SINGAPORE (Apr 6): Two mid-day announcements on April 4 by Hyflux and its rescuer SM Investments left both investors and market watchers confused. First, Hyflux cancelled the meetings to vote on a scheme of arrangement scheduled for April 5 and 8, because it claimed SMI had repudiated the restructuring agreement.

<hr/><a href="https://www.theedgesingapore.com/" target="_blank">See: Hyflux scraps restructuring plan after spats with investors</a><hr/>

Under the terms of an October 2018 rescue agreement, a group of Indonesian investors led by Anthoni Salim will inject $400 million into debt-ridden Hyflux in exchange for a 60% stake. They will also loan the company an additional $130 million.

Things turned sour in recent weeks as differences between both parties surfaced. New issues were raised, including matters previously undisclosed by Hyflux in connection with the Tuaspring plant, its key operating asset.

“Regrettably, the Investor has declined to provide the Company with such written confirmation that it will proceed to complete the Proposed SMI Investment if the Outstanding Conditions are met,” states Hyflux in its April 4 statement just after noon, adding that SMI has repudiated the rescue agreement and therefore, Hyflux terminated it.

Within an hour, SMI shot back. “SMI refers to the purported termination by Hyflux of the restructuring agreement, and is surprised by the action taken by Hyflux,” it said in a statement.

Later in the evening, Hyflux asserted that it had made multiple requests to SMI to provide the confirmation. “Regrettably, the Investor, in a letter from its lawyers dated 4 April 2019, declined to provide the written confirmation sought,” the company said.

To comply with some of the conditions in the agreement between SMI and Hyflux, the secured creditors, unsecured creditors, preference share and perpetual security (PnP) holders and ordinary shareholders all had to vote for the restructuring scheme on April 5 and 8.

About 34,000 PnP investors invested a total of $900 million in Hyflux. Under SMI’s rescue deal, for each dollar they invested, they would be getting back just three cents in cash and 7.6 cents in equity.

The minuscule cash component of the deal clearly angered many investors. On March 30, between 350 and 400 of them, mainly retirees, gathered at Hong Lim Park to protest. They urged one another to reject the restructuring plan at a meeting that was to be held on April 5.

SMI flags non-disclosure of material issues

The cracks were apparent in the deal at least a fortnight earlier, as seen from a series of exchanges between both parties. “SMI has been waiting for Hyflux to disclose further material information following multiple requests for such disclosure. The delay in disclosing this material information has prevented SMI from determining a workable allocation between working capital and the settlement amount to creditors under the Restructuring Agreement,” the SMI announcement of April 4 says.

“As noted previously, SMI has already issued [to] Hyflux two notices to remedy threats to the Tuaspring and Magtaa projects on March 18 and 25 respectively. These threats have not been remedied,” states SMI. The Magtaa project is in Algeria.

On Dec 25, 2018, Hyflux received a notice threatening termination by Feb 8 this year from the offtakers in relation to the water purchase agreement at the Magtaa Desalination Plant. The offtakers alleged certain defaults under the concession agreement. But this was only disclosed to SMI on March 18.

Besides the existing problems at Tuaspring and Magtaa, SMI said on April 4 it was informed only on April 3 of “a threat to a third major project”. SMI did not name the project, but in the same late night statement, Hyflux said the third major project referred to SingSpring Trust, of which it owns 30%. Keppel Infrastructure Fund Management, which holds the remaining 70%, has “buyout rights” to this project; Hyflux has assured its partner KIFM that SingSpring won’t be affected by the restructuring deal.

“Accordingly, there is no ‘threat to a third major project as asserted by the Investor,” Hyflux said. SMI insists it has complied with the restructuring agreement and is taking legal advice in relation to the action taken by Hyflux.

In addition, on March 5, PUB announced that it had issued a default notice to Tuaspring and had extended the time period for Hyflux to remedy the default to April 30.

Are perpetual securities too sophisticated for retail investors?

The big boys are not the only ones asking questions. Many PnP investors are voicing concern over the way in which the retail tranche of perpetual securities was sold. At the demonstration, a retiree said she was told water is a necessity and a defensive sector.

The risk of this investment was also pointed out in a letter to the Business Times, which said that “financial analysts of the financial institutions who sold the perpetual securities should have anticipated the financial risks to unsophisticated CPF investors when the securities were issued in 2016”. The letter also pointed out that the proceeds of the 2016 issue were used to redeem older perps that had been issued to accredited investors.

“The Monetary Authority of Singapore should look into the financial analyses and selling processes of the financial institutions and ask why they chose to sell the new issue to unsophisticated investors when the financial health of Hyflux had deteriorated in 2016 compared to 2014,” the letter said.

DBS Bank is a key player in this whole episode. It was the sole manager and book runner for both the 2011 tranche of preference shares and the retail tranche of perpetual securities. When asked whether it took due care in bringing the retail perpetual securities to market, a DBS spokeswoman says the bank certainly did. In fact, financial institutions do not actually market retail products. It is up to the retail investor to buy the product through the ATM.

“There are different and strict guidelines on the availment of bonds/perps to retail investors laid down by SGX and MAS. These guidelines are stricter than the processes for bonds targeted only at institutional and accredited investors,” says the DBS spokeswoman.

“Retail bond issuances are also subject to additional clearances by the authorities. With any retail bond taken to market, DBS adheres to all guidelines and regulatory requirements, including processes to comply with the added regulatory disclosure requirements when the retail bond is sold with a prospectus/offer information statement.

“The perpetual securities were taken out to market with disclosures that were in compliance with legal/regulatory requirements and market best practices as advised by external professional parties, including legal counsel appointed for the issuer and the arranger respectively.”

Interestingly, banks continued to extend loans to Hyflux after the issuance of the perpetual securities in May 2016, indicating that they too must have done detailed credit analysis, a banker says.

Financials point to stress in 2015

Now, Hyflux’s financials, based on information readily available in the public domain, can already be interpreted as stressed in FY2015. For instance, total dividends paid for FY2015 were $69.19 million, of which $13.35 million was paid to its ordinary shareholders. In 2015, Hyflux had 785.28 million ordinary shares. The dividend payout ratio would be 31%, based on Hyflux’s net profit of $42.15 million for that year. It appears that the remaining monies were paid to preference shares and perpetual security holders.

If these distributions had been reclassified as interest expense, Hyflux would have reported a significant net loss, thereby dissuading retail investors from investing in the retail perpetual securities when they were offered.

What happens next? Hyflux says it will “relentlessly pursue” other viable opportunities. David Gerald, president and CEO of the Securities Investors Association (Singapore), urges creditors and stakeholders to be patient, and to give Hyflux the time and space to work out an alternative. However, just like how water is accorded value because of its scarcity, time and space for Hyflux is limited too.

This story appears in The Edge Singapore (Issue 876, week of Aug 8) which is on sale now. Or <a data-saferedirecturl="https://www.google.com/url?q=https://www.theedgesingapore.com/subscribe&source=gmail&ust=1554500047964000&usg=AFQjCNHAMfuOof7kM8zezP2WdrWRZjIMPw" href="https://www.theedgesingapore.com/subscribe" style="letter-spacing:0.19px;background-color:transparent;text-decoration-line:none;border-bottom:1px dotted rgb(56,131,157);color:rgb(56,131,157)" target="_blank">subscribe to The Edge now</a>

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