CFA Society Singapore
SINGAPORE (Mar 13): The catastrophic slump of Singapore’s much-vaunted water and power company, Hyflux Ltd., has stunned 34,000 retail investors who were lured by the promise of a 6% annual return forever from a company that seemed to have a gold seal of government approval.
At the heart of the debacle is Tuaspring, a desalination and power plant that cost $1.1 billion and was heralded as one of the “national taps” for an island that had long depended on importing water and harvesting rainwater for survival. The company’s glowing prospects encouraged investors including Li Meicheng and Violet Seow to funnel some of their savings into $900 million of junior debt to help fund the venture and group expansion.
Tuaspring was opened to great fanfare in September 2013, with the head of the Public Utilities Board and two government ministers flanking Prime Minister Lee Hsien Loong, who called the plant “the latest milestone in Singapore’s water journey,” praising its “unique and cost-efficient design.”
But the facility hasn’t made money since under its 25-year water-supply agreement. And losses snowballed after its gas-turbine power plant started selling excess capacity in 2016 to the power grid, which had a glut of electricity caused by the opening of the market to competition. As cash depleted and liabilities approached $2.7 billion, Hyflux sought court protection from creditors to restructure.
Many investors expected the government to step in and help a venture it had enthusiastically praised. But the authorities have rejected calls for intervention into what they call a “commercial matter.” The PUB served a notice of default on the Tuaspring plant owner for operational and financial lapses. Hyflux was given 30 days to make good on its obligations, or the state could terminate the contract and seize the plant.
“I’m very disappointed that the government has decided to take a tough stance instead of offering a helping hand to an iconic Singapore company,” said Li, a 42-year self-employed businessman who owns Hyflux perpetual notes and preference shares. “This is another dagger in the chest for retail investors.”
The government deadline for Tuaspring to comply, April 5, is the day creditors must vote on Hyflux’s restructuring plan, effectively forcing them to accept the workout deal or risk losing everything. Hyflux must persuade more than 50% of those who turn up to the meeting and 75% in value of claims, to back the reorganization. The company will reschedule a town hall previously planned for March 13 as a large number of noteholders wish to attend.
“This adds to the urgency and pressure on Hyflux and its creditors to pass the restructuring plan,” said Ang Chung Yuh, a senior fixed-income analyst at iFast Corp. “They are stuck between a rock and a hard place.”
The PUB said in response to questions that its responsibility is to safeguard Singapore’s water security and that desalination plants are integral to that security. “PUB’s decision to issue a default notice is to ensure the asset is secured and continues to produce water,” according to emailed comments from a spokesperson.
Li and other holders of junior securities stand to lose as much as 90% of their capital in the restructuring proposal, under which Indonesia’s Salim Group and energy company Medco Group will gain a 60% stake in exchange for a $530 million cash injection. Banks and senior bond holders would lose about 75%.
“The new investor isn’t a white knight when it only wants the assets but not the debt,” said Seow, a home-maker in her 50s who owns Hyflux shares and bonds, and intends to vote against the deal. Like many mom-and-pop investors who put their life savings into it, “we feel abandoned and sacrificed,” she said.
Hyflux on March 8 said it would alter its repayment plan to help retail investors, with staff getting a scaled-down incentive plan to complete projects, and senior lenders and creditors sharing some of their future payouts.
The changes “hardly moved the needle,” said Li. Hyflux may not even survive that long for retail investors to collect any recovery, Seow added.
Junior creditors may increase their recovery rate under the plan, but it’s uncertain if the amended proposal will pass because it may still be seen as unfair by those creditors, according to a report from Oversea-Chinese Banking Corp.
Hyflux didn’t answer requests for comment, beyond referring to its stock-exchange filings.
The company is the latest in a series of at least 15 corporate defaults since 2014 that highlight the risks in a dark corner of Singapore’s $386 billion credit market -- unrated bonds paying junk-level yields in a near-zero interest-rate era. From a 77-year old millionaire in Rickmers Maritime liquidation to a 71-year old former civil servant who felt cheated in Noble Group Ltd.’s implosion, retail investors have been battered by losses in bonds and stocks.
“This episode is really a wake-up call for the Singapore financial sector, how we promote such novel and risky instruments, the role of financial intermediaries and the education of the investing public,” said Lawrence Loh, director of Centre for Governance, Institutions and Organizations at NUS Business School in Singapore.
A spokesperson for the Monetary Authority of Singapore said in response to queries on Hyflux that all investments carry risks and that businesses can come under financial stress.
“As a listed company, Hyflux is required under SGX’s disclosure rules to provide investors with up-to-date, material information such as its financial condition and prospects," the spokesperson said. “MAS and SGX continue to monitor the situation closely, including ensuring that Hyflux actively engages its investors, and provide regular and timely updates to the market on its restructuring plan.”
For Hyflux investors, the terms of its debt sales certainly seemed attractive at the time. The company sold $400 million of preference shares in April 2011, double the amount marketed, to help finance Tuaspring. Another $500 million bond sale came in May 2016, largely to redeem maturing debts. Without a maturity date, both unrated instruments had promised to pay 6% or more annually to eternity. Buyers could even place orders through local ATMs.
The company’s pedigree also seemed solid. It grew out of a startup founded in 1989 by Olivia Lum, an orphan who left a career in pharmaceuticals with $20,000 from selling her car and apartment. After selling shares to the public in January 2001, Hyflux started winning municipal contracts in Singapore. Lum became a role model for local entrepreneurs, winning accolades and a seat in parliament reserved for distinguished community members.
The Hyflux saga should have rung alarm bells, said NUS’s Loh. The company was fueling growth by taking on a large amount of debt, while investors had misplaced their trust in what they perceived as a state-backed entity, he said. “Unfortunately, no one stepped back and asked questions.”
Hyflux previously counted state investment arm Temasek Holdings as a business partner and an equity holder, according to a 2005 annual report. Temasek fully exited its position in 2005, and isn’t a shareholder, according to an emailed reply to questions.
At its peak in late 2010, Hyflux was worth nearly $2.1 billion. The shares were suspended in May last year at $0.21 apiece, valuing the company at $165 million.
When Hyflux sought court protection last year, its legal adviser, WongPartnership LLP, called it a homegrown success whose business continues to be relevant to Singapore’s future economy. The company is now seeking to wipe $1 billion of debt off its balance sheet to survive.
“What they are offering to us is simply ridiculous,” said Christopher Ching, a construction industry consultant who bought $250,000 of senior notes from the secondary market in late 2017. While he stands to recoup a higher percentage than the junior creditors, he’s prepared to fight with them for a better deal. “We might as well go down together.”