Hyflux

[dreamybear]

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

.... or those holding Best World.   

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

I do not profess to know many SGX stocks but have looked broadly at banks, telcos, healthcare(i feel these are currently overvalued), semi-conductors(not confident of the state of the cycle we are currently at), O&G(think not really recovering yet), REITS(scared of rights issues), property(scared it's value trap & declining/aging population), commodities(not familiar at all). 

As a result, I hv started tracking SSB.

The good(or bad for the rich) thing abt SGX stocks is the recent relaxation of the security lending requirements, instead of 50,000 units, I think it has dropped to 10,000 units or $10,000 so more of us can have a chance for extra income.

[sgdividends]

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.

Did you know that in January 2018. OL gave a dividends in specie of hyflux shop. She didnt have to do that. Why did she do that? Because by doing that dhe breached the terms of the perpertual securties, where it is compulsory to pay perpetual securities their dividend in May 2018.
Hyfluxshop became a private company. she then did a GO before the court moratorium and now she has 76% control of hyfluxshop.

This is a leakage of value from Hyflux. An escape ship?

Even how many perps and prefs pleaded with her to cut her pay at the 2 townhalls..she refused. Will u not be pissed?I think she thinks she deserves it as she is working harder now to get out of the mess. Of course some people will say how much can the pay do to return back the money...this is missing the point. Is there any insincerity or accountability? Why are you enriching yourself when u and BOD caused it , at the expense of others?

[AQ.]

Did you know that in January 2018. OL gave a dividends in specie of hyflux shop. She didnt have to do that. Why did she do that? Because by doing that dhe breached the terms of the perpertual securties, where it is compulsory to pay perpetual securities their dividend in May 2018.
Hyfluxshop became a private company. she then did a GO before the court moratorium and now she has 76% control of hyfluxshop.

This is a leakage of value from Hyflux. An escape ship?

Even how many perps and prefs pleaded with her to cut her pay at the 2 townhalls..she refused. Will u not be pissed?I think she thinks she deserves it as she is working harder now to get out of the mess. Of course some people will say how much can the pay do to return back the money...this is missing the point. Is there any insincerity or accountability? Why are you enriching yourself when u  and BOD caused it , at the expense of others?

1. I agree as well that the dividend in specie of hyfluxshop is not beneficial to the unsecured creditors+perps+pref. It is also quite clear that the reason was to ringfence hyfluxshop from Hyflux. I don't quite agree that OL benefitted from this though.

The dividend in specie was 1for10 mother => no of Hyfluxshop shares distributed= 0.1*785mio =78.5mio 
Since Hyflux only distributed 70% of Hyfluxshop, total no shares = 10/7*78.5mio = 112mio so Hyflux kept 33.5mio
Out of this 78.5mio, she got 34% as a shareholder => 26.7mio
Eventually she has 76% control => she had to buy over 0.76*112 - 33.5-26.7=25mio shares @ 17.83c each due to a forced GO ruling => she had to fork out $4.45mio of cash.

Would u want to pay cash for Hyfluxshop assets? 17.83c is reportedly the per share book value of Hyfluxshop. Personally i think this book value is probably way inflated and there's prob not much hard assets anyway. I can be wrong though - they didnt list the actual assets for Hyfluxshop.

In anycase, the dividend in specie was good for Hyflux shareholders @ expense of all other creditors above.

2. As for the paycut issue - well
    a. If its abt future paycut, OL has already said she will donate her pay as opposed to a paycut which only benefits SM. Anyway I doubt OL will stay on as CEO for long - she has no more vested interets and i think SM will prob appoint their trusted guy eventually.
    b. If it is abt a clawback of past pay, OL has already donated her  ~1.3% NewCo stake which is "worth" ard 0.013*667 = 8.7mio of implied equity value (as well as her share of management shares which is not disclosed). This move is actually good for the moms and pops as it is actual value that goes into their pockets i/o going to the SM group.

