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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)

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'être 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: https://www.mewr.gov.sg/news/oral-reply-by-masagos-zulkifli--minister-for-the-environment-and-water-resources--to-parliamentary-question-on-hyflux-on-1-april-2019) .

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.”
(source: https://www.straitstimes.com/business/companies-markets/hyflux-says-rescue-deal-with-indonesian-investor-terminated-cancels)

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)?

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

34)The Curious and Disturbing Default Notice of PUB- Hyflux
35) Why i Am Still Voting No to the Revised Offer - Hyflux

36) The Wrong Impression of the Revised Offer- Hyflux
37)When Exactly Did Tuaspring's Operational Problems Start? - Hyflux
38) The Illusion of High,Recurring Profits and Low Debt - Hyflux
39) Just what is Considered True and Fair? - 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

Monday, May 6, 2019

Spotlight on the Singapore Regulators ( Hyflux Case) - SGX, MAS - An Opinion

Image 1

In the green box above under Point (A), it was clearly stated that the highest price paid for the share buyback was $1.01 per share and the lowest price paid was $0.84 per share in 2014.

Image 2

Image 3

Image 2 and 3 shows the reply to my email enquiry. This was Cced to the Monetary Authority of Singapore (MAS). It stated that Hyflux bought shares below the net asset value per share. This is factually wrong. Any annual report post-2014 would have shown the NAV per share of Hyflux in 2014 was $0.56 and opening up the annual report of 2014 which i referred to would have shown that the lowest buyback price paid was $0.84 per share in 2014 as per Point(A) in image 1.

I replied again to substantiate with evidences and asked a simple question to show me just one example where Hyflux bought below the net asset value as asserted by SGX. This was the email i replied SGX with. I sent the specific page in Annual Report 2017 showing the NAV per share of Hyflux across the years as an attachment. MAS and SIAs is Cced in this too.

Image 4

Image 5

The above shows the Net Asset Value per share (cents) in 2014. Clearly, it was $0.56 per share in 2014.

My comments

The regulators in Singapore are clearly hopeless. Their response gives me the impression that their first instinct would be to jump to the defence of corporations without even doing a basic fact check . What use is a guard dog if it doesn't do its job of guarding the house? It's so blatant considering i have made it very easy for them by giving them the facts already.

To me, it is even worse that Hyflux was in the news already that they were in dire straits and this should naturally necessitate that the regulators should be on high alert on possible breaches or pending investigations.

It is clearly stated in Image 1 Point (A) that the highest and lowest share buyback price was $1.01 and $0.84 per share respectively. It only needed the regulator two minutes of their time to check out the NAV in 2014 by pulling out any of Hyflux's annual report to check like in Image 5. But i guess they couldn't afford the time or maybe just couldn't care.

Clearly, this shows the uselessness of SGX. By the way, the shares were bought back above their NAV per share from 2011 and 2015, every single year.

The Monetary Authority of Singapore (MAS) was also included in all the emails. They delegated the enquiry to SGX as they stated SGX was the frontline regulator. They said they will monitor SGX's response. I wonder what happened with monitoring SGX's pathetically wrong factual information given to me.

I also wonder what was the accountability mete out upon SGX? Did MAS really monitor in the first place?

I think the following statements is very apt.

".............When shareholders and other stakeholders “blow the whistle” on potential misconduct to regulators and provide substantial evidence to support their allegations, regulators must take these complaints seriously. Regulators should not only investigate when incontrovertible evidence has been provided by whistleblowers, who lack resources and investigatory powers themselves.

We often hear regulators talking about different stakeholders playing their role in improving market integrity. If stakeholders’ efforts in highlighting possible misconduct do not get the necessary support from regulators, they will stop doing it and the market will be the worse for it.

I am concerned about the loss of trust in our market and urge that more be done to improve regulatory enforcement to rebuild that trust. " - NUS Professor Mak Yuan Teen ( Emphasis mine)
source: http://governanceforstakeholders.com/author/mak-yuen-teen/page/5/

Guess what was SGX final response to my email (Image 4)?

