Hyflux - Treatment of perpetual holders by Ezion

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 don't like to speculate what will happen. I guess it wouldn't be totally nonsensical to look at what happened to perpetual holders in the case of Ezion. Now, it should be noted that Ezion is in the oil and gas service sector providing liftboats, jack-ups et.c while Hyflux is generally in the water business. The perpetual holders in Ezion are generally accredited investors who are  more sophisticated than the N2H and BTWZ retail holders. In fact, the problems of Ezion is also, arguably, much more the result of market forces than Hyflux. Why do i say so, their customer segments are different and Ezion is affected more directly by world wide oil prices which affect many of their competitors too. Think Pacific Radiance, Ezra, Nam Cheong e.t.c. AND....I have something heavy in my heart to say but i shall reserve it for now, pending further clarification.

I am actually very impressed with Ezion management's pro-activeness.
To summarise,

1) Issued an equity rights exercise in 11 July 2016.
By doing such a rights exercise proactively when the share prices were still not crushed(yet), they showed they were willing to dilute their shareholdings.

2) Took a reduction in compensation since 2015. (See pic)
A heavy reduction of 19% in 2015 and a reduction of  71% in 2017 compared with 2014. Now, i would really feel they are trying their best.

Taken from Ezion investor relation

3) Used 100 million of CEO and family shares for support from banks. (See above pic)

Now, i can really feel the proactiveness and alignment here, so much so that in February 2017 ,in the midst of the mess, they could attain a $120 million 3.65% committed funding backed notes due 2020 from a bank. Long story short, if they couldn't pay back these notes, the bank would pay back first. This was rated Aa1 by Moody!

In addition, RSM Corporate Advisory Pte Ltd also agreed to take shares of Ezion as payment of their fees, at a price of $0.2763 per Professional Fee Share.

In case you forgot!

Now, i am wondering how much goodwill Hyflux has with her bankers and advisors. Hopefully, seeing Hyflux having contributed so much to our nation , with their yearly appearance on National Day, cleaning the water that the bankers and advisors drink everyday, ensuring the water security of our nation ( at a cost of bidding at such an low price), giving bragging rights for Singapore to show that it can build the largest desalination plant in S.E.A and be self-sufficient,  it all amounts to something in the end when Hyflux needs help.

But, the pro-activeness ( or rather lack of it) by the Hyflux management is pathetic. I have never seen an equity rights issuance by Hyflux as a source of funding.
Why? Is it because it will cause dilution?
As opined by Professor Mak in Today about the tenure of the directors and chairman, i absolutely agree with him.

From Annual Report 2017

Is the founder CEO and majority of directors so long in her position that no one would dare to oppose them?
Did they take a pay cut like Ezion's?
Did any of them willingly used their personal fortune to secure funding for Hyflux yet?
If ever Hyflux survives, they should all be changed.

To be fair to Olivia, she did seem to spend some money to result in a dividend in specie in February 2018. This dividend resulted in coupons having to be paid to BTWZ as without a dividend to ordinary shareholders, there was no need of a coupon payment to BTWZ and it would accumulate instead. But some people opined it was her way to separate Hyfluxshop from Hyflux as it had potential and she would have something in the end if Hyflux was liquidated. Anyhow, the BTWZ coupon is now not paid, so, no matter whether her intentions were good or bad, could we demand back the dividend- in -specie of Hyfluxshop from Olivia, since the BTWZ convenant was broken........ BTWZ have to be paid coupons if a dividend to ordinary shareholders was made. I hope the ordinary shareholders (600) sold it back to her.

Anyway, back to Ezion and it is my own interpretation which could be wrong.

Ezion perpetual holders could choose :
1)Series C Non-Convertible Bonds
10 years of 0.25%pa with a 5% redemption premium at the end of 10 years.
( funny i couldn't find the exact terms in the investor relations but could only rely on this)

OR
2) Amended Series 008 Securities ( majority based on value chose this)

7 years of 0.25% pa.
7th year 1.25%pa
Stepping up by 1% every year onwards.
There is no fixed redemption date
There were warrants attached which were convertible to shares at a certain price, though it was a conversion in blocks of $50,000 denominations , after which these will considered to be "redeemed".

Further reading :
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question

Will Hyflux recover - the billion dollar question

I believe some investors are still in the state of numbness, while many others still believe that Hyflux is different from Noble  as Hyflux hold hard assets with strategic relevance to Singapore. Many others may not even know their investments are in trouble, especially those retirees.

How am i affected?I don't know frankly because i am still sleeping fairly well, but i am posting pretty fervently and finding out more. Its weird. I don't understand myself...maybe it hasn't sunk in. I don't know. But i certainly hate to lose money.

Anyway, is this a cashflow problem for Hyflux that is temporary and just needs time to heal or a structural one where Hyflux should just be allowed to fail. Let's not look at the assets Hyflux hold as a national strategic one, but rather through economic lens.

Problem
Hyflux problem started with the Tuaspring desalination project. I really hate to say this, but the following keeps glaring at me when i read about the projects Hyflux does.

Tuaspring
"Tuaspring Integrated Water & Power Project is Singapore’s first"
".....largest desalination plant in South East Asia.."

Tuas-one ( coming soon in 2019)
"TuasOne Waste-to-Energy Plant is Singapore’s sixth and largest waste-to-energy plant"

It feels like Hyflux loves to bite off more than it chew to please "i don't know who" to want to keep having buzzwords like "largest", "first" in their projects.

Hyflux is like in a start-up mode, taking projects which are unchartered and that they have not much experience. Hyflux ventured into the electricity business by way of the integrated power plant linked to the Tuaspring Desalination.

For me, i think Hyflux should just stop taking on such adventurous projects before amassing a large cash hoard.  They should instead just continue to do what has been tried and tested and earn recurring revenue from maintenance.

USEP prices 
From what i see in the investor announcement, the earliest i managed to search regarding Tuaspring is in 2011. See here.

I would believe the feasibility studies done to decide to built Tuaspring would have been done much earlier than 2011. But i will just show the average USEP prices from 2011 to 2018. Data is taken from EMA.

Read this first to understand why the USEP prices decreased.

It was during the period 2011 - 2013 where Hyflux secured funding for Tuaspring. In 2011 ,DBS, Mizuhi and Sumitomo Mitsui who together loaned $150 million. And in 2013, Maybank loaned Hyflux $720 million.  The average annual USEP prices from 2011 to 2013 was in the range of $214.5 to $173.2, making $173.2 the base at which i guess Maybank deemed Hyflux profitable enough to dare to loan such a large amount with i think,  a safety of margin.

Look at the average annual USEP price after 2012! It was the lowest in 2016 and 2017!

Compare the USEP price to the 5 year income statement of Hyflux.
In 2016, loss attributed to Tuaspring = $118 - $4 = $ 114 million
In 2017, loss attributed to Tuaspring = $ 116-$34 = $82 million

Relation between Loss and USEP 

Conclusion
Hyflux, without the Tuaspring electrical component would have been an ok company. Without the Tuaspring, Hyflux would have been a profitable company, though in 2017, why it suffered a loss of $34 million attributed to other businesses needs to be investigated.

So whether Hyflux can pay back the debts or even survive would really depend on the USEP prices in the future.

From simple linear interpolation, it would seem a USEP price of $127 would be the breakeven price for Tuaspring.

Further reading :
1) Considerations about Hyflux
2) The fate of Hyflux