Hyflux

[AQ.]

More info has been released on 16Feb19. Quite a fair bit of dirt finally revealed via Pg 4-7 on status of various projects

https://www.hyflux.com/wp-content/upload...ressed.pdf

Qurayyat => LD of 76mio for non-completion of project by 2017
TuasOne => LD of 113mio for non-completion of project 
Magtaa    =>Perf bonds+Corp guarantees of 135mio for completion delays
Tlemcen => 92mio claims over poor performance due to feedwater quality


The actual amount of contingent claims will only crystallise after deadline for submission of claims and admitted.
Looks like total max unsecured claims = 1.9bio but eventual amount should be less than that if they avoid liquidation, of which those due to the above should materialise in some amounts i.e. ~ 416mio on top of those due to banks + MTN of 844mio.

As well, balancesheet for the 5 subsidiaries under the moratorium has deteriorated by 140mio mostly due to cost overruns at the various projects esp TuasOne
Total equity as of Jul18 = 1262mio
Total equity as of Dec18 = 1122mio

Tuaspring should continue to be bleeding 50-60mio p.a. as USEP is still <120.

[CY09]

What I am more interested is not how much Tuaspring is bleeding in P&L, but how much cashflow Tuaspring is generating annually, after nett off its operations cash outflow, during the years of low USEP.

This will allow noteholders, Perpetuals and Preference shareholders to guage how much value Tuaspring is worth. After all, Tuaspring contributes to a significant portion of the asset base. In my opinion, it is definitely not worth so low like Sembcorp's bid of $500 million bid after present valuing the expected cashflow streams.

[karlmarx]

I am not an OL sympathizer, and neither do I delight in the losses of Hyflux stakeholders, but I do wish to share my thoughts that may be offensive to the latter. My apologies if you find this post offensive.

1) It looks to me that SIAS is not making rational questions/statements, and is instead venting the frustration of the aggrieved holders of Hyflux securities.

From 2007 to 2016, when OL received $58m of dividends, did the rest of the common shareholders/note holders/hybrid securities holders/lenders not receive their rightful portion of dividends/coupons/interests? If they have, should these parties also take out whatever was previously distributed to them, and contribute to the restructuring process? Because that is what SIAS is asking; why is OL is not using her past dividends to fund the restructuring?

2) The fact that OL is willing to give up her shares in the Newco demonstrates her willingness to share the pain of the aggrieved parties. And while the amount will not make a material difference to the recovery rates of the aggrieved parties, it should be noted that she was under no obligation to perform such a gesture.

I am not OL, nor am I acquainted with her, but I imagine such an individual as her who enjoyed much success and praise over the past 20 years to be psychologically (if not financially) devastated by the failure of what has defined her life. The psychological effects is perhaps not too different from a PMET who is retrenched in their 50s. OL is also not young. If she/Hyflux doesn't 'turn around,' she will forever be remembered for all the negative things surrounding this debacle. I don't imagine an individual such as OL wants to go into her twilight years that way. Not even with the $58m of dividends collected.

3) There is much anger and frustration from the aggrieved parties towards the restructuring proposals. There is also a lot of finger-pointing towards not only Hyflux and its management; but also the government, for allowing electricity prices to be so low, and for not rescuing Tuaspring; SM Investments, for not tabling a better deal; and even the market regulators, for not highlighting/categorising Hyflux instruments as 'high-risk' products that should only be meant for Accredited Investors.

But at the heart of the matter, Hyflux failed because its ventures failed. It (borrowed and) spent money on investments that failed to generate a satisfactory return. This is not different from what happened to many other businesses that failed, from Ezion, Swiber, to Noble. Hylux management made poor business decisions, just as failed fund managers made poor investment decisions. So while aggrieved parties may be upset at their losses, there has to be acknowledgement that they were too optimistic in their judgement of Hyflux's business. And that their losses were not due to more nefarious reasons such as fraud.

If the government (or any GLC) comes to the rescue of aggrieved parties, there will be implications on the risk-free rate of Singapore's capital market. Because if a company can issue debt at 5-6%, and there is an implicit guaranteed -- as a result of past government bail-out -- then no one will want to buy government securities at 3%. And their borrowing cost will increase to match 5-6%. Companies will be happy to issue more debt, and lenders will be obliging since they know the government is willing to act as a guarantor. Easy money will then invariably lead to more reckless business decisions.

This is the moral (and economic) hazard to socialising losses, and privatising gains; the very criticism levelled against US financial institutions by the layman in 2009. Therefore if the aggrieved parties are hoping for any government-related rescue -- or think that using SIAS to make their wish heard will improve their chances -- my opinion is that the probability of such an outcome is low.

[CY09]

Thanks Karl, one issue some preference and perpetuals have is also due to the need to obtain pre-approval from PUB before Tuaspring could be sold to one party.

Hyflux mentioned that 2 out of the 8 parties interested in Tuaspring was approved by PUB to bid. This could have severely diminished the value of the plant. In addition, in 2011 when the plant was first opened for biddings, there was no restrictions and companies of any country of origin could bid in it. However, in 2018 when the plant needed to be sold, it seemed only local companies were allowed to bid by PUB's actions of approving Keppel and Sembcorp to bid.

This has provided some angst to those invested because the recovery of their capital has been affected

[dreamybear]

Thanks Karlmarx for yet another excellent insightful post, I shall not replicate here as it is quite long.