They could not give a single example when Hyflux bought their shares back below the NAV per share. Choosing instead to ignore that question and carry on life as usual.

And very ridiculously, the Company that i am lodging a complain against answered my query. I wondered if SGX checked on the validity of the reply. Oh but wait... this time, SGX replied to me without Ccing MAS. I wonder how MAS is able to monitor SGX in this case.....

The complacency and arrogance of the current system is appalling. There is totally no accountability , no check and balances with CEOs also being Chairman as in the case of Hyflux and with unwilling regulators. SIAs remained silent throughout the email, in case you are wondering.

Retail investors, just remember, you are on your own in Singapore.

More to come...surely...stay tuned.....

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, albeit, still a non-binding offer. In it, 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)?

Further reading

34)The Curious and Disturbing Default Notice of PUB- Hyflux
35) Why i Am Still Voting No to the Revised Offer - 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

Saturday, May 4, 2019

Protection of Retail Investors in Singapore - Noble and Hyflux - An Opinion

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.

"......The SGX and MAS have proven themselves incapable and impotent while greed has blinded the vast array of financial intermediaries who have enabled this tragedy. While I remain open to being proven wrong, Richard Elman, his management, EY and every single board member have utterly disgraced themselves through the most appalling lack of transparency, financial controls and governance. This indeed is Asia’s Enron.
What is needed now is for the courts and the legal system to do the regulators job and step in and force the disclosure and transparency the regulators have been unwilling to demand......."
- Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://iceberg-research.com/2018/05/08/dead-men-walking/

Above is about Noble. I did not invest in Noble, instead i invested in the 2016 Hyflux Perpetual Securities. I see similarities between Noble and Hyflux, most notably, the lack of any accountability enforced by regulators. With reason, i am of the opinion that there are grounds for enforcement action in Hyflux and in Noble's case. I am not a lawyer, neither am i educated in law. From my experience with this Hyflux episode, i am utterly disappointed with the current state of protection for retail investors.

In my opinion, there is neither an effective regulatory system nor legal avenue in Singapore that protects retail investors against corporations and their significant stakeholders.

Legal Avenues For Retail Investors

1) Unlike in the United States, Singapore does not allow class action. A class action is one in which a group of people with the same or similar injuries caused by the same product or action sue the defendant as a group. Anyone who doesn't want to join the class can choose to opt out, otherwise, they are automatically in it.

Class action enables the vindication of claims that otherwise could never be litigated, no matter how meritorious. Class actions can also be a way of leveling the playing field for poor or economically less powerful individuals.
Read here for class action case ( Yahoo) in US.

2) Unlike the US, Singapore also does not allow contingency fees where a lawyer is allowed to take a cut from the winnings. This is seen in ( Law Society of Singapore v Kurubalan s/o Manickam Rengaraju ) where a lawyer was punished for doing so in 2013.

3) Representative action ( different from class action) has happened in Singapore.
Representative action is a kind of group action, similar to class action, however, it is based on an opt in system where only those who wish to be represented join the suit and any recovery or cost is theirs alone. However, there are stumbling blocks to how it can benefit retail investor.

An example is ( Koh Chong Chiah v Treasure Resort ) The representative action was thrown out by the judge initially as it did not fulfil certain tests. On appeal to the Court of Appeal, the higher judge allowed the representative action, based on tests again. In my opinion, this just takes additional time and cost, to determine whether the claimants can form a representative action before the real case is fought.

4) In recent years ,there is an initiative to allow litigation funding. However, it seems that the litigation funding cases here are primarily to fund liquidators in the name of companies during insolvency. Recovery from such cases are on behalf of companies which would then distribute the proceeds according to ranking of the creditors.

Legal fees in Singapore are notoriously expensive. By allowing lawyers to take a cut from the winnings without retail investors having to fork out much money would allow access to justice and a fairer society. I do not agree with naysayers who say that allowing such a structure will lead to a litigious society because lawyers would not agree to frivolous suits as they are vested. Instead, lawyers will be more motivated and this solves the principal-agent problem where some lawyers just act to drag cases to earn fees even when they know the case has a low chance of winning.

