EZRA Holdings revisited: Do bondholders have a case against DBS and HSBC for selling them negligently if not carelessly over-hyped Ezra debt securities?

by Ganesh Sahathevan  

The following is an extract from Mak Yuen Teen's Corporate Governance Case Studies (Volume Nine) from the chapter on the collapse of Ezra Holdings Limited in 2015,ostensibly due to crash in crude oil prices. At page 90:

It seems that Ezra’s cash flow problems had started way before the crunch in the oil market. KGI Securities Singapore analyst Joel Ng noted that Ezra had been reporting negative free cash flows for 10 years, even when oil prices were above US$100 a barrel. This was said to be due to it taking up too many loans during the years when the oil industry boomed. Such problems only surfaced when the oil price fell. Persistent weak free cash flows within the Group led to a “highly unsustainable” balance sheet. Ezra could have been able to manage with the market conditions if it had a healthy balance sheet.

That is however not how DBS Bank Ltd. and The Hongkong and Shanghai Banking Corporation Limited described  the company, Ezra Holdings Limited, when they promoted its debt securities: Joel Ng relied on figures from Ezra's published financial statements,and hence DBS and HSBC would have known or ought to have known that Ezra had been reporting " negative free cash flows for 10 years, even when oil prices were above US$100 a barrel."

In the words of DBS and HSBC, in 2012: 

Ezra Holdings Limited (Ezra, the Group or), a leading global offshore contractor and provider of integrated offshore solutions to the oil and gas (O&G) industry, has announced that it has launched and priced its first Singapore dollar denominated Subordinated Perpetual Securities (the "Securities") to raise S$150 million. This issuance is the second offering under Ezra's US$500 million Multicurrency Debt Issuance Programme ("Debt Issuance Programme") established on 28 August 2012.

DBS Bank Ltd. and The Hongkong and Shanghai Banking Corporation Limited are the appointed dealers for the Securities. The issuance of the Securities was well received and the order book was multiple times oversubscribed with participation from more than 50 investors. In terms of geographical distribution, the allocation was primarily to Singapore based investors. In terms of investor classes, a substantial portion of the issue was allocated to private banks, with sizable interest from institutional investors and asset managers.

The Group's recent benchmark S$200 million, 5% 3-year fixed rate notes issued on 7 September 2012 also received strong interest from investors. The net proceeds of both issues will be used to refinance the Group's existing borrowings, as well as for general working capital and general corporate purposes.

Ezra's Managing Director, Mr Lionel Lee, said: "The strong appetite for our notes and securities in support of our efforts to strengthen our balance sheet reflects investor confidence in Ezra and our future.

"By diversifying our sources of funding and extending our debt maturity profile, it positions the Group well ahead of any global uncertainties and allows Ezra to take advantage of the many opportunities we see in subsea construction and offshore support services."

Mr Clifford Lee, Head of Fixed Income at DBS, said: "This is indeed an important milestone for Ezra's continuous efforts in setting its credit benchmark in the debt capital markets following its recent 3-year SGD note issue. The issuance of both the notes and perpetual securities has allowed Ezra to create a transparent SGD credit yield curve which will be useful for its future debt raising exercises. DBS is extremely proud to be part of this ground breaking transaction."

Mr Jason Khoo, Head of Debt Capital Markets, South East Asia at HSBC, said: "The strong investor response to Ezra's perpetual securities issuance represents a clear endorsement of investor appetite for Ezra's credit, and represents a strong testament to Ezra's credit standing, following their successful SGD senior bond issue. The perpetual securities issuance enhances the company's capital structure and is instrumental in providing the issuer with greater financial flexibility going forward.

(Source: Ezra Raises S$150 Million from Issuance of Perpe tual Securities
Distributed by Contify.com 18 September 2012 Singapore Government News)

Ezra's bondholders have been left with nothing, but do they have a cause of action against DBS and HSBC for pushing debt securities that were clearly not as secure as they held them out to be? 

END