According to a summons issued by Petromena, the company is facing a US$300 mn funding gap on its three semi-subs, Petrorig 1-3, currently under construction at SMM’s Jurong shipyard. Against a total outstanding of US$946 mn, the company can access only US$600 mn (US$200 mn for each rig) in undrawn facilities with Lloyds and US$41 mn in cash (Fig. 1). If Petromena cannot raise an incremental US$100 mn to take delivery of Petrorig 1 by 30 April, it would trigger a default.

The company has asked Lloyds to increase the undrawn facilities of US$200 mn for Petrorig 1 to US$300 mn. In return, the bank is asking for to be released from its obligation on the other two rigs leaving a US$600 mn hole to be plugged by Sept 2009. Given Petromena’s high leverage, assets sales may be inevitable.

We estimate Petromena and a related company, LOG Rig, jointly owe over US$1.2 bn to SMM (20% of net order book). We are cutting our target price for SMM to our trough value estimate of S$0.95 (from S$2.15) and lowering our rating from Neutral to UNDERPERFORM on increased customer distress.

Petromena ASA (PMENA NO, NOK1.52) is facing a US$300 mn funding gap on its three semi-subs, Petrorig 1-3, currently under construction at SMM’s Jurong shipyard. It needs to plug US$100 mn gap by 30 April 2009 (delivery date for its first rig, Petrorig 1) or otherwise it would trigger an event of default for both the yard (SMM) and Petromena’s bondholders. Refer to Fig 1 for payment details.

At present, Petromena has US$200 mn undrawn facility for each of the three rigs from Lloyds TSB (LLOY.L, 98.40p, N, TP 125.00p) but that is not sufficient to cover the increased project cost. Because of the looming payment for Petrorig 1, the company has asked Lloyds to increase its facility for Petrorig 1 to US$300 mn. In return the bank has asked for additional security (which requires bondholders’ approval) and to be released from its obligations towards the other two rigs. Should this agreement be executed, Petromena will be able to take delivery of Petrorig 1 and avoid defaulting in April 2009 but will have a US$600 mn funding gap on the other two rigs.

On 16 January, bondholders approved additional security for bank loan conditional upon the company meeting the following objectives by 30 January: 1) detail a process, controlled by the bondholders, to sell all three rigs under construction; 2) provide a mechanism for bondholders to approve any new financing facility; and 3) written approval of the revised bondholder agreement by certain percentage. At this stage, both bondholders’ final approval and the bank’s ability or willingness to lend on the indicative term sheet of early/mid-Dec. 2008 is uncertain.

If this exercise is approved then Petromena may have bought time till September 2009 to sell assets. Given outstanding bonds of over US$850 mn plus a possible US$300 mn bank loan against its present market capitalisation US$32 mn, the chances for the company to secure an additional US$600 mn in debt or equity financing appear remote.

We estimate Petromena and a related company, LOG Rig Ltd. (unlisted), jointly have over US$1.2 bn outstanding towards SMM, or approx 20% of SMM’s net order book. Until Petromena’s workout is successfully completed, potential threat of a major customer default may overshadow SMM’s share price performance.