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Monday, August 6, 2018

What happened to other Debt Restructuring Exercises - Ausgroup

Ausgroup is not purely an oil and gas or marine company. It is also heavily involved in mining of iron and lithium and predominantly, their business is in Australia. What strikes me about this company is that it did not undergo a court supervised moratorium process, it engaged SIAs for assistance and underwent a restructuring process with its Medium Term Note (MTN) holders ( those kind need minimum $250,000 for a note). It has a substantial shareholder ( in a range of 15% to 20% shareholding before the troubles began) in Ezion, who is facing troubles of it's own. Ausgroup also owes Ezion shareholder loans. Unlike Hyflux, it does not have retail investors ( perps or preference shares).

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 holder (S$110 million 7.45%pa due 20 October 2016)

May 2016 - DBS Trustee notified Ausgroup of a breach in a convenant whereby the total equity fell below a certain threshold.

June 2016 - During the informal meeting with the noteholders, Noteholders were informed that DBS is a financier for :
1) Term loan facilities of US$12,769,650
2)Banker’s Guarantee Facilities of up to an aggregate amount of AUD51.2 million
3)Short Term Loan Facility of AUD30 million
4)Account Receivable Purchases Facility of AUD8 million
5) Account Receivable Purchases Facility of AUD15 million

Sep 2016 - Noteholders agreed to
1) Extend maturity dates by 2 years to 20 October 2018
2) A partial principal repayment of at least $4 million
3) Interest will be paid monthly at a rate of 7.95% pa for the year ending 19 October 2017 and 8.45% pa for the year ending 19 October 2018;
4) Make-whole premium. If notes a redeemed earlier, a 9.45%pa on the principal is payable on the outstanding principal
5)Redemption premium - 10% capital gains on sale of ports is payable if redeemed earlier than 20 October 2018

May 2017 - MTN noteholders and Ezion was asked to do a debt-to-equity conversion at $0.058. This was at a premium of 6.62% above the VWAP ( volume weighted average price) of $0.0544 on 18 May 2017. Understandably, the acceptance was low, Ezion only accepted to convert $8 million ( out of permitted $42 million) of its debt to shares , while only $28 million worth of MTN notes ( out of $110 million) were converted.

Sep 2017 - MTN noteholders were asked again to do a debt-to-equity conversion at $0.058. This was at a premium of 21.8% above the VWAP of $0.0476 on 7 September 2017. 22 notes ( $5.5 million of debt) were exchanged to shares.

April 2018 - Ausgroup announced a proposed rights and placement of $0.035 representing a discount of 25.37% to the VWAP of $0.047 on 28 March 2018. This issuance could potentially raise $62 million in funds, out of which $21 million is allocated to redeeming the outstanding MTN notes.
These proposed rights and placement is conditional upon the MTN noteholder accepting a further restructuring of their debt.

Current NAV per share ( based on Q2 FY2018)= S$0.02
Current market price as of writing = S$0.035
Remaining estimated MTN noteholders loan after all the debt-to-equity conversions(estimated) = $71 million ( out of the original $110 million)

My thoughts about its relation to Hyflux

In the debt-to-equity conversion, VWAP is used as the basis for comparison instead of NAV/share.
In the Hyflux Townhall meeting, a lady actually stayed back after it ended and questioned why rights are not issued. The reply was that the equity is very low or the share price is already so low, so Hyflux can't do it. I will be looking ( if time permits) at other examples where a company with negative equity can still issue rights. My point is, Hyflux has not done everything it could, so it would be grossly unfair for any perps/prefs to take any losses before rights or placement is undertaken.

There is some form of reciprocity when the notes were restructed. When the MTN holder allowed the maturity extension, they were given an increase in coupon rates and they were paid monthly for the interest. Of course,Hyflux perps/prefs do not have any maturity based on terms, so there is no such thing as maturity extension. The point is Hyflux perps/pref should not only give but also take. For example, any reduction of distribution/dividends to the perps/prefs should be accompanied with a fixed redemption date. However, a fixed redemption date will turn it into a debt ( currently accounted for as equity), which would make the balance sheet look worse. So, the Hyflux perps and prefs have to think of what to take.

DBS sold to the MTN holders these notes. DBS also provides financing to Ausgroup. It leaves one to wonder if there is a conflict of interest since many of these financing is done on a secured basis and are thus ranked first in terms of priority. Risk is reduced for banks since many MTN holders would take the brunt of the losses before the banks. When Hyflux perps and preference shares are underwritten or advised by banks who also finances Hyflux, is this considered right, even if it may be legally right?

Thursday, August 2, 2018

Informal Steering Committee for the Reorganisation Process - Hyflux

Townhall Aftermath
I attended the Townhall meeting on 19 July and came back unconvinced.
" I am still young and i can work still work for you all..."said Olivia Lum.
Sounds heartwarming.
But, actions speak louder than words.
The preference and perpetual holders are the ones losing money but yet, the board of directors and Hyflux CEO/Chairwoman didn't mention anything about reducing their salaries or bonus to show reciprocity or sincerity.
Nevermind about Ezion CEO using his personal assets as collateral to secure more than $100 million of funds for Ezion and cutting his pay by 71%, we are not even asking you to use your personal assets, just show sincerity by cutting your pay.
It is ridiculous that the ones who made all the big strategic decisions are not accountable.
To be clear, i think the rank and file should not have a paycut.
Its the top that should have their paycut.
Its about the morale of the company and the suppliers.
Imagine suppliers are paid late or not paid, but the top echelons still keep their pay as though business is as usual, how would they feel?
This reminds me of a time where i lent my "friend" $1000 and he still hasn't paid me back. Instead, he just recently bought a Maserati, a much more luxurious car that i drive.

