Hyflux Still In Limbo- Hyflux Asserted That Utico Gave Inaccurate Announcements

The scheme meeting with creditors will be held on 22 April 2020. However, we are already seeing the senior management of Hyflux once again crossing sword with their own White Knight Utico. Yes, I used the word “again” because Hyflux also went into disagreement previously with their previous White Knight Salim Medco Group. Apparently, the current cracks in relationship came from the amount of legal and advisory fees pot of S$50Mil being committed. Utico is only willing to put up S$30Mil as the professional advisors of Hyflux and SIAS failed to show support for the scheme by 29 Jan 2020 court hearing. Original intention was S$50Mil for the professional services pot if show of support settled by end of Jan 2020 but unfortunately it was not to be due to various factors such as the emergence of another player, Aqua Munda, which offers to buy creditors’ debts at a minimum discount of 85%.     

Why so drama?
The senior management of Hyflux released a statement that asserts Utico’s press announcements contains “material inaccuracies” which appear to be designed to further its negotiation with the company and dissuade competing third party investors from investing into Hyflux. Personally, I think it is strange that Hyflux management team is still thinking of getting other prospective investors to come in at this juncture. One will probably be wondering whether it is Utico instead of Hyflux which is in need of a financial bailout.

Parting thoughts- slow and painful progress (if we can call it progress at all)
My thoughts are that the senior management of Hyflux are behaving as if they got many choices and can afford to keep shopping around. Hence one cannot blame Utico for bypassing Hyflux and conducting their restructuring negotiation through public announcements. Why do I get the feel that Hyflux management team will be more than happy if the Utico deal failed? In the meantime, the never ending Hyflux soap opera continues…..


P.S: Please see my previous other postings here on the Hyflux saga:
1. Hyflux Utico Rescue Deal May End In Failure- Unsecured Creditors and Perpetual Securities Holders Still Unhappy

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

Hyflux Utico Rescue Deal May End In Failure- Unsecured Creditors and Perpetual Securities Holders Still Unhappy

To pass the restructuring of Hyflux and accept the Utico rescue plan, the schemes of arrangement need to be approved by at least 75 per cent in value and 50 per cent in number of each creditor class. This seems to be in jeopardy based on the disgruntled retail creditors who attended the townhall on 20 January 2020. One  PnP investor who invested S$70K in Hyflux preference shares but only getting S$1,500 back under the proposed plan mentioned that he would rather vote against the Utico offer and let Hyflux go into liquidation so that he can join a class action suit against the Hyflux Board of Directors for running the business to the ground.

Does it makes sense for disgruntled creditors and PnP holders to choose liquidation and pursue a lawsuit against the Board of Directors?

My own personal thoughts are that it is not a wise move as the disgruntled creditors and PnP holders get the logic and timing all wrong. 

(1) Firstly, creditors and PnP holders need to accept the fact that investments and debt extension to companies are not risk free and that the businesses can go bankrupt. Under the scheme of the Utico rescue package, unsecured creditors stand to recover S$42Mil and PnP owners gets S$50Mil- a total of S$92Mil. If Hyflux went into liqudation, the creditors will only get between S$7.5Mil to S$16Mil with the PnP holders possibly getting nothing due to them being ranked almost to the last of the queue in such instance. This is a miserable recovery as compared to S$92Mil being put on the table by Utico.

(2) Secondly, choosing liquidation and pursuing a class action suit against the Board of Directors is a fallacy. My own view is that retail creditors and investors who chose this path are not thinking coherently. Utico is dishing out a S$92Mil package to help soften the alternate scenario of zero dollars return. There is no better deal out there. The pertinent question here is that even if the class action suit were to succeed, will the directors be able to cough up more than S$92Mil? Disgruntled creditors are probably looking towards at least S$200Mil from the Directors if they want to beat what Utico had to offer? How is this possible? 

(3) The only winner out of all this mayhem will be the lawyers who charge legal fees for their professional services while bringing the class action lawsuit to trial since the creditors and PnP holders wanted lots of money that is way above what Utico can offer. In addition, I am not sure why some of these creditors and PnP holders are so confident that the court will find their arguments valid and find Olivia Lum and her fellow directors guilty of mismanagement of the company and award damages in the first place. For the case as aforesaid mentioned, there will not be any lawyer that can guarantee a 100% success rate in bringing a class action suit against Oliva Lum and her fellow directors.

