Keppel Corp continues to make progress towards its Vision 2030 and its goal of “transitioning Keppel to become a global asset manager and operator with strong development and operating capabilities in energy & environment, urban development and connectivity solutions, all part of a continuous value chain to provide solutions for a sustainable world,” says group CEO Loh Chin Hua on Oct 27, during a 3QFY2022 business update.
Since then, Keppel has announced the completion of the acquisition of a 50% stake in Cleantech Solar Asia by Keppel Asia Infrastructure Fund LP and a co-investor of KAIF.
On Nov 11, Keppel Infrastructure announced a joint study agreement to explore the development of green hydrogen and green ammonic with Pertamina Power Indonesia.
On Nov 16, Keppel Infrastructure announced the formation of a joint-venture with MET Holding, a Swiss-based entity focused on renewables.
Getting legacy rigs off the balance sheet
In April this year Keppel had already announced the proposed divestment of its legacy rigs and associated receivables to Asset Co for $4,050.3 million, and on Oct 27, the sale of Keppel Offshore & Marine to Sembcorp Marine.
Keppel Corp had 16 legacy rigs comprising 10 jack-ups of which four are completed, and six floaters (semi-submersibles).
The $4,050.3 million isn’t upfront cash, but comprises $3,929.8 million of vendor notes, $120 million of 10% Keppel Perpetual Securities, $0.5 million via the issuance of 499,000 new ordinary shares in the capital of Asset Co at the issue price of $1 per share.
Asset Co’s shareholders are Keppel with 10%, Baluran with 74.9% and Kyanite (15.1%). Kyanite is a unit of Temasek Holdings, and Baluran is owned by funds managed by Argyle Street Management which also holds a major stake in OUE.
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“As consideration for the sale of the legacy rigs and associated receivables to Asset Co, Keppel will receive a combination of ordinary shares, vendor notes and perpetual securities issued by Asset Co,” says an April announcement by Keppel.
External investors in the Asset Co transaction will provide capital that can be used for finishing uncompleted legacy rigs, which will no longer be funded by the company, Keppel had stated in April. Improving conditions in the offshore & marine sector, underpinned by improving oil price and increasing utilisation and dayrates of offshore drilling rigs, provide an opportunity for Asset Co to monetise the legacy rigs, Keppel had said.
As the rigs are monetised, Keppel’s economic exposure in Asset Co will be reduced over time. The vendor notes from Asset Co will be gradually converted into cash, and these freed up funds can be re-invested into future growth initiatives at Keppel and also used to reward shareholders.
On October 27, Keppel announced that its coupon from the vendor notes will be increased from 2% to 4%. This translates into about $79 million of additional interest earned by Keppel per annum, or about $236 million to $393 million over three to five years, according to Loh.
Not the same as SCI’s coal power transaction
The transaction structure of Asset Co is somewhat different from the divestment of Sembcorp Energy India Ltd (SEIL) by Sembcorp Industries (SCI) for the equivalent of $2.058 billion, to the Tanweer Consortium. SEIL operates two supercritical coal-fired power plants totalling 2.6GW in India. The Tanweer Consortium comprises Oman Investment Corporation S.A.O.C. (OIC), the Ministry of Defence Pension Fund, Oman (MODPF) and Dar Investment SPC (Dar Investment).
SCI doesn’t get cash upfront, but arranged vendor financing for the Tanweer Consortium via a deferred payment note or DPN which has a 15-year term, that can be extended to a 24-year term with no penalty for non-payment.
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SCI will receive interest on the DPN at the rate of 1.8% pa plus the Indian government’s 10-year bond yield spot rate, for 15 years, less a greenhouse gas emissions intensity reduction incentive. SCI’s announcement says, on a pro forma basis, the 1.8% pa plus the Indian government 10-year bond yield spot rate is likely to work out to $157 million (post-tax) of DPN income for the twelve-month period ended-December 31, 2021.
Since the interest payment from the DPN is likely to be similar to the cash flow from SEIL, SCI’s Patmi will not be altered too much from the actual FY2021 Patmi. All outstanding payment obligations under the DPN should be payable in full on the 15th anniversary date of the completion, which is also the maturity date.
Bloomberg reported that Anthropocene Fixed Income Institute, a London-based think tank, said carbon footprint of SEIL’s coal plants shouldn’t be removed from SCI until DPN is fully repaid. Bloomberg also quoted an associate professor at Nanyang Technological University referring to the SCI transaction as “greenwashing”.
The only similarity between the Keppel and SCI transactions is that both entities are unlikely to receive upfront payments for the divestment of brown assets. There are key differences. SEIL was providing SCI with cash flow, and will continue to do so in the form of interest payments on the DPNs.
Keppel’s assets are so-called stranded assets. The main difference is, unlike SEIL, Asset Co will be independently managed from Keppel, and also will have no association with Sembcorp Marine which is acquiring Keppel O&M. Hence the legacy rigs are truly off Keppel’s balance sheet. The external investors of Asset Co will provide capital which can be used for completing uncompleted rigs, which would no longer be funded by Keppel. Of course, Keppel continues to receive coupons from its vendor notes, and will also receive monies as and when the rigs are sold.
Settling the Sete saga
Back in 2011 and 2012, Keppel received orders from Sete Brasil for a total of six semi-submersible rigs scheduled for delivery between 2015 and 2019. The rigs were to have been chartered by Petrobras for 15 years. Sete Brasil was a Brazilian investment company created in 2010 to fund rigs used in the exploration of oil in the waters off the east coast of South America.
According to press reports at the time Sete Brasil won contracts from Petrobras worth US$89 billion for 28 ultra-deepwater drilling rigs in the period 2011 to 2014, with another two in the pipeline. Sete Brasil awarded contracts worth US$22 billion to five Brazilian shipyards including BrasFels owned by Keppel O&M, and SembMarine’s Estaleiro Jurong Aracruz. SembMarine was awarded seven drillship contracts. The Keppel and Sembmarine contracts were reported to be around US$5 billion each.
As it turned out, Sete Brasil filed for bankruptcy protection in 2016, leaving Keppel and SembMarine with stranded assets. Both Keppel and SembMarine announced their respective settlement agreements with Sete Brasil in 2019. SembMarine kept five of the seven drillships as buyers were found for two of them.
The issue of these stranded assets have - more or less - been resolved. SembMarine has recapitalised twice, and is a now acquiring Keppel O&M which ironically has received orders from Petrobras.
At any rate, the enlarged SembMarine-Keppel O&M will increasingly focus on transition energy and renewables. As a result of the various reorganisations, mergers and de-mergers (SembMarine was de-merged from SCI), Keppel, SembMarine and SCI are all pivoting to renewables for a more sustainable future.
