Hyflux: Laundry list of warnings says little about the likelihood of events

IN the aftermath of the financial collapse of water treatment company Hyflux, much has been said about the approximately 34,000 investors - the majority of them retail investors - who have been left holding its near-worthless perpetual securities and preference shares.

There have been sad stories of retirees who had invested a few hundred thousand dollars of their savings.

Several reasons have been advanced for this parlous state. Market watchers said this was symptomatic of a lack of investor education and appreciation of risks inherent in such products. They highlighted the role of DBS Bank, which was both manager and distributor of the perpetual securities in 2016, for marketing these products to retail investors. (The Monetary Authority of Singapore has said it hasn't uncovered any impropriety by the bank in arranging the sale of the perps.)

Some say the investors were comforted by the belief - erroneously, as it turned out - that Hyflux, which supplies drinking water to the Public Utilities Board, is too important to be allowed to fail.

It is tempting to claim ignorance or a lack of education on the part of unsophisticated investors for their predicament, but doing so risks missing the wood for the trees.

Let's not overlook that Hyflux's insolvency did not just catch retail investors by surprise; it also ensnared bank credit officers, fund managers and auditors - financial professionals who ought to have known better.

Flooding the investor with all kinds of disclosure isn't the answer either. Take risk appreciation, for example. Will an investor reading the Hyflux prospectus for its 2016 perpetual securities offering from cover to cover be any clearer about a default risk than someone who did not, bearing in mind that a prospectus typically contains a long list of things that could possibly go wrong?

Students of statistics are taught that merely listing possibilities without knowing the corresponding probability level will frustrate any meaningful risk evaluation.

The risk factors in Hyflux's 2016 perpetual securities offering prospectus ran over 20 pages long. Its woes today come from an ill-conceived plan to enter the power plant business, based on projections that profits from selling electricity will go towards subsidising the cost of producing water.

This did not pan out due to a severe over-capacity in the power generation market. So if you were able to identify "The group is a new entrant to the power business" on page 35 of the prospectus as the key factor that would bring Hyflux to its knees, your foresight as an investor is exceptional.

Another piece of conventional wisdom that went wrong is that investors had not heeded the warning sign intrinsic in the issue's high coupon. But it's debatable whether 6 per cent - the dividend/interest of Hyflux's pref shares/perps - suggests a high risk of default. French bank Societe Generale just issued a S$750 million perp priced at 6.125 per cent, which has received overwhelming response from investors.

Rather than continue to play the blame game or look for magic fixes to prevent one from getting burnt, it's useful to reiterate the importance of diversification in investing. You should never put all your eggs in one basket. Avoid an over-concentration of wealth in individual assets or asset classes.

READ MORE: Hyflux sues SM Investments; appoints Nicky Tan as adviser