From AR17, OL earns ~1mio p.a. as salary => she is effectively donating ~9yrs of pay into the perp+pref pockets directly. I dun see the likes of Noble/Ezion/Ezra doing the same.

[money]

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.

Did you know that in January 2018. OL gave a dividends in specie of hyflux shop. She didnt have to do that. Why did she do that? Because by doing that dhe breached the terms of the perpertual securties, where it is compulsory to pay perpetual securities their dividend in May 2018.
Hyfluxshop became a private company. she then did a GO before the court moratorium and now she has 76% control of hyfluxshop.

This is a leakage of value from Hyflux. An escape ship?

Even how many perps and prefs pleaded with her to cut her pay at the 2 townhalls..she refused. Will u not be pissed?I think she thinks she deserves it as she is working harder now to get out of the mess. Of course some people will say how much can the pay do to return back the money...this is missing the point. Is there any insincerity or accountability? Why are you enriching yourself when u  and BOD caused it , at the expense of others?

Looking at the big picture, even without the dividend in species, preference shareholders will at most get back another few cents for each dollar of preference shares, so ...  As much as i think Olivia and her bod did a poor job of management, i think we should also consider that the fall of Hyflux has the biggest impact on Olivia, psychologically and financially. Dont really need to target her anymore, she is pitiful enough

Imo, it would be more fruitful to pick up the lessons from this fiasco, i.e. since a few years back, it seems to me the company is struggling with its cash flow from its operations to pay for the interests on its debt and preference shares, yet many people mistakenly think that because water is top on the list of national security, somehow the money will appear. It pays to be conservative in investing, you need not assume for the worst, but you should think seriously and objectively think about how the company will earn its money, and whether the cashflow FROM OPERATIONS is in excess and hopefully a decent buffer to pay for the interest on its debt, CPS, perps, etc

If you are going to invest in common shares of hyflux, you will definitely demand much more

[AQ.]

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.

U can find the info somewhat from Hyflux AR17, Pg 138 Note 32 under Discontinued Operations

                                                     2017                  2016
Results of TS
External Revenue                            175mio             156mio
External Expenses                          -229mio            -238mio
Finance Cost payable to Company     -47mio             -60mio

Operating results                            -101mio           -142mio

U cannot isolate revenues from water vs electricity as they are lumped together, but OL mentioned that 90% revenue is from electricity.
U cannot isolate costs of LNG vs interests to Maybank vs fixed costs from external expenses
Apparently Hyflux also extended a shareholder loan to Tuaspring and the finance costs is isolated.

Further info on USEP can be obtained from EMA 
https://www.ema.gov.sg/cmsmedia/Publicat.../35RSU.pdf

In short average USEP in 2017 is 81; in 2016 is 63. In 2018, the average is 110.

More information can also be gathered from OL's affidavit on 14Jun2018 (Pg17) where she revealed that spark spreads (i.e. revenue from electricity - cost of LNG) has turned +ve since Feb18 (average USEP in Feb18 is 99.5). 

Going fwd, 2 things should happen once SM group takes over
1. Refinance with Maybank to lower interests
2. Once the take-or-pay LNG contracts expire (not sure when exactly this happens - Hyflux refuses to answer), SM will be able to use the piped gas from Indonesia to Singapore (which they own) for both TS and PacLight. Current LNG prices is reportedly 3x the price of piped gas.

Some thoughts:
1. Spark spreads turn +ve for USEP >99.5
2. Breakeven for TS on a cash basis should be ~130 for USEP. This is just a guestimate as while revenues should be correlated to USEP, the relationship need not be linear.
3. Interests savings and piped gas usage from SM eventually should bring even further savings
4. It is also clear why SM will be interested in TS esp when they also own PacLight+piped gas, and why the advisors recommend SM as the synergies are significant.

Of cos, if USEP falls back to 60, then its square one again.

