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Hyflux tweaks scheme to give perp, pref holders more recovery upside

HYFLUX is making a tweak to its restructuring scheme that will allow retail perpetual and preference shareholders to ride more upside in the recapitalised water treatment firm.

This comes after unhappy perp and pref holders, represented by the Securities Investors Association (Singapore) or Sias, complained that they are not agreeable to the "paltry" recovery rate of 10.7 per cent on their original investment that Hyflux needs them to accept in order to return to solvency. 

In comparison, Hyflux's senior unsecured creditors, namely medium-term noteholders, unsecured banks and contingent claimants, are promised a minimum recovery rate of 24.5 per cent under the same scheme.

This second group gets to ride more upside because if none of the contingent claims are crystallised, 80 per cent of their proportionate compensation (which will be held in escrow) would have been distributed to noteholders and banks. The remaining 20 per cent would have been distributed to the managers of the projects for which the contingent claims were extinguished as "management payouts", according to Hyflux's Feb 15 court affidavit.

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Sias president David Gerald argued last Friday: "While we understand that perp and pref holders stand to receive nothing in a liquidation scenario, they require a more equitable distribution... At a very minimum, any returns over and above the projected liquidation recovery of 8.7 per cent to the unsecured claims should be proportionately distributed among the unsecured claims and the perp and pref holders."

Hyflux said on Friday that it had communicated the Sias proposal to its senior unsecured lenders.

"Having carefully considered both your letter and their response, we propose making amendments to the Hyflux scheme which will provide for the (perp and pref holders) to share... the upside from contingent liabilities extinguishing or expiring," Hyflux said.

With the changes in place, senior unsecured creditors will still receive a minimum of 24.5 per cent recovery on their principal. 

The difference now is that the management payout will be reduced from 20 per cent to 10 per cent of the cash allocated to any contingent claims that are extinguished. Hyflux confirmed that no member of the present board or senior management will receive any part of the contingent claim management payouts.

"All of these amounts will only be distributed to the project staff responsible for the extinguishment of the contingent claims," Hyflux said. This is to incentivise project managers to complete projects on time so that more claims will not be called.

Perp and pref holders will also receive a pro rata share of the remaining 90 per cent of the cash (but not equity) allocated to any contingent claims that are extinguished.

Hyflux said: "This means that when contingent claims under the scheme extinguish over the next two years, 90 per cent (up from 80 per cent) of the cash allocated to those extinguished contingent claims will be distributed among both the (perp and pref holders and senior unsecured creditors), rather than just being distributed among the (senior unsecured creditors)."

Hyflux has accounted for S$678 million worth of contingent claims in its proposed scheme.

Under the scheme, S$93 million in cash and 10.87 per cent of the assumed S$667 million equity value of the recapitalised Hyflux (which works out to an implied equity value of S$72.5 million) will be set aside for contingent claims.