Are Hyflux Debt Woes Over?

With lots of uncertainties surrounding the efforts made by the beleaguered Hyflux in trying to stem off possible liquidation threats from creditors, it finally got a lifeline of $530 million from a consortium led by Indonesia-listed Salim Group, and the Medco Group (SM Investments). The former is led by the renowned Indonesian tycoon Anthony Salim, while the latter is an integrated energy and natural resources company which supplies the West Natuna Transportation System Pipeline that delivers gas to Singapore.

Trouble In Hyflux

Hyflux is a Singapore-based firm and founded in 1989 by a Malaysian-born entrepreneur named Olivia Lum. When the company was listed on the local bourse in January 2001, the market capitalisation was just over $50 million and the company expanded aggressively both locally and abroad.

With the aggressive expansion of the operations, it soon found itself mired in debt. In May 2018, the company announced that it has obtained a court-supervised reorganisation and later obtained a six-month debt moratorium in June 2018. It also held a meeting with its noteholders and shareholders organised by SIAS, to update them on the debt restructuring plan. Following that, SIAS set up an informal steering committee for holders of Hyflux’s Series 008, 009, and 010 notes which are due this year and next, to facilitate the company’s engagement with the noteholders during the reorganisation.

Most recently in early October, the company disclosed that it was in advanced talks with at least two potential strategic investors which culminated to the SGX announcement made on 18 October 2018.

Financing Lifeline

The mix of debt and equity financing package by SM Investments comprised of a $400 million equity injection in exchange for a 60 percent stake in the water treatment firm upon the settlement of all its debts. SM Investments will also be providing a shareholder’s loan of $130 million and a debtor-in-possession loan of $30 million to help finance it through the restructuring.

In the SGX disclosure filing, the Company noted that the proposed transaction is subjected to approvals by SGX and confirmation by the Securities Industry Council (SIC) that it is not being structured as general takeover offer. In addition, the proposed transaction is subjected to shareholders’ approval at an extraordinary general meeting (EGM) which will take place later. The proposed transaction is also subjected to approvals from its regulators namely the Public Utilities Board (PUB), the National Environment Agency (NEA), the Energy Market Authority (EMA).

Impact On Shareholders And Noteholders

If the financing package gets approved through a court-supervised process, the largest shareholder of the Company and founder, Olivia Lum will forgo her majority control of the company. As for the minority shareholders, noteholders, the perpetual and preference shareholders, there are continuing uncertainties about the timeline for the completion of the financing package, as it has to go through various approval processes.

According to The Business Times (BT) news report on 19 October 2018, the entire Hyflux group had bank debts of about $1.8 billion in June, and note holders are owed $265 million. The perpetual and preference shareholders are owed $900 million.

Questions Over Tuaspring Desalination Plant

Earlier in October, The Business Times (BT) reported Sembcorp Industries (Sembcorp) emerged as the only bidder for the Tuaspring project which was one of the key assets held by Hyflux in Singapore. However, Sembcorp’s offer was below Tuaspring’s book value of $1.5 billion as of March 2018 and will not be enough to fully pay back the loans worth $518.4 million that was owed to the project’s main creditor, Malayan Banking (MayBank) due on 29 October 2018, according to sources.

A check on 2017 annual report of the company showed that Tuaspring was classified as an ‘Asset Held for Sale’ meaning that the Company had the intention to divest its stake, and the assets are measured at the lower of carrying value and less costs to sell according to the prescribed accounting standards. The financials related to Tuaspring are presented separately in the annual report as ‘Discontinued Operations’. As of financial year ended 2017, Tuaspring’s operations suffered an operating loss of $81.9 million, but lower than the S$114.5 million loss in the previous year.

The October BT report also noted that another bidder, Keppel Corporation (KepCorp), which had earlier shown interest in Tuaspring, did not submit a binding bid by the 01 October deadline. The two companies (Sembcorp, and KepCorp) were reportedly being selected as the two suitors by the PUB to study detailed information on the asset.

When questioned over the fate of the debt owed to Maybank, Ms Lum replied that it is still engaging in talks with Maybank and if the restructuring plans are successful, the Company need not be selling any more assets.

Hyflux’s Fate

The financing deal by SM Investments is one positive step towards the eventual resolution of Hyflux’s debt woes. However, concerns among shareholders will continue to linger in terms of the amount of dilution the shareholders will be willing to accept. Meanwhile, for the noteholders, there are still uncertainties to whether they could get their monies back.

It should also be noted that in the SGX disclosure statement dated 18 October, the proceeds from the financing package will be applied towards the settlement of each of the unsecured financial debt, preference shares, perpetual securities, contingent debt and trade debt, and the working capital needs of the Company’s business. There was no mention in the disclosure document regarding the settlement of secured debt, or how the entire settlement process with the rest of the Company’s stakeholders.

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