Parting Thoughts:

The order of things and thought process are wrong. Utico is not the one that caused Hyflux to collapse and so, why are stakeholders still blaming Utico and upset about the one and only rescue package that is being offered for their benefit relative to the scenario of liquidation? The only best solution here is for the creditors and PnP holders to accept the Utico offer. Grab the package on the table and put them into their pocket as soon as possible. I think that the retail creditors and PnP holders can then still choose to continue pursuit a class action suit against the previous directors and fund it using Utico's rescue package offer (if they really still wanted to pursue this option). Let the Singapore Court decides whether there is any merit in the civil suit. 

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 2^nd 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.

Hyflux Saga- PUB Turns Out To Be The Real White Knight

In an interesting turn of event, PUB- which I previously posted that it had single-handedly stopped the Salim Medco rescue package- turned out the be the real white knight because most stakeholders have mistaken its good intention. By taking away the loss-making Tuaspring desalination plant, PUB has let Hyflux off the hook on the business unit that is making its business bleed profusely. In addition, PUB added icing on the cake by further waiving off compensation claims for breach of contractual KPIs. What a dramatic week it turns out to be with the latest development.  

Even though the government insisted public fund cannot be used to help retail investors, I now view the above as a partial bailout by the government. By foregoing the rights to the very low water tariff rate locked in with Hyflux, the government has released Hyflux from its Achilles’s heel. Meanwhile, Tuaspring power plant still resides with Hyflux. Hyflux has made a statement that given this turn of event, many buyers which have previously stayed away might make a bid to rescue Hyflux now.

From the public perspective, taxpayers are the ones losing out as we are actually funding the plant with the increased cost of running it now borne by PUB at prevailing material and labour market rate instead of the “discounted rate” that Hyflux was initially contracted to provide. Hence no bailout as asserted by PUB and government but in fact, personally, I rationalized that it is actually a form of partial bailout due to “the need to safeguard the security of our water supply”.

Salim Medco and Hyflux blaming each other- Fight for the S$38.9Mil in escrow

The S$38.9 Mil in question is a lot of money. The irony of this is that if Salim Medco had not made the offer of rescue in the first place, Hyflux will not even be able to get a single cent. Now that the rescue deal is off (as good as never offer in the first place), Hyflux suddenly stood to gain S$38.9Mil. This is good money for Hyflux. I am sure that this sum of money can be used to finance legal fee payment and reimbursement for aborted booking fees incurred for the credit restructuring meetings that never took place. This does help the creditors to have some spare change in the event of liquidation.

Who are the legal team lawyers representing Hyflux? They are damn good in their work!

The legal team advising Hyflux are damn good. First, they argue that Salim claim of material breaches is not valid and hence the White Knight cannot just walk away from the deal. They bite on and refuse to let Salim Medco escape from the deal.

Subsequently, when more clarity arises from PUB on Tuaspring, the legal team of Hyflux swoon in and wrote formally to Salim Medco demanding to know whether the white knight will still honour the deal with a clear and unequivocal written confirmation. Since there was no confirmation on this, the Hyflux legal team is now arguing that it is Salim Medco which repudiates the deal. Accordingly, Hyflux will be entitled to retain the S$38.9Mil kept in escrow.

The legal team seems to be from Wong Partnership. One of the top law firm in Singapore with many of the brightest in the legal profession also there. Manoj Pillay Sandrasegara is the partner of the Restructuring and Insolvency Practice who is advising Hyflux in its US$2.3 billion restructuring exercise.

Parting thoughts on the latest development

The legal advisor will probably be filing for an extension of court protection for at least another 2 to 3 months for Hyflux to find another shining white knight by arguing on the better slate of its business operations with the loss-making Tuaspring desalination plant out of the way. Oliva Lum will be fighting hard to save her baby.

