Hyflux: Management Hopeful, Unsecured Lenders staring at a 33-66% Haircut
Wishful Thinking?
Observers are questioning the optimism of Hyflux's management pertaining to the approval from PUB, for the new Indonesian investors to control a 60% stake in Hyflux. Earlier PUB denied all foreign investors from purchasing Tuaspring (water and power plant) and a 60% ownership in Hyflux is technically a Change-of-Control for Tuaspring. Any PUB's blessing for the deal will contradict their earlier stand on Tuaspring
Indonesian firms hand Hyflux S$530m lifeline, but questions raised on whether deal would get green light
Are the Indonesian buyers serious about the investment or their backing was made, to pressure local GLCs to come up with a better deal for Hyflux? By and large, Singapore will not be pleased to see Tuaspring falling into Maybank's control, but analysts are also questioning the indifference of the state investment vehicle, Temasek Holdings in the recent months. It appears that there are many prospective foreign buyers and investors in Tuaspring and Hyflux respectively but PUB is engineering a situation whereby Tuaspring will be subjected to low-ball offers from approved GLCs.
No News is Bad News.
Olivia Lum refused to reveal details about the debt-restructuring prerequisites for the deal to go through.
As part of the deal, the Indonesian investors demanded a final 60% stake and some secured assets to back their $100-130m loan, leaving the remaining 40% stake to be split among unsecured bank creditors, noteholders, perpetual bondholders, preference shareholders, and ordinary shareholders, and management staff with a combined exposure in excess of $3 billion.
However, the credit-ratings of the energy-partner in the deal, Medco Energi is not really better than Hyflux (before Hyflux's suspension). With the continued decline in Indonesian Rupiah, and reiterations of no core-asset disposal for Hyflux, one can only conclude that the profits or value that the Indonesians attain from Hyflux will be derived
from the magnitude of the debt write-downs of Hyflux's unsecured stakeholders.
https://www.moodys.com/credit-ratings/Medco-Energi-Internasional-Tbk-PT-credit-rating-600070745
BCA vs DBS
The earlier rumor about DBS's sudden engagement was probably not without basis. Salim Group's Bank Central Asia (BCA) is expected to be involved in the deal and Hyflux was a darling of DBS bank since the IPO-days, retail preference shares, bonds, and perpetual bonds offerings.
Before the recent weakness in rupiah, BCA had surpassed DBS in market capitalisation since 2016.
DBS toppled by Indonesia-based Bank Central Asia as South-east Asia's largest bank
And now, even more disappointing, one can only conclude that not only our local GLCs low-balled Hyflux, DBS also offered less supports to an old friend (Hyflux) who helped promoted many within DBS's ranks.
Haircut Inevitable for Retail Investors if Hyflux Falls into Indonesian Hands
The biggest winners in the deal will be the Indonesian investors and Hyflux's management.
In simple maths, Indonesia's investment ($400m for 60%) will give Hyflux a $666.7m market cap valuation, assuming the Indonesian investors convince unsecured stakeholder absorb capital-losses.
Hyflux's next 6 months will not likely be profitable, due to penalties from overdues, operating losses and delays in Tuas-One. Hyflux has a near-zero NTA in the last reporting and with continued losses, it is not unreasonable to assume that Hyflux's NTA is almost zero now.
If Hyflux's $666m market-cap presents a 1/3 discount to NTA (after restructuring) due to it's the reasons cited in the earlier paragraph, Hyflux's NTA will about $1billion after the debt-restructuring. Taking away the value of $400m injected, it hints that unsecured stakeholders need to write-down over $600m in exposure.
Unfortunately, most of Hyflux's retail investors are ranked-last in terms of debt-seniority and a full absorption of the $600m debt-reduction out of their $900m exposure will
equate to a 66% haircut for the perpetual bonds and preference shareholders (The figure could be lowered by half to approximately 33%, if other unsecured bankers bear a smaller haircut for their exposures).
Still Hoping for a State Bailout
Hyflux's downfall can be attributed to three main external factors; overcapacity in power generation, "use-or-burn" requirement in gas-contracts and PUB's regulatory hindrance.
Olivia Lum's willingness to engage the Indonesian squashes earlier rumours that she hindered any ownership-change.
Hyflux is the largest corporate-collapse in the history of Singapore, affecting over 50,000 retail investors. Combined-exposures to Hyflux bonds, perpetual bonds, preference shares and ordinary shares exceed $1.5billion.
Numerous lower/middle-incomed and retirees were exposed to Hyflux's retail offerings.
Hyflux may be highly-indebted but it is not uncommon for utility companies. She was drowned by regulations and policy-failures; and in similar plight, Singapore did engineered a bail-out for SMRT. Likewise, Singapore also bailed out Olam when there were flagged by Muddy Waters.
In a recent Zaobao article on 14th Oct 2018, the author concludes,
"If the government insists that the water and power plant can only be sold to a local company, then the solution has be a government intervention; through privatization or sale to a GLC at a reasonable price, to protect national interests. Otherwise, Singapore should consider the recent market-liberalization model of our public bus sector (foreign ownership). "
Olam's listed debts surged above par, after Termasek's takeover.
If there is a state takeover of Hyflux for a majority stake, there will not even be serious need for haircuts to restructure any debts and bankers will keenly refinance existing debts at significantly better rates. Hyflux will no longer be sunk by debts and easily return to profitability. Doing so, will restore and create value for every stakeholder.
With so many Singaporeans affected and their immediate dependents, we shall still be hopeful that the state will assist very soon to avoid disruptions and erosion in public-confidence.
