SINGAPORE (May 13): Embattled water company Hyflux is in a race against time to find a new investor after it failed to complete an earlier restructuring agreement with Salim-Medco Investments (SMI). Hyflux needs a binding term sheet and agreement by May 29, the date of the end of a court-granted moratorium that was extended by five days.
On May 7, the Singapore High Court rejected the petition by a group of seven unsecured banks to be carved out of a debt moratorium so that they can file an application to have Hyflux and its subsidiary Hydrochem placed under judicial management.
Hyflux owes the seven banks — Mizuho Bank, KfW IPEX-Bank, Bangkok Bank, BNP Paribas, CTBC Bank, Korea Development Bank and Korea Development Bank (Singapore) — a total of $648.7 million.
In addition, Hyflux will be able to apply for a further extension to the court-sanctioned protection from creditors when it appears before the court on May 29. In the meantime, it will have to file an affidavit by May 24 to provide an update on the restructuring process.
Despite the moratorium, creditors have been issuing letters of demand. On May 6, BNP Paribas issued a letter of demand to Hyflux for US$57.73 million ($78.6 million) for performance bonds relating to a desalination plant in Algeria, the Magtaa project by Tahlyat Myah Magtaa.
On May 3, Hyflux announced that it had received a non-binding letter of intent from Utico FZC, a Middle Eastern investor, for a possible injection of $400 million. According to Hyflux’s announcement, UAE-based Utico has a reputable track record in the water and power industries. Its shareholders include sovereign institutions of the governments of Oman, Saudi Arabia, Bahrain and Brunei.
According to Hyflux’s affidavit filed on April 23, the company has received expressions of interest from various parties for its EPC (engineering, procurement and construction) business and its potential projects that can be developed by leveraging its existing track record.
Tuaspring no longer part of restructure
Utico is aware that the Tuaspring Integrated Water and Power Plant (IWPP) is no longer part of Hyflux’s assets, as the Public Utilities Board is likely to take control of the Tuas Desalination Plant. Tuaspring has been blamed for Hyflux’s excessive debt and weak capital structure after the latter was awarded the contract in 2011 to build and operate Tuaspring. Hyflux’s operations suffered a negative impact from Tuaspring’s losses after it was completed in 2013.
On April 23, Hyflux received a letter from Malayan Banking for immediate payment of $509.11 million and US$44.53 million for a term loan and cash cover for contingent liabilities respectively for the Tuaspring power plant. As a result, Maybank — for which Tuaspring is security for a non-recourse loan — has the intention to take control of Tuaspring power plant.
At any rate, Tuaspring IWPP was performing sub-optimally because Hyflux did not have sufficient cash flow for new membranes and the power plant was making a loss. Yet, it appeared to be of interest to SMI.
Whatever the case, the affidavit says that, with the termination of the SMI agreement, Hyflux will be able to pursue alternative structures to dispose of some assets and reduce liquidity pressures as well as restructure the EPC business. Although Hyflux has experience with EPC water plants, the affidavit points out that the EPC business is “plagued with liquidity issues and needs to be restructured in order to perform to its full potential”.
New restructuring plans
Hyflux’s April 23 affidavit describes two new restructuring plans: Plan A, which takes into account an investor such as Utico that comes in with $400 million; and Plan B, which assumes no immediate investor.
Under Plan A (see Chart 1), the new investor and the original Hyflux will co-own a new company called New Hyflux. If the new investor is Utico, $300 million out of $400 million will be used to discharge the senior unsecured debt, including medium-term noteholders, trade creditors and contingent liabilities. The remaining $100 million would be used for working capital. This plan is likely to be subject to at least a couple of scheme meetings.
Under the SMI rescue plan announced in February, various approvals from scheme meetings were required, including senior unsecured creditor parties comprising banks, noteholders and trade creditors. The noteholders’ total claims alone are $278 million; total claims by unsecured creditors, most of which are the banks, amount to $1.672 billion. A big portion is contingent liabilities. Under the original restructuring plan with SMI, $232 million was assigned to all these unsecured senior creditors. Also, noteholders would have received $107.63 million worth of Hyflux shares and $138.72 million in cash, totalling $246.35 million. In other words, noteholders would have received 24.6 cents for every dollar invested.
Under Plan A, however, the noteholders continue to be owed $278 million, the bank creditors have a claim of $714 million, and potential contingent liabilities amount to $724 million. If all the contingent liabilities do not materialise, total claims could be reduced to $1 billion. In this event, the $300 million cash infusion will amount to 30 cents on the dollar versus the original 24.6 cents. That is the good news.
PnP not part of scheme
The bad news is, under Plan A, the 34,000 preference share and perpetual security holders — the so-called PnP — who are owed $900 million are not subject to scheme meetings and get no share of the $300 million in cash. The PnP will receive dividends only when the company starts operations again and if it is profitable.
Under Plan B, the restructured EPC and other operating businesses will continue to be held under the new Hyflux, and the new Hyflux shares will be pledged to the senior unsecured creditors. As and when assets or projects are divested, the proceeds can be distributed to the scheme creditors (see Chart 2). When a new investor emerges, it will directly own the restructured businesses.
The PnP will continue to own the old Hyflux, and if any profit flows through it, they could receive dividends. In Plan B, the PnP will also not be voting in any scheme meeting, unlike the senior unsecured creditors.
