This article first appeared in The Edge Malaysia Weekly on July 1, 2024 - July 7, 2024
YINSON Holdings Bhd (KL:YINSON) is putting its balance sheet to work.The floating production storage and offloading (FPSO) operator is busy raising funds through equity or borrowings to support its operations.
Its burgeoning debt and fundraising activities are not new to the investing community and are often criticised by its detractors.
The group’s proponents would argue that the debt is expected and justified, given the nature of its business where capital expenditure is intensive and usually front-loaded. Furthermore, Yinson has so far been able to manage its debt and meet all its obligations.
On the other hand, its critics are not convinced that the debt accumulation is sustainable, especially after its most recent financial year ended Jan 31, 2024 (FY2024), which saw borrowings rising to RM16.3 billion, a whopping 70% increase from RM9.6 billion in FY2023.
It puts the company’s net gearing at 1.66 times in FY2024 compared with 1.23 times in FY2023. This does not take into account its RM1.79 billion in perpetual securities in FY2024, which is classified as equity.
Yinson’s total borrowings increased further to RM16.56 billion as at April 30.
In March this year, the company issued another round of perpetual sukuk wakalah that amounted to RM640 million.
Term loans make up the bulk of the group’s total borrowings. In FY2024, they increased to RM14.92 billion, representing an 83% increase from RM8.15 billion a year ago. The rest of the group’s borrowings come from sustainability-linked sukuk wakalah amounting to RM1.01 billion and revolving credit of RM395 million.
In a reply to The Edge, Yinson says the rise in debt in FY2024 is largely in line with the increase in the conversion progress of three of its FPSOs — Atlanta, Maria Quitéria and Agogo — where the total capital expenditure amounted to US$4 billion (RM18.9 billion).
Yinson was awarded the FPSO Atlanta and Maria Quitéria contracts in February 2022 while the FPSO Agogo contract was awarded in February 2023. In total, the group’s fleet consists of nine FPSOs.
“With FPSO Anna Nery successfully delivered in May 2023, we are reaching the end of the biggest capex cycle that Yinson has embarked on in our history,” the company says.
FPSO Atlanta arrived at its destination on May 11 and is on track for first oil by August while FPSO Maria Quitéria sailed from the shipyard on May 7 and is expected to have reached Brazil. As for FPSO Agogo, it is still under construction and is expected for first oil by 4QFY2026 (November 2025 to January 2026).
Yinson explains that it has taken on more FPSO jobs in recent years partly because FPSO providers are hard to come by, making the group a favourite of the oil and gas (O&G) companies.
“FPSO is a capital-intensive business, but offers respectable, visible, stable cash flow returns when executed well. From a single FPSO asset under construction (FPSO Anna Nery — awarded in 2019, our first FPSO win in Brazil by Petrobras, at the start of the pandemic) in the early years, we reached a peak of four FPSO projects being constructed at one point,” says Yinson in its reply.
Nonetheless, the profile of Yinson’s loans is worth highlighting. Of the RM16.3 billion in borrowings, RM9.83 billion have a maturity of between two and five years. Those with over five years’ maturity amount to RM3.84 billion.
On the other hand, the bulk of its finance lease receivables, under total undiscounted lease payments, will only be received after more than five years and amount up to RM17.79 billion.
Some observers have pointed out that the mismatch between its borrowings, the bulk of which will mature in between two and five years, and its receivables, which will be later than five years, may represent substantial refinancing risks for the group.
About RM13.7 billion of its term loans are denominated in US dollars. Some of these bear interest ranging from 3.89% to 10.17% a year on variable rates and as high as 13.88% for its fixed rate loans. The rest are denominated in ringgit and Indian rupees.
Notably, 80% of the total borrowings are variable rate borrowings while 20% are fixed rate borrowings.
While Yinson has a proven track record of being able to manage its debt levels, critics believe there could be significant risk ahead in light of the global environment should interest rates begin to rise.
“As interest rates rise, the question is whether the returns from contracts will be sufficient to cover the cost incurred on borrowing,” says an observer.
In line with the increase in borrowings for the purpose of its FPSO construction, the group’s finance costs have also grown in FY2024 to RM963 million, up 67% from RM577 million in FY2023.
Finance costs for FY2024 amount to almost the same as the year’s net profit at RM964 million. Its annual revenue totalled RM11.65 billion.
That said, Yinson emphasises that its project financing loans have been structured to ensure repayment over the course of the FPSOs’ contracted periods and to become non-recourse shortly after the FPSOs are operational.
In other words, lenders are only entitled to repayment from the cash flow of the operational FPSO that the loan is financing, and not from any of the group’s other assets.
