SMM's client problems. PetroMena has issued a summons as it is facing a US$300m funding gap for three semi-subs currently being built at Sembcorp Marine's (SMM) Jurong Shipyard. Against total costs of ~US$945m for all three rigs, PetroMena only has access to US$600m (US$200 for each rig). With the first rig to be delivered by end 1Q09, PetroMena needs another US$100m for payment to Sembcorp Marine (SMM) or risk default.

Lloyds' conditional precedents are achievable. PetroMena has requested the additional US$100m for the first rig from its banker, Lloyds.The bank is willing to increase the facility to US$300m but will only honour its US$600m obligations to the next two rigs if certain conditions are met. As we know it, the main conditions are for the next two rigs to be delivered on-time, on-budget and with definite charters. SMM and PetroMena has updated that both rigs are on-schedule and on-budget with long term charters. As such, we think Lloyds' would honour its obligations for the next two rigs.

Cancellations unlikely. However, we have moved PetroMena's milestone payment of US$105m (for Petrorig III) due on 31 Jan 2009 to Jan 2010 in view of PetroMena's tight cash flow. Order cancellations are the least preferred route for all three parties although SMM is the most buffered should this happen. Order cancellation is highly improbable as PetroMena has already paid about 50% (total ~US$730m) for all three rigs to SMM. Lloyds would find it difficult to claw back that money.

SMM has advantageous position. Even in the event of default, we think SMM will finish building the rigs with its strong balance sheet (S$1.5b net cash) as all three rigs have secured long-term charters. When SMM sells the finished rigs, cost recovery should not be an issue (see Exhibit 3). Changing order win assumptions. While this situation will have limited impact on SMM, the rate of order delays/cancellations along with a dire near-term outlook on oil demand have spurred us to lower our FY09 order book to S$1.4b (prev: S$2b) but our FY10 order book has been bumped up to S$2.5b (prev: S$2b) in view of payment deferments. This lowers our fair value slightly to S$2.00 (prev: S$2.05), still based on 10x FY09F EPS. Maintain BUY.