Hyflux Tuaspring Saga- White Knight Becomes Fleeting White Clouds

Since PUB served notice on Hyflux with regard to the defaults in the Water Purchase Agreement ("WPA"), it leads to more questions rather than answers.  If Hyflux does not cure all defaults by April 5, 2019, PUB can elect to terminate the WPA and take over the operations of the desalination plant. The white knight Salim Medco group, in turn, responded with a threat to walk out of the rescue deal if Hyflux management does not cure the operational and financial defaults of Tuaspring by April 1st, 2019. As we all know, Hyflux is already facing a "one leg in the grave" situation. It is thus almost a mission impossible to muster adequate resources in its current state to cure the defaults unless Olivia Lum is able to get PUB to waive the default notice or alternatively, get Salim to pump in cash immediately. The white knight has quickly turned into fleeting white clouds.

There are a few mind-boggling questions here as listed below:

1. Did PUB get its timing wrong to come out on March 5th, 2019 to serve the default notice?

Personally, I think that the serving of the 1-month notice on March 5th, 2019 seems to be throwing the gauntlet on the creditors as an ultimatum. It is too much of a coincidence that the end of the one month notice falls exactly on April 5th, 2019 which is the upcoming creditors restructuring vote. 

While the notice served was to protect Singapore water supply and vital, PUB seems to have been caught off guard that the White Knight decided to pull out of the rescue deal. It quickly issued a statement on March 21st, 2019 that Salim Medco should not use PUB as an excuse to pull out of the Hyflux deal. I believe that the souring of the deal has very much negative political impact given that the general election may be coming up by the end of 2019 or 2020. There are a lot of angry Singaporeans who are going to be losing all their investments in Hyflux. It appears that the government is not keen to bail out Hylfux and is actually hoping that the Salim Medco rescue package will get through.

There is no doubt that whatever was its original intention, PUB had single-handedly smashed the only rescue deal on the table. Keeping my fingers crossed that either PUB or Salim Medco will reconsider their current stand and craft out something mutually acceptable for the restructuring to proceed.  

2. Why did Hyflux not build in a safety mechanism in its contract with PUB during the tender for the building of plant and WPA?

I am not sure why the Hyflux team did not request for a minimum rate to cover their basic cost of building the plant and basic maintenance into the contract. My personal thoughts are this would have reduced the huge losses with running the plant. In my current industry, we will build in a minimum volume or rates in our tender for business contracts. Please see point 3 below on the aggressive water tariff rate submitted by Hyflux.

Alternatively, I think that Hyflux could have proposed a simple cost-plus model to the government agencies given that this is their first major venture into a long term concessionary service agreement. An open book for incurred cost and an agreed markup is definitely a safer option while building up invaluable experience and also financial data for future contracts. This is a similar model used in many commercial contracts.

3. If another operator- other than Hyflux- were to run Tuaspring, will it be profitable?
Hyflux may have been overzealous in its business strategy to derive more stable recurring income by entering into a long term concessionary agreement with an overly optimistic water tariff rates. It seems that in 2010, Hyflux bid for the water contract at a first-year price that was the lowest compared to any desalination plants in Singapore that had been or was being built.

Other operators may have bid using a much higher water tariff rate. PUB had made a statement that it cannot allow Hyflux to revise upwards the tariffs stipulated in the signed agreement given that this would not be fair for the other operators which have also tendered for the contract for the desalination plant during the request for quotation stage in 2010.

4. Do the Hyflux accountant preparing the financial statements and the auditor of Hyflux have access to the WPA? Or is it so confidential such that a lot of vital accounting entries for liabilities and asset valuation were not captured in its financial statement disclosure?

PUB made a statement that there were numerous breaches in the WPA with regard to the volume of daily treated water KPI of 70 million gallons since early 2017. It has also waived off compensation claim of 3 digit million amount. This is a staggering amount. Does this not constitute a legal provision way back in 2017 for breach of agreement?

In addition, I am shocked that PUB had publicly stated that the valuation of the desalination plant is actually negative based on the WPA. Surely, the WPA is a very critical piece of contract for Hyflux that spells out its contractual liabilities as well as Tuaspring valuation. The latest revelation by PUB put another huge dent in the valuation of Tuaspring which would have made the S$916Mil recently announced impairment by Hyflux grossly inadequate.

Please see my last posting on the valuation and impairment of S$916Mil for Tuaspring here.

5. Will the Hyflux saga end with the vote on April 5th, 2019 or will there be lawsuits- David vs Goliath?
From the recent spate of revelations and dividends payout despite poor operating cash flow, it does seem that there are certain contentious areas with regard to the financial statement preparation as well as the contentious issue of fiduciary duties to shareholders that will be up for dispute. I do hope that things turn out well for all retail investors and holders of perpetual securities and all issues settled amicably.

