Hyflux Perps Leave Investors In The Lurch
Till recently, Hyflux was regarded as the quintessential Singapore success story. The idea for the company was born way back in 1989 when Olivia Lum, a chemistry graduate from the National University of Singapore, left her job in Glaxo Pharmaceutical to launch her own venture.
Over the next three decades, the organisation went from strength to strength. It established itself as a technology leader specialising in water treatment plants. Hyflux was awarded several contracts to supply potable water to Singapore’s residents.
In 2001, the company’s shares began trading on the secondary board of the Singapore Exchange. Barely two years later, Hyflux moved to the mainboard of the SGX.
The public listing saw Hyflux expanding its operations beyond Singapore’s shores. It took up projects in China, India, and the Middle East and North African (MENA) region. The company also diversified into power. It completed a 411 MW power plant that was co-located with the Tuaspring Desalination Plant in Singapore.
But now the decades-long winning streak enjoyed by Hyflux seems to have come to an end. Consider the following facts:
Hyflux shares take a beating
In the last five years, Hyflux shares have been steadily trending downwards. From a level of S$1.21 about five years ago, the valuation currently stands at S$0.21. Trading has been suspended since 21 May 2018.
8% Hyflux Perpetual Preference shares redemption date deferred
The first call date for the company’s perpetual preference shares was in April this year. Hyflux management decided to defer redemption as its financial position did not allow it to carry out a buy back.
Prices of the share, which theoretically offer preferential payment of dividend, but no voting rights, have crashed.
About a year ago, the Hyflux Perpetual Preference share was valued at a little under $S100. Today, its latest price is listed at approximately $60. At that valuation, its yield to maturity is more than 13%. Trading in the preferential shares has been suspended.
6% Hyflux Perp/Callable 2020
Trading in the 6% perpetual bonds has been suspended as well. A payment on 28 May 2018 will not be made. Hyflux states that it has been “advised” to withhold payments.
In the months before the bond’s trading was suspended, prices tumbled sharply.
How Hyflux stumbled
The company says that its Tuaspring project, which is the first integrated water and power project in Asia, has led to large losses. Depressed electricity prices in Singapore have led to lower than expected revenues. This project has been responsible for the first full year of losses in the company’s history.
CEO Olivia Lum has explained in a recent letter to Hyflux stakeholders that the company follows an asset-light business model. It sets up a project and then sells it and uses the cash that it generates to finance its next round of expansion. But this strategy did not work with the Tuaspring project in Singapore and the Tianjin Dagang plant in China. The company has been unable to find buyers for these assets.
Consequently, the company’s cash flows have been affected. According to a recent investor presentation made by the company, the Tuaspring project alone has contributed S$23.2 million in losses in the first quarter of 2018. If it ignores this project, Hyflux would have been profitable in the Q12108. Its profits after tax and minority interests (PATMI) would have been S$1 million for the quarter.
But, of course, it can’t exclude Tuaspring from its results. Till it finds a buyer at the correct price, it is stuck with the project and will have to continue incurring losses unless there is a marked improvement in electricity prices.
Tuaspring is not the company’s only problem. A little less than a quarter of Hyflux’s revenues come from the MENA region. Low oil prices have impacted the company’s operations there. Government organisations in Saudi Arabia and other countries are facing a financial constraint. This has led to a delay in payments that are owed to Hyflux for contractual obligations.
The company has decided to tackle the problem head-on. In CEO Lum’s words, “In view of the challenging environment, our options are to either maintain the status quo and hope to ride out the storm, or to step back and assess holistically how to reorganise our liabilities.”
Hyflux has opted for a court-supervised reorganisation
CEO Lum has taken the drastic step of approaching the High Court of Singapore to reorganise its liabilities and businesses.
Hyflux has applied to the court to restrain creditors from winding up the company or seizing its assets for the next six months. The company has received an automatic debt moratorium for a period of 30 days from 22 May 2018, the date on which it filed the application. Hyflux can’t avoid its creditors forever. The court proceedings will only give it breathing time so that it has a chance to raise the money to settle its dues.
While the legal proceedings are bound to take time, creditors and investors should be prepared for losses. A Straits Times report quotes Ezien Hoo, a Singapore-based credit analyst at OCBC Bank as saying, “A debt workout of some sort was inevitable.”
Meanwhile, investors want to know where they stand. The Securities Investors Association of Singapore (SIAS), an organisation that works towards safeguarding and protecting investor rights, has approached CEO Lum for details. SIAS president David Gerald says that Ms Lum will meet with investors at “the right time.”
Perps can carry a high risk premium
Investors are often attracted to the higher yields that perpetual securities carry. But there is a reason for the enhanced level of returns on offer. It is because they are also riskier. Currently, there are several companies in Singapore that have issued perps. These include:
|Deutsche Bank AG||6.25%|
|Lippo Malls Indonesia Retail Trust||6.6% and 7%|
|Mah Sing Group Bhd||6.8%|
|UMW Holdings Bhd||6.35%|
|Yinson Juniper Ltd||7.85%|
Investors would do well to remember to take an extra degree of care when they are considering an investment in a perpetual security. These financial instruments often carry covenants that favour the company that has issued them.
It’s a good idea to study the credit quality of the issuer before you commit your funds. Finally, remember that, as a general rule, a higher rate of interest usually indicates a lower credit standing.