Ouch! I just lost $33K on Triyards after it got suspended last month. Triyards is a shipbuilder and a subsidiary of Ezra, which is now under Chapter 11 bankruptcy protection. By right, if you read my post on My Upstream Oil & Gas Rescue Operations, ship and rig builders have not seen the worst of the Oil & Gas (O&G) long and harsh winter and I should not have invested in Triyards in Mar this year. However, Triyards has successfully diversified away from the O&G sector. Among its new orders for the financial year ending in Aug 2016 are chemical tankers, research vessel, passenger ferries, river cruise vessel, wind farm support vessels, etc. New contract wins in such non-O&G vessels totalled USD226.2M in FY2016. Including O&G vessels, total contract wins represent 84% of the revenue in FY2016. The orders-to-revenue ratio is an important metric for me when investing in O&G stocks, as described in Oil & Gas, Show Me the Orders!

Given its success in diversifying away from the O&G sector, Triyards is similar to another ship builder, Vard, which has also diversified away successfully and was the subject of a voluntary cash offer by its parent company in Nov 2016. However, unlike Vard, Triyards' parent company, Ezra, is not in any financial position to offer a cash offer. Nevertheless, Ezra had pledged all its 60.9% shareholding in Triyards equally to both DBS and OCBC in Jul 2016. Any sale of the shares to recover the loans by any one bank would have triggered a mandatory cash offer. When I first bought into Triyards at $0.288 in Mar, its net asset value was USD0.673 as at end Feb 2017. Its debts were USD187.9M, translating to a debt-to-equity ratio of 0.86, which was very high. However, most of the debts were used to finance working capital and trade receivables were USD238.6M. When the bills are collected, there will be cash to pay down the debts.

On 19 Mar, Ezra announced Chapter 11 protection under US laws, instead of the usual judicial management under Singapore laws, which means that creditors cannot foreclose and sell the assets pledged to them. In other words, both DBS and OCBC cannot sell Ezra's Triyards shares to a third party except with the approval of the US courts or consent by Ezra. Since the banks could not sell off the shares, there would be no cash offer, at least not in the near term.

Upon Ezra's bankruptcy protection, Triyards disclosed on 21 Mar that it had approximately USD41.5M exposure to Ezra, mostly in the form of joint corporate guarantees. This represents 19% of Triyards' equity, reducing the net asset value to USD0.545. In Triyards' 3Q2017 financial results announcement, it announced another USD45.1M in impairment losses. As at end May 2017, the net asset value was reduced to USD0.478. Including the exposure due to joint corporate guarantees of USD38.5M mentioned above, the net asset value would be USD0.359. Ezra was a huge body blow to Triyards, but not fatal. Triyards itself was not under Chapter 11 bankruptcy protection and continued trading on SGX despite Ezra's troubles and trading suspension, until 4 Sep.

The company that has a bigger impact to Triyards has a name that also starts with "Ez", but it is not Ezra, it is Ezion. On hindsight, Ezion is a major customer of Triyards, much more so than Ezra. Ezion subscribed to 29.5M warrants in Triyards at an exercise price of USD0.563 in Jul 2015. One of the conditions for the issue of warrants to Ezion is that Ezion enters into shipbuilding contracts with Triyards worth at least USD150M. Based on outstanding order book of USD422M as at Oct 2016, this represents 36% of Triyards' order book. On 23 Feb 2017, Ezion announced that it had indefinitely deferred delivery of 4 service rigs worth USD270M to reduce capital expenditure. A cross-check between Ezion's and Triyards' announcements of contract wins in 2014 suggests that 3 of these orders worth a total of USD162.5M are Triyards'. That means USD162.5M of the outstanding trade receivables of USD230.0M could not be collected, dealing a serious blow to Triyards' cashflow. Triyards' 3Q2017 financial results also suggest that banks, despite "owning" 60.9% of Triyards, have grown cautious about providing further loans to it. On 6 Sep, Triyards suspended trading of its shares.

Triyard's problem is similar to Keppel Corp's and SembMar's problem with Sete Brasil, which had deferred offers and stopped payments. Keppel Corp and SembMar survived, because of strong backing of their parents, Temasek, and continued support of their banks. Triyards have neither, and its chance of surviving is a lot lower. For Triyards to survive unscathed, either its banks continue to provide financing to complete the ships ordered by other customers, or Ezion takes delivery of some of its ships, so that Triyards can convert the receivables into cash and pay off the debts.

Actually, I also did not expect Ezion to go into restructuring. Ezion's market capitalisation was one of the highest among the mid-cap O&G stocks before it was suspended on 14 Aug. In fact, I had just bought into Ezion warrants just before it was suspended.

Triyards is the biggest loss on a single stock. The lessons I learnt from this episode is to know your customers really well!

See related blog posts:

• Understanding Shipbuilders' Balance Sheets
• My Upstream Oil & Gas Rescue Operations
• Oil & Gas, Show Me the Orders!