[ACTIVIST SPEAKS]

https://www.channelnewsasia.com/news/bus...n-11277580

“I wish to highlight that in this demand proposal, there are no contractual obligations to redeem capital or to pay interest, therefore it is not a debt and it is placed in the same classification as equity."

“Our ranking is the same as equity, so is there a need to write off the preference shareholders?” Mdm Loo Leong Hun, a retail CPS and PCS holder.

She also referred to the company’s 2017 annual report, which suggested that perpetual securities do not fall under the category of a financial liability given that there is “no contractual obligation to repay its principal or to pay distribution”.


Personally, I think this is the best argument thus far.....then again, this is not what Salim wants.

[AQ.]

To recollect, and to share some numbers 

SM                       gets 60% NewCO
unsecured claims   gets 27% NewCo + $232mio => value of 412mio
pref+perps           gets 10.26% NewCo + 27mio => value of 95mio
common equity     gets 2.74% NewCo               =>  value of 18mio
trade creditors      gets  13mio cash

Unsecured Claims:
844mio (banks+MTN) =412/1900*844 = 183mio => worst case recovery = 21.7%
remaining = 412-183 = 229mio of which
20% goes to managers to be paid if they complete projects w/o realising contingent claims = 45.8mio
80% to be held in escrow, to be paid to banks+mtn subject to terminating actual realised contingent claims => 229-45.8=183.2mio

Worst case contingent claims ~1bio of which only 416mio is explicitly spelled out in the affidavits. There is no mention of the liability for the Iran contract which has a definite "significant" impact.

What is not clear is how this 183.2mio implied value to used to extinguish the contingent claims i.e. if only 416mio is realised, then is 183.2mio used to extinguish 416mio? or is is a pro-rata amount?
Without this info, it is not possible to calculate the recovery rate of the senior unsecured other than say for sure that the best case is (183+183)/844=43.4% and the worst case is 21.7%

But just for fun, suppose the perps+pref votes agst the SOA thinking that they should get a bigger cut of the amt reserved for contingent claims:
Suppose 
1) the managers really get the work done and no contingent claims arise
2) the banks+mtn agree to share the spoils with the perps+pref
3) amts are prorata'd

so the perps+pref get 900/(900+844)*183=94.4mio
so the best case recovery for the perps+pref will then be (94.4+95)/900=21%

But since one can be almost sure that there will be some realised contingent claims, and that being senior, the banks+mtn will never agree to a prorata amt, even if they agree to share the spoils in the first place, the net result of voting agst the SOA, hoping to get a bigger share of the amt reserved for extinguishing contingent claims is prob only 2-4% more.

Based on the numbers, i think voting agst the SOA hoping to get a larger share of the amt reserved for contingent claims, is rather silly. There's 2-4% on the upside, and 10.7% on the downside.
But of cos, if one thinks that by trying to force a liquidation, one draws a better offer from SM/better scheme terms since banks+mtn will not want liquidation/just to prove a pt since recovery rate is just 10%, then it can be valid.

[Shiyi]

Perps are considered as equity for accounting purpose.
But they are still debt once the company is undergoing restructuring.

Btw, there is a petition going round by perp holders to ask for government bailout.

[ACTIVIST SPEAKS]

I think it will be an amazing feat if the management can get all stakeholders to agree to this restructuring considering the 75% vote and 50% number rule for all groups.

And I really hope all the PCS and CPS holders read AQ's analysis.

[tanjm]

I think that holders may have some leverage assuming the deal is a lucrative one for Salim because of the synergies for them. Think of the current proposal as an option premium. By voting no, you take the risk that Salim will walk away or up their offer. There's also the emotional factor for smallholders.

The govt is a stakeholder too because of Tuaspring, which they are concerned about whos hands it falls into in the event of a disorderly liquidation.

A direct govt bailout is highly unlikely because of the slippery slope argument. However, it could come sneakily via a better offer (though not full book value) for Tuaspring by a GLC.