Wednesday, August 8, 2018

What happened to other Debt Restructuring Exercises - Nam Cheong

Nam Cheong is in the business of shipbuilding and vessel chartering. Its business was affected by the oil price environment leading to the oversupply of newly built offshore supply vessels by competitors and lower demand of its vessels.

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.

The journey of the MTNs holders, comprising of  $90 million 5% due 2017, $200 million 5.05% due 2019 and $75 million 6.50% due 2018

Jan 2017 to March 2017 - Resignation of CFO and CEO sold shares

March 2017 - Auditor flagged that as of 31 December 2016, the Group’s loans and borrowings that were classified as current amounted to RM948,720,000 of which RM278,566,000 (S$90 million) pertained to medium term notes that are due for repayment on 28 August 2017. These amounts exceeded the Group’s cash and cash equivalents of RM162,618,000 as at 31 December 2016.

July 2017 - Informal noteholder meeting held. The following was mentioned:
  • All unsecured lenders ( banks and noteholders) will be treated equally.
  • Possible support from major shareholder through dilution of shareholdings and injecting of funds.
  • Secured assets to be sold (if applicable) and repaid to the secured creditors. 
  • Secured debts which are not represented by the value of the secured assets will be settled pari-passu with unsecured debts 
  • All unsecured debts will be treated equally under the Schemes of Arrangement of the Company and its subsidiaries (“Scheme Companies”)
May 2017 - The quarterly financial statement ended 31 March 2017 showed a positive equity of  RM 1,311 million

August 2017 - The financial statement ended 30 June 2017 showed negative equity of RM 700 million

As part of the management comments about total assets: 
Total assets of the Group decreased by RM2.36 billion from RM4.10 billion as at 31 December 2016 ("FY2016") to RM1.74 billion as at 30 June 2017 ("PE2017") mainly due to assets impairment and written down of RM2.0 billion mentioned above.
September 2017 - 2nd informal noteholder meeting held.  It was announced that a rights issuance will be conducted with the chairman committing USD11 million to subscribe for it. There was a choice for noteholders who refused the base scheme to opt for either option A or option B.

Base scheme ( simplified) -
35% of principal to be converted to equity at a rate of (estimated)SGD $0.08 per share. ( USD1 for 17 shares).
65% of principal will be converted to a 7 year term loan at 4% pa, where the interest of 4% is partly paid in shares and cash. Based on the current price of SGD$0.02 since suspension, estimated recovery represents about 73.6% of principal.

Instead of the 65% of principal converted to a 7 year term loan, , noteholders can choose the following:
Option A ( simplified)- Rights will be issued to current shareholders,part of the proceeds will be used to pay those who chose this option. Estimated recovery from this will be 13.5% - 23.5% of principal.  No further claims.
Option B (simplified) - total conversion to equity at USD 1 for 34 shares. Estimated at SGD$0.041 per share. No further claims. This represents an estimated recovery of 41% of principal.

The chairman also commited not to sell his shares for 7 years and his entitled rights for 1 year.
Among which, a management incentive plan was in place that focused on meeting cashflow targets. 

October 2017 - 6 months court moratorium filed. Court proceedings were also filed in Malaysia

Dec 2017 - A FAQ to clarify the restructuring terms was issued. (The terms must be changed between Sep and Dec as the new terms are much improved).

Base scheme ( simplified) - 35% of principal to be converted to equity at a rate of (estimated)SGD $0.047 per share. ( USD1 for 30 shares). 65% of principal will be converted to a 7 year term loan at 4% pa, where the interest of 4% is partly paid in shares(2%) and cash(2%). The 2% interest will be converted at a rate of USD1 for 30 shares.
Option A ( simplified) - seems to stay the same
Option B (simplified) - I didn't see any mention.

It was mentioned that if the MTN chose the liquidation route, they would get not more than $15k for their investment of $250k.

Through the restructured deal, the chairman who is the major shareholder would stand to dilute up to 68% of this shareholding.

It was further mentioned that the rights issuance pricing would be at a price of $0.014 per share , a 30% discount to the suspended traded price of $0.02 per share. The USD11 million which the chairman committed will be used to subscribe for these discounted shares ( $0.014 per share). This USD11 million will be conditional upon the restructuring being agreed upon by the creditors.

My thoughts about its relation to Hyflux

Nam Cheong is an example where rights can still be issued when a company has negative equity. It's suspended share price is $0.02 which is also very low. What this means to me is that there is no excuse for Hyflux not to issue rights. If the share price is low, a share consolidation can always be done to bring up the share price. A share consolidation will not affect value of the share, only the price, since the percentage ownership of the company is the same.

There have been some Hyflux perps and prefs who would like a liquidation scenario. From Nam Cheong's example, the asset values can go downhill super fast. In a span of 3 months, the asset value of Nam Cheong went from a positive RM1311 million to negative RM700 million. I do think that for economic reasons, a liquidation scenario will still be the worst outcome. Nam Cheong estimated recovery is not more than $15k for $250k and thats considering the MTNs are ranked equally with the unsecured bank lenders based on the first informal noteholder meeting held in July 2017.

I feel its highly unlikely that Hyflux perps and prefs will be offered a debt to equity scenario since we are considered equity already, actually. Neither will Hyflux be willing to give us fixed redemption date since we will be converted to debt and make the balance sheet worse off. A likely scenario will be asking us to reduce our distribution/dividends and maaaaayyybe, asking us to take part of it in shares.

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
17)Why a debt to equity option for retail investors is not right
18) Consolidated Questions For Hyflux Townhall Meeting on 19 and 20 July 2018 - Hyflux
19)Consolidated Questions For Hyflux Townhall Meeting on 19 and 20 July 2018 - Hyflux- continued
20)Informal Steering Committee for the Reorganisation Process - Hyflux
21) What happened to other Debt Restructuring Exercises - Ausgroup

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