Ezra Holdings: The Anatomy of a Collapse

02/22/2017 01:13 AM

Postscript:  On February 28, 2017, six days after this note was written, offshore energy company Emas Chiyoda Subsea filed for bankruptcy in Houston. Emas Chiyoda Subsea is a joint venture between Ezra Holdings, Chiyoda Corporation, and NYK Lines.

This article by Suresh Sankaran uses the Kamakura Risk Information Services (““KRIS”) default probabilities subscription service to manage exposure entry and exit based on Kamakura Default Probabilities (“KDP”) movements.

Introduction & background
Singapore-listed Ezra Holdings (EZRA), (Straits Times ticker 5DN) its sister company EMAS Offshore Ltd (EMAS) (Norwegian Stock Exchange ticker EOC) and Ezra’s 22.5% stake in Malaysia-listed Perisai Petroleum Teknologi Berhad (PPTB) (Malaysia Stock Exchange ticker PPTB} and Perisai’s 51%-owned subsidiary SJR Marine (SJM), provide a timely example of how creditworthiness erosion happens as a consequence of a combination of macro factors, market factors, and idiosyncratic factors.

Figure 1 – PPTB Stock Price

On October 3, 2016, PPTB had declared itself insolvent after defaulting on a SGD 125m (USD 90m) bonds due earlier, and this has had an adverse impact on both EZRA and EMAS. Beleaguered Malaysian offshore services provider Perisai Petroleum Teknologi joined the ranks of other regional oil and gas services companies in serious trouble, as it defaulted on a debt repayment.

This article highlights how it would have been possible for an investor to exit from a position not just in PPTB but also in EZRA, EMAS, and indeed, any correlated regional organisation.

EZRA Relationship Woes
Figure 2 highlights the woes of EZRA and the deterioration in its creditworthiness over the last year, and Figure 3 represents the stock price movements of EMAS during the same period.

Figure 2 – EZRA Stock Price

Figure 3 – EMAS Stock Price

Since the default event of PPTB, the loan default of SJR Marine and the associated troubles of EMAS mean that any creditworthiness analysis of EZRA would be incomplete without a detailed understanding of PPTB and EMAS. Furthermore, the objective is not a post-mortem but an early warning; is there a clear signal a year or so before default to exit credit exposure? While PPTB has declared itself insolvent, EZRA and EMAS are both active, and therefore it would be instructive to look at where they fall in terms of riskiness in a comparison with all listed companies in their countries of incorporation. This comparison can also be performed for the same date last year to understand their riskiness indicator.

Risk Analysis
On February 17, 2017, EZRA was listed as the riskiest company in Singapore by KRIS, and EMAS was ranked the seventh riskiest company in Norway.

Figure 4 – The list of the riskiest companies in Singapore as on 17 February 2017

Figure 5 – The list of the riskiest companies in Norway as on 17 February 2017

It is instructive to note that the same list produced for 17 February 2016 reveals that EZRA was in the 92nd percentile of all the companies in Singapore. This clearly implies that the rot had started to set in at least 12 months before the events of October 2016. It is therefore, revealing to compare the KDPs of EZRA

Figure 6 – EZRA KDP term structure since 2015

In Kamakura Corporation’s popular troubled company index, a firm is considered “troubled” if its default probability exceeds one percent. It is clear from the graph that even for the most of 2015, KDPs for EZRA were above the 5% mark, and this is reflected in the relative riskiness analysis encapsulated above. For a fixed income investor, this is tremendous early warning, and highlights exit options well before a default event. One also immediately notices that the one-year KDPs of EZRA rose to over 12% in March 2016 and though volatile, never came back to below 5%, while the 1-month KDPs steadily showed an uptick hovering around 5%.

If EMAS KDPs are displayed in the same way, it also tells the tale of deteriorating cash flows and a struggling organization.

Figure 7 – EMAS KDPs

How does PPTB, the defaulting company, fit in? In fact, Perisai almost mirrors EZRA and shows a KDP greater than 7% since 2015 and well above 10% for most of 2016. The smart investor would have dotted the lines to understand the relationship between these entities and drawn an unflattering conclusion from the analysis.

Figure 8 – PPTB KDPs since 2015

Another important metric in KRIS is the cumulative default probability for the counterparty being analysed. In February 2015, the cumulative 2-year default probability for PPTB was a very high 3%. This metric was a warning signal provided by KRIS a full two years before default.

Figure 9 – PPTB cumulative KDP

Early Warning Indicators
Now that the relationship between the three entities has been established, attention turns to EZRA. Another indicator that is very valuable as an early warning signal is a comparison to the industry peer group, which in the case of EZRA is the energy peer group. It can be seen clearly in the graph below that the EZRA one-year default probability moved from just above the median level of the peer group to well above it in 2016 and has moved in line with the 90th percentile of riskiness. This is another warning, more than a year before default, to exit from any holdings of EZRA.

Figure 10 – EZRA Sector comparison

Figure 11 – EZRA macro factor relationship

Which macro factors that have impacted EZRA? A critical indicator that is provided by KRIS is the linking of macro factors to default probability functions. An analysis of EZRA shows that the firm’s KDPs are directly linked to the JPY/USD exchange rate, oil prices, and the Singapore GDP. Since the performance of this organization was directly related to Singapore economy apart from the oil prices, a drop in oil prices meant that the creditworthiness of EZRA was adversely impacted; further the movement in 10-year treasuries and Singapore GDP essentially meant that the KDPs of EZRA moved in line with a drop in the in both these factors. Figure 11 above identifies the various macro factors that drove the creditworthiness of EZRA, and Figure 12 below identifies the relationship between oil prices and EZRA KDPs.

Figure 12 – Oil prices impact on EZRA KDP

EZRA’s KDP term structure points to both short term and long term problems. It is therefore ranked as the riskiest company in Singapore, in an analysis of all listed companies in Singapore, and this does not bode well for this company, as can be evidenced below.

Figure 13- EZRA riskiness

In conclusion, what is the bottom line? If an investor had an exposure of SGD 10m in EZRA, what would be the potential losses that this exposure would incur? The answer is quite simple: with their KDP structure, the entire 100% is expected to be lost over a one-year holding period.

Figure 14 – EZRA loss position

From an expected shortfall analysis, it can be gleaned that the entire position would be wiped out over the next year. Other ‘at risk’ metrics include the credit-adjusted VAR, the component, incremental and marginal value at risk, and the expected shortfall as analysed below.

Figure 15 – EZRA @risk

This early warning signal for any investor in 2016 would have identified a very clear exit strategy, thereby avoiding a ‘crash and burn.’

Appendix: Kamakura’s KRIS Default Probability Models
The KRIS default probability models are benchmarked on more than two million observations of firms of all types. The total number of defaults used in the current version 6.0 models is more than 2,600. The unparalleled volume of data and the research insights of Kamakura’s Managing Director Prof. Robert Jarrow make the KRIS default probability service the most accurate early warning credit risk assessment indicator framework available. That is one of the reasons why Credit Magazine named both KRIS and the Kamakura Risk Manager Software package “Innovations of the Year”. For more information about KRIS default probabilities, please contact your Kamakura representative or e-mail Kamakura’s credit experts at