Sunday 20 November 2016

KrisEnergy Bondholder Woes

Came across a Straits Time Article about Krisenergy seeking bondholder's consent to accept a new bond and the bondholder's unhappiness. The article is linked here.


Basically KrisEnergy is asking existing bondholders to accept a new bond which is of a 5 year tenure and at a lower interest than the existing bond. In addition, bondholders get to enjoy some increase in interest rate repayment if oil prices move above US$70 during these 5 year period.

In addition, KrisEnergy shareholders (mainly Keppel Corp) will inject $140 mil into the company by subscribing to zero coupon secured notes.

My Opinion

In my opinion, it is highly unlikely for oil to turn around within these 5 years. This is because there is already a production surplus where supply outstrips demand. There are many oil tankers out at sea holding inventory, it will take years for this surplus to be used up.. Furthermore, oil producing nations like Saudi, Iran, Russia are inclined to pump more oil if it goes back to 60+ to cover their budget deficit, given their very low cost of drilling oil. To add to that, we now have a US president who is promising an energy independent policy (more production). We should be planning for a scenario where oil is unlikely to recover past 70 due to such factors.

Hence, I think it is a very bad deal for KrisEnergy bondholders. This is because if they accept the new bond and the zero coupon secured notes offering were to happen, existing bondholders will be pushed further behind in the queue of priority if KrisEnergy's assets are liquidated. This is because senior note holders are ranked ahead of bondholders (unsecured note holders).

Based on Krisenergy's latest balance sheet (3QFy16), if existing bondholders vote "no" and KrisEnergy's oil/gas/exploration assets are liquidated at 50% of stated book value, existing bondholders will be able to get some of their principal. This is likely to be a better scenario than in 2022; where secured note holders get the proceeds first in the event of liquidation. 

Disclaimer: The above are only my views and not to be construed as a solicitation or financial advice as I am not a certified financial adviser. Analysis of Krisenergy balance sheet is based on its latest reported financial results released on 3 November 2016. They are not guaranteed as being accurate or reliable as of the time of this posting. Readers should not regard this post as a substitute for the exercise of their own judgment. Any opinions expressed are subject to change without notice and this blog is not under any obligation to update or keep current the information contained. The author accepts no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

Tuesday 15 November 2016

My Dividend Stock Purchase: Hyflux Preference Shares (N2H)

After holding  a large percentage of cash for a long while; I have decided to purchase shares in N2H, Hyflux Preference Shares. 

Hyflux's preference shares are bond like instruments which gives the holders a fixed dividend payout at each time period (6% for Hyflux's case). These dividends are paid on a pro-rated semi annual basis and cumulative, meaning to say if Hyflux defers on paying dividend this year, it will be rolled to next year. It can be for an indefinite period However, these preference shares has no maturity date to redeem, but Hyflux has to pay 8% dividend if they do not redeem on April 2018. I have written how preference shares work in a previous post.

Why did I invest?

To me, it seems the preference shares looks like a deal. This is because at its selling price of 93.30 and if Hyflux decides to redeem its preference shares on April 2018 (at face value of 100.00), it means I will obtain a return of about 0.065 (100- 93.30- comission) and 3 semi annual dividends of 0.03. That is about a total return of 16.6% for a 1.5 year holding period

That is the good side.

What is the downside?- Hyflux going bankrupt in the next 5 years with its assets only able to repay it lenders; leaving nothing to shareholders. However, I find such a scenario being remote. This is because I hold the view that in the event of liquidation, Hyflux has enough stated assets on the balance sheet such that preference shareholders will recover a significant amount of principal. 

As of now, equity shareholders hold 700 mil of the equity, which is about 20% of Hyflux's assets. Hence a loss of this magnitude is neccessary to have any impact on preference shareholders. That to me is an adequate margin of safety.

The other downside is that Hyflux decides not to redeem in April 2018. In such a scenario, I will be left with a stock which I had bought at 93.30 but yields 0.08 cents annually. That gives me an effective yield of 8.57% which is decent. Furthermore given that these dividends are cumulative, should Hyflux turn around and decide to redeem the preference shares; it will have to pay the face value and all the accurred dividends.

Are the Dividends Sustainable?

As of now, Hyflux's operating cash flow generated, nett of PPE acquisition and interests, is roughly equivalent to the distributions (dividends) it has been paying out. Furthermore with the opening of more plants, which means more revenue, its semi annual payouts are definitely sustainable.


I find that Hyflux Preference Share is now a decent prospect to park some money and bank on the possibility of a redemption in April 2018.

This is mainly because the cost of financing an 8% "debt" is significant to Hyflux's finance and Hyflux will be inclined to redeem them with a financial instrument which has a "lower cost of capital".  

Let's see how it goes.