Hyflux 6% perpetual callable 2020

[wonghw12]

It still seems not straightforward that Hyflux would prefer to redeem the preference shares.

1) With weak operating cashflow, the additional 250m cash will have to come from further asset sales or borrowings. Questions:
a) What assets would they sell?
b) Would Hyflux be able to obtain borrowings, and if so would the rate of borrowing be cheaper than 8% (rate that the preference share would increase to if not redeemed)

2) Suspect it is hard to say that bankers or other lenders would be more convinced about Hyflux if the preference shares are redeemed. Perhaps precedents (e.g. Swiber, Ezra) had redeemed perpetual capital securities in an attempt to instill confidence. However, perpetual capital securities were small in relation to their capital structure. For Hyflux, preference shares represent a very sizeable 36% of Hyflux's total equity. Perpetual securities represent another 45%. As a lender, would you prefer that Hyflux redeem (and hence wipe out 36%, or 36%+45% of the total equity), or would you prefer they not redeem and defer the coupons till their operating cashflows turn positive?

3) Are there projects which need the cash (that takes priority over the redemption of the preference shares?)

Something which I am pondering about: how would the spin-off of the consumer business affect the capital structure of Hyflux? Especially since it is dividend-in-specie. Would that leave less assets on the table to protect preference shares?

[sgdividends]

Vested.
For hyflux, I think everything now hinges on their ability to sell tuaspring and Tianjin dagang. This would get them $1047 million( assume sale at book value of these assets) .

This can cover the 2018 perps.

[sgdividends]

Vested

I think that everything hinges in their successful sale of tuaspring and Tianjin dagang. If done at book value , it will net them $1047 million nett .

This will amount to comfortably the following :
April 2018 400 million perps
Sept 2018 100 million bonds
Aug 2019 100 million bonds
Sept 2019 65 million bonds 
And a large part of the 2020 500 million perps..

This is really a high return , high risk legit investment !

[sgdividends]

Recently , 1 day ago, investor relations reply.

The nature of Hyflux’s business is very capital intensive, hence, for Hyflux as well as companies in similar industries, gearings are typically high. At Hyflux, we employ an asset light strategy where we divest our assets and recycle capital for new infrastructure projects. We are in the process of divesting two of our assets at the moment – Tuaspring in Singapore and Tianjin Dagang in China. Proceeds from divestments are typically used for future investments as well as to pare down debt, upon which gearing will drop. Hyflux’s major construction projects are supported by non-recourse project financing, with loan drawdowns at established project milestones. We currently do not have plans for early redemption of the preference shares and perpetual securities.

[AQ.]

Firstly, i agree that N2H (call 2018) is a better bet than BTWZ (call 2020)

I bot late 2016 and sold a few mths ago in 2017 ard par.

Some of my thoughts behind the sale:

1. Gay Chee Cheong sold all of his ~$500k holding ard par.

http://infopub.sgx.com/FileOpen/_Form1_G...eID=457260

http://infopub.sgx.com/FileOpen/_Form1_G...eID=457067

2. In Apr18, what can happen?

    a. Redemption thru cash. This is not impossible, esp since they sold their Tuas property and if they manage to divest TuasSpring. This will be the ideal case but leave Hyflux seriously dry on liquidity. @ 95c, one makes 8c in total. (redemption @ 103)

    b. Issue new debt to fund perp redemption. From what i understand, Hyflux is already under considerable strain under the convenants for their notes - perps were done precisely to relieve the  debt/equity load. It is not impossible to seek further relaxation of the convenants and then get more debt but this is all subject to lenders confidence - something i do not have a feel of. @ 95c, one makes 8c in total. (redemption @ 103)

    c. Rollover perp. When the retail tranche was launched in 2016, N2H was trading at a yield-to-call of just 4+%. This made it possible to issue BTWZ @ 6+2%. Now that BTWZ is trading at >10%, i doubt a new perp issuance is going to offer much better coupon terms. If they have to issue @ ~10%, it only makes sense to not call, and pay the stepped up 8%. If this happens, the market price prob falls to 8/0.1= 0.8 (or even worse if the yield-to-call is >10%, or even worse if they decide to skip a payment). @ 95c, one loses 15c in total.

3. I was surprised management didn't bother to buy back the perps on the open market. Afterall, these were yielding >15% YTC (when i bot) which will save them a bunch of interests costs not to mention restoring market confidence. Perhaps they thought liquidity was too low. Perhaps they could not be bothered with price fluctuations. Or perhaps....

4. Deep down, I just did not like Hyflux's business fundamentals nor its balance sheet management. Even after the sale of ~50% of TuasSpring (if it happens), they will still need to account for 50% of TuasSpring's results which seem to be bleeding ~ 30mio per quarter. And no i do not think highly of Elo.

Actually i still get the feeling that they will scrap thru and find a way to redeem N2H, but unfortunately the math after evaluating the risk-reward tilts the bet to the downside, and hence i decided to get out. 

The actual downside is not a default - Hyflux has enough receivables to secure its loans. The downside is the event of a non-call or even a non-payment, both of which do not constitute default - it just means common equity do not get dividends. But this event will prob adjust market prices down so capital losses is significant albeit at a higher coupon (if paid, even cumulatively eventually).

[gzbkel]

If management wants to act in the best interest of the common shareholders at the expense of the preference shareholders, seems to me that they should not redeem and stop all dividends to both common and preferred. Preferred shares will drop and they can buyback further below par.

Not saying they will do something nasty like this and risk damage to reputation, but it's one possibility. Is there any law that can stop them?

[corydorus]

I have been asking can they stop giving preference shares dividends in perpetual. Unlikely now I think as their businesses requires debts to work. What may happen is they either may temporarily stop or pay much higher new PS. Their business is still viable as long their Tuas plant get settled I feel. Problem is I have small heart so no longer vested.

[CY09]

Both the preference shares and perpetuals witnessed a tremendous fall in value today. Makes me wonder if it is due to "Market speculation that Hyflux may not be redeeming". If it is, I wonder how much confidence will be lost by banks

[sgpunter]

Both the preference shares and perpetuals witnessed a tremendous fall in value today. Makes me wonder if it is due to news that Hyflux is not redeeming. If it is, I wonder how much confidence will be lost by banks

May I know where you got the news that Hyflux is not redeeming? Appreciate if you can share the source as I cannot seem to find this anywhere and I will say that this a material piece of information. 

I note in another earlier posting by sgdividends on Hyflux's reply from their investor relations but I interpret that to mean that they do not have plans for an early redemption but that does not mean that they do not intend to redeem the CPS during the callable date on 25 April 2018.

[CY09]

Hi Sgpunter,

apologies for the confusion. Was meaning if it is due to market speculation that Hyflux may not be redeeming the Preference shares. Have reedited to prevent mis reading.

<vested in Hyflux Preference shares>