Given that this is an emotionally charged issue, I also wish to emphasize I am merely sharing my personal lessons learnt from the fiasco(in the hope that readers can avoid financial loss from my mistakes because I wished someone had taught me all these beforehand), and not about taking any sides nor trying to demean anyone. 

As a layman, I am still trying to fully grasp the issues surrounding Hyflux. After reading Hyflux's recent response to SIAS, I get the impression that Hyflux is trying to subtly convey that a lot of things had been disclosed in company announcements, AR and were there for anyone to read. Thus, I am not sure whether SIAS cld have asked better questions or Hyflux mgmt is good at crafting the answers.

I get the impression then (given the above) that many Hyflux investors did not seem to have followed Hyflux's developments closely enough to ascertain the risks of their investments(e.g. debt levels/operating models/business strategy etc). I think many investors are just passive investors(esp the pref/prep) who are hungry for yield, and generally thought that since water is a critical resource to SG, their investment shd be much less risky(i.e. compared to other SGX counters like retail, F&B, O&G etc).  

It brings to mind some financial blogs I read where the writers share that they buy/sell stocks
- after the stocks had risen/droppped a certain percentage,  
- the prospect is good e.g. 1) aging population, so healthcare stocks sure earn money, 2) oil price going up, O&G companies a sure bet, 3) IOT is coming, buy 5G related equipment companies  4) internet shopping is the trend, buy Alibaba, Amazon when there is a price correction etc
- now at 52 week low, must buy or all time high, better sell !

I have listed some examples, but I think u get the idea.

It seems to me that anyone doing the above does not seem to be able to value the stock, and as such, is not really practising value investing. The gist of it is we shd be able to predict the stock's earnings/financial statements fairly accurately(i.e. almost no surprises when reading every quarterly result announcement).

I admit I am guilty of the above(fortunately significantly less so now - learn from mistakes mah) and I have lost quite a bit of money in a number of counters. IMO value investing is more suited to be a full time job, although like what WB say - it doesn't mean monitoring the share prices throughout the day, but for me, I think it is very important to keep abreast of the news surrounding the industry, company, country, etc of your stocks daily. If one only reads the news once a week(e.g. because of a 12 hour day time job, so only catch up on the stack of newspapers over the weekends), it is difficult to constantly evaluate the company u r invested in.

[ACTIVIST SPEAKS]

Ernst & Young issued clean audit report on Noble. Pricewaterhouse affirmed the valuation model used by Noble. And now, KPMG issued clean audit report two month before Hyflux seek bankruptcy protection. International audit firms appear to be able to get away scot-free (so far?) using their watchdog/bloodhound argument in all cases in Singapore.

It is no wonder that investors do not believe Ernst and Young when they told the CPS and PCS investors that they will get nothing in the event of a liquidation. Some retail investors prefer liquidation to restructuring.

This is hell of a difficult decision to make....hope they get it right.

[Behappyalways]

Two Monkeys Were Paid Unequally: Excerpt from Frans de Waal's TED Talk
https://www.youtube.com/watch?v=meiU6TxysCg

[karlmarx]

Thanks Karl, one issue some preference and perpetuals have is also due to the need to obtain pre-approval from PUB before Tuaspring could be sold to one party.

Hyflux mentioned that 2 out of the 8 parties interested in Tuaspring was approved by PUB to bid. This could have severely diminished the value of the plant. In addition, in 2011 when the plant was first opened for biddings, there was no restrictions and companies of any country of origin could bid in it. However, in 2018 when the plant needed to be sold, it seemed only local companies were allowed to bid by PUB's actions of approving Keppel and Sembcorp to bid.

This has provided some angst to those invested because the recovery of their capital has been affected

It was mentioned in news reports that Hyflux board received offers from other parties, but SM was judged to be the best. Since SM's offer was open for everyone to see, this meant that any third party that was interested in Hyflux could have made an offer that was better than SM. If Sembcorp really wanted Tuaspring, it could have offered a deal similar to SM, but with more cash, say $700m instead of $530m. But it didn't. It was also mentioned in the news that since the announcement of SM's offer, there were no other offers made to the board. If this is true, it probably means that SM's offer was the best, to the board at least.

While we do not know the identities of the other bidders/interested parties and the terms of their offer, perhaps part of the reason why SM was preferred by Hyflux board is that SM is willing to keep Hyflux's present management intact. If it was a party with experience in running water treatment plants, it is less likely that they will wish to retain Hyflux management, though they may offer a better deal than SM.

[karlmarx]

IMO value investing is more suited to be a full time job...

Investing requires much more effort than most understand it to be. It is very hard work. Even our local professionals have difficulty maintaining a satisfactory outperformance over their benchmarks, over the long term. And that is why WB recommended investing in broad indices. All that time spent looking for above-average returns...may be for nought.

As an aside, it seems the only group of investors left unscathed since 2009 are those with a REIT-heavy portfolio.

[Wildreamz]

IMO value investing is more suited to be a full time job...

Investing requires much more effort than most understand it to be. It is very hard work. Even our local professionals have difficulty maintaining a satisfactory outperformance over their benchmarks, over the long term. And that is why WB recommended investing in broad indices. All that time spent looking for above-average returns...may be for nought.

As an aside, it seems the only group of investors left unscathed since 2009 are those with a REIT-heavy portfolio.

Or perhaps investors avoiding the local market completely. The Singapore market is only a tiny faction of the investible universe as a whole.