OVER THE LAST WEEK Yinson Holdings Bhd caught the attention of investors after an entry in an online forum made allegations about the group’s financial condition.

It comes just a week after audit problems were discovered at Serba Dinamik Holdings Bhd at the end of May.

At a glance, Yinson appears to be sitting on increasingly high debt with negative net operating cash flow. During that time, more than a third of its operating profits went to pay finance costs or interest paid on loans. In the last fiscal year 2021 (FY21) ended January 31, finance costs increased 61% year-on-year.

The concern is whether a liquidity crisis could be brewing in the floating production, storage and offloading (FPSO) rental company.

At the same time, a key question arises. Why haven’t the major institutional funds among Yinson’s directors and shareholders raised the red flags if there are indeed issues with Yinson’s financial condition?

After all, the investment manager of the Employee Provident Fund (EPF), Rohaya Mohammad Yusof, sits on the board of directors. EPF is Yinson’s largest shareholder, followed by Retirement Fund Inc (KWAP) and insurer AIA Bhd.

In a response to StarBizWeek, Yinson says the group’s operational projects have stable, recurring cash flows that would help the group effectively manage its loan repayment schedules.

He adds that the increase in borrowing is driven by new projects, which have debt financing. “The increase in 2017, for example, coincided with the completion of FPSO John Agyekum Kufuor, while the increase in 2020 is attributable to FPSO Anna Nery.

“It is also important to note that although we add debt to our balance sheet when building new FPSOs, the repayment of these loans does not begin until the assets start to be chartered and start to generate cash flow.” , the group said.

Based on Yinson’s cash flow statement for the 12 month period ended January 31, the group recorded a negative net operating cash flow of RM 522 million after accounting for changes in working capital. . A year earlier, net operating cash flow was positive at RM 956 million.

The main reason for the negative cash flow was the presence of a working capital adjustment of RM 2.3 billion for the contract assets.

“In 2021, we had two FPSOs under construction that were accounted for as finance leases, and therefore the cash flows for the construction of the assets were recorded in operating cash outflows as contractual assets.

“Under an operating lease, this would have been recorded as cash flow for investing activities. This is a purely accounting treatment. Excluding the impact of cash flow going to the asset under construction, we generated a positive net operating cash flow of RM 598 million, ”explains Yinson.

The group expects the value of contractual assets to continue to increase until construction is completed in early 2023. After which, provided that there are no new projects recorded as contracts for finance lease, the value of contractual assets will begin to decline as projects start up to generate liquidity.

Once chartered, FPSO bareboat payments will be used to reduce the balance over the term of the charter.

Yinson says his current backlog is more than enough to extinguish loans, cover operational costs, taxes and generate free cash flow, in addition to profits for the group.

“The last time Yinson launched an equity call for a project was when we got the John Agyekum Kufuor project in Ghana in 2015. Since then we have completed the FPSO Helang and the FPSO Abigail Joseph without raising new equity. This shows that we have succeeded in financing the equity portion of these projects with resources generated internally ”, indicates the group.

Responding to a question about the large RM 5.26 billion loan withdrawal she undertook in FY21, Yinson attributed it to building the Anna Nery FPSO, her biggest asset at this time. day, for Petrobras.

“The repayment will come from the cash flow of the project. FPSO Anna Nery has a charter that will pay US $ 5.4 billion (RM 22.18 billion) over 25 years. According to the research analyst you follow, the capital expenditure (capex) is between 900 million US dollars (3.69 billion RM) and 1.1 billion dollars (4.52 billion RM) ”, he indicates.

It is noteworthy that despite the massive loan withdrawal, Yinson also repaid RM 3.14 billion of loans and borrowings in the same fiscal year.

Yinson’s FPSO charter costs normally consist of two components, namely the bareboat rate and the operation and maintenance (O&M) rate. The bareboat rate is the rental rate for the property. Meanwhile, the O&M rate covers all costs of operation, repairs, maintenance, and insurance over the life of the asset.

“Normal wear and tear on equipment is factored into our O&M rate and calculated based on a thorough understanding of an asset’s life cycle,” he says.

Amidst the scrutiny of its finances, Yinson reaffirms its commitment to continually strengthen its standards of governance.

“Half of our board members are independent directors, who are professionals with experience in both the public and private sectors. We are also supported by our external auditor, PwC Malaysia, ”he says.

Commenting on the industry, Yinson points out that in recent years there have been fewer bidders internationally for large FPSO contracts that have a capex closer to US $ 1 billion (US $ 4.11 billion). RM).

In many cases, oil majors have struggled to find more than two bidders for such large FPSO projects. “The larger the FPSO project, the more technically complex it becomes and the capex is very high, which therefore requires a good balance sheet to be competitive,” he says.

Such a situation is positive for Yinson, given the lower competition and the possibility of extracting a higher profit margin from the tenders submitted. Looking ahead, Yinson expects better performance in the current 22 fiscal year, boosted by the full-year contribution of FPSO Abigail-Joseph, which began chartering on October 30, 2020.

Additionally, on June 9, 2021, Yinson announced that it had been selected by French oil and gas giant Total to carry out the preliminary engineering design for two FPSO projects to be installed in Angola and Suriname. The process is expected to result in a call for tenders, with contract award expected in 2022.

“Oil companies are currently struggling to find enough bidders for large FPSO contracts and we expect this to continue until 2022. More recently, we have submitted our bid for the Parque das Baleias project for Petrobras in Brazil, and Upstream indicated that we were the only bidder. With that, we think the outlook is positive for FPSO rental contractors, ”says Yinson.