honestbee applies for court protection; eyes conversion of over US$180m debt into equity

Singapore

THERE is no quick fix for restructuring the more than US$180 million honestbee owes its creditors, but a massive debt-to-equity conversion could be its best bet, the startup's chief executive Ong Lay Ann told The Business Times on Friday.

Three weeks into the job, he has made his first move - to protect debt-laden honestbee from creditors. On Thursday, the firm applied for a six-month debt moratorium from the High Court.

If this is granted, honestbee will use the reprieve to convert all its debt - secured and unsecured - to equity, Mr Ong said.

The firm has appointed Oon & Bazul as legal adviser, and DHC Capital as independent financial adviser.

Mr Ong said: "This is all part of the clean-up I am trying to do, to reset the shareholding structure, as well as the debt level of the business. Once we emerge from restructuring, I expect that we will be incurring minimal debt - only ongoing liabilities... through the ordinary course of the business."

honestbee plans to continue operating its grocery-delivery service and its supermarket, habitat, during restructuring.

Under the moratorium, no application can be made for the winding up of the company, and no legal proceedings can be commenced or continued against honestbee for six months following the court order.

Legal proceedings also cannot be commenced against honestbee's property, and no steps can be taken to enforce any security over its property or repossess goods. The moratorium would also restrain any forfeiture of the lease of honestbee's premises.

But looking back, how did a four-year-old startup like honestbee even rack up such a giant debt? Mr Ong puts it down to the company's heavy reliance on convertible notes to raise funding.

honestbee's major creditors include US venture firm Formation Group, Formation's managing partner Brian Koo and his associates, as well as a Singapore-registered special-purpose vehicle (SPV) known as "A Honestbee".

On Tuesday, BT reported that regulatory filings have it on record that A Honestbee subscribed to US$50 million worth of convertible notes issued by honestbee in 2017. The SPV's largest shareholder is Yesco, a subsidiary of Korean conglomerate LS Group, which is owned by Mr Koo's family.

These three groups of major creditors have agreed to the debt-to-equity swap, Mr Ong said. The conversion ratio, along with other terms of the exercise, is still being decided.

Mr Koo and his associates are expected to be honestbee's biggest shareholders after the exercise. At present, former chief executive Joel Sng appears to be the largest shareholder, holding 256,200 ordinary shares, out of the 325,588 ordinary and preference shares issued by honestbee.

One consequence of the conversion is that honestbee's trade creditors, such as suppliers, could end up becoming shareholders, Mr Ong conceded. "In this exercise, we will effectively force a mandatory conversion of all the debt... Unfortunately a lot of small trade creditors will get swept up in the process and inevitably become honestbee shareholders.

"We will need to engage each of them on this over the next few months. We may try to arrange some kind of liquidity event for them if they do not want to be shareholders," he said, citing sales to other shareholders as a possibility.

honestbee is awaiting the hearing date for its application to the High Court. After this, the startup will assess how it can also protect itself from creditors in the other markets.

While restructuring may be a painful exercise for the startup, the local legal industry will be watching its moves closely.

honestbee will in fact be among the first companies to tap Singapore's recently-added restructuring process, which combines elements of the US Chapter 11 and UK Scheme of Arrangement, noted Sonya Van de Graaff, a partner in the business restructuring and insolvency group of law firm Morrison & Foerster.

She said: "The process reflects the philosophy, long-accepted in the US ... that all stakeholders benefit from the business continuing rather than being liquidated."

When the company emerges from the process, it will likely benefit from a deleveraging, so that the business can continue in operation with a fresh start. However, this will only be possible if it is determined that there is a viable business that has simply been overburdened with excess debt."

Restructuring aside, it remains to be seen how honestbee will continue to cut costs. On Friday, the startup announced that it is laying off 38 employees on Friday - 20 from its habitat supermarket and the rest in its main office - under its cost-reduction drive. It now has about 300 employees in Singapore.

Mr Ong was not immediately able to give the global headcount. honestbee has suspended or halted operations in its other markets - Malaysia, Indonesia, Thailand, the Philippines, Japan, Taiwan and Hong Kong.

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