VARD Holdings announced that it was notified on 12 Mar 2015 that two affiliates of its customers, E.R. Offshore, have filed for insolvency at a local court in Germany. VARD’s subsidiary is currently constructing one PSV for each of these companies at the Vung Tau Shipyard in Vietnam, and has received a 10% installment for one of the vessels.

With the termination of the two shipbuilding contracts, VARD does not expect to repay the prepayment received, and expects to be able to sell the vessels at a price that will cover the expected construction cost less the prepayment.

Recall that in mid Jun last year E.R. Offshore ordered a PSV from VARD with delivery scheduled for mid-2016. At the same time, the German owner took over a contract for a sister vessel from Carlotta Offshore via a novation agreement with delivery meant for 3Q15. Our rating on VARD is currently under review; the impact of the termination and the proposed resale is not expected to have a material effect on VARD’s EPS for FY15.

Source: OCBC Research - 16 Mar 2015