Thursday, March 17, 2011

Drydocks World in massive debt restructuring talks

Drydocks World is suffering from the effects of overexpansion and high leverage. They have been on a binge not only to expand their Emirates facilities but also have moved into southeast Asia, acquiring facilities in Singapore and Indonesia. Although essentially a repair yard, their ambition is to go into shipbuilding, conversion and offshore work. Business has not developed as they hoped and they have to restructure a whopping US$ 2,2 bn debt with their senior lenders.

At the same time that Dubai Drydocks World was aiming to become a major force in world shipbuilding, other ME countries flush with petrol money were investing in rival repair facilities in Qatar and Oman. These projects have been slow to come on stream, but Qatar Drydocks at Las Raffan opened in December last year. These new facilities are likely to create margin pressures with the increased competition and need for new business to fill the new facilities.

The Gulf region has no tradition in deep-sea merchant vessel construction. It is not an area of industrial production for the auxiliary equipment like Japan or Korea. They have done some off-shore platform work and supply vessels, but their main staple has been ship repairs.

Meanwhile Singapore shipbuilding activities have been in consolidation with mergers for fewer and stronger groups. The former Pan United shipyard that Dyrdocks World acquired in Singapore was one of the smallest and weakest yards. Singapore has some tradition in merchant shipbuilding, but mainly smaller vessels. They have a good reputation in ship repairs, conversions and off-shore platforms. Of course, Dubai Shipyards has to face competition from established Singapore players like Keppel and Sembwabang.

An even bigger problem for their strategy is competing with major shipyard players like China, where capacity increased by 57% last year and has become of the three major shipbuilding countries as well as the Koreans and Japanese. Japan and Korea have proven design history, auxiliary industries for engines and equipment, and sophisticated export finance facilities. China is a relative newcomer, but is it credible that Dubai Drydocks World can compete with their labor costs?

Drydocks World brought Khamis Jumaa Buamim into their business the middle of last year as part of a management reshuffle and to look at refinancing its huge loans. Buamin was with Conoco and ConocoPhillips for 25 years in various management positions including Vice President, Dubai Petroleum Company (2002-2007), a ConocoPhillips affiliate company in the United Arab Emirates.

In January Drydocks World lined up US$ 200 mio in intermediate financing from seven existing creditors to tide it over while it attempts a restructuring. Buamim reported at the time the money would be used to cover ongoing business costs such as equipment suppliers, subcontractor services and staff wages. He was hopeful that the business cycle was coming back.

The question is whether there will not have to be further restructuring, sale of assets and reduction of capacity under the weight of the enormous debt load, if recovery takes longer than expected.

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