The only recourse to retail investors are through representative actions. The obstacles are great due to the need for gathering claimants and determining the fees each claimant should pay. This is on top of the need to satisfy the various tests/criteria. This will certainly drag the case, lining the pockets of lawyers, to the detriment of retail investors.

On the surface, liquidation funding seems like an improvement. However, on deeper look, it actually serves to advance the needs of corporations or people with resources, to the detriment of retail investors. Retail investors are generally ranked behind the other creditors( corporations and the rich) and they would get nothing or very little since such cases are fought on behalf of the company and recovery goes to the company. Besides, it only applies to insolvency. If the rogue company drags its restructuring, liquidation funding is not applicable.

In the Singapore Constitution - Article 12(1) - Equal Protection
'All persons are equal before the law and entitled to the equal protection of the law.

However, if the lack of resources hinders retail investors' access to avenues of justice identical to what rich corporations and rich people are able to, is this a fair society?

Hence, in my view, allowing of class actions as punitive deterrence and also allowing contingency fees by lawyers, would make Singapore a much fairer society. It is in the public interest to do so.

The Regulatory System

Noble
Iceberg research, issued their first report in Feb 2015. Muddy Waters, another similar research outfit, issued another report in April 2015. In their reports, they stated very clearly what was wrong with Noble.

It was only in Dec 2018 that there was an official joint statement by MAS, CAD and SGX Regco. Three and a half years later........Yet, this joint statement was only about investigations ongoing and it was "imprudent" to allow the re-listing of New Noble. The ship has sailed...for goodness sake!

The funny thing was that even after the comprehensive reports by the two research houses have been released in early 2015, Noble was still allowed to raise $500m from equity holders in June 2016, and a $750m bond in March 2017. I am not a Noble investor. The corporate announcements of the old Noble has been taken down, so it is better to read here for the specifics of the case.

Up till date, i don't remember hearing anyone being held accountable. Noble has been likened to Asia's Enron but contrast this with the real Enron, where the US Securities and Exchange Commission (SEC) charged the CEO who was sentenced to 24 years imprisonment. In Singapore, no one is accountable as of now, to my knowledge!

“....In the Noble case, however, they were well informed and yet have failed miserably over 3½ years to protect investors and maintain the integrity of their financial markets. Their excuses are lame and misleading, their investors have lost billions and, worst of all, they have shown others who would deceive that there is little risk of being held to account"
- Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://www.theedgesingapore.com/former-temasek-director-michael-dee-calls-forensic-accountant-look-noble

Hyflux
The snail pace of investigations in Noble's case is utterly in contrast to the speed at which MAS has taken to defend DBS bank, the issue manager for both the 2011 and 2016 Hyflux Preference shares and Perpetual Securities ( PnPs). As far as i know, there was no research report or general big hooha in the news that DBS is to be blamed, yet, the speedy action of MAS to jump to the defence of DBS is uncalled for. To me, MAS chose to rely on a single statement, neither bold, underlined or emphasized and inconspicuously stated on page 119 of the 197 pages of the Hyflux 2016 prospectus to seemingly release DBS of any impropriety.

"If the current challenging market landscape of low Singapore electricity prices continues, the Tuaspring power plant is expected to incur losses in 2016. "

197 pages for goodness sake! And one statement on page 119 is deemed sufficient for adequate and accurate disclosure for retail investors to make an informed choice. With the target audience of retail investors made up of retirees and the working class, many unsophisticated investors!

Why was MAS so quick to jump to DBS's defence when no one accused it publicly of any impropriety? I understand the systemic importance of banks to the whole financial ecosystem. Very recently, in an unrelated case to Hyflux's one, the regulators in Australia fined the National Australian Bank (NAB) A$1.05 billion. They also fined ANZ bank A$928 million. Westpac and Commonwealth banks were also not spared. Total fines for the sector amounted to A$6 billion. Surely, punitive fines will not cause systemic failures. Why the need for the quick defence leaves one to wonder.....

