Teekay Offshore – Refinancing Risks Appear Overblown – Seeking Alpha

I have been following with strong interest recent articles about Teekay Corporation (TK) and Teekay Offshore Partners, LP (TOO), especially the deep concerns that TOO will somehow not be able to refinance upcoming maturities and even hints of a possible bankruptcy. Since I follow these names as part of my active management in fixed income issues, I have looked closely at the TOO situation, and I believe that TOO is virtually certain to take care of upcoming maturities, assuming no major meltdown in the overall credit markets. I offer my views as a former commercial banker directly involved in originating, negotiating and executing, as the lead banker, well over a billion dollars in credit facilities for companies ranging from middle market to publicly-traded large corporate. My former professional work as a banker was admittedly not in the shipping industry, which usually is handled by specialized groups, but the fundamental credit analysis cuts across most industries. Listed below are the reasons why TOO is very likely to obtain the necessary financings/refinancings and/or amendments to its various credit facilities:

In conclusion, there is really little to indicate that TOO is somehow facing a major liquidity crisis or worse, some kind of bankruptcy event. The loss of the Arendal Spirit UMS contract appears overblown. Companies lose business representing 5% of their cash flow all the time, it's hardly a crisis. $120 million of debt is small relative to the company size. A quick scan of financial performance shows that operations are normal. Cash flow from operations and after cap-ex is nicely positive in Q1-17 (and for all of 2016 as well) and CVFO has shown stability, especially in the core segments. The outlook is positive with contracted projects expected to grow CVFO by 35%, including a $1 billion project coming on line now under a 12-year contract (Libra FPSO). To assess the likelihood of refinancing, put yourself in the shoes of the banker: there is little incentive to put unnecessary pressure on TOO and its parent, TK. There is certainly enough good news on the horizon to work constructively with the company. The broader Teekay entity is a cash cow for the banks, and as long as leverage is within normal range and operations show stability and growth potential, the banks will amend & extend.

Where is the risk? The key risk I see is that since TOO is highly leveraged there is little cushion for future bad outcomes. A major credit crisis would be the biggest near-term threat to TOO. In credit crises, typical bank behavior, like what I outlined above, is abandoned, and fear takes over. When fear takes over, banks are willing to accept irrational losses, just to "get out." Upper management effectively shuts down operations and removes any flexibility bankers have to work with companies in amending credit facilities or closing new business (I have personally experienced this). These actions are usually short sighted, but it happens. Banks tend to act like a herd, and this has ripple effects across the credit industry. Another oil crash could also force some lenders to cut back on oil exposure (especially if leverage starts to tick up due to declines in EBITDA), even if not a rational move.

While I do believe that assuming a normal credit market environment TOO will be able to refinance, banks will certainly use any excuse to charge higher fees and higher rates, and perhaps force other actions, like an equity raise or dividend cut. There may be a negative impact to common shareholders if refinancing rates are high, a secondary offering or a preferred offering is required, or a JV or asset sale is completed at a discounted value. High leverage by definition means less cushion to withstand adversity and volatile equity valuations, and I do not recommend the stock of TOO for these reasons. But I also consider it extremely likely that TOO solves upcoming maturities, assuming normally functioning credit markets.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Teekay Offshore - Refinancing Risks Appear Overblown - Seeking Alpha