Aban’s interest cost has been rising over the past five quarters. Interest outflow for the June quarter was 36% higher than a year ago. (Aban’s interest cost has been rising over the past five quarters. Interest outflow for the June quarter was 36% higher than a year ago.)
Aban’s interest cost has been rising over the past five quarters. Interest outflow for the June quarter was 36% higher than a year ago.
(Aban’s interest cost has been rising over the past five quarters. Interest outflow for the June quarter was 36% higher than a year ago.)

Mark to Market | Debt refinancing to lower stress on Aban’s balance sheet

If the firm is able to reduce debt, the debt-to-equity ratio should come down to half of FY12 levels of 5.2

Aban Offshore Ltd, the country’s largest offshore drilling services firm, is striving to restructure the high debt on its books to lower interest costs. At its annual general meeting held last week, the management got shareholders’ approval to raise additional funds, both through the overseas instruments ($400 million) and domestic qualified institutional placement ( 2,500 crore).

Aban’s interest cost has been rising over the past five quarters. Interest outflow for the June quarter was 36% higher than a year ago. Poor business prospects because of the global economic slowdown have made it difficult to find reasonable refinancing options. The coupon rates for refinancing its borrowing—between 12% and 14.5%—were considerably higher than the earlier rate of 9.5%.

The management highlighted at the meeting that it plans to repay around 1,000 crore of debt this fiscal, out of the total loan funds of 13,700 crore. A report by Emkay Global Financial Services Ltd points out that if Aban now plans to refinance its high-cost rupee loan of 1,800 crore with external commercial borrowings, it would bring down interest costs by 5-6 percentage points.

One positive is that Aban’s operating cash flows appear stable. Four out of its six rigs, whose contracts are due for renewal during the current financial year, might get renewed at higher day rates. Besides improving cash flows, it will enhance operating margin. June quarter margins improved by 7 percentage points to 59.5%, compared with the preceding quarter, although they’re lower than the year-ago period. Rates for rigs and the number of operating days were lower than analysts’ estimates, leading to lower than expected revenue in the quarter.

But per day rental rates are slated to improve for its fleet. Meanwhile, the interest cover ratio (number of times the operating profit covers the interest outflow), which has been declining, should improve by end-fiscal 2014 to 2.2 from the present 1.5 levels. If the management’s plan to reduce debt fructifies, the debt-to-equity ratio should come down to half of fiscal 2012 levels of 5.2.

These factors have translated into an upward earnings revision by around 9-10%. Aban’s shares, which have been volatile based on prospects for its core operations, lost 2.23% to 436.40.

Close