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Saturday, October 20, 2018

My layman views on so called " white knights" 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.

Overview

To summarise the major developments that rocked the world of only Hyflux stakeholders recently:

1) News mentioning that Hyflux received only one final bid for Tuaspring by a local company, Sembcorp which is not even enough to pay back the loan by Maybank. Since the loan by Maybank is in the range of $500 - $600, we know the upper bound of the bid. Many stakeholders are rightfully disappointed or angry that the market price of the bid is so low and naturally attributed this to non-market forces . The hindrance of PUB which only approved 2 local companies.

Link to news

2) The most recent news that an Indonesian consortium led by Salim and Medco group are interested in Hyflux.

Link to source

In short, with conditions being fulfilled, they would pump in $400 million to own 60% of Hyflux, shareholder's loan $130 million to Hyflux and before completion of the deal ,loan of $30 million as working capital rescue financing.

One of the conditions before the $400 million and $130 million pumped in is that there will be a full and final settlement of notably the MTNs, Perps ( BTWZ) and the Pref (N2H). It was also mentioned in the picture above under point 4.2 that " a proportion of new shares would be issued to certain creditors"

My layman view

1)Is this Indonesian consortium deal better off than Sembcorps bid of only Tuaspring which is below Maybank's outstanding loan as stated in the media? The exact amount of Sembcorp's bid is not revealed publicly. However, a good guesstimate could be gleaned from a CIMB report on 30 Aug 2018.

Hyflux's outstanding loan to Maybank as of End-June 2018 = SGD$658.6 million
Maybank's loan provisioning = SGD$106.3 million
Guesstimate of Sembcorp's bid = SGD$552.3 million

If 60% gets $400 million of Hyflux based on the consortium's offer, 100% of Hyflux will be $667 million.

If Tuaspring is bidded for $552.3 million by Sembcorp ( this amount is just speculation ) which if we use as a guage for it's market value, wouldn't it mean the Indonesian consortium valued the rest of Hyflux's assets ( Tianjing Dagang, Qurayat, Tuasone, Associated and JVs) at $667 - $552=$115 million?

2) Let's see from the position of MTNs, Perps (BTWZ) and Pref(N2H).

If Tuaspring is sold to Sembcorp and the money is paid back to Maybank and no further claims from Maybank. Hyflux's noose is gone and Hyflux should return to some profitability, possibly slowly returning the debts to its creditors. At least there is no known " full and final settlement" condition set.

However, if it is based on the Indonesian consortium's bid, and with the "full and final settlement" condition, it seems to me that if we would take the $400+$130-$30 = $500 million proceeds earmarked( worse case scenario, assuming no further top-ups from financing, further rights) that is going to be shared with the various creditors, it would be a massive, massive capital loss . The point 4.2, "proportion of new shares given to certain creditors" isn't going to be much also, since the new shares will be a proportion of the 40% of Hyflux, which amounts to $267 million market price based on the Indonesian consortium's bid.

So from my layman point of view, without further details and based on just assuming $500 million is all there is to be shared among the creditors plus some shares, out of the 40%, thrown in, i think it sucks.

3) How about from the position of the BOD ?

It would be far harder to keep Hyflux going if Sembcorp's bid ( based on only on news) is accepted instead of the Indonesian's bid.

Remaining in control is not valuable if the business environment is hard( considering a large bulk is in Middle East ) and needing to pay back the remaining MTNs, Prefs and perps. If Hyflux fails, salary is gone, shares is completely worthless. To pull through, BOD needs to work harder to get business.

It would be so much easier to accept the Indonesian consortium's offer, even at the expense of losing control. Indonesian can be the new market for Hyflux and that market is huge. With the consortium's backing and connections, the sky is the limit. I mean i would rather be a small fish in a big pond than a big fish in a small pond. Besides, i get to get my salary and my shares should recover, given such strong partners AND the balance sheet is wiped clean. And i would be given some Management Retention Shares some more.

Conclusion

Of course it is a happy day for certain people. But it isn't a happy day for the many others who invested their retirement funds, child education funds or CPF. A flu really trivializes the issue here and it is not a cold to many of us. It is years of toil, sweat and hardwork to earn those money that we placed into Hyflux. What about the statement :" I am still young and i will work hard for you" said during the Townhall? Is this, the easy way out, leaving the unsophisticated, helpless ones behind?

Wednesday, August 8, 2018

What happened to other Debt Restructuring Exercises - Nam Cheong

Nam Cheong is in the business of shipbuilding and vessel chartering. Its business was affected by the oil price environment leading to the oversupply of newly built offshore supply vessels by competitors and lower demand of its vessels.

The journey of the MTNs holders, comprising of $90 million 5% due 2017, $200 million 5.05% due 2019 and $75 million 6.50% due 2018

Jan 2017 to March 2017 - Resignation of CFO and CEO sold shares

March 2017 - Auditor flagged that as of 31 December 2016, the Group’s loans and borrowings that were classified as current amounted to RM948,720,000 of which RM278,566,000 (S$90 million) pertained to medium term notes that are due for repayment on 28 August 2017. These amounts exceeded the Group’s cash and cash equivalents of RM162,618,000 as at 31 December 2016.

