Wednesday, May 15, 2019

Lehman Bonds are no Hyflux Bonds - An Opinion

“I get emails from a raccoon, so nothing sounds crazy.” 
—Natasha Romanof (Avengers:Endgame 2019)

Disclaimer: I am not an investment advisor or lawyer. 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 guess reading a column by Straits Times Deputy Night Editor, Dennis Chan, sounds crazier to me. At the risk of unintentionally quoting him out of context, here is the article he wrote. Please read through it carefully before proceeding further.

" Flooding the investor with all kinds of disclosures is not the answer either. Take risk appreciation, for example. Will an investor reading the Hyflux prospectus for its 2016 perps offering from cover to cover be any clearer about a default risk than someone, who did not, bearing in mind that a prospectus typically contains a long list of things that could possibly for wrong?"
" Statistic students know that merely listing possibilities without knowing the corresponding probability level will frustrate any meaningful risk evaluation."
- by Dennis Chan, Straits Times Deputy Night Editor. ( source: Hyflux bonds are no Lehman Minibonds) 

Is Dennis Chan, Straits Times Deputy Night Editor trying to say that full disclosure is not necessary in a prospectus since retail investors who diligently do their due diligence by reading cover to cover, would not be better off than one who hadn't done his due diligence? Or retail investors don't have the ability to digest a prospectus? ( If so, then maybe he didn't realize he just implied that these hyflux securities really ain't suitable to be sold to retail investors). I don't understand what his reasonings are which in my view contradict each other but simply just wanting to drive home the point that Hyflux investors deserved their current predicament. Of course, my opinion.

What is the point of issuing a prospectus in the first place since retail investors are already judged ( at least by Dennis Chan, Straits Times Deputy Night Editor ) to not be any better off after reading it. Therefore,as Dennis Chan, Straits Times Deputy Night Editor mentioned ,flooding with many disclosures are not the answer. This sounds ridiculous in my opinion. How does one, then make informed decisions?

What about what Minister Ong Ye Kung said in Parliament:
"A key aim of regulation is to require that investors have access to "up-to-date, material information such as a listed company's financial conditions and prospects, in order to make informed investment decisions".
But investors also "need to pay close attention to what is disclosed, look beyond potential returns and assess if they can also accept the risks that come with specific investments"
( source: Parliament: Investors must do their part by only taking risks they can live with)

Who is to judge whether a disclosure is material or non-material if Dennis Chan, Straits Times Deputy Night Editor deem it unnecessary to list "all kinds of disclosures"since it will flood? Who is going to be the arbiter of disclosures? The company, who is selling the securities? Or the Monetary Authority of Singapore? Or perhaps, the Singapore Exchange? Or perhaps Mr Dennis Chan, Straits Times Deputy Night Editor? If any of these aforementioned entities are the arbiters, then who will take the responsibility when the disclosure deemed immaterial to be included in the beginning, turns out to be very material in the end?

In order for an informed investing decision to be made, adequate and accurate disclosures should be made and it is the responsibility of investors to consider which disclosures are material and which are not material and then make an informed choice. Let there be no grounds for investors to absolve themselves of any responsibility in making losses and caveat emptor. This is my stand.

Naturally, the next reasonable and fair question would be, why did some investors buy Hyflux 2016 perpetual securities ( or perhaps the 2011), assuming they knew about Hyflux's cashflow. This is what many people shout about when calling Hyflux investors greedy only for the yield and therefore, they deserve every drop of loss. The reasons for this would also precisely answer why they didn't buy the Hyflux ordinary shares, but instead chose to buy the perpetual securities or preference shares, inaccurately coined as "retail bonds" by Dennis Chan, Straits Times Deputy Night Editor. (When a national newspaper use the word bonds loosely, don't blame the public for thinking it has bond-like characteristics.)  When Dennis Chan, Straits Times Deputy Night Editor, dismissed this Hyflux episode by comparing with the other failures in SGX where minority stakeholders were only silently griefed and why should this episode be any different, did he realize that this is the very first time that a "retail bond" bought through ATM, ensnaring over 34,000, nearly, all Singaporean investors failed in the history of Singapore? Or did he just mixed up "retail bonds" with ordinary shares where ordinary shareholders lost money, in other failures in SGX?

