Hyflux - A bet gone wrong

I received the brochure to inform me that my area will be eligible for the "open electricity market" from 1 March. The government first rolled out the program in the western side of Singapore. 

This booklet served as a reminder about the bet that went wrong - Hyflux. Both referring to myself as well as that of Hyflux. A lot of investors thought they were investing in "water" sector at the desalination plant, but Hyflux was actually betting on the "energy" market when it won the bid for the desalination project at Tuaspring. 

According to my friends who are more experienced in the infrastructure space, Hyflux was the lowest bidder and the assumptions they used to compute the ROI were aggressive. As a result, with the crash in the electric power supply market prices locally, the Tuaspring Plant became a "negative" carry. In other words, investors who buy over the plant have to be very prudent in their projections as it is literally bleeding - the more electricity it sells, the higher the losses. Literally, it means Hyflux would need to pay people to take the "liabilities" off their books. 

Did Olivia see the downfall coming ?

Absolutely.  Olivia probably saw it coming and all her actions pointed to it. For someone who is close to the business, she probably realised that 4 years into the winning the project that she made a wrong bet. Yet, she tried to kick the can down the road by using the "Hyflux" brand to raise significant capital $500m of  perps issuance to retail investors in 2016. This allowed Hyflux to live a life on borrowed time. You can see that she is already planning for an exit by paying dividends in both cash and stock in specie - Hyfluxshop even when the Company is performing very poorly and is too highly levered. She is already planning for a life post-Hyflux. 

The biggest con Job ever - legally 

Someone in the legal world told me that perpetual securities is the biggest con job. It is neither a bond nor an equity. In other words, the Company is allowed to treat what is essentially a liability (bond) as an equity on its books. This resulted in the perps holders being "squeezed" from both ends. It is ranked quite lowly during a liquidation and in good times, it doesn't enjoy any upside from share price. Unfortunately, perps are allowed to be issued in Singapore. You can read an article about perps here. 

Let's take a look at the roles of the different parties in this bond saga and see if there is any "recourse" against these parties. 

DBS Bank - What role did DBS play in this saga?

DBS is the sole bookrunner and helped raised the retail money for Hyflux. Should DBS be held partly responsible? In my view, probably. Why?

1. Hyflux has a weak balance sheet and was unable to fund raise from institutional investors. As such, the bulk of the money were raised from retail investors. 

2.  Was there a proper book building process? I guess not, as this is not the market practice and the bonds are probably of junk status, hence the 6% interest rate was probably set arbitrarily without a proper book building process with institutional investors.  If this has been priced properly by institutions, it would probably need a higher interest rate than 6%. 

3. Why did DBS not stop the Hyflux from upsizing the tranche? You should know that banks are conflicted entities. The more bonds they sell, the higher the commission. On one hand, they are selling the bonds to investors, on the other hand, they are advising the company. If the demand from investors are so good, why not?

Of course DBS can always argue that at the point of issuance, everything looked hunky dory, hence this will be a tough case to prove. 

Board of Hyflux - Did the Board question Olivia diligently and rigorously ? 

The board plays an important role in any company. Hyflux probably failed many of the board governance guidelines where the CEO and Chairperson are one and the same person. Where are the checks and balances ? Own Chairwoman check own CEO? See my previous write up about my views of the board and the independent board members here

The board members have been on the board for many years and are probably her friends by now. There had not been much renewal of board to begin with and the awarding of share options to the board resulted in all of them being in a potentially conflicted position. While the independent directors may have discharged their duties, deliberation of the board may be less robust. I would be interested to know the questions that were asked when the company bid for a new "energy market" project or whenever dividends were being proposed and paid, in particular, the dividend in specie. It would be great if the board meeting minutes are released so that investors know the quality of the board meetings and the deliberations that took place before any major business decisions. Did board members ask the relevant questions, questioned the assumptions, asked why dividends are being approved when company is not doing well? It seemed rather useless for the board to "contribute its entitlements" into the pool and to make amends now. I guess the intent is to appease investors so that the scheme of arrangement can go through. 

Are there undue preference when the dividend in specie was announced? 

Undue preference is the act of acting for oneself to the detrimental of others. You read more about undue preference here. The biggest beneficiary of the distribution in specie is Olivia Lum. To declare a dividend in specie in December 2017 only to declare insolvency shortly after is to me, an act of undue preference. Hyflux was in no position to weaken itself further, engaging in dividend-in-specie added no value to the investors. If Hyfluxshop turn out to be highly profitable or can be listed now, the benefits should go to creditors and perp holders and not to Olivia Lum. The least she can do is to return the assets to Hyflux. I would be keen to know what questions were being asked when the Hyflux shop was "dividend' out

KPMG - Did the Auditors question the value of their assets diligently? 

I would like to know if the auditors raised any questions about governance or the valuation of key assets on the balance sheet? What did they do to discharge their duties that the valuation of the assets are valued fairly?

Did the audit committee ask any questions or direct the auditors on specific areas to focus over the last 3 years? Did the Auditors  impair the assets or have sufficient grounds not to ? Why didn't they qualify the accounts?

There are many questions but again, no answers. 

What role did SIAS play? 

Did SIAS play any important role? My answer is no. They are only a facilitator and part of their fee income model is to organise such "meet and greet" sessions on behalf of the companies to meet up with their members. They always try to be "cooperative" with the Company but are seldom confrontational.  

They only sent out a list of "open letter" questions right at the end of the saga where they could have been more vocal at the first instance. In my personal opinion, they lost the best chance to be the voice of the retail investors. The least they could potentially do now is to either seek justice or maybe initiate class action suit on behalf of investors? 

Why are there no class action suits against Hyflux and its board ?

America is probably one end of the extreme where law suits are flying left right and center. If the Hyflux saga has happened in the US, some Lawyers would probably have filed class action suits on behalf of retail investors against many of the parties I mentioned above. While I am not in favour of such class action suits at its extreme end, in situations like this, you just wished some heroes will stand up and fight for the retail investors. SIAS is probably the one who can do a crowd funding to start a legal action but are they doing it? Can some hero please stand up for the battered retail investors?  

How would Mr. IPO vote?

I haven't had a chance to sit down and review my options. I have already fully written off my $100,000. Since I have already fully written off my investment, I am in the "seeking justice" mode rather than being a rationale battered investor. 😅

I would rather see the company go under than being treated like this. I would definitely loved to see a if there are reasonable grounds for the liquidator to recover Hyfluxshop as well as help determine if all relevant parties have discharged their duties responsibly.

I will be voting NO but what about you?  

Here is a polling question for Hyflux investors. You can access it here.