20 June 2018
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Hyflux crisis puts focus on its management

Business Times
14 Jun 2018
Marissa Lee

When Hyflux meets its retail stakeholders, as it eventually must to get their buy-in for any debt restructuring plan, founder Olivia Lum will have a lot of explaining to do. And after all that has happened, it would be fair to argue that many investors will not be confident that the current management can lead Hyflux out of the rut.

The water project developer gulped down a full S$900 million in cash and Central Provident Fund (CPF) monies during two massive fund-raising rounds in 2011 and 2016. Thousands of ordinary folks are still hanging on to Hyflux's preference shares and perpetual securities issued in those years.

Ms Lum wrote in a letter to stakeholders on May 22 that Hyflux has been "proactive" in engaging financial and legal advisers, the same day it filed for a court-supervised debt revamp.

Not everyone will agree, given the series of actions that have left big question marks over the management of the company.

By now, the story of how the ambitious water recycling firm made an ill-fated push into the power generation market with Tuaspring, which combines South-east Asia's largest water desalination plant with a gas turbine power plant, is well-understood.

But only the S$400 million raised from Hyflux's first retail perpetual preference share issue in April 2011 had gone towards the development of Tuaspring.

Tuaspring was up and running by May 2016, when the second tranche of retail perpetual capital securities was issued. Of the S$500 million Hyflux raised that time, S$275 million went into paying off bonds and perps previously sold to institutional and accredited investors. The S$225 million left over gave Hyflux some breathing space to sort out its business - there were cashflow issues by then - but little was done.

In the game of greater fools, the bankers who arranged Hyflux's 2016 refinancing probably gave each other pats on the back when the moms and pops of Singapore dipped into their pockets to pick up the hot potato.

Fast forward to 2018, when Hyflux's cash woes grew more apparent. Uneasy retail investors asked: "When will Tuaspring be divested and for how much?"

But Ms Lum's dogged insistence that Tuaspring should be divested for no less than book value resulted in no results.

And now that Hyflux has been hit with letters of demand and default notices from various parties as well as its bankers, the question has been rephrased: "When Tuaspring is divested, will perp and pref holders even get any of the proceeds?"

Together with Ms Lum, Hyflux independent director Gay Chee Cheong had tried to soothe concerns about the delayed Tuaspring divestment during Hyflux's last results briefing. "This is a really big amount and as with all big amounts, we have to be patient, same thing as en bloc sales," he told investors in February. "The important thing is whether we have the cashflow to fund the payment for the preference shares. And we have, so they will be paid."

Incidentally, he sold all 4,860 of his preference shares while they still traded at their par value of S$486,000 in June last year. As it turns out, April's coupon is the last one pref holders might be getting for some time.

Hyflux filed for court protection on May 22. A hearing on its petition for a six-month debt moratorium will take place on June 19.

Contacted on Wednesday, Mr Gay said his earlier statement was made with no specific reference to any of the shares: "I am still holding three million Hyflux shares and 500,000 perps."

Then there is the series of transactions related to Hyflux's smaller consumer water business, HyfluxShop.

In February, Hyflux distributed 70 per cent of the shares of HyfluxShop to Hyflux shareholders via a dividend in specie, resulting in Ms Lum, Hyflux's controlling shareholder, owning 23.8 per cent of HyfluxShop.

She then made a general offer to buy up the remaining HyfluxShop shares from the rest of the minority shareholders. HyfluxShop is valued at S$20 million, based on the price per share she offered to pay. At the same time, Hyflux agreed to buy S$20 million HyfluxShop preference shares with a 6 per cent annual dividend.

Why were Hyflux shareholders treated to a distribution three months before the company told perp holders that their S$15 million semi-annual coupon would be withheld in May? Were these moves made to ring-fence HyfluxShop from the troubled mother ship in the event creditors came calling? That's what some observers have suggested, and Ms Lum will have to answer to Hyflux's perp and pref holders.

There is still a perception that Hyflux would be saved because it operates a strategic asset. But the fact is PUB, the national water agency, is agnostic about who operates Tuaspring. Sembcorp or Keppel could easily take on the job if Hyflux goes bust.

Asked by The Business Times how a winding-up of Hyflux might affect the ownership and operations of Tuaspring, a PUB spokesman said: "The plant is currently in operation and supplying desalinated water to PUB. PUB has been monitoring the developments closely and there are measures in place to keep the plant in continued operation."

In any case, the perps trustee has slapped Hyflux with a notice of default for missing the May payment.

For what it's worth, the event of default gives perp holders the power to order the trustee to initiate proceedings for Hyflux to be wound up - that is, if 75 per cent of the votes cast at an extraordinary general meeting are in favour of doing so, or if perp holders representing not less than 25 per cent in principal amount of the perps write in to the trustee to do so. In both cases, the trustee will require pre-funding and indemnification.

But liquidation is probably the worst case scenario for all concerned, so perp holders will still be hoping that Hyflux's proposed restructuring would offer them fair terms - and not be let down once again.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.