What are responsibilities of bookrunners when perpetuals fail?
Judge gave some broad hints that DBS, the bookrunner for the perpetual capital securities and preference shares issue, ought to be bearing some of the costs of the advisers' fees in Hyflux's rescue negotiations.
SHOULD banks be held responsible for the fixed income securities that they underwrite? Justice Aedit Abdullah implied as much at the Hyflux hearing last week when he gave some broad hints that DBS Bank, the bookrunner for the perpetual capital securities and preference shares (PnP) issue, ought to be bearing some of the costs of the advisers' fees in Hyflux's rescue negotiations.
It was not right for retail investors to be marketed an investment and then left without advice when things go wrong, he said. Investors should receive adequate financial and legal advice, and these advisers should be paid, he added.
Water company Hyflux is undergoing a liabilities re-organisation process following a weakening of its finances, and Middle Eastern utility provider Utico has offered Hyflux a rescue package that includes some funds for PnP holders.
There is a chance, however, that the Utico deal will fall through. If it does, advisers of the institutional investors will be able to claim payment of fees from the latter. But the retail investors' advisers will have no such recourse. They have been appointed by the Securities Investors Association Singapore (Sias), which relies primarily on donations and sponsorships for its expenses.
Disagreements over payments of fees have already caused a fallout between Hyflux and its previous lawyers from WongPartnershipwho discharged themselves, citing "loss of confidence and good cause" in working with Hyflux.
When Justice Abdullah suggested halting the hearing last Tuesday so that lawyers could call their clients and see if any might be willing to contribute some funds towards the fees of Sias' adviser, there was unhappiness - both from Hyflux's lawyers who pointed out that Sias' advisers have already been paid S$2.4 million to date, and from other creditors who wanted the same treatment.
Hyflux's lawyers argued that there was little legal basis for Sias' advisers to get preferential treatment "at the expense of other unsecured creditors". Nish Shetty, partner at Clifford Chance Asia, argued that passing the hat around for money to be kept in escrow for Sias' advisers meant that other creditors were now providing the backstop for the subordinated creditors
Justice Abdullah's stance, however, was clear: Those with the ability to fend for themselves will do so; the court's primary concern will be with protecting the retail underdogs who have neither the knowhow nor the financial clout to defend themselves.
Finding the funds
This position should encourage law firms that are asked to represent a retail investor group in the future not to turn down a job for fear of not being paid. But it does not quite solve the problem of where to find the funds to pay these advisers.
Danny Ong, partner at law firm Rajah & Tann, pointed out that in the US, creditors can have their attorney's fees paid from the debtor's assets under the debtor's Chapter 11 plan.
"In Singapore, generally speaking, there is no provision in the legislative framework or the restructuring system that goes to provide for the retail investors to have funding to get advice in relation to a proposed restructuring."
There are anecdotal instances in which banks were pressured into covering some professional fees after products sold ran into trouble, he added.
"It must be self-serving in a sense; it could be a case where the clients were super high net worth private banking clients and everyone was complaining, or perhaps the authorities were on it and they felt the pressure to set aside something even if they were, strictly speaking, not obliged to," said Mr Ong.
But he also pointed out that the bookrunner of Hyflux's PnPs was just a distributor, and not a quality assurance provider. "It's far too much to expect a bank to pay for investors' adviser fees, unless the bank has to protect its reputation. If the bank does it, it is a matter of morality, customer relationship and reputation," he added.
Typically, Sias encourages the company to set aside certain a sum that retail investors can use to seek legal representation and advice. Another common alternative is for a trustee to appoint advisers. Investors then chip in to pay the trustee in a structure similar to that of a class action suit.
One restructuring specialist here said: "The trustee that acts for the investors could sometimes also be from the same bank as the bookrunner, since it already has the database of the bondholders, but the tendency is that it will only act if it is paid a fee."
But the specialist added that banks have little incentive to help investors do so. "Once the bank has earned its commissions from selling the bonds, their work is finished," he said. "Moral compulsion" from a judge will do little to change that.
Issue under review
The fee issue has become a serious enough problem to prompt Singapore Exchange Regulation (SGX RegCo) to form a retail bonds working group that will review issues concerning retail-investor protection. These include proposals to tighten the admission criteria for retail bonds, introduce insurance coverage for bond issuers at the time of issuance to draw down on in times of default, and to mandate a minimum participation by institutional investors in every retail bond issue.
The working group is expected to present its recommendations and views to SGX RegCo by the first quarter of 2020, after which a public consultation will take place by mid-year.
In cases of corporate restructuring and insolvencies, institutional creditors tend to have the upper hand. It thus falls upon the authorities to hasten the installation of a formal framework that safeguards the interests of retail bondholders.
As the global economy slows, more companies are likely to face financial difficulties; and the issues that Hyflux's PnP holders are now facing could become more common. A formal structure to protect retail investors will be of great value in such an environment.
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