Olivia Lum has always stated in the annual reports about the asset-light strategy of Hyflux. 

"We also adopt an asset-light strategy that allows us to make value-creating investments without taking on excessive borrowings. Our approach is to build up the value of an asset and divest it at an opportune time to recycle capital for growth." - page 8, annual report 2016

"As part of our asset light strategy and to recycle capital for new investments, we unlocked value and divested our entire stake in five water and wastewater treatment plants in China to Tus Water Group Limited, a new joint venture with Tuspark TSI, of which we own 25% stake" - page 4, annual report 2015

"As part of our asset light strategy, we sold and leased back Hyflux Innovation Centre as well as divested our interests in Hyflux Marmon Development Pte Ltd and Marmon Hyflux Investments Pte Ltd." - page 5, annual report 2014

Similar to comparable water companies in Hyflux's industry, once the asset is built, it's sold and the cash is then used to pay back creditors. That's the very nature of the business. Just take a look at the other water companies such as Citic Environtech and China Everbright, who also have negative operating cashflows in 2018,2017.  The most important thing for investors  of  "retail bonds" ( borrowing from Dennis Chan, Straits Times Deputy Night Editor) to take note of then, are the asset and liability valuation figures .Whether they can be **trusted**, in my opinion, so that investors can do their calculations on whether this "loan" can be paid back. They are not looking at prospects of the company because "retail bonds" do not enjoy much capital appreciation. Prudent investors who take note of the cashflow issues of companies in such an industry are likely the very ones who bought the "retail bonds" instead of the ordinary shares.

It is well known that Hyflux is involved in many notable private -partnership projects (PPP) in Singapore. More than 60 % of revenue actually. Unbeknownst to many however, except for diligent investors, is that according to the Ministry of Finance guidelines, PPP projects are structured in such a way that it could be seen by investors to be less risky, hence more reliable asset valuations. This perception is not groundless, this is based on black and white.

  "2.3.3 Similarly, for the private sector, there should be sufficient revenue, either from Government or directly from the users, to recover the initial investment and the costs incurred by the private sector. " - (source: page 27 Public Private Partnership Handbook ,emphasis mine)
An email to clarify this statement has been sent to MOF for their clartification on 2 May 2019. No clarifications has been received as of posting. Please read the handbook carefully before proceeding.

Let's put aside the mistaken trust capital build up over the years for the moment perpetuated by the environment.  Would it be reasonable then to think that investors had grounds to trust the asset values of Hyflux, or more notably Tuaspring's value , an entirely local PPP project,  which is the raison d'ĂȘtre for Hyflux's downfall? Especially when it is considered in relation to 2.3.3 of the MOF guidelines?

Even up to 27 February 2018, less than 3 months before court protection, Olivia Lum was still assuring investors with these words

".....We believe that we have a good asset, we have a good track record, still have a brand name....We have no shortage of interested parties talking to us..."
(source: Hyflux perps won't be redeemed till divestment of Tuaspring)

Based on the then asset value of Hyflux's assets and based on the asset-light strategy, investors could have calculated that selling off the assets would have been sufficient to redeem all of the 2011 preference shares. 

However, Dennis Chan, Straits Times Deputy Night Editor ,instead of focusing on what really went wrong, which are non-disclosures, chose to parrot about cashflow issues which has been repeated many many times by many after Hyflux court protection. Worst, he came out to say full disclosures  is flooding retail investors and hence not the answer. Let me explain what went wrong that has not been parroted much by the mainstream media instead.

It is the inadequate and inaccurate material disclosures, or rather the material non-disclosures.

Point 1
What was not disclosed in any corporate announcements, let alone the prospectus, was that the Tuaspring Integrated Water and Power plant derived the bulk of its revenue, 90%, from electricity, instead of water. This was only disclosed in the first townhall after court protection.

That the Tuaspring Integrated water and power plant was actually a spare tyre and didn't actually produce 318,500 cubic metres a day but more of only doing about 30% utilization on average was also not disclosed before court protection in any of Hyflux's corporate announcements.  Compare this to the statement in the annual report 2013, page 6.

