Hyflux 6% perpetual callable 2020

[weijian]

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.

That may not be exactly true (in bold). Hyflux has some pretty stable decent cash-generating assets that can be pledged as collateral. I think the nature of these assets will be quite attractive for the banks to take the bite to lend to them (bankers always think "return of capital" first).

If things turn awry, then most probably it will end up in the scenario here: https://www.valuebuddies.com/thread-156-...#pid140939

P.S. That said, i am not making a call or assessment on Hyflux's future prospects, or trying to insinuate that it will end up as per link provided.

[AQ.]

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.

Well, they do not need to not redeem AND freeze payment.

Suppose they do not redeem the perp but continue to pay the stepped up 8%, who really suffers?

   a. those who are buying betting on an early redemption will suffer.

   b. those who have bot the perps wanting a 6% coupon forever and do not look at the market price, will prob like a 8% coupon (but of cos they might get a surprise if they check the capital loss)

   c. it is true that they will prob not be able to issue perps for a long time, but they have already issued $1bio @ 6% with 400mio stepping to 8% forever already. If u ask me, this is a very good deal for unsecured long term infra financing. Currently, the MTN notes maturing 2018 are yielding 9% on the ask, and those 2019 are @ 10% on the ask. So the price for 1-2yr unsecured credit is already @ 9-10%, what more forever?

   d.  If they really redeem the 400mio perps together with the MTN, that's 665mio out of the 1bio or so from the asset sales leaving 300mio for liquidity. Is this sufficient to fund future capex for their Tuas WTE+Egypt projects, esp with TuasSpring continuing to bleed with adjusted spark spreads so low? I think lenders (and i mean the banks and the MTNs) confidence will be dented with a deterioration in net tangible assets, debt/equity if they did redeem the perps as this reduces equity, not debt.

Ultimately, i think people need to be aware that perps are invented for a reason - it gives the issuer a free upside - if rates are low, i roll; if rates are high i keep. At some stage plenty of perps wlll stop rolling and this become a common thing. It is just that we are in a protracted low rate environment that people assume an automatic first call. I suspect a non-call will not affect the credit rating need for bank/MTN lending much, but a non-payment might. As such the smart thing is definitely to keep paying the stepped up.

[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?

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.

Thanks Yoyo for sharing .

I don't think perps is considered a bond. It is classified under equity , same as preferred.

Regarding what tanjm said, hmm , it seems the perp is a better one than the cps as the perp floats and given we are likely in an increasing ir situation

[tanjm]

Actually the perp is a bond, but for accounting purposes, it is classified as equity. Regardless, the difference is not relevant.

I took at look at the financial statements. It seems that there are 432 million worth of trade payables. That's a big lump. I presume that recognises what Hyflux owes its contractors for work done. There's 221 million of cash.

Companies have gotten into trouble before for mismanaging their working capital. i.e. liquidity. I can't judge the likelihood of this happening though.

[wonghw12]

To make it less confusing, perpetual bonds are a special class of bonds. Bonds are typically senior to preferred stock, according to the above investopedia. But the seniority of perpetual bonds, which are not the usual bonds, are defined separately. In this case, I believe the Hyflux perpetual bonds are as senior as the preferred stock.

[sgdividends]

There are also 282 million trade receivables. Add with the cash is more than enough . Nearly all are government linked customers with bulk from Singapore givernment linked ..shouldn't be a problem collecting

[CY09]

If you notice on hyflux balance sheet, there is a billion close of financial receivables. Most of it are what is owed to them by govt (e.g. Singapore and municipal towns of China).

Some may argue that means good chance of getting them, while some will argue it is ticking time bomb

[tanjm]

If you notice on hyflux balance sheet, there is a billion close of financial receivables. Most of it are what is owed to them by govt (e.g. Singapore and municipal towns of China).

Some may argue that means good chance of getting them, while some will argue it is ticking time bomb

According to the last AR, they are all due to contracts made with various parties to receive long term revenues for operating their plants. One is with Singapore, another with Oman. 6 are with PRC entities - but one is for sale, and the other 5 were already disposed of.

They should not be of direct relevance to the subject of Hyflux as a going concern (though it would affect share price). Given concession time periods of 20-25 years, the 1 billion or so (ignoring discounting) is worth about 50 million a year worth of cashflow.

[AQ.]

If you notice on hyflux balance sheet, there is a billion close of financial receivables. Most of it are what is owed to them by govt (e.g. Singapore and municipal towns of China).

Some may argue that means good chance of getting them, while some will argue it is ticking time bomb

I wouldnt worry too much abt that stuff - the elephant in the room is more likely the >1bio of intangibles due to the SCAs from TuasSpring agst equity of 1.5bio.

Anyway, truth will be unveiled soon with the sale of TuasSpring - how much confidence does the buyer have in this modelling over 25yrs esp with spark spreads now?

In AR16 Pg101-102:

The segregation of the consideration between the financial receivables and intangible assets, if any, requires
the Group to make an estimate of a number of factors, which include, inter alia, fair value of the construction
services, expected water and wastewater volume and supply of electricity over its service concession period,
guaranteed and unguaranteed amounts, as well as choosing a suitable discount rate to calculate the present
value of those cash flows.

The key assumptions which the Group had adopted in its determination of the recoverable amount of its

intangible assets arising from service consession arrangement include pre-tax discount rate, spark spread over
the duration of the service concession period; and long term utilisation rate of the desalination plant and power
generation facility.

Sensitivity analysis
A 1% downward revision of the pre-tax discount rate, spark spread or utilisation rate of the power generation
facility as at 31 December 2016 would have decreased profit before income tax in profit or loss $8.6mio  (I have edited this part to be readable)

Estimating the value
in use requires the Group to make an estimate of the expected future cash flows from the intangible assets and
also to choose a suitable discount rate in order to calculate the present value of those cash flows. Significant
changes to the expected future cash flows and discount rate could impact the recoverable amounts of the
intangible assets.

[CY09]

Hyflux is indeed interesting. Worth noting with their proposed disposal of Tuas spring, Hyflux has moved the intangible asset to asset for disposal. Wonder how much will they realize from this "Intangible".

However, with Tuasspring making constant losses yearly and its assets being reported as 1 billion, I wonder how much will market participants really rate it. Ordinary shareholders could ask how much cashflow is being earned from Tuasspring.