Hyflux

[freedom]

CPS will subordinate any NCPS in the future.

will Hyflux later issue more NCPS?

[D123]

it is cumulative pref share. it means if hyflux can't pay 6% this year, it need to pay it later.

the only benifitting situation for common share holders will be that hyflux keeps earning a huge profit so that common share holder will get more than 6% yield after paying loan interest and pref dividends.

currently hyflux is paying 2% for its common share, lower yield than pref shares and higher risk than pref shares. the eps of hyflux last year is around 10 cents, even if hyflux paid all to common share holder, still lower than 6%.

if in any year or period of years, hyflux could not make huge profit, for years, common share holder would get nothing.

I see. In general, I don't view common stocks of normal corporations as a yield plays since dividends are less reliable than coupons of fixed income securities.
_____________________________________________________________

Anyway, I was looking briefly at Hyflux a while back, along with other engineering and construction companies with exposure to the Middle East, and I concur with the general sentiment that its reported cash flows are not very pleasing to the eye.

What I would like to know, and think would add the required clarity, is the knowledge of the percentage of revenue, income and order book that come from projects that they build and operate themselves, and the percentage that come from projects that they build and then sell to the contract owners. This is comparable to property developers.

With property developers, you can more easily estimate the rental income and cash flow they get from their investment properties, than their development property projects. Cash flows from development property projects are lumpy. Projects can be started and halted for various reasons, TOPs can be extended etc. Furthermore, not all developers report the percentage sold and percentage of revenue recognized for each development, in which case analyzing the progress billings and seeing how much is left to be recognized can be impossible.

If a majority of Hyflux's contracts are on a design-and-sell basis like development properties, then it is hard to judge their cash flows management skills from just the cash flow statements. Cash inflows from progress billings get recorded into "contract work in progress". Cash outflows into new development projects, which can be argued as cash flows from investing activities, also get recorded through "contract work in progress" and other line items. And this item falls under cash from operating activities. Most property developers only show the net change in the line item ("development properties" in their case), and I'm assuming Hyflux does the same.

So if CFO is negative, it is not a certainty that cash flows from operations per se is not well managed. Even if the sum of CFO and CFI is negative, it also cannot be argued that cash flow management is bad since such projects, just like development property projects, are like leveraged buyouts. If they keep finding new, and more importantly, substantially bigger (in total aggregate value) deals every year, you can expect the sum of CFO and CFI to be negative every year. It just means that instead of paying it out to shareholders, they are reinvesting it in new projects.

Having said that, the other leverage and liquidity ratios like debt/equity, liabilities/equity and interest coverage, does seem to suggest that Hyflux's balance sheet is quite stretched at the moment. The pseudo-debt raising should
a) come as no surprise at all. And,
b) not necessarily be inferred as a bad sign for shareholders.

Disclaimer: I'm not an accountant and some of my understanding of these issues might be flawed. Please correct me if I'm wrong.

[freedom]

if Hyflux can't generate enough cash flow to pay interest for loans and dividends for pref shares, there is not going to be any equity left for common share holders.

no matter how bright the business prospects is, no company is going to survive without cash generated from operation.

[Musicwhiz]

Business Times - 15 Apr 2011

Will Hyflux's 6% dividend on prefs be the new gold?

By SIOW LI SEN

HYFLUX's first preference share issue seems to be the best thing in the stock market since slice bread going by the chatter of retirees during their morning walks at the iconic Botanic Gardens yesterday.

A day after the company launched the deal, not a few private bankers have gotten hot and bothered under the collar from being yelled at by frustrated clients who were told the allocations to Hyflux's prefs were all gone.

The fuss was of course the rich 6 per cent coupon or dividend offered by Hyflux's seven-year prefs, with an upside to 8 per cent if the prefs are not redeemed in April 2018. The hoi polloi will get their shot at the deal via ATM application at a minimum $10,000.

Not surprisingly then that, by early afternoon yesterday, the issuer's sole lead manager and bookrunner, DBS Bank, closed orders from more than 70 institutional clients which included offshore interest, as orders reached almost seven times. Yesterday's Monetary Authority of Singapore monetary policy review, which further tightened the Sing dollar, was obviously not lost on foreign investors. The Sing dollar climbed to a record $1.2491 to the US dollar from $1.2557 on Wednesday.

In a call with The Business Times, DBS's head of fixed income Clifford Lee said the bank had received orders close to $1.4 billion or almost seven times the $200 million offer size. The plan was to offer $200 million cumulative, non-voting preference shares with an option to upsize to $400 million depending on demand. Of the $400 million, the placement tranche for institutions and private banks does not exceed $200 million and retail gets $200 million.

In all likelihood, the retail tranche will receive strong demand too because it will be hard to resist the princely 6 per cent given the practically zero interest for bank savings. Singaporeans can also use part of their investible CPF monies to buy the Hyflux prefs which, at 6 per cent, beat the tier 2.5 per cent and 4 per cent interest rates paid on CPF accounts.

