Lamprell Provides Trading, Funding & Liquidity Update

Source: 6/24/2022, Location: Middle East

Lamprell is providing an update on developments within the business, including an update on the various financing and strategic options, the Group's near term liquidity position and current trading. While operationally the business continues to deliver for clients and has an active pipeline of new business opportunities, further to the updates with respect to financing and strategic options detailed below, the Board is urgently pursuing the options available to deliver a funding solution that will resolve the Group's immediate and severe liquidity concerns.

This announcement should be read in conjunction with the statement regarding a Possible Offer, announced seperately this morning.

In 2021, the Group launched a balance sheet recapitalisation programme to fulfil its near-term working capital needs and to meet medium term strategic objectives with the intention of completing a new funding arrangement of $120-150 million by the end of Q3 2021.

At the interim results for the six months ended 30 June 2021 released on 28 October 2021, it was disclosed that the Group faced severe liquidity constraints and in the absence of reaching a near-term funding solution, the Group would not be able to meet its funding obligations as set out in more detail below. The Company partially addressed the immediate liquidity concerns by successfully securing a $45 million Export Credit Agency (ECA) backed revolving trade loan facility with two regional banks in October 2021 (the "Initial Facility") and raising gross proceeds of approximately $30.1 million through a placing of new Lamprell shares (the "Placing").

In addition, at those interim results the Group disclosed that additional capital would still be required in the form of a second working capital facility of $45 million, to be secured by the end of Q1 2022, and further funding alternatives which were required to be put in place in 1H 2022. The Company has reiterated its funding requirement and timing over the course of the last year. Furthermore, in the trading update issued on 7 February 2022, the Company highlighed the financial pressures caused by the ongoing impact of Covid-19 and the investment required to deliver the Group's strategy, further details below.

Accordingly, the Group has continued to explore a number of potential financing and strategic options, including asset monetisation, project-specific financing, hybrid facilities and/or additional equity, with a view to finalising these options in Q2 2022, in line with the Company's working capital requirements.

Funding and Strategic Update

Debt Financing and Alternative Sources of Capital
During the course of 1H 2022 the Board has continued to explore various financing and strategic options with a number of potential providers of finance with respect to securing non-equity related sources of capital. Despite significant efforts by the Company to secure this additional finance and/or execute a transaction which would provide the Group with additional capital, which includes the additional $45 million non-binding ECA-backed accordion facility (the "Second Facility"), to date these discussions have not resulted in new financing for the Group. In particular, the Second Facility remains uncommitted and the Group's lenders have indicated that they will only be prepared to provide the facility following completion by the Company of a significant equity fundraise. Therefore, there can be no certainty that the Second Facility will be agreed and become available to the Group. As a result, the Group now faces urgent and severe liquidity constraints and in the absence of reaching an immediate alternative funding solution, the Group will not be able to meet its funding obligations as detailed in this announcement.

Exploration of funding options - Equity Raise
The Board has been engaged in frequent discussions over the last three months with its two largest shareholders; Lamprell Holdings Limited and Blofeld Investment Management ("Blofeld" and together, the "Major Shareholders"), who in aggregate own approximately 53.98 per cent. of the ordinary shares of Lamprell, with the intention to receive support for a potential equity fundraise of up to $150 million and/or some form of interim financing arrangement.

The Company has also consulted with its other top institutional shareholders to gauge their support for an equity raise. To date, the Group has not been able to reach an agreement with the Major Shareholders and the institutional investors in respect of an equity-based financing solution. Blofeld has sought an alternative solution by way of an approach to take the Company private with an offer for the entire share capital of the Group, as described in the separate announcement made by the Company today.

Update on Potential Offer for Oil & Gas Business
On 29 March 2022 the Group announced that it had received an early-stage proposal for a potential sale of a majority stake in its Oil & Gas business and that it had entered preliminary discussions with an interested party.

