Saturday, March 2, 2019

Stock Review: Hyflux's Restructure Plan to erase $3.3B unsecured debt

If you need a summary of the Hyflux re-organisation process, you can read the FAQs at Hyflux website and Q&A from Second Townhall Meeting with Holders of Perpetual Capital Securities and Preference Shares .

Key points extracted, words in square brackets added by me:

[Internal Factors:]
  1. While the Group reported losses in 2017 for the first time in its history, it had also regularly kept the market abreast of its plans to divest the Tuaspring project as well as its discussions with potential strategic investors.
  2. [Unsuccessful Tuaspring sale]
[External Factors:]
  1. Tuaspring was the largest asset Hyflux has invested in. In line with the business model, Hyflux sought to divest Tuaspring about a year after the power plant started operations in March 2016. Unfortunately, at that time, the poor market conditions hindered the divestment efforts.
  2. The oversupply of gas in the Singapore market resulted in depressed electricity prices which adversely impacted Tuaspring’s financial performance when it started operating. The average wholesale electricity price in 2016 (when Tuaspring power plant started operations) was at $63/MWh, compared to $220/MWh in 2011 (when the project was first awarded to Hyflux). [Main reason, like how certain US oil companies went bankrupt when oil prices fell 80% because they priced projects based on best case scenarios and were over leveraged.]
[Unsuccessful Tuaspring sale]
  1. The effort to divest Tuaspring started in January 2017.
  2. DBS and CICC Bank were appointed as advisors for the divestment exercise.
  3. By August 2017, more than 50 parties had indicated an interest in Tuaspring and had been provided access to the information memorandum concerning Tuaspring following written approval to disclosure being received from PUB. This information memorandum provided high level information on the asset.
  4. As a result of this exercise, the company received several preliminary non-binding bids, all of which were subject to agreement on the investment structure, regulatory and other approvals, and completion of detailed due diligence. Three of these indicative bids attributed an enterprise value of S$1.4 bn to the Tuaspring project. [Entreprise value isn't asset value; it's the sum of how much it will cost to buy over the plant.] These came from a PRC SOE, a private UAE party and a subsidiary of a Singapore listed company.
  5. However, these numbers were not final but subject to various conditions, investment structures and further due diligence.
  6. To conduct further due diligence (which required obtaining access to more confidential information relating to Tuaspring) and to make a binding offer, an interested party needed to be approved by PUB to be granted access to such confidential information.
  7. By May 2018, none of these parties had completed their due diligence processes, and the time required to complete such due diligence and receive an offer was likely to take a much longer period of time. With the weak electricity market not likely to recover in the near term, the Group will continue to suffer losses. As such, Hyflux decided to commence a transparent financial reorganisation supervised by the High Court of the Republic of Singapore.
  8. The effort to divest Tuaspring continued in July 2018 through a collaborative sale process with the sole secured bank lender, Maybank.
  9. Of the parties that had expressed an interest previously, only 8 requested to be pre-qualified by PUB.
  10. Of the 8 parties, only 2 local parties [Keppel Corp and Semb Corp] were pre-qualified by PUB, of which 1 submitted a conditional bid [Semb Corp] in early October 2018.
  11. This conditional bid would have been insufficient to repay Maybank. [Maybank's loan = $700M ]
  12. Maybank agreed to extend the relevant deadlines for the collaborative sale process but to-date no further offer has been received from the other pre-qualified local party.
  13. No further request for pre-qualification has been made by any other interested party nor have any other offers been received.
  14. The Board is duty-bound to consider any offer that is made and compare that against the proposed investment by SMI.
  15. At present, the best option in all the circumstances, is the proposed investment by SMI. Before the scheme meeting on the proposed investment at the end of March 2019, the Board will consider any better offer that is received. To-date no other offers have been made.
  16. Please also refer to the SGX announcement issued by Hyflux on 28 January 2019 regarding the Tuaspring sale process and related news reports: http://investors.hyflux.com/newsroom/20190128_161822_600_P8YLNZWOKM8HC60B.1.pdf
How I read all these

How much unsecured debt is there? S$2.6B for Hyflux Ltd only or $3.3B including subsidiaries
Read the Scheme document for Hyflux Ltd Creditors. Summation is my own as the total isn't stated.
Items #1 to #5 appear in the financial statement Balance Sheet as Liabilities, $1.65B.
Items #6 to #7 appear in the financial statement Balance Sheet as Equities, aka off-balance-sheet-liabilities $1.8B.
  1. $572.1M - Facilities
  2. $136M - KfW
  3. $265M - Notes Series 8,9,10
  4. $668.1M - Contingent
  5. $11.3M - Other Trade Creditors
  6. $500M - Perpetual Capital Securities @6%
  7. $400M - Preference Shares @8%
  8. $72.3M - Subordinated Scheme
Page 193 states how $3.3B debt will be erased with SM Investments's $400M. Debt from the other 3 subsidiaries are stated too. That's 88% of debt magically disappearing from the books.