How did DBS arrive at 6 per cent? Mr Lee said the pricing discussions looked at Hyflux's five-year senior debt current yield of 3.61 per cent. Paying 2.4 per cent more for a seven-year debt seemed reasonable. Discussions also took Reits' yields into account as investors look to Reits to provide a stream of stable income. Top-quality Reits are yielding slightly more than 5 per cent but these are also proven investments with good liquidity.

So what are the risks? Hyflux is not paying 6 per cent for fun. Sure, raising money via prefs keeps its existing stakeholders - shareholders and bankers - happy. Shareholders don't suffer dilution and bankers are placated as Hyflux's borrowings don't rise.

Prefs investors should know that their securities rank behind senior debt which are bank loans and bonds and only ahead of shareholders. That means if Hyflux goes belly-up, banks and bondholders get paid first, prefs holders are next if there's anything left, and last in line are shareholders.

Investors tend to associate Hyflux with a utility because it builds and operates water plants. Its most recent contract was an $890 million agreement to build, own and operate Singapore's second seawater desalination facility. But it also suffered a setback in war-torn Libya. With the country's uncertain future, Hyflux will let a US$100 million contract it won last November lapse, while discussions for a potential billion-dollar deal to build two other desalination plants in Libya will not proceed.

The other risk is liquidity. So far, despite efforts by the Singapore Exchange to promote fixed income trading, which includes prefs, secondary trading remains thin.

The problem is supply. Unlike traders, investors in such instruments normally buy and hold. But Mr Lee said efforts are being made to ensure a diversified investor base in order to help liquidity. In addition, DBS will make the market when there is no buyer.

Interest rate risk is yet another factor. Currently, regional interest rates, except in Singapore, are moving up to deal with inflationary pressures. Eventually, Singapore too will see interest rates rise when the US economy begins to grow.

Will 6 per cent be the new gold? Mr Lee sure hopes so, suggesting that after Hyflux's groundbreaking issue, more corporates will follow.

[freedom]

will DBS make the market when there is no seller?

[D123]

OMG.

Mr Lee said the pricing discussions looked at Hyflux's five-year senior debt current yield of 3.61 per cent. Paying 2.4 per cent more for a seven-year debt seemed reasonable.

1. That's yield, not interest rates. The interest rates charged for this senior debt is 4% - 5.68%.

I assume this is from the MTN program established in 2008 for $300mn worth of debt, since it's the only loan reported in the annual report with a five year term. Come on Mr. Lee, you should know, since the dealers of that program were Standard Chartered and... DBS.

2. The preference shares, being subordinate to this credit line, should in principle offer a higher interest rate.

3. Furthermore, these are preference shares, not pure debt instruments. There is no recourse on the principal amount, and lenders cannot put Hyflux into receivership. Okay, let's not talk about Hyflux going belly-up. Even if they just stop paying coupons, preference shareholders cannot file penalty claims on the company like bondholders can. Hence, another additional premium should be added to the rates.

[freedom]

the interest rate on the loan in 2008 can't be used as the benchmark. the yield would be the new interest rate applied if Hyflux is going to refinance the same loan.

so nothing wrong to use yield instead of original interest rate as benchmark.

[D123]

the interest rate on the loan in 2008 can't be used as the benchmark. the yield would be the new interest rate applied if Hyflux is going to refinance the same loan.

so nothing wrong to use yield instead of original interest rate as benchmark.

The MTN program was established in 2008, but actual debt issued from the program was done progressively over the past 2 years. Interest rates are fixed at the time of the credit being drawn. Between Dec 2009 and Dec 2010, they still managed to issue $75mn worth of debt from this program at only 4% - 5.68%.

[freedom]

issued interest rate at 4% - 5.68% does not mean they issued the notes at par. maybe above par....

[D123]

issued interest rate at 4% - 5.68% does not mean they issued the notes at par. maybe above par....

That is true.

However, I doubt that in general, bonds and notes are placed at above par, at least at the institutional level. The fact that there is a range of interest rates declared for this line item of notes, suggests that the coupons rates and yields were adjusted to reflect market conditions, instead of fixing the rates and adjusting the discount or premium to notes issued.

Another point that makes me skeptical that the notes were issued above par is that as of 31 Dec 2010, the face value of the notes was $233.5mn, while the carrying amount was $222.788mn. The carrying amount is calculated through the effective interest method. Assuming issue costs are negligible, this means that carrying value will be higher than face value if there was a premium to the bonds issued, and lower than face value if there was a discount issued to the bonds instead. Since the carrying amount here is lower, the notes were likely issued at par (more likely) or at a discount.

If issue costs more than make up for the premium you get, then frankly you should sack your banker.

So well, I still think that from a financing perspective, this is probably as good a deal as it can get for Hyflux. Now if only Mr Clifford Lee can come out and explain how he arrived at the 3.61% yield...