Also, within 2 months of an unqualified audited Annual Report 2017 based on a going-concern basis, Hyflux filed for court protection. Isn't it weird?

Many people that i know have emailed facts and evidences to the various regulatory agencies. Hyflux and the various stakeholders are all based in Singapore. I wonder if the ship will again sail off .......

I will leave some phrases from experts for your consideration. This phrases may not be specific to Hyflux's case.

"....A debt capital markets lawyer here told The Business Times: "When I first came in, I was actually very shocked by the whole process of how easy it is to raise a bond. Issuers want to issue bonds quickly but don't want to spend on fees, so that comes at the expense of credit ratings, and the due diligence process....." - Published in July 2018
Source:
https://www.businesstimes.com.sg/brunch/insolvency-limbo-the-sgd-bond-market

"....Lim Sin Teck, partner at Morgan Lewis, flags that due diligence and disclosure standards in the international high-yield market are more robust than here: "Right now we're seeing a whole range of standards in disclosure in the Singapore market...." - Published in July 2018
Source:
https://www.businesstimes.com.sg/brunch/insolvency-limbo-the-sgd-bond-market

It seems to me that the welfare of companies take precedence over the welfare of retail investors when companies are allowed to easily and quickly raise money from retail investors and have ample leeway in terms of disclosure.

Where are the safeguards for retail investors?

My comments

Retail investors in Singapore, in my opinion, are left utterly defenseless. A David with a slingshot agaisnt a Goliath with a shield, a spear and a sword. The regulators have to step up, or the legal system have to change to make investing in the Singapore Exchange a much fairer and safer investing place. We now have Noble, Hyflux ...what next?

“Singapore’s regulators, if they really care about investors, and their own reputation, should halt the restructuring agreement, demand full disclosure of the last 10 years of management and board compensation, and appoint a world-class, fully independent forensic accounting firm to [investigate whether] Noble has been running a criminally fraudulent accounting programme that has precipitated the collapse of the company,” Micheal Dee ( Ex-CEO of Morgan Stanley South East Asia and a former managing director of Temasek). Emphasis mine.
source: https://www.theedgesingapore.com/former-temasek-director-michael-dee-calls-forensic-accountant-look-noble

If a less litigious society is preferred , then The Authority in charge of MAS has to make sure that MAS does it's job of enforcement effectively and corporations are effectively deterred.

As representative action seems like the only way now for retail investors to fend for themselves and do the regulator's job of seeking accountability and to serve as a deterrent.

To Noble Investors
I have 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, albeit, still a non-binding offer. In it, 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.

It would serve as a good read to understand more about the state of regulatory governance in Singapore by this subject matter expert, a NUS Professor.
David Vs Goliath
No Sign of Governance - March 2019
Administrative oversight, inadvertent omissions, administrative inadvertences: what next? - January 2019

" Inadvertent Omissions" Another Blot On Our Disclosure-Based Regime - Nov 2018

More can be done despite surge in sgx regulatory action - May 2018

Further reading

34)The Curious and Disturbing Default Notice of PUB- Hyflux
35) Why i Am Still Voting No to the Revised Offer - Hyflux

40)How Effective are SGX Listing Rules Really ? - Hyflux
41)The Liquidation of California Fitness and the case of Hyflux

Thursday, April 11, 2019

The Liquidation of California Fitness and the case of 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.

California Fitness

In a Straits Times article on California Fitness, the liquidators said ,in their view, that there was a "fundamental failure" in the conduct of the companies directors, management and auditors to prudently and reasonably assess the veracity of the financial position of the company.

California Fitness had accumulated losses as early as 2013, yet the auditor did not raise red flags. Instead, its financial statements were prepared on the basis of ongoing concern which assumes the company will remain solvent and operational indefinitely until proven otherwise. The auditor also issued an unqualified opinion despite the company's poor financial standing. Unqualified means no issue with the financial statements and they are true and fair.
California Fitness was still collecting membership fees from 2013 to 2016.

