Tuesday 15 October 2019

The Never Ending Hyflux Saga- Utico Deal May End In Shambles


I was very disappointed last month when the Court again grant Hyflux another 2 months extension of the debt moratorium again. It was alleged that the predominately show stopper was the inability of the senior management of Hyflux to resolve the cap of S$25Mil imposed by Utico over professional and advisors’ fees in the restructuring agreement. Power struggle over board representation was also alleged to be the other issues holding back the signing of the restructuring and capital injection agreement by Utico.

The absolute lack of meaningful progress was even after Utico has managed to get creditors’ approval for the restructuring agreement and many perpetual retail investors got a very good deal relative to the first rescue package from Salim-Medco. Small retail investors could get as much 50% cash redemption. It was reported that Hyflux retail perpetual securities and preference (PNP) shareholders could get between "$50 million minimum to $150 million on the high side depending on the restructuring options which they choose". Of course, this is definitely so much better than the worst case scenario of forced liquidation where they are not going to get a single cent.

Unfortunately, the Utico deal may end in shambles and lead to the possible downfall of Hyflux due to the following reasons:

1.   Firstly, it is a fact that the management of Hyflux had make a fatal mistake from day one when they under-quoted the water desalination business of Tuaspring by the wrong assumption that the power generating business will be extremely profitable and hence able to subsidize the water treatment segment. This was the cause of the current predicament of Hyflux that has dragged on for many years. But right now, the management seems to be shopping around for the best deal on the block on offer by the numerous white knights that are perceived to be “dying to bail out” Hyflux. They sure have taken a long time to search for a white knight and are not afraid to delay signing any rescue package until all their wish list demands have been met by the White Knight.

I was very surprised that apparently, the bargaining power seems to have been residing more of in the hands of Hyflux which has defaulted on its obligations to numerous creditors (and surviving through the grace of the Singapore Court), rather than in the hands of the White Knight that has the capital. Despite this being closely aligned with my favorite motto of “Who dares wins”, this approach may just backfire anytime.

2.   Secondly, Hyflux had tried to forfeit the S$39Mil deposit placed by the Salim-Medco, the first White Knight to the rescue. With the PUB taking over the loss making water desalination segment of Tuaspring, the massive hemorrhaging in Hyflux business had stopped and things actually improved. Perhaps sensing an improvement in its business fundamentals and valuation from the taking away of the huge loss making business by PUB, Hyflux went on to assert that Salim-Medco had breached the agreement when they withdrew their initial offer and are willing to waste legal resources to play hardball with their first white knight in a bid to gobble up the S$39Mil placed in escrow. From a legal perspective, Hyflux did indeed have a case but personally and ethically, I thought that this was a bad move as it sullied Hyflux’s own reputation among other potential White Knights.

3.   Thirdly, for the case of Utico, the 2nd rescuer, the lawyers representing Hyflux management team had cited that there are other “White Knights” waiting to rescue Hyflux even if the Utico deal does not go through as part of the argument for debt moratorium extension. I find such arguments offensive and personally, I think a bit conceited. They seems to have taken the white knights for granted.

Summarising, from the way the management are handling the cases of Salim-Medco and also Utico, other potential white knights who are waiting in line can see for themselves the behavior of the management of Hyflux in contract negotiation. Should the Utico deal fails, all other potential White Knights that are perceived to be waiting in the queue may also choose to simply walk away. This may just become a no rescue deal scenario with an eventual liquidation of Hyflux caused by none other than the Hyflux senior management themselves. I hope for the sake of the other stakeholders that this would be the last extension of the debt moratorium and the conclusion of the much anticipated signing off on the Utico rescue package.

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