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NEWS ANALYSIS

Bitter pill to swallow despite Olivia Lum's sweetener to small investors

Hyflux perp, pref holders face 10.6% recovery vs unsecured creditors' minimum 24.7%

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The desperate bid to save Hyflux from liquidation has taken many twists and turns, the latest being Hyflux boss Olivia Lum and her board of directors' offer to forfeit their shares in Hyflux as well as what little entitlements they have from the debt securities they own, in favour of small investors.

Singapore

THE desperate bid to save Hyflux from liquidation has taken many twists and turns, the latest being Hyflux boss Olivia Lum and her board of directors' offer to forfeit their shares in Hyflux as well as what little entitlements they have from the debt securities they own, in favour of small investors.

They've asked for their holdings to be divided solely among retail perpetual and preference shareholders as part of Hyflux's rescue deal.

But the late charm offensive is cold comfort, some investors said.

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Market voices on:

Retail perp and pref holders are facing an implied recovery rate of 10.6 per cent of their original investment, comprising a cash recovery of 3 per cent and 7.6 per cent implied equity value, Hyflux revealed on Saturday.

That's S$900 million in debt owed to retail investors swapped for S$27 million in cash and a 10.26 per cent equity stake in Hyflux post-revamp, which has an implied equity value of S$68.4 million.

If contributions from Ms Lum and the board were excluded, investors would have received 9 per cent of Hyflux shares.

Retiree Peter Lim, who owns both perps and pref shares, told The Business Times: "It's a 1.26 percentage point increase. I think it's a good gesture on their part but it does not actually make any difference."

There's also the risk that Hyflux's perp and pref holders, many of whom did not sign up for this level of complexity, will run for the exits all at once.

Mr Lim said: "I wouldn't attach too much value to the shares, because their value will significantly drop once they are floated... I get a 3 per cent cash recovery, that's not acceptable."

Implied equity values assume Hyflux is worth S$667 million post-revamp. Indonesia's Salim Group and Medco Group had earlier agreed to give Hyflux a S$400 million equity injection in exchange for a 60 per cent stake in the company once all its debts are extinguished.

The market value of the shares once they resume trading is hard to determine and will depend on the restructured company's cashflow projections as well as the latest valuation of Hyflux's assets. This information has not yet been released by the company.

Notably, unlike other past cases of companies that have undertaken debt revamps, Hyflux will emerge from bankruptcy protection debt-free, so the market may reward its cleaner balance sheet.

Of the S$400 million equity injection from Salim-Medco, S$128 million will go towards working capital. Add another S$130 million in shareholder's loan, Hyflux will be getting S$258 million in total working capital from Salim-Medco.

The haircut to creditors is less severe as we move up the pecking order. Hyflux's senior unsecured creditors, comprising medium-term note holders owed S$271 million and unsecured banks owed S$717 million, can expect a minimum recovery rate of 24.7 per cent.

A wide variance in realisable rate is expected and can be attributed to Hyflux's restructuring adviser, EY, grouping contingent claims of around S$682 million together with the S$988 million owed to the note holders and unsecured banks.

These creditors, with combined claims of S$1.67 billion according to EY, will receive S$232 million in cash and S$180 million in implied equity value.

For illustrative purposes, EY has said that assuming 50 per cent of contingent claims are crystallised, their recovery will be about 29 per cent.

Examples of contingent liabilities include banker's guarantees, performance bonds and liquidated damages in a construction project, if there are delays.

However, if the contingent claims do not crystallise, 80 per cent of their allocations (which will be held in escrow) will be distributed to note holders and banks.

The remaining 20 per cent will be distributed to the managers of the projects for which the contingent claim is extinguished, according to Hyflux's Feb 15 court affidavit.

This is to incentivise project managers to complete projects on time so that more claims will not be called.

EY partner Angela Ee explained: "If you don't crystallise a contingent claim, more money will be spread amongst the remaining pot."

In its affidavit, Hyflux produced a "non-exhaustive list of contingent claims". But actual dollar values were not disclosed.

What's next

At a scheme meeting on April 5, creditors will be split into respective classes to vote on the deal.

Whether Hyflux gets restructured or liquidated will boil down to how two classes of creditors vote.

Perp and pref holders will vote as one class. Holders of unsecured claims - comprising bond holders, unsecured banks and contingent creditors - will vote as a separate class.

The scheme needs to be approved by at least 75 per cent in value and 50 per cent in number of each creditor class.

If this condition is not met, Hyflux can still proceed with the restructuring, so long as a majority in number of creditors representing 75 per cent in value of claims voted "yes".

The company said these creditors would get more under the restructuring plan than if the firm were to go into liquidation.

A spokesman for Hyflux's financial adviser told reporters on Saturday that "this is the best option we have".