Primary Preview: Yinson Production Offshore Near-Term Leverage Spike Concerns Offset by Solid Asset Coverage, Contract Backlog, Track Record; Bonds Trade Up on the Break

Malaysia-based Singapore-listed floating production, storage and offloading, or FPSO, vessel operator Yinson Production Offshore’s debut $500 million senior secured five-year notes are underpinned by solid asset coverage, a chunky $22.5 billion contracted order backlog and a strong track record, which offset concerns over the group’s expected near-term leverage jump to fund its fleet expansion, sources said.

After having initially marketed a $500 million to $600 million bond at an around 10% yield, leads set initial price talk at 10.25% to 10.5% (including a roughly 2 point OID) and fixed the size at $500 million. The deal priced at 98 with a 9.625% coupon and traded up on the break, with the bonds changing hands at 99.25 this morning, one source said.

The proceeds will enable the group to repay a $430 million bank loan and boost cash by $70 million. The new bond will sit at the holdco level and be secured by share pledges in the issuer and the parent and upstream guarantees from the group’s material holdcos. The structure includes $2.813 billion of nonrecourse project finance debt secured by six of the group’s newest vessels, while its three oldest vessels are unencumbered.

Yinson will be 4x net levered at close based on $668 million full-year 2024 accounting EBITDA. However, that will rise as a result of project finance for three additional vessels Yinson commissioned, which will push up total debt by another $1.2 billion, but is expected to result in midpoint pro forma cash EBITDA for the fully delivered fleet of around $850 million to $900 million.

Net leverage based on cash EBITDA starts off at 5.6x and is expected to peak at 7.6x in 2025, before steadily decreasing to below 3x in 2029 when the bond matures, which requires a leap of faith. However, the deleveraging trajectory is supported by the group’s $22.5 billion contracted revenue backlog, sources said.

The group’s contracts are structured to ensure that the clients take on any commodity price, reservoir and country risks, and over 85% of the contracted backlog is with investment grade companies or large national oil companies. Yinson derives around half its revenue from Petrobas, which exposes it to significant customer concentration risk. However, the group has a strong track record in always being made whole in the few cases where clients terminated contracts after abandoning fields, which provides a lot of confidence, sources noted.

There is also significant asset coverage, sources added. The group has a roughly $1.6 billion market cap, and the three unencumbered FPSO vessels are worth roughly $200 million based on the net present value of their discounted cash flows, while the three additional commissioned vessels are expected to drive significant additional equity value, although there is some execution risk as they are yet to be hooked up, the sources said. Two of the new FPSOs will come onstream in 2024 and the third one in 2025.

The group also boasts one of the youngest fleets in the sector with an average fleet age of just 3.4 years, which is reflected in average uptime of 99.8%, sources noted.

Yinson is required to obtain credit ratings for the bonds from any two of Moody’s, S&P and Fitch within three years of issue date or face a 100 bps coupon step-up. The company told investors it could secure a BB- rating, but the long lead time it gave itself to obtain the rating suggests that it expects its metrics to worsen considerably in the short term before improving again, one source noted.

The underlying market dynamics are also positive, with Yinson seeing signs of a relatively tight market for FPSOs, sources added.

Yinson Offshore Production’s pro forma capital structure as of Jan. 31, 2024 is below:
 
DNB Markets and Pareto Securities were joint bookrunners on the deal, while ABG Sundal Collier ASA was joint lead manager.