Despite sending questions to Hyflux through emails more than 2 weeks before and one email about 5 days before the Townhall meeting, some answers left unanswered. Why?

Steering committee
The formation of the steering committee leaves a bad taste in my mouth.
It means that a restructuring to the terms, coupons or principal is "confirmed" to be in place.
What is the point of an informal steering committee where the choice of members are not clearly defined?
Is the steering committee just to create some form of artificial legitimacy to make any unpleasant decisions seem widely accepted?
To be clear, this is the first time in the history of Singapore where an informal steering committee is formed for retail investors. Imagine the headache to gather them together to discuss with the representative!
Also, it seems Hyflux and SIAS would like to lump N2H and BTWZ together. I have no issue with that. However, it has to be clear to the stakeholders that there are some differences between the 2 as i will state later.

Perplexing statements mentioned by Hyflux during the Townhall

Olivia Lum said she was given a projection of 8 million population. Where did this come from?
Regulatory approvals are needed at every stage of the bidding process for Tuaspring. Doesn't this slow down the bidding process while losses are mounting? What happens when an entity wants to buy Tuaspring at a high price but it doesn't get regulatory approval, and instead a low price bidder gets the regulatory approval?
Hyflux is unable to not buy and burn the Liquefied Natural Gas as it is a take-or-pay contract. If Hyflux doesn't buy, they will be penalised. Doesn't this result in an oversupplied electricity market since generation companies have to keep buying and generating?
Her statement" It's ironic that Hyflux failed in Singapore..." , when she pointed out that the Tuaspring project was meant to spearhead Hyflux's entry into the middle eastern countries since an integrated water and electricity project is desired in that region. Did she feel betrayed?Especially after volunteering her employees at NDP for so many years and even opening up her premises for Residential Committees events. Somemore on 25 August 2018 when they are in dire straits....

An Allen and Gledhill Lawyer will be available to BTWZ and N2H for free. How to contact him?

I think its worthwhile to understand the current rights of the preference and perp holders.
Please take note that this is my interpretation and i may be wrong.
It is also general and not being specific.

Rights of the Preference (N2H) shareholders

The dividends will accumulate if they are not paid.
Ordinary shareholders cannot be paid ordinary dividends until all accumulated dividends to the N2H shareholders are paid.
Hyflux is able to redeem in whole or part of N2H by giving a redemption date and redemption price.
Hyflux may not be able to buy back in the open market ( on SGX) N2H. ( I did not see about the provision of purchase in the open market for N2H but i see it in BTWZ)
N2H shareholder has the same voting rights as ordinary shareholders if the following occurs:

General Meetings are convened for the purpose of reducing the capital of the Company;
General Meetings are convened for the purpose of winding up of the Company;
General Meetings are convened for the purpose of sanctioning a sale of the whole or substantially the whole of the undertaking of the Company;
General Meetings are convened where the proposal to be submitted to the meetings directly affects their rights and privileges as Class A Cumulative Preference Shareholders; or
Dividends (when, as and if declared by the Board) in respect of such number of consecutive Dividend Periods as shall be equal to or exceed 12 months have not been paid in full when due and payable,

Rights of the Perpetual ( BTWZ) holders

The distribution will accumulate if they are not paid. This accumulated distributions will be considered as principal and bear interest.
Ordinary shareholders and N2H shareholders cannot be paid dividends until all accumulated distributions with interest are paid to BTWZ.
After May 2020, Hyflux is only able to redeem in whole at the principal value ( including accumulated distributions and interest)
Hyflux is able to buy back any amount, at any price, at any time ( even before May 2020) in the open market ( on SGX)
Within 6 months before a distribution is to be paid to BTWZ, if dividends are paid to ordinary and N2H shareholders, BTWZ has the right to hold Hyflux to a default. ( This has happened when the ordinary shareholders are paid a dividend in specie earlier this year but BTWZ is not paid it's distribution.
BTWZ has a trustee which would take action if 75% of principal value agree

What is worse is that the BTWZ distribution went EX-DISTRIBUTION already on 17 May. It was to be paid on 28 May but the automatic moratorium was announced on 22 May.

What does this say about a healthy and functioning SGX market?

Ex-distribution means the money is considered in the pockets of the investors who held the BTWZ on 17 May. Logically, a healthy and functioning market would require the funds to be ring-fenced or placed into the BTWZ trustee's segregated account.

If this is not corrected, it sets a precedent where an investor can no longer make informed investing decisions using EX-dates. To be clear, investing around Ex-dates is a valid strategy by some people because it is a fact that prices do rise before Ex-dates and drops after EX-dates.

The Power to force Liquidation of Hyflux

Of course for economic reasons, liquidation of Hyflux will result in a bad scenario for N2H, BTWZ and ordinary shareholders, since their ranking is low.

This power to force liquidation would be more useful when Hyflux is healthy and used if the CEO/Chairwoman or BOD are enriching themselves at the expense of the other stakeholders. That is when we are able to get back more in liquidated value.

BTWZ at the moment should have this power because of the breaching of the clause and not paid the distribution on May 2018.

While there has not been any breeching of clauses for N2H, many people think that it has no power to enforce liquidation at this point. One way to get around this is to muster up 10% shareholding of the ordinary shareholders to call for an EGM to liquidate and the N2H will now have the same voting rights as them to vote together. However, this is a very very very unlikely scenario when one thinks about it.

Thanks for reading . Again, the above is from a layman who is just trying to understand what the heck is happening.

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Monday, August 6, 2018

What happened to other Debt Restructuring Exercises - Ausgroup

Thursday, August 2, 2018

Informal Steering Committee for the Reorganisation Process - Hyflux