Monday, June 25, 2018

Why a debt to equity option for retail investors is not right - Hyflux

Approaching a pretty banker, he muttered in a husky voice " Hi, my friend told me about a 18% pa product that he bought from the bank. Something like I-U-ME-Later...." he asked eagerly. "
Oh, pls complete this form.
"Sorry, your risk profile is very low and your knowledge of investing is practically nil. I think a one-year fixed deposit is most suitable for you."She said.
Ok, i think we are not fated, guess i will go to somewhere else to grow my money then...." he muttered softly..

After the mini bonds saga in 2010, more protection for retail investors were put in place. The Monetary Authority of Singapore (MAS) required all investment products to be rated for relative complexity and risk. See this link for more details. Retail investors had to take a risk profiling assessment to see if the product offered by the bank is suitable .
Disclaimer: I am not an investment advisor. Heck, i am not even working in the financial industry. Below are my interpretation and i am grateful if you will let me know if anything i say is wrong and i will correct it in a reasonable time. I am not an expert and don't wish to be assumed to be one. I make losses frequently.

Why did the retail investors GULP Hyflux?

In 2011, about 20000 retail investors, mainly mom and pop and retirees, many of whom used their Central Provident Fund bought the preference shares (N2H) of Hyflux. Preference shares were a relatively new concept in Singapore. If i am not wrong, OCBC with their 5.1% NCPS 100 was the first publicly listed company in Singapore to offer this to retail investors in 2008. DBS was next in 2010.  ( I base this on the list of such listed NCPS in SGX and found OCBC to be the earliest)

Given the ultra low interest rates in 2011 due to the financial crisis, to borrow the phrase from Business Times, retail investors "GULPED down " with their CPF monies.
In 2016, given the continuation of the low interest rates, new retail investors and some old ones also, totaling about 20,000 " GULPED down" with their CPF monies for the newly issued perpetual securities (BTWZ). In fact, they "GULPED down" so much, the original $300 million "GULPED down" has to be increased to $500 million to satisfy the lack of investment opportunities to grow their money.

The much hyped fanfare of the opening of Tuaspring," being Singapore's first" , "largest desalination plant in South East Asia" and " one of the world’s largest UF installations in a desalination plant" only added to its allure.

Whoever mentioned about a debt to equity for Hyflux ?

To be clear, i don't think a debt to equity option has been mentioned by Hyflux at this point.
I think what most people expect at this time is a cut in coupon or maybe a temporary stopping of coupon to tide Hyflux over this unfortunate incident.

A debt to equity means converting how much one is owed into shares of the company at a certain price.

However, the following outcomes for other SGX listed companies in trouble, sure doesn't put one at ease that this will be totally ruled out.

Why a debt to equity option for retail investors is not right?

Reason 1- Complexity
Preference shares and perpetual securities are accounted in the financial statements under equity.
However, when you think of it, people ( or at least to the retail investors of the N2H and BTWZ) expect it to be a debt.

It gets so complicated and technical that headline numbers seem to consider it a debt at some time or equity at another time depending on how nice it would make the numbers look.

When it is considered equity that makes the gearing lower

When it is considered debt that makes the NAV per share higher

I am not finance-trained and i do not want to even calculate what is the right gearing and right NAV per share to do a comparison.

To be fair, if retail investors were to read the annual report very very deeply, there will be explanations as to how they define the gearing, or what were used and what were not used in the calculations.

But touch you heart and tell me is this reasonably expected of a retail investor who comprise of mom and pops, retirees or people who were turned away from banks due to their low risk profiling?

Reason 2 - Risk Profile

I think in the recent news about Hyflux, it was mentioned that there were in total 34000 retail investors in N2H and BTWZ and another 16,000 who invested in the ordinary shares. The headline numbers should not be 50,000 retail investors ( as stated by some media) as some 16,000 investors in ordinary shares would have also invested in BTWZ and N2H.

Assuming the unlikely scenario that ALL 16,000 ordinary share investors invested in N2H and BTWZ, that would make about (34,000 - 16,000) 18,000 retail investors in N2H and BTWZ who do not own Hyflux ordinary shares.

Now, this 18,000 retail investors would  likely be those risk-adverse sort who shun shares ( thats why they didn't buy the ordinary shares) and would probably fail the risk profiling from a bank, like the dude in the fist paragraph that tried to buy an accumulator with a husky voice.

If their preference shares and perpetuals are indeed converted into ordinary shares, this would be akin to a risky product shoved down their throat against their risk profiling!


I think it is morally wrong to subject N2H and BTWZ investors to a debt to equity deal. These are retail investors who include retirees, mom and pops who are not financially savvy, unlike those investors who can afford the wholesale bonds of Nam Cheong, Ezion, Noble e.t.c.

Mini bonds saga involved banks, foreign companies and 10,000 investors who were not able to use their CPF to buy the "bonds". This was set against a backdrop of a Global Financial Crisis, where Singapore is a price-taker in the international stage. 

This Hyflux fiasco involves 34000 preference and perpetuals and 16000 ordinary shareholders, against a backdrop of a booming economy, where the company involved is local with a majority of local contracts. 

I urge the stakeholders to exercise " heart" in their decision.

Further reading
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question
4) Hyflux-Treatmeat of perpetual share holders- Ezion
5) Hyflux - loans and borrowings - Pacific Radiance
6)A happy ending for retail perpertual securities holders - Tiger Air and Hyflux
7) The Very Curious Case of Sharebuybacks- Hyflux
8)What did the founder/Chairwoman/CEO do to help hyflux throughout the years
9) Moving forwards at the Townhall meetings with Hyflux - Part 1
10) Moving forward at the Townhall meeting with Hyflux - Part 2
11)The Lucky Accredited Investors of Hyflux's Perpetual Securities - Part 3
12) The Peculiar Case of HyfluxShop - Question 12 
13)Uncovering the Real Motivations Behind the HyfluxShop 
14) High Level Staff Movement Indication of Red Flags -Hyflux
15)An industry comparison of Hyflux compared with its peers - Question 15
16)What other Water Companies did that Hyflux didn't - Question 16

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