To allay concerns about the risk of the energy sector going into a downturn, Yinson says it only initiates FPSO projects upon being awarded a long-term contract. The company’s average contract length is 17 years.
“This asset class (FPSOs) is also much insulated against economic cyclicality, has a ‘near-to-zero speculative construction’ element due to the size of capex and is built-to-purpose,” explains Yinson.
The group adds that it always seeks strong counterparties with solid credit standings. It’s also worth noting that the contracts have protection upon termination.
“Termination by convenience by the charterer triggers an early termination fee derived based on the NPV [net present value] of the remaining contract cash flows, which in all cases will be sufficient to repay outstanding asset debt,” it says.
Generally, all of Yinson’s FPSO contracts are protected by termination clauses, with the exception of the Petrobras contracts. The group has two contracts with Petrobras with an estimated aggregate value of RM22.7 billion (FPSO Anna Nery) and RM21.7 billion (FPSO Maria Quitéria).
While the contracts may provide some form of security for Yinson in the case of termination, the process of recouping the fee can be lengthy, especially when court proceedings are involved.
The company says its FPSO charters are not affected by oil prices.
“Note that even during the peak of the Covid pandemic, when oil prices reached negative territories, our revenue and cash inflows were not impacted. Putting things into perspective, FPSOs tend to be a favourite among infrastructure funds that understand such a business class (FPSO charters) and are keen to seek a sustainable income stream,” elaborates the group.
Yinson says due to the capital-intensive nature of its business, it has to seek various sources of external funding to construct and deliver the FPSOs.
So far, it has been successful at raising financing, be it through equity or borrowings.
Yinson, whose financial year ends on Jan 31, has been actively raising funds in FY2025.
Besides issuing perpetual sukuk wakalah amounting to RM640 million in March, the group also secured a US$500 million five-year senior secured bond in the Nordic bond market. Part of the proceeds from the latter were utilised to repay corporate loans amounting to US$431.8 million.
On April 30, Yinson completed US$1.3 billion in debt financing for FPSO Agogo. A month later, it placed out US$1.035 billion in non-recourse, senior secured notes to refinance FPSO Anna Nery. It has an 18.2-year maturity, with a fixed coupon of 8.947% that is payable semi-annually.
The group has also completed a private placement that raised RM283.2 million for the expansion of its renewable energy and green technology business.
A UOB KayHian Research report dated June 20 mentions that Yinson remains keen to bid and has identified 21 potential FPSO opportunities, involving some US$13 billion in capital expenditure, in the medium term.
This implies that fundraising is likely to continue if the opportunities materialise.
UOB KayHian forecasts that Yinson’s total debt will rise to RM18.32 billion in FY2025 and RM19.3 billion in FY2026, translating into a net debt to equity ratio of 2.4 times.
CGS International Research, meanwhile, expects the company’s total borrowings to climb to RM18.85 billion in FY2025 and RM20.44 billion in FY2026.
Yinson says it is proactive in undertaking various debt refinancing and reprofiling activities, which it deems a sensible move to enhance its debt amortisation profile.
“This has allowed us to back-load the maturity of our debt to be paid beyond 2028, freeing up our cash to return more value to our shareholders who have supported us over the years and support the growth of our other businesses,” it adds.
Over the last three financial years, Yinson has paid out a total of RM238 million in dividends. On a per-share basis, it works out to two sen for FY2023 and three sen for FY2024.
It has also spent a total of RM194.78 million in share buybacks over the same period. Most of the buybacks, amounting to RM190.75 million, took place in FY2023.
Yinson says it is committed to delivering higher dividends, with a constant quarterly dividend payout beginning FY2025, given the expected delivery of FPSO Atlanta and FPSO Maria Quitéria by end-2024 and FPSO Agogo by end-2025, which will significantly increase its operational cash flow.
CGS forecasts dividend per share to come in at five sen for FY2025, working out to a dividend yield of 2.14%.
In the first quarter ended April 30, 2025, revenue amounted to RM2.21 billion, down 27% from a year ago, while net profit amounted to RM203 million, 2.4% lower than a year ago.
Despite the rapid rise in borrowings, Yinson seems to be a screaming buy in the O&G industry given that all analysts covering the stock have “buy” calls on it, with an average target price of RM3.68. The FPSO operator’s share price closed at RM2.33 last Friday, valuing it at RM6.9 billion.
Yinson’s largest shareholder is founder and executive chairman Lim Han Weng, who has an indirect stake of some 23% in the company. The Employees Provident Fund is the second-largest shareholder with 17.8%, followed by Retirement Fund (Incorporated) or KWAP, which has 7.65%.
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