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Promised cash infusion from Hyflux’s white knights insufficient to go around

Goola Warden
Goola Warden10/29/2018 07:30 AM GMT+08  • 7 min read
Promised cash infusion from Hyflux’s white knights insufficient to go around
SINGAPORE (Oct 29): Hyflux’s noteholders, preference shareholders and holders of perpetual securities have to be prepared for a substantial haircut while equity shareholders need to be prepared for significant dilution when the water company’s restruc
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SINGAPORE (Oct 29): Hyflux’s noteholders, preference shareholders and holders of perpetual securities have to be prepared for a substantial haircut while equity shareholders need to be prepared for significant dilution when the water company’s restructuring plans are announced.

On Oct 18, SM Investments Corp, a consortium formed between Salim Group and Medco Energi Internasional, announced it would inject $400 million into Hyflux for the subscription of new shares representing 60% of its enlarged issued share capital. That would take Hyflux’s issued share capital to $666.67 million compared with just $128 million as at March 31. SM Investments is likely to be the company’s largest shareholder, given that founder and executive chairperson Olivia Lum’s stake will be diluted.

Hyflux last announced its financial statement for 1QFY2018, stating that its net debt stood at $1.3 billion, with a gearing ratio of 1.3 times. The net debt figure does not include the preference shares and perpetual securities, which are viewed as quasi equity, which ranks above ordinary equity and is part of the company’s capital structure. Together, these were valued at $887 million as at March 31 (see Table 1).

In April, Hyflux was unable to “call” its $400 million preference shares. The $500 million of perpetual securities’ first call is in 2021.

The total commitment by SM Investments is $560 million. Of this, $130 million will be a “shareholders’ loan” subject to terms and conditions. A further $30 million will be granted as an interim working capital rescue financing, subject to terms and conditions.

Since the numbers do not really add up, there is likely to be further capital injection in some form or other. At any rate, approvals and waivers will still be required, including those of equity and other security holders, lenders and other creditors. In addition to approvals from existing shareholders and the Singapore Exchange, approvals are also required from PUB, NEA (formerly the National Environment Agency) and the Energy Market Authority.

“One of the conditions [of the investment] is that the existing debts be restructured and reorganised through court proceedings (called a scheme of arrangement) that are part of the ongoing reorganisation process,” Hyflux says.

Huge haircut, swap debt for equity or both?

The Hyflux announcement on Oct 18 — while short on details — stated that additional shares could be issued to “certain creditors and stakeholders” and “key members of the management team”.

Based on the current arithmetic, and excluding equity that would be issued to creditors and stakeholders, the yawning gap is likely to result in the need to swap preference shares and perpetual securities for ordinary equity.

According to Hyflux’s 2017 annual report, it has $498.19 million of secured bank loans, $777.98 million of unsecured bank loans, and $265 million of unsecured notes. The unsecured notes comprise $100 million in 4.25% notes due in 2018, $65 million in 4.6% notes due in 2019, and $100 million in 4.2% notes due in 2019 (this debt does not include the preference shares and perpetual security holders).

“The investment amount and the shareholder’s loan amount (collectively, the “proceeds”) shall be applied towards (a) the full and final settlement of each of the unsecured financial debt, preference shares, perpetual securities, contingent debt and trade debt; and (b) the working capital needs of the group’s business (which shall include the repayment of the pre-completion working capital rescue financing),” Hyflux said in its announcement.

There was no reference to Maybank’s debt, secured by Tuas pring Integrated Water and Power Plant on Oct 18. Subsequently, Hyflux has said: “Given the investor’s offer, a voluntary sale of Tuas pring will no longer be actively pursued and Hyflux and the investor will be engaging with the secured bank creditor on this.”

UOB Kay Hian says: “The $658 million loan by Maybank is fully secured against Tuaspring and the TuasOne Waste-to-Energy Plant. As such, we believe the $560 million proceeds from this exercise may be earmarked to pare down debts at Hyflux’s group level rather than Maybank’s project financing loans at the plant level.”

Bursa-listed Maybank has been weighed down by its exposure to Hyflux. It is unclear what the arrangements are for Tuaspring. One of the scenarios could be for the bank to “ride out” the gestation period for the restructuring, UOB Kay Hian suggests. If so, Maybank will have to make further provisions for Tuaspring.

DBS Credit Research says: “Cash allocated for ‘settlement’ could also suggest at least some of the creditors (including trade creditors) would get redemption (albeit partial), but again, who gets how much would really depend on the terms of the allocation.”

Table 2 shows the haircut that security holders may have to take, and Table 1 illustrates Hyflux’s capital structure as at March 31.

Even if Maybank’s portion of the debt — which UOB Kay Hian says is around $658 million (of which $602 million belongs to Tuaspring) — is excluded, the initial cash injection by SM Investments is woefully insufficient. It appears increasingly likely that the noteholders, preference shareholders and perpetual security holders may eventually have to swap their securities for equity.

“The perpetual and preference shares are already considered as equity in the financials of Hyflux though in practice, senior unsecured debtholders may find it more palatable to support a restructuring with outright common equity buffer,” says OCBC Credit Research in a recent update. “In the case of Hyflux, the proposed new equity and shareholder loan injection is lower than the senior unsecured debt amounts and should this class of creditors get equitised (at least in part), it goes to reason that those more junior than them would need to be equitised as well.”

Ezion’s experience

Earlier this year, Ezion Holdings completed a restructuring plan, which could form a model of sorts for Hyflux. Ezion’s security holders were asked to either accept newly issued convertible bonds or have their bonds replaced by a new vanilla bond. The maturity of the convertibles and the new bonds are between six and 10 years, with the coupon rate reduced to just 0.25% a year.

Ezion’s conversion price is reset every six months; as at Oct 13, it was 27.63 cents compared with the market price of 6.3 cents. Still, most of the $575 million of noteholders are understood to have opted for convertible bonds — which are much more liquid than vanilla bonds — and convert them into equity.

The downside of converting debt to equity is the huge dilution, and for Ezion’s security and equity shareholders, a loss of value. The number of shares in issue for Ezion has risen from 2.1 billion as at March 30 to 3.6 billion now. If all security holders swap their bonds for equity and the equity holders exercise their warrants, which were issued as part of the restructuring, Ezion’s shares-inissue will balloon to 6.58 billion. Concomitantly, its share price is likely to decline.

Hyflux’s potential new shareholders

DBS Credit Research says SM Investments “would be welcomed by investors across the capital structure. We believe the new monies could also help support the group’s ongoing ope rations, which is critical at present”.

On the face of it, there could be synergies, DBS suggests. “Given the businesses of Salim and Medco, it seems there could be potential synergies at least at face value (for example, supplying gas to Tuaspring), further adding merit to SM Investments as potentially the largest shareholder in Hyflux, if the restructuring agreement proceeds successfully,” DBS adds.

Interestingly, only $30 million out of the financing has been earmarked for working capital. For the first quarter of the year, Hyflux’s working capital, excluding assets and liabilities held for sale, was around a negative $256 million (see Table 3). Negative working capital means the company has insufficient short-term assets to cover short-term liabilities. Assets held for sale included Tuaspring and a project in Tianjin.

Whatever the case, the announcement on Oct 18 is a small step into a larger world of restructuring. The next announcement is likely to be a dialogue with security and equity holders, followed by the restructuring plan and then extraordinary general meetings for the various parties to vote on the restructuring.

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