EOL also disclosed that it had impaired its investment in Perisai in full, following its classification to PN17 status.
Clearly, the company’s disclosures and arrangements relating to Perisai raise many issues. Perisai has since been delisted from Bursa on 22 January 2020.
But there are even more serious issues relating to undisclosed interests in transactions and possible insider trading. These are covered in the concluding Part V.
Note: This series of articles draws on certain parts of a case study written by Cliff Seah Wen Jie, Goh Mei Qi, Hu Jingyi, Kelsey Feng Qiqi and Liu Yuchen, BBA (Accountancy) students at NUS Business School, under the supervision of Associate Professor Mak Yuen Teen. It has been written solely from public information, including media reports.
ENDNOTES (Note: Draft only)