"The official opening of our Tuaspring Desalination plant ( Tuaspring) by Prime Minister Mr Lee Hsien Loong on 18 September 2013 established Hyflux's dominance in membrane-based desalination, particularly in a market considered to be among the most competitive in the world. 
Tuaspring adds an additional 318,500 cubic metre of water per day to singapore's water supply." -( source : annual report 2013,page 6, emphasis mine.)

Point 2
What was also not disclosed, was that Hyflux chose to built a power plant " significantly more than what the desalination plant needed, with the intention of selling excess power to the national power grid" according to Minister Masagos in Parliament. 
(source: .

Compare this with what Hyflux informed SGX
" This Desalination Plant is in the ordinary course of business of the Company. As energy cost is a major cost component of a Desalination Plant, the objective of power plant that was built concurrently was meant to supply electricity to the desalination plant. This was explained on slide 8 of the presentation deck dated 7 March 2011 where the Company explained that this power plant was the best size for optimal efficiencies as energy cost is a major cost component of the Desalination Plant. Excess power will then be sold to the power grid."
- (source :SGX email dated 1 February 2019)

If the objective of the power plant was to supply electricity to the desalination plant, how could 90% of the revenue of Tuaspring be from sales of electricity?

In my opinion, the intention of the power plant stated by Minister Masagos in Parliament is clearly different from the objective stated by Hyflux. The former implied that electricity was intended as a core business while the latter, implied that electricity was intended as an ancillary business.

Point 3
What was also not disclosed was that electricity sales ( comprising 90% of Tuaspring's revenue) was not mentioned as one of the core business of Hyflux in the Newspaper Advertisements when the 2016 perpetual securities were sold.
Instead, the core businesses stated on Straits Times were, environmental solutions, membrane sales, operations and maintenance of water plants.

It is clear to all now that electricity sales is important to Hyflux. It is the very fact that the glut of electricity brought down Hyflux. How then is electricity sales not considered a core business and shown clearly on the advertisements?

Point 4
What was not disclosed ( or not highlighted by Dennis Chan of Straits Times Deputy Night Editor in my opinion) was that under the risk factors stated in the 2016 prospectus, the risk was in the operations of the power plant, not in sales of electricity from the power plant.

"......If any of the Group’s counterparties fails to perform its obligations or if the creditworthiness of any of these counterparties deteriorates, the operations of the power plant may be materially and adversely affected, which may in turn cause the Group’s operations, business and financial condition to be materially and adversely affected...." - page 35 of 197 pages

As far as all the public information released so far, there are no problems with the operations of the power plant. The power plant is operating just fine. Instead, it was the sales of electricity that brought down Hyflux.

Point 5
What was not disclosed was whether Hyflux needed to attain a shareholder approval for major transactions to enter a new core business of electricity which materially changed its risk profile, in accordance with SGX listing rules, practice note 10.1.  An email has been sent to SGX for clarification on 20/01/2019. As of latest reply by SGX on 11/04/2019, they are still investigating. I don't know what is taking them so long. This is despite Hyflux having to attain an EMA genco licence according to the Electricity Act to operate the power plant, despite Hyflux having spent more than $800m in power assets in Tuaspring which have breached the 20% market capitalization threshold of the listing rules, despite Minister Masagos stating that the power plant was built significantly larger than what the water plant needed,  despite the very fact that it is publicly known that electricity sales was the culprit that brought down Hyflux.

Before 2011 when Tuaspring was awarded, Hyflux was only in the water business. Post 2011, electricity should have been highlighted as a new CORE business but who would have known, until after the court protection.

In conclusion

I do agree with Dennis Chan, Straits Times Deputy Night Editor, on one thing though. He wrote
" so if you were able to identify " The group is a new entrant to the power business" on page 35 of the prospectus as the factor that would bring Hyflux to its knees, your foresight as an investor is exceptional."  ( source: Hyflux bonds are no Lehman Minibonds) 

Indeed. Except that the retail investors are just your ordinary man in the streets, the retirees and those who work hard for a living in ordinary jobs. Certainly not the exceptional investor or even the " bank credit officers, fund managers and auditors- financial professionals" which Dennis Chan, Straits Times Night Deputy Editor mentioned. Perhaps the latter was mistaken too due to disclosure issues too?