  1. Olivia Lum Volunteers To Contribute Her Entire Stake Of 267 Million Hyflux Shares And Securities Solely To The Other Holders Of Perpetual Capital Securities And Preference Shares As Part Of Restructuring Plan --> She could have also done this by selling Tuaspring to Semb Corp at say $530M too.
  2. Hyflux was following Singapore government’s instructions to prepare for 8 million population and industrial expansion. --> This means that Tuaspring isn't operating at full capacity, however, we have no visibility on the % utilisation, something like occupancy rate of a building you rent out.
  3. Maybank holds the secured debt backed by tuaspring at a value of $700M. They have the best bargaining powers now. --> Maybank still has hope to get back $700M because they are not part of the restructure plan.
  4. Tuaspring is operating at a $70M loss in 2016 (Hyflux response to SIAS letter Page 12, Q17) based on last audited accounts. In the restructure plan, nothing is mentioned about this, but we know that an indonesian tycoon will own 60% of it and ALL other Hyflux assets with $0 liabilities (because all will be written off)at a steal -- just $400M! Equivilantly valuing all assets at $400M / 60% = $667M.
1Q2018 Financial Reports
  1. Based on 1Q2018 reported $24M loss, Earnings Per Share was -4.53 cents (-1.82 cents in 1Q2017), or -1.57 cents (1.6 cents in 1Q2017) excluding Tuaspring. Based on 785M shares, Tuaspring's 1Q2018 loss was -2.96 cents/share (-3.43 cents in 1Q2017) or $23M ($27M in 1Q2017).
  2. $3.6B assets of which tuaspring is under asset-held-for-sale at $1.47B, $2.6B liabilities (of which $0.56B belongs to tuaspring).
Salim Smart

This is an awesome deal for SM Investments to own 60% of Tuaspring at a fraction of Semb Corp's offer. He deserves to be a tycoon. Assuming Semb Corp paid $530M, including $560M of liabilities, it would have paid $1.09B.

For Hyflux shareholders, the 785M units will be diluted 25 times. I hope I am interpreting this correctly from Page 193, that post re-org, ordinary shareholders own 4%. This also means that there will be approximately 785M x 25 = 19.625B units without shares consolidation.

In terms of paper value for 1 unit of Hyflux share post re-org, it's 3.4 cents ($667M / 19.685B units). Based on last traded price of 21 cents in May 2018, it's -84%.

For Perpetual Capital Securities or Preference Shares holders, not Hyflux shareholders, for every $1 owed to you, Hyflux will return you 10% in the form of 3 cents cash + 2.26 units of Hyflux shares (assuming 19.625B base, 19.625B x 10.38% / 900M = 2.26 units) supposedly worth 7.69 cents. If you have 10 units of shares (or $100/unit x 10 units = $1,000 worth), the restructure offer is to redeem your 10 units at $30 cash + 2260 units of Hyflux shares worth $76.90 instead of $1,000 cash.

Is there a better way out?

If I have the answer, I will probably be an investment banker, and not a nobody writing stock reviews? Here are my thoughts:

Firstly, Tuaspring's asset value should not have been stated as $1.47B. It should have been $1.47B - $0.56B = $0.91B. This can quite misleading in various contexts.

Secondly, the interest payments are suffocating. Although the interest rate for the bank debts were not stated, but we can assume it to be 5%, a bit lower than the 6% paid to retail investors, because usually banks aren't willing to lend, hence seek retail investors. 
If the $3.5B debt is re-negotiated
@5% = $175M/year
@2% = $70M/year

Personally, I think re-negotiating the debt @2% is one option, while they work on making Tuaspring profitable and then selling it off. Given the current stand-off situation, even if Hyflux offers @0%, I bet many creditors will choose 0% over the 10% redemption offer, similar to what Maybank is doing, hope for gas prices to go back up. 

Thirdly, if there is synergy between Tuaspring and Salim's businesses, then work on partnership deals to improve its profitability. I am not a Tuaspring expert, but minimally, I will think that scaling down operations is one way to cut cost. In addition, gas prices have fallen by two-thirds, so it won't be too unreasonable to re-negotiate the concessions with the government? I don't know.

The writer owns 130 units of Hyflux Preference Shares.

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