Monday, May 28, 2018

Will Hyflux Survive?

Hyflux has been the talked of the town among the investing community as they had recently announced the commencement of court supervised process for reorganisation. This is to protect them from creditors as they sort out their debt issues. Shares of Hyflux and its related securities were halted for trading since 21st May 2018. It is unknown what will happen from now.

Hyflux was a rags to riches story. However, at this point in time, the rags to riches seem to have overturned. The question is will it survive the crisis and will investors get back their money? In this post, I will try my best to dissect its business and only focus on its balance sheet and equity. Hopefully this will give us some clue to what is happening and what will happen in the future.

Who are the people who should be worried?

For Hyflux, there are generally the following retail investors who will be concerned now:

  1. Ordinary Shareholders
  2. Those who invest in the ordinary bonds
  3. Those who invest in the perpetual securities such as the Hyflux Cumulative Preference Share (CPS) 
For ordinary shareholders, there will surely be losses incurred as Hyflux's business has not been doing well with a negative financial position for FY2017. With the current suspension, I don't see any light at the end of the tunnel at least for the near term as they face a really challenging business environment in the energy market. 

For those who invest in the perpetual securities, the previous Hyflux 6% CPS which were supposed to be redeemed in April were unfortunately not and the interest was stepped up to 8%. In addition, there is another $500 Million 6.00% Perpetual Capital Securities (SGX:BTWZ) which should have coupon payment on 28 May 2018 but no payment will be made as announced by Hyflux. Whether these 2 perps will be redeemed in the future is also a question mark. If they can sell their assets and repay the bank loans and still have leftover to redeem the perpetual securities, then it could happen. Otherwise, its mostly a waiting game now. 

For bond holders, the likely scenario is that Hyflux will propose an extension for the bonds maturity. It may still be redeemed if Hyflux's business can turn around in the future. 

There are indeed many uncertainties but I don't think all is gone for the time being. Let's take a look at its financial statements to assess the impact properly. 

Dissecting Hyflux's Financial Position

As at 31st March 2018, Hyflux had total liabilities of $2.6 Billion with total assets of $3.6 Billion. Out of its $3.6 Billion assets, it has $233 Million in cash and equivalents. Most of its assets are held for sale of $1.4 Billion which is the Tuas Spring plant it is trying to sell. 

Out of its $2.6 Billion liabilities, $361 Million are loans and borrowings which have to be repaid in 1 year and another $1.2 Billion of loans and borrowings which are repayable after 1 year or more. Looking at this situation alone, Hyflux's ability to repay the loans and borrowings due in 1 year's time is questionable. 

The perpetual securities are not listed as liabilities but as equity even though these perps are actually also loans to the company. The Hyflux 6% CPS is listed under share capital in the owner's equity statement. This is about $400 Million. The 6% Perpetual Capital Secutiries (SGX:BTWZ) is worth $500 Million. In essence, they have another $900 Million worth of securities to redeem and pay back on top of the $2.6 Billion liabilities.

Will Hyflux Survive?

With all the numbers above, now the question is will Hyflux survive? 

Let's say if they are able to sell their Tuas power plant at $1.4 Billion, this will allow them to payback the $361 Million loans and borrowings due within 1 year and still able to redeem at least the $400 Million Hyflux 6% CPS which was supposed to be redeem in April 2018. However, the situation can be much more complicated than this as other creditors such as the banks and other senior unsecured creditors will not be happy if they use the proceeds to redeem the CPS. For those holders of BTWZ, it might be harder as there is no fixed maturity and this was only launched in 2016. The first callable date is in 2020. 

Now, this situation is dependant on 2 main issues. The first is whether Hyflux can sell its asset, especially the Tuas power plant for that $1.4 Billion. This will give them the cash to pay back some of its loans and redeem the CPS. The second is whether Hyflux can come up with a good proposal for all its creditors so that nobody brings them to court. It will get ugly if that happens. 

Now, the court protection is for 30 days so there will surely be more news after 30 days. This protection will allow them to focus on the pressing issues of restructuring their business.

It is not all over for investors of Hyflux. For ordinary shareholders, perhaps they will be the worst hit as it is unlikely that Hyflux will turnaround its business in the near term. The focus now is to clear its debt obligations so that it can still be in business. For bonds and perpetual securities investors, Hyflux might be able to redeem the loans if they can liquidate their assets or if there are new investors who inject funds into the company. If not, the situation will be bad also. Let's see what happens this year. 

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