Hyflux 6% perpetual callable 2020

[sgpunter]

No prob at all CY09 

Glad to see that you are vested as well. I took a risk back when Olam was facing headwinds and bought its bonds back then which proved to be a very worthwhile investment with the dividends and capital gains.

Hoping that Olivia Lum does not disappoint now.

[corydorus]

One thing I do not fully understand is if Hyflux is losing money on supplying water (tuas), wouldn't the competitors with larger market share maybe also in bad situation ? anyone know?

[sgdividends]

I think hyflux attributed it due to the weak electricity market.
If u check the USEP (uniform Singapore electricity price) it was about 150 to 200 dollars per unit in 2010- 2012 . ( Off top of head) when they clinched the deal or in the midst of constructing .
Right now and recently, its below 100 per unit.

I think they also didn't make much from selling the water as one forumner stated they were selling at 45 per unit to PUB in first year but a competitor more recently sell at 91 per unit.

I feel hyflux is basically subsiding and charging cheaply their services to our government .

The bright side is, I was looking at the divestments in the past and hyflux seems to have been able sell their assets for sale at quite accurately their book value as stated in their balance sheet. ( Correct me if I'm wrong ). Their sale and leaseback of their Tuas property was in fact sold at a high premium to their book value. ( Though many people read esr REIT bought it at a discount to its market valuation). Market valuation > transacted prices > book value.

So , on the bright side ( I'm vested) , hyflux doesn't seem to inflate it's asset values which is reassuring .

[tanjm]

I didn't know much about Hyflux when I first posted. I still don't know much, but I gather that there is probably only a small risk of an actual default, but perhaps a considerably higher risk of a non payment of a dividend. I'll just comment on the fixed income angle (which I'm more comfortable with).

At the moment, the 6% CPS is selling at 92.4 (ask), and the 6% perp 2020 is at 0.8 (ask).

Let's assume that Hyflux will not default, but may miss a dividend or not call an issue.

At these prices, the CPS is a 30% yield to call. The risk is that they do not call. This is not unlikely given their short term cash issues. If they do not call, the rate rises to 8% perpetually. There is no more call date beyond this. Therefore, the CPS really has interest rate risk. If hyflux's credit profile becomes better in successive years, they can simply buy back in the open market with new borrowings at their own timing.

The 6% perp on the other hand, if not called, resets every 4 years at 4Y SOR + 6.2%. The yield to call is 16% (all dividends paid). The yield to call if the next 2 dividends are missed, is 13%. i.e most of the gain is in the principal repayment at call. If the issue is NOT called, then the bond essentially becomes a floating rate bond with a healthy 6.2% spread.

I think the likelihood is the CPS will not be called, but the perp will. Even if the perp is not called, a 6.2% spread to risk free is a good spread. The prices on the 2 issues right now probably reflect the relative risk.

[gzbkel]

The 6% perp on the other hand, if not called, resets every 4 years at 4Y SOR + 6.2%. The yield to call is 16% (all dividends paid). The yield to call if the next 2 dividends are missed, is 13%. i.e most of the gain is in the principal repayment at call. If the issue is NOT called, then the bond essentially becomes a floating rate bond with a healthy 6.2% spread.

I think the likelihood is the CPS will not be called, but the perp will. Even if the perp is not called, a 6.2% spread to risk free is a good spread. The prices on the 2 issues right now probably reflect the relative risk.

I think its not appropriate to call it a bond, because non-payment of dividend will not be a credit event.
They can stop payment of dividend to the 6$ perp if they stop payment to the junior obligation.
I think the worst case scenario is stoppage of dividend and non-calling.

[tanjm]

I didn't  know much about Hyflux when I first posted. I still don't know much, but I gather that there is probably only a small risk of an actual default, but perhaps a considerably higher risk of a non payment of a dividend. I'll just comment on the fixed income angle (which I'm more comfortable with).

At the moment, the 6% CPS is selling at 92.4 (ask), and the 6% perp 2020 is at 0.8 (ask).

Let's assume that Hyflux will not default, but may miss a dividend or not call an issue.

At these prices, the CPS is a 30% yield to call. The risk is that they do not call. This is not unlikely given their short term cash issues. If they do not call, the rate rises to 8% perpetually. There is no more call date beyond this. Therefore, the CPS really has interest rate risk. If hyflux's credit profile becomes better in successive years, they can simply buy back in the open market with new borrowings at their own timing.