A legal opinion the liquidators obtained said that the auditor had " breached it duty of care to the company" by failing to adhere to auditing standards.

Hyflux Limited

2015 - In the annual report 2015, it is stated that Hyflux has $41m (green box) profit attributable to shareholders.
However, on closer look, if one is to consider perpetual securities and preference(PnP) shares as debt,
which is classified in the court affidavits " Debt Securities Claim", then the profit attributable to the REAL ordinary shareholders should actually be a loss.

See the red boxes below.
Instead of just stating it as simply as possible as , "Loss attributable to Ordinary shareholders", Hyflux has stated it as " Earnings/(Loss) per share (cents)"
The interest paid to the PnPs which are not "owners" but more like debt are commingled with the $41 m, " Profit attributable to shareholders"

In fact, every year from 2011 to 2015, Hyflux seems to be making pretty stable profits.
However, a starkly different story emerges when one looks at the " Earnings/ (Loss) per share (cents)" over the years. It has been declining drastically from 2012 to 2015, this despite Hyflux doing massive sharebuybacks over the years.

It looks like financial engineering to me. With issuance of Perpetual Securities in the local market given the blessings by higher ups, more financial engineering ensued.

2016 - Hyflux issued $500 million of the perpetual securities to retail investors.
In their Offer Information Statement (OIS) , see how rosy they portrayed the profitability of Hyflux in the years preceding it with no footnotes on this page ( pg 146) mentioning that this profit figure included interest that is paid to the PnP ( debt securities).

The product highlight sheet which most investors would most likely read, compared with the main Offer Information Statements (OIS)also portrayed a beautifully rosy picture of the profitability.

Of course being bankers they would cover their ass with the green box.
Reading the OIS is like reading a book on "Finding Wally".
Beautiful numbers placed in prominent places but ugly information written in obscure places.

The green boxes reference to these pages.

2017 - The annual report for 2017 was signed off on 22 March 2018 as a going concern but Hyflux went into court protection on 22 May 2018. Exactly 2 months later.

My Opinion

Why did Hyflux choose to use the phrase " Profits attributable to shareholders" when PnPs is more like a debt? PnPs have no voting rights nor do they share in the profits of the company.

If you look at the profit trend in blue above with interest to PnPs removed, one can see a drastic decline from 2013 to 2015.
Coincidentally, 2013 was the year the Tuaspring Desalination plant started producing water and taking electricity solely from the grid. Olivia Lum had signed a disastrous money losing contract with PUB and i think she was hoping for the Tuaspring power plant to cover the cost.
It can be seen clearly, Olivia Lum's intention was to built a Power Plant whose forecasted profit was to be so large that it was enough to cover the loss selling water to PUB !
Who would have known this woman did not intend to be in the water business but have instead used the water part of Tuaspring to masquerade Tuaspring as a Desalination Plant instead of a Power Plant. No one would have expected electricity to be the death knell to Hyflux!
Many would have thought the power plant would be the right size for the water part and once built, would supply electricity inhouse so as to lower the cost of producing water, boosting profits.

In addition, looking at the trend of profitability with PnPs removed, one can see the severe downtrend with a loss in 2015 already, making further losses in 2016,2017. Similar to California Fitness, why did the Auditor still sign Hyflux off as a going concern in 22 March 2018, only for it to enter into court protection in 22 May 2018?

Why did DBS and Hyflux issue $500 Million Perpetual securities to retail investors in 2016 when in 2015, Hyflux was already at a loss?

Why did MAS approve such a thing? Where are the safeguards to retail investors?

Register your interest for legal avenues.
Click here.

Pages

Wednesday, May 15, 2019

Lehman Bonds are no Hyflux Bonds - An Opinion

Monday, May 6, 2019

Spotlight on the Singapore Regulators ( Hyflux Case) - SGX, MAS - An Opinion

Saturday, May 4, 2019

Protection of Retail Investors in Singapore - Noble and Hyflux - An Opinion

Thursday, April 11, 2019

The Liquidation of California Fitness and the case of Hyflux