Friday 27 July 2018

Hyflux Sale of Tuaspring and the Financial Damages - Part 2

In my previous post, we discussed about the possibility of Hyflux taking s$600-$750 million impairment for the sale of Tuaspring. The next order of question is to find out the effects of the impairment on vested interests in Hyflux.

If Hyflux Closes Shop

Basically Hyflux has 4 vested parties. Should all of Hyflux's assets be sold off (cease to be a going concern), below is the order in which these parties will have a share of the proceeds:

(i) Firstly, secured lenders (e.g. Banks such as Maybank)
(ii) Unsecured Bondholders (who collectively hold $265 million of Hyflux bonds)
(iii) Perpetual and Preference Shareholders (collectively having a $900 Million Stake)
(iv) Lastly Ordinary Shareholders (who have $100 Million in equity left in the balance sheet).

Hence should Hyflux take the $600-750 Million impairment and is able to sell off the rest of its assets and projects at their stated value. Hyflux Ordinary shareholders will get nothing, Perpetual and Preference shareholders are likely to lose close to 70% of their capital; while Bondholders and Secured lenders are likely to walk away unscathed.

What happens if Hyflux takes the Impairment and continues Operating with its other assets?

In my opinion, this scenario has a higher probability to occur. Hyflux will continue its oeprations after selling Tuaspring for a cash proceeds of about $700-850 Million.

However, Hyflux has to first pay off Maybank the $400 million loan it took. This leaves Hyflux with about $300 million - $450 Million cash. Hyflux currently has about $18.6 million in cash reserves in June 2018. With a $100 Million bond it has to pay this year and bank loans due this year, $165 million of bond due next year, it is difficult for Hyflux to repay all its bondholders and continue funding its projects which are burning cash as they are not under construction.

Should Hyflux be unable to sell off its other assets, i expect Hyflux to propose a financial restructuring where bondholders (ii) , and investors of group (iii) and (iv) will have to undertake a conversion to share exercise like what Ezion did.

Ezion Case Study

Ezion is a unique case because bondholders, perpetual shareholders all agreed to a conversion to share deal. However one key difference is that Ezion bond and perpetual holders knew that should Ezion cease as a going concern, they were likely to lose their entire capital. However, in Hyflux's case, bondholders are probably aware they will get a significant amount of capital back if they demand the closing down of Hyflux and liquidation of its assets.

The Damage

Should Hyflux decide to save itself and fight for a financing restructuring, it mean bondholders have to be offered either more shares per $1 capital or converting Hyflux shares at a lower price than perpetual holders.

As for ordinary shareholders, they have no choice but to be massively diluted. After all, getting even 0.01% of your capital back is better than getting none at all.

In my opinion, it is likely that groups (ii), (iii) and (iv) of the vested parties will be financially impacted should Hyflux attempt to keep itself afloat by restructuring.

However, should Hyflux be forced to closed down, it is likely group (iii) and (iv) will be impacted the most, while group (ii) are likely to get their bond principal back- minimal financial damage to them.

The whole Hyflux restructuring will be decided on the outcome of Hyflux Bondholders vote, will they vote for (a) converting to shares in an ailing company or (b) will they try to preserve their capital; which as a result will cause massive financial damage to perpetual, preference and ordinary shareholders (mom and pop investors).

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