Reading the above article raises some room for concern to DBS as a long term investment.
1. The management extended the loan on the basis of an investor (AMTC) that has dragged his feet in investing in the company - if the private equity is having concerns with the investment in the company, I think the bankers should be even more conservative, not aggressive.
2. To prop up your local champions is admirable. But Singapore has always had the history of letting things that are not viable, fail - think Stats Chipac, NOL, etc. What makes DBS so special to help this company to the extent?
3. The management were caught off guard. This is the most shocking. CEO Piyush is constantly seen as the man with the big picture and detail oriented mindset. I am slightly astounded by the fact that he could be caught off guard. Worse still, the swiber management team did not even keep DBS as the principal banker in the loop - causing much shock and awe and losses of about 3.6bln to DBS market cap.
What is credit analysis all about?
This is a classic case of character consideration. In credit analysis, the 3 Cs that are most critical are
1. Character
2. Collateral
3. Capitalization
Given that number 3 was a big problem - i.e. no equity based left, its a very big concern why DBS should increase its loans from an estimated 100m to 700m.
Collateral, such distressed assets have minimal collateral....but providing working capital for a lightly capitalized company basically means you are investing in a company with very high risk....
Character, sadly it seems that the character assessment by the RMs failed when the board and management team of swiber decided to liquidate without consulting their bankers.
What happens now?
Quite likely, DBS will escape relatively unscathed given the large amount of assets. However, it brings concerns to the risk management ability which it says there would be 'no change'. Either its a show of marketing to the public or that the management is heading down the road to a very deadly end.
What is most important is not to ask what DBS can get back but the contagion that may breakout as a result of one company going bust (suppliers may stop providing supplies, clients may stop paying, banking loans may freeze up, banks may earmark and block your loans etc.).
Would this happen to other oil industry companies because of one player? - quite possibly. And then you may see the big hit to DBS's balance sheet - contagion if it happens will be something that would reverse all the good work that wealth management has done so far for the company.
IF anything positive, it would be that the company is very open telling you their exposures. Which is significant (as per below)
Investors beware - Caveat Emptor.
Bloomberg has sound the warning bells - https://www.bloomberg.com/gadfly/articles/2016-08-08/dbs-soured-loans-mask-something-more-disturbing
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