SINGAPORE: The restructuring of water treatment firm Hyflux is credit-negative for its creditors, said Moody's Investors Service in a research report released on Friday (May 25).
However, that does not imply an industry-wide deterioration in the asset quality of bank loans to other large power generation companies in Singapore, it added.
On Tuesday, Hyflux applied to the Singapore High Court to commence a court-supervised process to reorganise its liabilities and businesses. The company also announced that it would be skipping the upcoming coupon interest payment on its S$500 million perpetual securities.
Moody’s noted that this restructuring, which may include a combination of haircuts, debt maturity extension, or interest rates adjustments, could lead to financial losses for its creditors.
These include around 30 financial institutions that are mostly Singapore branches and subsidiaries of foreign banks, according to Moody's citing Hyflux's annual report.
However, with most large power generation companies here having “strong shareholders with diversified portfolios of generation assets”, Moody’s does not view Hyflux’s problems as “symptomatic of a general deterioration in the asset quality of banks' loans to other large infrastructures companies in Singapore”.
"In addition, these companies' power assets were mostly commissioned some years ago, implying that the debt load on these projects would be more manageable when compared with Hyflux's Tuaspring, which was commissioned in 2015," added Moody's vice-president and senior credit officer Eugene Tarzimanov.
“The risk that they would follow Hyflux’s restructuring path is low.”
In the case of Hyflux, it had a large amount of secured debt, which heightened the risk to its unsecured creditors.
Moody's report pointed out that the company’s loans and borrowings are dominated by banks. It pointed out that 68 per cent of Hyflux's debt is unsecured, with 51 per cent in the form of unsecured bank loans.
The recent development could mean losses for these creditors.
One of them would be the Singapore branch of Malayan Banking Berhad though potential losses “should be limited”, said Moody's.
In 2013, Maybank had agreed to provide an 18-year, S$720 million financing facility to desalination and electricity generation plant Tuaspring.
"The loss-making Tuaspring project has become the centre of Hyflux's problems because low electricity prices have dampened its electricity generation revenue. At the same time, Tuaspring's desalinated water output will continue to be in demand in Singapore, which still relies on imported water to meet its total water needs."
But Moody's said it believes that Maybank's exposure has decreased since 2013 because of loan amortization.
“We assume that most or all of Maybank’s exposure is secured by the Tuaspring project or related cash-flow receivables, or both. This should mitigate losses for Maybank in a worst-case scenario where Hyflux goes into bankruptcy," the report said.