SINGAPORE (Apr 22): Announcements continue to be made thick and fast in the ongoing Hyflux saga. The Public Utilities Board (PUB) announced on April 17 plans to take over the Tuaspring desalination plant in 30 days. The national water agency, which has a contract to buy desalinated water from Hyflux, alleges that Tuaspring is not performing reliably.
On March 21, PUB already warned that it would take over the plant in the name of safeguarding Singapore’s water security — unless Hyflux was able to fix problems in its water supply agreement with PUB by April 5. This deadline was then extended to April 30.
In a one-sentence statement on April 17, PUB did not give further details on how it was going to take over the plant. It had earlier said it would be doing so at zero dollars, given Tuaspring’s current valuation, which is a negative number.
PUB’s impending nationalisation of Tuaspring is but the latest blow to Olivia Lum, founder and chairman of Hyflux and one-time entrepreneurial role model. The company, which is weighed down by a debt load of $2.95 billion, faces possible probes from several regulatory bodies.
“The MAS, ACRA and SGX RegCo are currently reviewing Hyflux-related disclosure issues, as well as compliance with accounting and auditing standards, to determine if there have been breaches of listing rules and/or the relevant laws and regulations,” say the Monetary Authority of Singapore, the Accounting and Corporate Regulatory Authority and Singapore Exchange Regulation.
Last October, Hyflux seemed to have found a rescuer in the form of SM Investments (SMI), a group of investors led by Indonesian tycoon Anthoni Salim, which agreed to invest $400 million for a 60% stake in Hyflux and loan the company an additional $130 million.
However, new issues emerged. SMI alleges belated knowledge of matters previously undisclosed by Hyflux in connection with Tuaspring, with which Hyflux disagreed. On April 4, Hyflux announced that SMI had declined to provide written confirmation that it would proceed with its investment in the company despite repeated requests. Hyflux said it would therefore not proceed with the restructuring deal. Within an hour, SMI shot back, saying it was surprised by the termination by Hyflux of the restructuring agreement and that it would be taking legal advice in relation to the latter’s action.
On April 15, Hyflux announced that it was suing SMI. It accused SMI of repudiating the October 2018 restructuring agreement. The water and power company — currently under court protection and on the brink of bankruptcy — is also claiming the $38.9 million deposit placed in escrow shortly after the execution of the restructuring agreement. Hyflux also announced that it had appointed nTan Corporate Advisory as an additional adviser in the company’s ongoing court-supervised reorganisation process.
The genesis of Hyflux’s current woes can be traced back to 2011, when it won the contract to build the Tuaspring combined desalination and power plant. Tuaspring was conceived with the idea that the plant would earn revenue by selling excess power to the nation’s electricity grid. But when energy market policies changed, prices started falling and Tuaspring began to lose money.
The heart of the problem was the manner in which Hyflux financed Tuaspring, which was funded by project debt. The monies for Hyflux’s equity portion of the financing were raised from issuing preference shares and various tranches of perpetual securities.
Curious chronology of issuances and redemptions since 2011
In April 2011, Hyflux upsized a $200 million offering of cumulative preference shares (CPS) offering with a dividend rate of 6% a year until 2018, to $400 million. The sole manager and bookrunner was DBS Bank. The CPS were offered to the public and retail investors could subscribe for them as they were offered through ATMs. The CPS were listed on the SGX mainboard on April 26, 2011.
According to Hyflux’s announcement on April 13, 2011, the listing approval was subject to compliance with SGX listing requirements and approval obtained from MAS.
In July 2011, Hyflux announced that it had upsized its Multicurrency Debt Issuance Programme from $300 million to $800 million. Hyflux also entered into a supplemental trust deed with DBS Trustee in July 2011 to amend the trust deed, to reflect certain financial definitions regarding service concession arrangements following the implementation of IFRS 112 (International Financial Reporting Standards).
In January 2014, Hyflux entered into a subscription agreement with DBS as the sole lead manager and bookrunner for $300 million of perpetual securities carrying a coupon rate of 5.75%. The first call date was Jan 23, 2017. Under the subscription agreement, DBS had agreed to subscribe and/or procure subscribers for all the perpetual securities at 100% of their principal amount. At any rate, in denominations of $250,000 per security, this tranche was meant only for accredited investors.