The 6% perp on the other hand, if not called, resets every 4 years at 4Y SOR + 6.2%. The yield to call is 16% (all dividends paid). The yield to call if the next 2 dividends are missed, is 13%. i.e most of the gain is in the principal repayment at call. If the issue is NOT called, then the bond essentially becomes a floating rate bond with a healthy 6.2% spread.

I think the likelihood is the CPS will not be called, but the perp will. Even if the perp is not called, a 6.2% spread to risk free is a good spread. The prices on the 2 issues right now probably reflect the relative risk.

The 6% perp on the other hand, if not called, resets every 4 years at 4Y SOR + 6.2%. The yield to call is 16% (all dividends paid). The yield to call if the next 2 dividends are missed, is 13%. i.e most of the gain is in the principal repayment at call. If the issue is NOT called, then the bond essentially becomes a floating rate bond with a healthy 6.2% spread.

I think the likelihood is the CPS will not be called, but the perp will. Even if the perp is not called, a 6.2% spread to risk free is a good spread. The prices on the 2 issues right now probably reflect the relative risk.

I think its not appropriate to call it a bond, because non-payment of dividend will not be a credit event.
They can stop payment of dividend to the 6$ perp if they stop payment to the junior obligation.
I think the worst case scenario is stoppage of dividend and non-calling.

Apologies, I was not precise enough.

The 6% CPS with call date in 2018 is a cumulative preference share (lets call it the CPS), while the 6% perpetual with a 2020 call date is a bond (lets call it a perp). In any case, for the purpose of analysis, aside from seniority, they can both be analysed in a similar way.

By "default", I mean the chance of hyflux failing altogether, rendering all its securities at salvage value only. I was not referring to any security being defaulted on. Similarly, I was using dividend loosely for conciseness.

I've just read the prospectus of the perp. It looks like while Hyflux can defer a payment, that non-payment amount itself is added to the capital of the bond and accumulates interest - in other words, a non-payment is a deferral of the payment, and not a complete cut.

[sgdividends]

The cps and perp both are cumulative from my understanding

Actually, I think by the terms of both , hyflux shouldn't been able to redeem any part or whole before the first step up dates for both, because that is the first 'call' dates  Maybe that's the reason why the investor relations said they are not calling early for both.

Which is more senior in claims, cps or perps?

[wonghw12]

Believe cps and perps are equally senior, but this is probably only relevant in a gone concern scenario. Hyflux might be able to redeem early, need see if there is a 'make whole' provision. Or Hyflux can simply buyback on the market.

[Yoyo]

The cps and perp both are cumulative from my understanding

Actually, I think by the terms of both , hyflux shouldn't been able to redeem any part or whole before the first step up dates for both, because that is the first 'call' dates  Maybe that's the reason why the investor relations said they are not calling early for both.

Which is more senior in claims, cps or perps?

Hi sgdividends

Your answers to your queries may be found here:
https://www.investopedia.com/articles/ac...choose.asp

A preferred stock (in this case CPS) is generally considered between to a bond (PERPS) and common stock in the sense that it pays fixed dividends like a bond but takes lower precedence than a bond in case of liquidation proceedings

Differences:

• Seniority
  

Both bonds and preferred stocks are senior to common stock, but bonds take precedence over preferred stocks in bankruptcy proceedings. Whereas interest payments on bonds are legal obligations and are payable before tax payments, dividends on preferred stocks are after-tax payments and are not made if the company is facing financial difficulties. Any missed dividend payment may or may not be payable in the future depending on whether the security is cumulative or non-cumulative.

• Risk
  

Generally, preferred stocks are rated two notches below bonds with regards to risk to account for the lower claim on assets of the company.

[sgpunter]

Tricky situation for Hyflux in my view. If they don't redeem the CPS and freeze dividend, they can jolly well forget about issuing any more debt instruments in the future as investor/lender confidence will be severely dented. With the corresponding fall in share price, fund raising via equity will prove to be a problem as well.

Buying back from the market at the current depressed prices seems like a better deal than redeeming but seriously, how many lots can they possibly accumulate looking at the volume. I believe many mom and pop investors and retirees are holding on tight.

I think Management should provide some updates on the progress of their divestment plans given the recent drops in prices of mother share and debt.