Hyflux Impairment of S$916Mil for Tuaspring- Does it make sense?

I actually do not want to post any more topic on Hyflux as this subject has become very sensitive lately and stir up much negative feelings with the upcoming voting on creditor restructuring. But being an ex-auditor, I seriously think that our Singapore Authorities should re-look into the asset valuation framework and standard for all Singapore Companies listed on SGX so as to better protect retail investors. 

In June 2018, Tuaspring carrying book value was SGD 1.47 Billion. This plummeted by SGD 916Mil within half a year for the results released as at 30 September 2018. The key question is how can the valuation of Tuaspring just nosedive overnight? The weakness over the electrical tariff is a recurring issue since day one of Tuaspring operation. So, why was there no major impairment then but only took a big bath at this juncture?

According to the accounting standard, an impairment arises if the carrying value of an asset is less than its recoverable value. The recoverable value, in turn, needs to be assessed based on the higher of (i) fair value less cost to sell or (ii) Value in Use.

(i) Fair Value Less Cost to Sell

The fair value concept is basically the market price of similar assets less off transaction cost to sell. In Tuaspring case, this is not likely to be used as there are not many comparable deals. This is unlike say trading in quoted equities.

(ii) Value in Use

This is the present value of the future cash flows expected to be derived from Tuaspring. Based on future cash flows projection and poor market pricing of electricity, this value in use will be a lot lower than the carrying amount of Tuaspring. This lowered "value in use" should give rise to an extremely low "recoverable value" against the actual carrying value. While the value in use projection is subject to numerous assumptions and judgments, there should be stress tests with different scenarios drawn up for proper assessment. I cannot comprehend why no major impairment had been recognized in the previous financial years of Hyflux and that for FY2018 results announced in 2019, an impairment of SGD916 Mil for Tuaspring suddenly materialized. 

Hyflux had replied that it intended to appoint a further valuation to be undertaken by a different valuer for the purpose of finalizing its 2018 full-year financial results. As you can see, the business of valuation is an extremely tricky and messy affair. But saying that, my personal thought is that it does not make sense for an infrastructure asset to plunge in its value by 60% overnight.  

Final Thoughts

Hyflux has just announced a better package to appease unsecured retail investors after the submission of an alternative proposal by SIAS. Hopefully, things turn out well for the upcoming meeting and Hyflux can survive the current crisis.

Pls see other posts on Hyflux
(i) White Knights Charging Forward To Save Hyflux And Tuaspring
(ii) Government Should Bail Out Hyflux And Don't Put All Your Eggs Into One Basket

White Knights Charging Forward To Save Hyflux And Tuaspring

In my last post on 21st July 2018, I have posted the reasons on why the government should step in to bail out Hyflux. I have also mentioned that Temasek linked companies such as Keppel and Sembcorp should step forward to rescue Hyflux. My wishes came through-both Keppel Corp and Sembcorp appeared as white knights in shining armour along with other interested parties. Out of 8 interest parties approved by the PUB, only one submitted a bid. It was believed that the only bid was submitted by Sembcorp. 

As I mentioned before, Hyflux investors will have to suffer a hair cut in terms of what they can recoup. The only question now is how much they can get back. I believe that more news on the rescue package will be announced as early as next week. It will not be a surprise if the bidder put in a bid that is significantly less than the S$1.3 billion in book value of Tuaspring. Temasek linked companies or not, the bidder will likely exploit the current weaken financial position of Hyflux to extract a good deal for their own shareholders. Nonetheless, it will be a win win deal for both parties.

It will be interesting to watch out for the unfurling of more details with regard to the rescue package next week.

P.S (Updates as of 20 Oct 2018): It turned out that the White Knights are from the Indonesian consortium making up of the conglomerate Salim Group and the energy giant Medco Group. The consortium will pump in liquidity of S$400Mil equity in exchange for 60% stake in Hyflux after they have settled their debt. Also a loan of S$130Mil for Hyflux for its working capital needs during the restructuring. A cool S$530Mil. This is a strong testament to the underlying value in Hyflux business operations that many experienced businessmen still see in it. There will also be additional business opportunities opening up to the "new Hylflux" from the synergy with the new shareholders coming onboard. 