In July 2014, Hyflux announced that it had entered into a subscription agreement with Credit Suisse as the sole lead manager and bookrunner for $175 million of perpetual securities with a coupon rate of 4.8%. Credit Suisse agreed to subscribe and/or procure subscribers for all the perpetual securities at 100% of their principal amount. The first call date was scheduled for July 2016. This tranche was also only for accredited investors.
In January 2015, Hyflux announced a consent solicitation for $50 million 3.89% Series 006 Notes and $100 million 3.5% Series 007 Notes, both of which were due in 2016. There was also another tranche of $100 million 4.25% Series 008 Notes due in 2018, and $65 million 4.6% Series 009 Notes and $100 million 4.2% Series 010 Notes due in 2019. These were largely redeemed. But there are unredeemed notes and the noteholders rank above the so-called PnP (preference shares and perpetual securities) investors.
In May 2016, Hyflux offered $300 million of perpetual securities — with a coupon rate of 6% — to retail investors. Again, DBS was the sole manager and bookrunner. Owing to the strong response, the tranche was upsized to $500 million.
In July 2016, Hyflux redeemed the $175 million 4.8% perpetual securities offered to Credit Suisse, and in January 2017, Hyflux redeemed the $300 million 5.75% perpetual securities offered to DBS.
When questioned earlier this month, a DBS spokeswoman maintained that the bank had adhered to all guidelines and regulatory requirements, including processes to comply with the added regulatory disclosure requirements when a retail bond is sold. The Hyflux perpetual securities were taken out to market with disclosures that were in compliance with legal/regulatory requirements, the DBS spokeswoman said.
MAS also confirmed that DBS was in compliance. “MAS’ supervisory reviews to date have not uncovered any impropriety on the part of DBS in performing its roles as both issue manager and distributor of Hyflux perpetual securities in 2016,” a MAS spokeswoman says.
“As the issue manager, DBS conducted due diligence checks to ensure that material information relating to Hyflux was highlighted in the offering document. As a distributor of the securities, DBS complied with MAS’ requirements to configure its ATM screens to remind investors to read the disclosure documents before making their applications,” the MAS spokeswoman adds. “We note that Hyflux had disclosed in its offering document in 2016 that the Tuaspring power plant was expected to incur losses if electricity prices in Singapore were to remain low.”
Stressed financials
By 2016, the company was clearly stressed. During the course of 2017, prices of PnP — they were trading on the SGX — had started falling. In February 2018, The Edge Singapore had flagged that the PnP were under pressure, and questioned whether Hyflux had the ability to meet dividend and coupon payments for the PnP.
Hyflux, classifying PnP as equity, was able to hide indebtedness, as dividends and coupons are not classified as interest expense in the profit and loss statement, but as Cash Flows from Financing Activities, along with dividend payouts.
Based on FY2012’s financials, two years before DBS and Credit Suisse were managers for the $300 million and $175 million tranches of perpetual securities, Hyflux’s announced gearing ratio was 0.67 times, a startling increase from the 0.18 times for FY2011. However, if the preference shares — which are redeemable just like bonds because of their call date and step-up dividends — were classified as debt, Hyflux’s gearing would have been 1.06 times in FY2011, and nearly double at 2.05 times in FY2012.
Yet, with these stressed financials, Hyflux’s board gave the green light for the DBS and Credit Suisse perpetual issues in 2014. These, in turn, were redeemed, and refinanced with perpetual securities offered to retail investors in 2016.
In all fairness, MoneySense has highlighted the risks associated with investing in perpetual securities. “MAS, through the national financial programme MoneySense, has been working with industry and other stakeholders to educate investors about the features and risks of the various investment products and encourage investors to seek financial advice if needed,” the MAS spokeswoman says.
In hindsight, the noteholders, along with DBS and Credit Suisse, which had committed to subscribe to earlier tranches of perpetual securities, all dodged a bullet, as these issuances were successfully redeemed. The retail investors of the PnP were still holding on to their investments when Hyflux filed for court protection.
With the collapse of the SMI deal, Hyflux is currently working with key creditors and stakeholders to find a way to pursue alternatives to saving the company. However, Hyflux’s stakeholders have to be painfully aware that woes are piling up on all fronts.