The Group progressed these discussions with the interested party which then formed a consortium including the interested party and Lamprell's second largest shareholder, Blofeld. However it became apparent during the course of negotiations that such a disposal on the terms proposed, would be highly problematic to execute and would ultimately leave the Group without a viable business going forward. Furthermore, the Board believes the proposal significantly undervalued the assets of the business. The proposal did not include the requisite interim funding solution to bridge to completion of the transactions, therefore these discussions have been terminated.

IMI Investment
Since May 2017, the Company has been a joint venture ("JV") partner in the IMI JV with Saudi Aramco, Bahri and Hyundai Heavy Industries which was established for the development and operation of the King Salman Maritime Yard in Saudi Arabia.

The Company committed to invest $140 million as part of the JV agreement, to date the Company has invested a total of $85 million since the formation of the IMI with a further $37 million scheduled for Q3 2022 and $18 million expected to be paid in FY23. During this time, it developed a growing presence in the Kingdom of Saudi Arabia. However, in view of its financial position, the Board has decided that it was appropriate to review its financial involvement in the IMI under the terms of the JV agreement. Any review of its investment will not be completed in a timeframe that would enable the Company to address its short term liquidity requirements.

IMI rigs and associated ECA-backed financing
The Company has been in the process of constructing two jackup rigs for its client, the IMI JV, since January 2020. The construction process is well advanced with the first rig ("Rig 1") having completed the load out and float off in May 2022 which is an important milestone in its completion. Delivery of Rig 1 is expected by the end of 2022 with delivery of the second rig ("Rig 2") scheduled to be in Q1 2023.

At the point of delivery of Rig 1, the Company expects to receive its final milestone payment under the respective contract. However, the Company has significant working capital requirements to enable it to complete Rig 1. There is a similar working capital profile in respect of the completion and delivery of Rig 2. The current milestone payments expected to be received by the Group include $26.4 million in October 2022, $44 million in December 2022 and $44 million in March 2023. One of the significant working capital requirements relates to the payment for equipment provided by a Tier 1 services company for use on Rig 1 and Rig 2. The aggregate quantum of this payment is $59 million, $51 million of which is due to such key supplier in July 2022 with the balance payable in December 2022 (capable of being deferred in consideration of an additional fee).

In order to assist with the financing requirements of the rig contracts, the Company signed the Initial Facility. As part of the terms of the Initial Facility there was a non-committed option for the Second Facility which the Company had expected to be available in Q1 2022. As indicated above, the Company has not yet been in a position to access this accordion facility which, amongst other criteria, is contingent on the completion of a significant equity fundraise and credit approval. The overall capital requirement was outlined by the Company in its financial statements for the year ended December 2020 which were released in June 2021.

Under the terms of the Initial Facility, the Company is required to make an initial repayment of $26.4 million on 27 June 2022 with the final repayment of the Initial Facility being due in Q4 2022. The Company is seeking a one-month extension for payment of the June milestone. There can be no guarantee that such extension will be granted by the Company's lenders.

Yard upgrade programme and renewable production line investment
As announced on 22 March 2022, Lamprell signed a capacity reservation agreement for the Moray West Offshore Wind Farm, a major project in Scotland. The reservation agreement secures capacity in Lamprell's Hamriyah yard for the work as the project moves towards financial close and full contract award.

In anticipation of this and similar other awards in the Renewables business unit, the Group has commenced a significant yard upgrade programme, including the construction of a state-of-the-art renewables serial production line, through which we will be able to construct jacket components, transition pieces and monopiles, thereby expanding the Group's capacity and product offering.

The Company believes that this major capital expenditure project amounting to approximately $55 million of capex over the next 9 months is critical to delivering the Group's growth strategy in renewables. The project has the potential to double Lamprell's annual renewables revenue capacity from c.$400 - $600 million to c.$800 - $1,200 million while lowering unit production costs and materially improving gross margin contribution by over 2.5x on offshore wind foundations projects. The Company believes that this, in turn, offers the potential to unlock incremental EBITDA generation of up to $100 million per annum in the medium to longer term, as and when the strategic capital investment programme has been delivered.

Liquidity Position
Our unaudited liquidity position is set out in the table below. The reduction is driven by an intensive working capital phase on the IMI rig projects.