Government Should Bail Out Hyflux And Don't Put All Your Eggs Into One Basket

It was poignant to read from the news that there was a retail investor who risk losing a certain portion of his S$250K of capital investment into Hyflux bond. The retail investor in this case was a retiree who originally intent to use it to finance part of his retirement income and also to fund his children upcoming university expenses. For all retail investors caught in the current Hyflux Tuaspring crisis, I am keeping my fingers crossed that the eventual divestment and re-organisation is successful so that they can get back most of their capital.

Types of Bond

There are some who believed that bonds are relatively safer than equities. This is not true. Rather, it is more of lower volatility relative to stocks. The same stringent risk assessment of the fundamental of the underlying business entity by retail investor must still apply. Types of bonds can be generally classified into 2 main types, namely, government bonds and retail/corporate bonds.

(i) Government Bonds
For our Singapore local context, this will refer to Government Securities Bonds (SGS), Singapore Saving Bonds (SSB) and short term Treasury bills. As such bonds are guaranteed by the government, they are usually of a lesser risk for investors relative to Retail/Corporate Bonds. Less risk does not mean ZERO risk. There are countries such as Greek which defaulted on bond repayment before during the Greek financial crisis. Even for SGS or SSB, there are still risk. For example, in a scenario of extreme hostility exercised by the Malaysian government to stop the supply of water immediately to Singapore & eventual escalated armed conflicts, it may trigger exodus of MNCs and people pulling out of Singapore. Singapore ultimately does not have its own natural resources and in such extreme situation, the Singapore Government may have insufficient funds to repay back borrowers. 

Not likely, but from the fanatical antics of Mahathir towards Singapore, this is a concern. It may not just be a simple strategy of softening the negotiation for the cancellation or postponement of the High Speed Rail Project.  

 (ii) Retail/Corporate Bonds
This represents the debt financial instrument issued by companies to raise funds. For corporate bonds, most of the issuance used to be in larger denomination of at least S$250K before an individual investor can invest in it. The trending now seems to be going into smaller bite size minimum S$1K tranche for retail investor. Again the financial strength of the underlying investee company will determine the risk level. Those government linked companies or statutory board (HDB, LTA etc) bonds will be less risky while pure commercial organisation issuance (Eg: Hyflux, Aspial, Perennial) will have a higher degree of risk of default. 

Bonds are also subject to interest rate fluctuation risk. If the market interest rates goes up, price of the bond which is inversely related will decline as prospective investors demand a higher yield as compensation. 

The Need for Diversification in Investments
The Hyflux episode clearly illustrated a need for portfolio diversification. Too much concentration in one particular bond issuance or equity may lead to an unexpected loss of capital albeit how well known a Company is or how long a company had been in the industry.  

The recent Astrea class bond issuance by Temasek Holdings is a good example of a bond instrument that is supported by sub-funds with bond issuances from hundreds of companies re-packaged into this unique product. Hence any failure in one company will be balanced out by the numerous companies in the stable. 

Why the Government should step in to rescue Hyflux?
While I always believe in the free market for business to compete and run in the most efficient manner, the shareholders and other stakeholders of Hyflux have all been punished already with the plunge in share price and also expectation of a haircut of debts owing to them. 

It may come to a ludicrous situation if any prospective bidders decided to make an offer at a severely discounted fair value. The need for liquidity quickly and the short 6 mth reprieve given by the High Court means that Hyflux has the shorter end of the stick and leverage is on the bidders' side.

The Tuaspring integrated desalination and power plant is clearly a vital strategic asset of the entire nation. Temasek linked companies such as Keppel or Sembcorp should step out to make an offer based on the current selling rates of desalinated water & electricity, expected cost of running and required profit margin and not taking advantage of the current financial crisis that Hyflux is embroiled in by asking for huge discount. 

In addition, if the current crisis worsen and Hyflux really goes into liquidation, it would mean the loss of numerous jobs as well as the loss of local expertise in water treatment. This scenario will also mean heavy losses for the shareholders and bond holders. If Temasek can save Olam, surely it can come out and give a bit of help to Hyflux and all its stakeholders. 

I do hope that things turn out well and see how the next few months unfold for Hyflux which was once the market darling vaunted for its amazing accomplishments in water treatment projects locally and overseas.