Hyflux

[freedom]

debt are tradable among institutions, even if it is private secured loan. it can be securitized and traded as derivative. I guess.

probably 3.61 is the yield on the securitized Hyflux debt.

[Musicwhiz]

Apr 19, 2011
Hyflux's bond offering may double to $400m
It has seen hot response from investors attracted by 6% dividend promise
By Goh Eng Yeow, Senior Correspondent

HYFLUX appears very likely to double the amount it raises from a bond offering exercise from $200 million to $400 million, judging by the enthusiastic response from institutional investors so far.

The response from retail investors to the public tranche of the water treatment firm's first-ever preference share issue, which closes at noon tomorrow, looks to be just as hot.

Investors are being lured in droves by the 6 per cent annual dividend promised by Hyflux's preference shares - a bond- like investment which offers a fixed dividend payout without giving its holder rights such as voting at the company's annual general meetings.

Better still, Hyflux's preference share issue is 'cumulative'. This means that the company will have to make good at a later date any outstanding dividends on the preference shares if it wants to make a payout to its shareholders.

As an added inducement, it is offering to step up its annual dividend payout to 8 per cent if it fails to redeem the preference share offering in seven years' time.

The company had planned to issue up to $200 million worth of preference shares with the option to upsize it to $400 million - $200 million for institutional investors and another $200 million for retail investors - to satisfy demand.

For retail investors applying via ATMs, the minimum subscription is $10,000.

Mr Clifford Lee, head of fixed income at DBS Bank, which is managing the issue, said response from retail investors is very strong.

Last Friday, when the placement tranche closed, the company allocated $200 million of preference shares to institutional investors after getting indications of interest worth $1.4 billion.

Analysts have also given Hyflux's preference shares the thumbs up.

JPMorgan analyst Chan Ying Jian said in a note last week that the fund-raising will improve Hyflux's balance sheet position and cut its net debt gearing from 75 per cent to 25 per cent.

But some analysts observe the rub is that the 6 per cent dividend which Hyflux will be paying on its preference shares is quite a bit higher than its latest borrowing cost of about 3.85 per cent.

'Assuming an issue size of $200 million, the earnings per share to ordinary shareholders could be reduced by 4.3 per cent in 2011,' said Credit Suisse in a research note.

This has led some investors to question Hyflux's rationale for pricing its preference share issue so aggressively.

'If the offer is upsized to $400 million, Hyflux will have to shell out $24 million in dividends a year for its preference shares and that is a hefty sum, considering that it made only $88.5 million in profits for its latest financial year,' said a retail investor, who wanted to be known only as Mr Chan.

Some investors are also concerned over Hyflux's exposure in the Arab world which includes a US$468 million (S$580 million) desalination plant in Algeria.

But Mr Lee said institutional investors are comfortable with the firm's profile and that its concerns were over the pricing of the dividend payout, rather than the political or economic risks.

engyeow@sph.com.sg

[piggo]

If hyflux doesn't pay, will the cummulated 6% dividends collect 6% annual interest rate?

[dydx]

While many investors are getting excited about the stated 6%p.a 'more or less guaranteed' return from the proposed Hyflux pref shares, perhaps forumers would allow me - for fun! - to be a devil's advocate.

Based on Hyflux's latest FY10 (ended 31Dec10) results announcement, while the group had a Total Equity position of $514.5m as at 31Dec10, the B/S also carried a high total gross debt balance of $599.3m and nett debt balance of $377.0m (after netting off cash balance of $222.3m), as well as a total trade & other payables balance of $210.0m.

If DBS (the Arranger of the pref share issue) and investors allow Hyflux to 'borrow' as much as $400.0m under the pref share issue, the B/S will be really bloated with debts and quasi debts.

3 relevant questions: How and where would Hyflux get up to $400.0m in the future to redeem the pref shares? Would banks be willing to increase their lending by the same amount on an unsecured basis to allow the redemption of the pref shares? Would Hyflux's common shareholders be willing to support a large rights issue to 'bail out' the holders of pref shares?

[Nick]

There is no maturity date for preference shares and neither is there any conversion. After 2018, the interest rate will step up to 8%. If the proposed planned expansion into China is a success, I don't think an incremental 2% base point increase in interest rates (or approx extra $4 mil) will hurt Hyflux badly. Alternatively, it can always roll over the pref shares by issuing new ones.

[corydorus]

I understand that issuing preference share ironically improve the debt gearing ratio for them to borrow more from bank due to divident is not guarantee and can theoritically hold the Preference share holder forever without payment till they decide to recall.

Cory

[Thriftville]

While many investors are getting excited about the stated 6%p.a 'more or less guaranteed' return from the proposed Hyflux pref shares, perhaps forumers would allow me - for fun! - to be a devil's advocate.

Based on Hyflux's latest FY10 (ended 31Dec10) results announcement, while the group had a Total Equity position of $514.5m as at 31Dec10, the B/S also carried a high total gross debt balance of $599.3m and nett debt balance of $377.0m (after netting off cash balance of $222.3m), as well as a total trade & other payables balance of $210.0m.

If DBS (the Arranger of the pref share issue) and investors allow Hyflux to 'borrow' as much as $400.0m under the pref share issue, the B/S will be really bloated with debts and quasi debts.

3 relevant questions: How and where would Hyflux get up to $400.0m in the future to redeem the pref shares? Would banks be willing to increase their lending by the same amount on an unsecured basis to allow the redemption of the pref shares? Would Hyflux's common shareholders be willing to support a large rights issue to 'bail out' the holders of pref shares?

I think Hyflux may consider offering another $400m of preference at 6%. Then use the money for redemption?

Hyflux net profit margin is about 10%. So I guess they are still able to squeeze out some money to pay off pref shareholders.

[Musicwhiz]

I think Hyflux may consider offering another $400m of preference at 6%. Then use the money for redemption?

Hyflux net profit margin is about 10%. So I guess they are still able to squeeze out some money to pay off pref shareholders.

What you propose sounds a lot like EUNetworks (former Global Voice), which have issued new bonds to redeem old ones, and essentially not eliminating the problem of paying a high coupon rate on its existing debt/preference shares.

And we should also not confuse profits with cash. A profit margin of 10% may also not be consistent depending on the nature and type of project, and cash flows may be erratic due to the nature of Hyflux's business.

To add on to what dydx has said, the $400 million will be hard to come by for Hyflux unless they have positive FCF for the 6 years after the issuance of their CPS. Even then, they would most likely pay down their debt first (i.e. bank loans) rather than reserve money to specifically pay off the CPS. If they can lower their gearing and improve their BS, then banks would be more willing to roll over their loans and/or lend them more money.

[freedom]

will be similar situation like DBS/UOB pref share.

new pref/common share will be issued to redeem the old pref share when interest rate is low or common share price is high.

[etan]

TOL:

Clean water is a needed commodity in the world

6% now is just too good to resist; ocbc now offering less than 0.5% for rollover fd;
Just like bank pref shares which give higher interest at 1st tranche, subsequent tranches may give out lower IR. I missed out the OCBC pref s, but got hold of the DBS one with slightly lower IR.

Interest is fixed + cumulative + locked in for several yrs - suitable for lazy ppl like me, unlike fds - need to withdraw and then put in again as fresh funds to get better rates, even then, the rates are marginally diff.

Applied through DBS online, handling charge – only $2

As in any kind of investments, there is a certain amt of risk, unless it’s SGS bonds which is rock solid.

Warning: the $100 unit price – price may go down (to $90? $80?) during bad times or black swan event.

No FA, no TA, just some commonsense thoughts… pls do yr own research