The Group now faces urgent and severe liquidity constraints, and requires an immediate funding solution or bridge financing to a funding solution in order to meet immediate funding obligations of $75 million in June / July 2022 as set out below.

Significant receivables tied up on balance sheet
These are features of our ongoing business model and consistent with normal practice for a construction company such as Lamprell. It is anticipated that these matters will be resolved in the coming quarters, although there is no certainty as to such resolution. In any event the Company requires a restrengthening of its balance sheet in anticipation of future awards.

Current trading
The macroeconomic environment has strengthened with oil and gas prices at multi-year highs and significant global demand for offshore wind infrastructure. This strong market backdrop is expected to lead to considerably higher levels of investment by operators in Oil & Gas both in the UK and Middle East. The Group sees significant opportunities, with noticeably increased bidding in both oil & gas and renewables addressable markets. Since the beginning of the year, the bid pipeline has grown to $9.4 billion, with $5.1 billion attributable to renewables and $4.3 billion attributable to Oil & Gas. Engagement with prospective clients remains encouraging with circa $1.4 billion of potential renewables contracts scheduled for award in 2022.

In February 2022, the Group received a limited notice to proceed for the procurement of steel and fabrication of up to five jack-up lift barges with BGMS, an oil and gas contractor based in Saudi Arabia. In March 2022, Lamprell signed a capacity reservation agreement for the Moray West Offshore Wind Farm. Subject to final investment decision, the full notice to proceed on this project with a value of more than $200 million is expected early in the second half of 2022. In April 2022, the Group also entered into a Memorandum of Understanding (MoU) with NOV, a leading energy services company, to support its delivery of three 1 gigawatt (GW) offshore floating wind farms for Cerulean Winds. The Group has seen an increased interest in reservation agreements for future yard capacity from its customers in offshore wind, and views this as a positive sign of forward planning and addressing capacity pressure in the renewables supply chain. The investment in the new renewables serial production facilities is an important element in the scale-up of our production facilities and a central component of the full award of contract on the Moray West project.

However, current Group performance continues to be affected by the delivery of legacy, low margin projects and insufficient revenue levels as the Group emerges from a prolonged period of low market activity due to the low energy prices and more latterly, the impact of Covid-19. New awards for Lamprell in all of the Group's end markets over the past two years were below expectations, impacted by Covid-19 and due in part to client concerns regarding the liquidity constraints the Group faces and balance sheet strength in order to support large scale projects.

As a result of the recent reservation agreement and anticipated contract awards, the Group expects 2022 revenue to be in the range of $400-500 million, with $340 million secured for 2022. The Group intends to continue its recently implemented cost savings.

Revenue recognition will be heavily weighted towards the second half of 2022, in line with progress milestones on major projects. Profitability in 2022 may be impacted by the Group's ability to achieve the 20% profit recognition threshold on any additional contracts secured in the course of 2022. Going forward, the Group expects to deliver a step up in revenue and financial performance from 2023. This will be delivered through the planned strategic renewables yard investment and a stronger balance sheet (assuming the recapitalisation of the balance sheet is successful), which will assist in converting its high quality growth pipeline into higher margin backlog.

Release of results for the year ended 31 December 2021
As announced on 29 March, the Company has until 30 June 2022 to report its full year results for the period ended 31 December 2021, which is also required in order for the Board to continue progressing potential financing and strategic options. The audit process has not yet been completed but is in its final stages. In the event that the Company is unable to report its results by this date, trading in the Company's shares will be suspended.

Sale of the Group and alternative implementation options
In addition to the Possible Offer announcement made in conjunction with this corporate update, the Company is seeking third party buyers for the Group and its assets. In the event an offer on an equity basis and bridging financing cannot be obtained in the very near term, then the Company will need to consider and take steps to implement alternatives which seek to protect the interests of financial creditors, commercial counterparties and employees and which safeguard the rescue of the business as a going concern, but which may result in no value being attributed to the existing equity. There can be no guarantee that the Company will be able to implement alternatives in the available timeframe.

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