SINGAPORE: The holders of Hyflux’s perpetual securities and preference shares will get back slightly more cash under a rejigged restructuring plan, but experts are split on whether the improved terms will be enough to persuade these junior creditors to give the ailing water treatment firm a second chance at next month’s do-or-die vote.
The beleaguered company announced last Friday (Mar 8) tweaks to its debt restructuring scheme, following calls from the Securities Investors Association Singapore (SIAS) to give junior creditors “a little more” than the current “paltry” recovery rate of 10.7 per cent.
By comparison, senior unsecured creditors get a minimum 24.6 per cent return rate.
To better balance the interests of all parties, Hyflux proposed that perpetual securities and preference shareholders – a large group of 34,000 people, with a majority being retail investors – will get to share the “upside … from contingent liabilities extinguishing or expiring”.
Previously, if none of the S$678 million contingent claims materialise, 80 per cent of their compensation – S$93 million in cash and 10.87 per cent of equity to be held in escrow – would be distributed to the senior unsecured creditors. The remaining 20 per cent would be set aside for management payouts.
Under the amended scheme, management payouts in cash will be halved and the remaining 90 per cent of cash allocations from extinguished contingent claims will be split “pro-rata” between the senior and junior creditors.
WHAT IT MEANS
Hyflux’s announcement did not provide any updated recovery rates. Neither did it respond to a request for these figures.
But according to analysts from iFast Corp and OCBC Credit Research, the tweaked scheme can help perpetual securities and preference shareholders to claw back more cash, thereby pushing up the overall recovery rate.
If none of the contingent claims crystallise, investors could recover as much as 7.5 per cent of their initial investments in cash, up from the current 3 per cent. With the equity portion unchanged at 7.7 per cent, this translates into a maximum recovery rate of 15.2 per cent, said iFast Corp’s senior fixed income analyst Ang Chung Yuh.
In the event that only half of the contingent liabilities crystallises, analysts estimate recoveries in cash to work out to be 4.9 per cent.
To be sure, these higher recovery rates will not be an immediate guarantee as they are hinged on contingent liabilities – such as liquidated damages in a construction project – expiring over the course of two years. So what are the odds of that?
Again sharing similar views, the analysts from iFast and OCBC Credit Research said a “significant amount” of these contingent claims may not materialise if Hyflux is given a second chance.
“Based on the explanatory statement, most of the claims are EPC (engineering, procurement and construction) and O&M (operations and maintenance) projects, which we think are within the company’s expertise,” said Mr Ang.
Nonetheless, there are variables to watch out for.
For one, Hyflux has received proofs of claims worth S$3.5 billion from 73 parties – a sum that is much higher than the S$2.7 billion laid out in its explanatory statement dated Feb 22.
The accurate claim quantum, which the company is expected to clarify by the end of this week, will “have an effect on the actual percentage recovery”, OCBC analysts told Channel NewsAsia.
READ: Hyflux lays out restructuring plan to revitalise business, but retail investors lament big losses
MORE PALATABLE PLAN?
With the clock ticking down to the Apr 5 scheme meeting, investment specialist S Nallakaruppan views the latest move as another “goodwill gesture” to sweeten the deal for minority stakeholders.
Last month, CEO Olivia Lum and her board of directors have said they would be contributing their shares, as well as entitlements from the restructuring, for redistribution among the junior creditors.
For Mr Ang, the tweaked scheme was a “substantial concession” from senior creditors to garner more support from perpetual securities and preference shareholders for the scheme.
“This is not exactly a surprise given that based on media reports, the reception from junior creditors has been overwhelmingly negative,” he said.
“Although the equity portion wasn't shared, it’s still a substantial concession from senior creditors that makes (the restructuring plan) more palatable for junior creditors.”
But OCBC analysts reckoned that uncertainties remain when it comes to whether junior creditors will now find it easier to accept the restructuring plan.
For one, the proposed recoveries under the amended scheme remain small. “It is even smaller if only the cash portion is considered."
With equity forming a significant part of the recovery terms, there also remains “insufficient information”, such as the company’s income and cashflow projections, for proper assessment of the value of the allocated equity.
In addition, “satisfactory clarification” have not been given on several issues and some investors could feel that “answers may become clearer by rejecting the scheme”, added OCBC Credit Research.
For example, national water agency PUB, which issued a default notice to Tuaspring last week, has not disclosed the compensation amounts if it takes over the Tuaspring plant.
“We cannot rule out junior creditors preferring liquidation, which results in Tuaspring being taken over by PUB per the notice of default, if there is a possibility that PUB will offer a high compensation amount," analysts said.
Another burning question that continues to linger on investors’ minds is what went wrong with the company’s books between March and May 2018.
“When the 2017 accounts were done and issued in March, the auditors didn’t mention any issues but shortly two months after, the company said there were issues and they had to go for a court-supervised reorganisation,” noted Mr Nallakarappan, who sits on the executive committee of The Society of Remisiers (Singapore) as its honorary treasurer.
“What happened? These are fundamental questions that need to be answered.”
Hyflux was scheduled to meet its stakeholders on Wednesday but in an update late on Monday night, the town hall meeting will be postponed.
The company said it is looking for an alternative venue to accommodate the “large number of investors” who have indicated their interest.