 “SMI has been waiting for Hyflux to disclose further material information following multiple requests for such disclosure. The delay in disclosing this material information has prevented SMI from determining a workable allocation between working capital and the settlement amount to creditors under the restructuring agreement.”

Now, Dennis Chan, Deputy Night Editor, are disclosures important now, even at the risk of flooding?
With the benefit of hindsight analysis, i would have expected better articles.

The Uniform Selling Electricity Price (USEP) was at the all time low during the issuance of the 2016 Perpetual Securities to the retail public. It was never this low in the history of Singapore, not even now. Who would have known, except for the insiders that the fate of Hyflux depended on the USEP prices when the materiality of electricity sales were not disclosed ?

Who would have known that the asset value of Tuaspring before the court protection would be impaired by about $900 million after court protection since the retail investors are none the wiser about the bleeding of Tuaspring due to its significant exposure to the electricity market? Interestingly, the USEP price and spark-spread is higher than before, yet the asset valuation of Tuaspring is significantly lower. Shouldn't Tuaspring be valued higher instead of being impaired by about $900 million?

Who would have expected just 2 months after the unqualified audited statements were signed off as a going - concern basis, that a court protection will be seeked?

Who would have understood convincingly why Olivia had to give the ordinary shareholders their ordinary dividends , instead of the coupons to the perpetual securities holder? Isn't coupons to perpetual securities holder ranked higher than ordinary shares, according to the terms of the prospectus?

Who would have known, except, unless all these adequate and accurate disclosures were made known.

Dennis Chan, Straits Times Deputy Night Editor, was right when he said investors would not be any clearer after reading cover to cover the Hyflux prospectus, but the reason is not because it was flooded with disclosures but rather it was lacking in accurate and adequate disclosures, in my opinion.

My point is, i would rather be flooded with disclosures. And disclosures are the answer.

To Noble Investors
I have just created a Noble Telegram group for Noble Investors to join. In my opinion, Noble investors are a less unlucky bunch compared to Hyflux because it has Big players on their side. Iceberg has set up a webpage to join them in the lawsuit.  I have also reached out to Iceberg and they have responded positively to me.

I am not a Noble Investor and i do not know the specifics of the suit, but i thought the old saying of
"Strength in numbers. Divided we fall, United we stand" is wise. I do not know if it will succeed but let's see how it goes.

To Hyflux Investors
For Hyflux investors, even those ordinary shareholders, we need you.  Hyflux posted an announcement on 3 May 2019, finally revealing the name of the mystery new  investor. At the date of this posting, from a non-binding offer, it has become a draft binding offer. Is draft binding or non-binding actually? In the 3 May 2019 announcement, it stated the current management will be retained. In the recent extension of court moratorium, Hyflux proposed a New Hyflux and Old Hyflux arrangement. This reminds me of what Iceberg said in May 2015 on their website about Noble.

 “The new Noble looks a lot like the old Noble: same management, same director (Elman), about the same financing costs,”

The Hyflux ordinary shareholders hold about 60% voting rights. An extremely uphill battle to vote out the current management definitely, but its worth a shot. And to put things in perspective, at least Noble Chairman Richard Elman stepped down eventually. Noble's Board of Directors, CEO and CFO were also changed, finally, at the very end. How about Olivia Lum (Chairman and CEO) and Lim Suat Wah (CFO)?

For Other Investors of other companies
A level playing field between corporations and retail investors can only be good for everyone. In a large scattered group, differing messages will be sent out. I can only speak for myself. It is the corporate entities and significant stakeholders whom accountability and recovery from is seeked. Understanding what happened along the way was also necessary in the process of reaching my conclusion.
I hope you read it the right way.

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!
32)The " not spoken much" dirty little thing about the Restructuring Proposal - the $33 million - Hyflux
33) The Failure of the much touted Public-Private-Partnership Model in Singapore - Hyflux
40)How Effective are SGX Listing Rules Really ? - Hyflux
41)The Liquidation of California Fitness and the case of Hyflux
42) Protection of Retail Investors in Singapore - Hyflux and Noble
43) Spotlight on Singapore Regulators 

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