July 2017 - Informal noteholder meeting held. The following was mentioned:

All unsecured lenders ( banks and noteholders) will be treated equally.
Possible support from major shareholder through dilution of shareholdings and injecting of funds.
Secured assets to be sold (if applicable) and repaid to the secured creditors.
Secured debts which are not represented by the value of the secured assets will be settled pari-passu with unsecured debts
All unsecured debts will be treated equally under the Schemes of Arrangement of the Company and its subsidiaries (“Scheme Companies”)

May 2017 - The quarterly financial statement ended 31 March 2017 showed a positive equity of RM 1,311 million

August 2017 - The financial statement ended 30 June 2017 showed negative equity of RM 700 million.

As part of the management comments about total assets:

Total assets of the Group decreased by RM2.36 billion from RM4.10 billion as at 31 December 2016 ("FY2016") to RM1.74 billion as at 30 June 2017 ("PE2017") mainly due to assets impairment and written down of RM2.0 billion mentioned above.

September 2017 - 2nd informal noteholder meeting held. It was announced that a rights issuance will be conducted with the chairman committing USD11 million to subscribe for it. There was a choice for noteholders who refused the base scheme to opt for either option A or option B.

Base scheme ( simplified) -
35% of principal to be converted to equity at a rate of (estimated)SGD $0.08 per share. ( USD1 for 17 shares).
65% of principal will be converted to a 7 year term loan at 4% pa, where the interest of 4% is partly paid in shares and cash. Based on the current price of SGD$0.02 since suspension, estimated recovery represents about 73.6% of principal.

Instead of the 65% of principal converted to a 7 year term loan, , noteholders can choose the following:
Option A ( simplified)- Rights will be issued to current shareholders,part of the proceeds will be used to pay those who chose this option. Estimated recovery from this will be 13.5% - 23.5% of principal. No further claims.
Option B (simplified) - total conversion to equity at USD 1 for 34 shares. Estimated at SGD$0.041 per share. No further claims. This represents an estimated recovery of 41% of principal.

The chairman also commited not to sell his shares for 7 years and his entitled rights for 1 year.
Among which, a management incentive plan was in place that focused on meeting cashflow targets.

October 2017 - 6 months court moratorium filed. Court proceedings were also filed in Malaysia

Dec 2017 - A FAQ to clarify the restructuring terms was issued. (The terms must be changed between Sep and Dec as the new terms are much improved).

Base scheme ( simplified) - 35% of principal to be converted to equity at a rate of (estimated)SGD $0.047 per share. ( USD1 for 30 shares). 65% of principal will be converted to a 7 year term loan at 4% pa, where the interest of 4% is partly paid in shares(2%) and cash(2%). The 2% interest will be converted at a rate of USD1 for 30 shares.
Option A ( simplified) - seems to stay the same
Option B (simplified) - I didn't see any mention.

It was mentioned that if the MTN chose the liquidation route, they would get not more than $15k for their investment of $250k.

Through the restructured deal, the chairman who is the major shareholder would stand to dilute up to 68% of this shareholding.

It was further mentioned that the rights issuance pricing would be at a price of $0.014 per share , a 30% discount to the suspended traded price of $0.02 per share. The USD11 million which the chairman committed will be used to subscribe for these discounted shares ( $0.014 per share). This USD11 million will be conditional upon the restructuring being agreed upon by the creditors.

My thoughts about its relation to Hyflux

Nam Cheong is an example where rights can still be issued when a company has negative equity. It's suspended share price is $0.02 which is also very low. What this means to me is that there is no excuse for Hyflux not to issue rights. If the share price is low, a share consolidation can always be done to bring up the share price. A share consolidation will not affect value of the share, only the price, since the percentage ownership of the company is the same.

There have been some Hyflux perps and prefs who would like a liquidation scenario. From Nam Cheong's example, the asset values can go downhill super fast. In a span of 3 months, the asset value of Nam Cheong went from a positive RM1311 million to negative RM700 million. I do think that for economic reasons, a liquidation scenario will still be the worst outcome. Nam Cheong estimated recovery is not more than $15k for $250k and thats considering the MTNs are ranked equally with the unsecured bank lenders based on the first informal noteholder meeting held in July 2017.

I feel its highly unlikely that Hyflux perps and prefs will be offered a debt to equity scenario since we are considered equity already, actually. Neither will Hyflux be willing to give us fixed redemption date since we will be converted to debt and make the balance sheet worse off. A likely scenario will be asking us to reduce our distribution/dividends and maaaaayyybe, asking us to take part of it in shares.

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Saturday, October 20, 2018

My layman views on so called " white knights" of Hyflux

Wednesday, August 8, 2018

What happened to other Debt Restructuring Exercises - Nam Cheong