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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