OSC’s core markets are concentrated in the petrochemicals sectors. How do you see these markets performing this year?
A substantial part of our fleet is on long-term charter, whether it is a product tanker or for energy, or oil carriers. Charter periods range from seven years to 20 years. So, whatever happens in the energy market tends not to affect us too much because our income is largely assured. Recently we have moved into management of very large crude carriers (VLCC), but that is subject to what happens in the crude market as far as rates are concerned. We don’t carry any crude in Oman – it’s all international crude, and we now have a three-year contract with Shell to provide support for its commercial operations; the company has assured us a minimum cargo on an annual basis. So as far as off-take of our ships is concerned, we are not bothered, but as far as freight weight is concerned, it depends on the market. For VLCCs we have seen rates going up, but during summer it tends to come down.
So far, we have been cautious this year; we will see how the market goes. If crude prices keep rising and we don’t see too many entrants to the VLCC space, we won’t see too many issues.
Oman’s economy encountered a pretty steep slowdown in 2016. How did the evolving state of the economy influence the treasury’s priorities in managing volatility?
In 2016, we did encounter some challenges. We had a number of short term loans that we wanted to convert into long term debt. At the same time, the Omani government was tapping into the same market we were looking at for fresh liquidity, which tightened liquidity in the local market even further.
We decided to avoid the local market altogether and went the international route and tapped into broader regional liquidity pockets, partly in a bid to insulate ourselves from the domestic funding environment. We saw some success in the regional market despite some broader tightening – and saw unsolicited offers from a number of lenders to help us access new credit. It was a reaffirmation of our standing in the market and broader confidence in the company.
Access to credit has become increasingly constrained, particularly towards the last quarter of 2016. With the first quarter of 2017 complete, have you seen any shifts in the funding environment? Has access to credit improved?
The government continues to tap the local market in addition to the international market, but it has shifted towards the international markets in recent years, which is positive – and has eased pressure on local companies that rely on the banking market, particularly in dollars. The slowdown in the broader economy here in Oman has also prompted many of the region’s borrowers to reduce their working capital requirements, so credit uptake has come down, which also means liquidity has actually improved in the past year; Omani banks seem willing to lend at better rates. It could be temporary – when local corporates become more expansive and begin hitting the market again, we may see another shift in the funding environment.
OSC successfully finalised a US$227mn financing package with a number of international lenders. Can you walk us through that transaction? What were some of the challenges you encountered along the way? Were there any alternative transaction structures discussed?
We were looking at a situation where liquidity in the local market was fairly low, and at the time we were looking for potential ECA support for the transaction. We already had three tankers on the way from Hyundai Heavy Industries and we were looking at a transaction that would have allowed us to finance an acquisition of ten. We first engaged with K-Sure, Korea’s export credit agency, and once we secured their support we managed to draw in a number of other commercial lenders including Santander, ABN Amro, Credit Agricole, Standard Chartered Bank, in addition to Societe Generale, which arranged the transaction, as well as the Korea Development Bank.
We wanted to secure a fully underwritten deal because we didn’t want to end up in a situation where only a portion of the ships were covered, only to have to seek out fresh financing a few years later. We wanted to adopt a structure that allowed us to fully cover all ten ships, and it took some negotiation – we started with an offer of five, but eventually secured underwriting for seven through a 12-year ECA-backed facility with a 20% balloon. Seven ships were covered through K-Sure and the other three were financed through vanilla commercial loans.
The transaction ticked two key boxes for us. We were broadening our exposure to international liquidity; and we also bolstered our internal capacity to deal with ECAs. They have much more stringent requirements for approvals, and coming to grips with that was a learning process – but it paid off, and it means we are in a much better position to do so again in the future. One key learning was that you need to start the process much earlier than you would otherwise in any other transaction. Another learning is that you must be prepared to moderate your expectations on interest rates – where we ended up was nowhere near where we originally anticipated we would be on pricing. The documentation was also more challenging than you might find on a vanilla deal.
What do you think is the biggest challenge confronting Omani CFOs currently? What advice would you offer them?
Managing receivables in a falling economy is one of the most pressing challenges for many of the region’s CFOs. Managing with payment delays – particularly as a supplier – can be quite a challenge given the knock-on effect that ensues during a downturn. Pruning marginal operations before they become loss-making is also important – it’s all about keeping focused on your core strengths. Often, marginal operations that are struggling tend to take up the bulk of your time, which is not how you should run your shop.
The flipside of this is to be acutely aware of merger and acquisition opportunities. This is a period where you could pick-up a company that offers a clear benefit to your business, potentially at a discount, so it pays to be aware of the environment and what others are doing.
Diversifying borrowing sources is also very important. Looking at alternatives – beyond local banks – is key, as well as diversifying structures. It is also important to set a benchmark on different instruments so that you can keep your future funding options open, and developing the internal capability to structure these kinds of instruments – like sukuk, for instance – is also important.
Becoming more efficient in analysing data using technology is becoming extremely important. In 2017, I want every employee within our treasury to come up with proposals on how they can increase efficiency by utilising technology. We need to ensure that we are as slimmed-down as possible so that we don’t encounter a situation where we have to trim any fat in the event of a downturn; we should be reliant on information systems to help improve our efficiency, we shouldn’t fear it – as many do. This also means establishing clear accountability guidelines in every area of the business.
