Saturday, February 23, 2019

The " not spoken much" dirty little thing about the Restructuring Proposal - the $33 million - Hyflux

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.

I think there is a psychological play going on here. It seems mostly everywhere is showing a 24.7% recovery to the unsecured banks ( meaning for every $100, they will get back $24.7). It is not accurate . Instead, the recovery to unsecured banks are in a range of between 24.7% to 38%, depending on how much of the contingent liabilities materialises. 
24.7% is the worst case scenario that the unsecured banks will get. They could be getting back 38% too.

And it seems Olivia Lum and her Board of Directors are so magnanimous as to give up their retention ordinary shares of 1.26% of the company to the Preference and Perpetual Securities Holders. This "story" of magnanimity has been blown way out of proportion by many mainstream media, with one even wasting precious column space on the article " 6 things to know about Embattled CEO Olivia Lum" , casting her in a positive light.

Unknown to many who don't read the affidavits, categorized under segment of " Unsecured Claims Scheme Parties" is this little arrangement where some money is allocated to the management as incentives.
( page 32 of the 15 Feb Affidavits).

This is how the "Unsecured Claims " are going to be split up among the banks, MTN noteholders, contingent claimants and the management. $412 m ( $232 m in cash+ $180 m in implied value)  is the total amount allocated to this group. Based on the proportion of contingent claims value compared with the other unsecured claims, $166 m is placed in an escrow account for a "just in case" basis. This $166m will be further split into 20% for management and 80% for additional recovery to the banks and MTNs.  See below flow chart.

It must be noted that contingent claims are claims that may never come about. They materialize only when things do not go according to agreement, for example, projects not completed in time. 

Also, there is a lot of leeway for Hyflux to attach a value to this, therefore, i am very skeptical about the value of contingent claims. 

Based on assumptions ,it may be inflated to give more to management. 
It would also make the recovery to the unsecured claims party more reasonable as people will look at a very large amount of unsecured claims but actually, a large part are actually contingent claims that may never happen.

** I have earlier mentioned that $82 million could be allocated to the management and this is wrong. The amount should be around $33 million. 
This was edited due to a reader highlighting it.

My thoughts 

There is no mention as to who this group of management recipients are. It is not unreasonable to think that Olivia Lum or the CFO  may be among these management recipients. What is giving up 1.26% in shares ( total $8 million in shares only) to the Perpetuals and Preference shareholders , as compared to $33 million? 

Let's even imagine that Olivia Lum or the CFO are not among these management recipients. 
This incentives is still ridiculous. 

How can incentives be classified under unsecured claims together with bank loans?

Why are the creditors who have already lost most of their money due to the management's incompetence, be the ones now to share the pool of money to incentivise this incompetenet management to complete their projects? The onus of incentivising management should be the responsibility of the new owners, Salim, not those whose debts are extinguished and have little future benefits from the projects when completed.

What the hell is wrong with Hyflux's human resource policy, where incompetence is rewarded? 
An employee screws up and is paid more to make sure he corrects that mistake he created. 
Is this policy breeding a culture of incompetency or what?
because the proposal is bad and it can certainly be improved.

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
22)What happened to other Debt Restructuring Exercises - Nam Cheong
23) My layman views of the so-called " White Knights of Hyflux"
24) The Unsecured Working Group (UWG) are against the retail investors - Hyflux
25)Where to find money to pay back retail investors? 
26)What happened at Hyflux's Second Townhall Meeting
27) Another bomb to the retail investors of Hyflux
28)The Underrated Importance of Regulatory Risk - Hyflux
29)The Overlooked Importance of Another Regulatory Risk - Hyflux
30)Why did so many Singaporeans invest in Hyflux - The positive image illusion
31)On Why The Rich Get Richer And Poor Gets Poorer - The Hyflux Proposal is Out!

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