Grace Leong

Business Correspondent

The one-time darling of Singapore’s water sector now finds itself in a race against time as its debt moratorium is set to expire on April 30, with no new viable suitor in sight yet.

Hyflux is hard-pressed to find another suitor,and questions remain over whether it can attracta high enough bid for its remaining assets without the desalination plant. Sources close to the rescue deal say that the Indonesian Salim-Medco consortium, SM Investments (SMI), may have underestimated the amount of funds required to fix the desalination plant, settle disputes and run the operations of the firm.

Another major burden is Hyflux’s cashflow issues that are so severe that it was unable to replace poor-performing membranes at its Tuaspring desalination plant.

Observers have also questioned how high a bid the Tuaspring co-generation power plant could have attracted, and whether the potential investment lifeline, if any, will be sufficient.

So, as Hyflux noted yesterday in its exchange filing, the plan by PUB to take over the Tuaspring desalination plant for zero dollars without seeking compensation could help the firm to “reach out to a wider pool of investors”. These investors “may not otherwise have been interested had this asset remained within the group, and for which PUB’s approval for a change in control of such asset will be required”.

However, PUB’s deadline to fix defaults at the Tuaspring desalination plant has reverted to today, given the termination of the rescue deal. Previously, the water agency had granted an extension to April 30. In response to queries yesterday on when the takeover of Tuaspring will occur, PUB said it is “monitoring developments”.

This piles on the pressure for the water firm, as some 34,000 Hyflux investors of perpetual securities and preference shares who are owed $900 million, as well as senior unsecured creditors who are owed $1.68 billion, are also on Hyflux’s back.

Many junior creditors have denounced their paltry 10.7 per cent recovery rate as a “beggar deal”, and are calling for the authorities to investigate Hyflux and its alleged mis-selling.

The company also faces problems with its overseas projects. Water buyers may scrap a purchase agreement owing to defaults in Hyflux’s Magtaa desalination plant in Algeria, while arbitration proceedings have commenced against Hyflux in relation to its Souk Tleta desalination plant in Algeria.

Regulators, too, are not sympathetic. The Energy Market Authority said on Tuesday

that Hyflux’s present financial situation was the “result of its own commercial decisions”.

Then there is the issue of who will get the $38.9 million deposit taken out of SMI’s proposed $530 million investment that has been placed in escrow. Now that the “marriage” is off, there are questions over what will happen to this “dowry”, observers say.

Hyflux had warned that if SMI were to “wrongfully terminate” the agreement, the water firm would be able to lay claim to the $38.9 million deposit. But now that it is Hyflux which pulled out, observers are asking whether there are grounds for SMI to take legal action – and will it?

There are also questions over how long Hyflux can survive on the cash it has left, and whether it can find a new viable suitor before April 30, after which creditors will likely seek to liquidate the company if the High Court does not extend the debt moratorium.

Its third-quarter earnings released on March 29 show the group has cash and cash equivalents of $193.7 million for the three months ended Sept 30, 2018, down from $314.2 million a year before.

In the final analysis, it may make sense for Hyflux to terminate the restructuring agreement if SMI “declined to provide written confirmation that it will proceed to complete the proposed deal if the outstanding conditions are met”.

Without terminating the restructuring agreement, Hyflux cannot proceed to court new suitors.

gleong@sph.com.sg

Hyflux and its former white knight SM Investments (SMI) haveclashed over what led to the death of a $530 million restructuring deal.

Refuting SMI’s claims of being “surprised” by Hyflux’s move, the water treatment company said in a near-midnight statement that it pulled out because of SMI’s “re-peated refusal to commit to mak-ing the investment necessary for the restructuring”.

Since March 25, Hyflux said it had written multiple times seekingSMI’s commitment to making the in-vestment, as well as written confir-

mation of its commitment, and had warned that it would otherwise be entitled to terminate the rescue plan. But SMI, in its lawyers’ letter dated yesterday, declined to pro-vide the written confirmation,Hyflux said.

Hyflux also disputed SMI’s allega-tion of a “threat to a third major project”. It said that this relatesto SingSpring Trust, in whichHyflux holds a 30 per cent minor-ity interest.

The majority interest holder, Kep-pel Infrastructure Fund Manage-ment (KIFM), had written to Hyflux

last Friday to state the holding of scheme meetings, announced by Hyflux on Feb 22, “entitles it to exer-cise buy-out rights under the terms of the relevant agreement between (Hyflux) and KIFM”.

This means KIFM may elect to buy part or all of Hyflux’s interest in SingSpring for value, subject to regu-latory approvals. Hyflux said KIFM sought to reserve those rights.

Specifically, KIFM requested con-firmation that it would not be sub-ject to the schemes proposed and that its buy-out rights would not be compromised by the schemes.

Hyflux provided such confirmation on Monday.

Hyflux added that it is important to note that KIFM’s letter does not indicate whether it intends to exer-cise such buy-out rights, and there can be no assurance that KIFM will ultimately choose to do so.

Accordingly, there is no “threat to a third major project”, Hyflux said.

Hyflux added that SMI had been given the relevant agreementsince Sept 15 last year and has been “well aware of KIFM’s buy-out rights which KIFM is entitled to exercise” in the event of Hyflux

convening a scheme meeting.Hyflux also said that SMI had

“for close to a month, rebuffedall attempts to meaningfully en-gage... on what exactly its con-cerns over Hyflux’s working capi-tal needs were”.

Despite being asked “multiple times over the past month”, SMI has not explained how the further information it has received necessi-tates a “reassessment” of the work-ing capital needs of the group.

It added that SMI was aware of the tight timelines Hyflux faced in the light of the April 16 deadline for

both parties to get the restructuring plan approved.

“It was aware that there would be insufficient time to accommodate any change in the settlement amount under the schemes if it did not postpone the April 16 deadline. However, despite being prompted on multiple occasions, SMI not only failed to offer to postpone the dead-line, but (also) stated that it would not agree to any variation of the terms of the restructuring agree-ment,” Hyflux said.

Grace Leong

Aw Cheng Wei

Troubled water treatment com-pany Hyflux faces a higher chance of being liquidated barring the ap-pearance of a new white knight in-vestor – and experts say that the chances of one appearing are low.

What was supposed to be a life-line for Hyflux to restructure its debts ended abruptly yesterday,a day before creditors were slated to vote on the proposed reorganis-ing deal.

The company called off a rescue deal by Indonesian consortium SM Investments (SMI), which had ear-lier agreed to pump in $530 million in return for a majority stake. Hyflux also cancelled anotherscheme meeting next Monday and an extraordinary general meeting scheduled for April 15.

Associate Professor LawrenceLoh of the National University of Singapore summed up the latest turn of events: “It is now back to square one for Hyflux.”

The debt-laden company is not giving up, however, saying in an ex-change filing yesterday that it will “relentlessly pursue” other avenues to find a way out.

This would entail getting credi-tors on board with its restructuring proposal, which the court has given Hyflux until April 30 to carry out.

But it may not be an easy task, with Singapore Management Uni-versity law don Eugene Tan noting that Hyflux’s decision to walk away means that the company

“now faces the real likelihood of liq-uidation unless it receives an un-likely reprieve”.

Indeed, Hyflux sounded a warn-ing yesterday that “there can be no assurance that the company will be successful in securing a new in-vestor or in finding a viable alterna-tive to execute the restructuring”.

Yet, the company believes that PUB’s takeover of its Tuaspring desalination plant “could poten-tially enable the company to reach out to a wider pool of investors which may not otherwise have been interested” if the plant re-mained under its charge.

PUB had said it would exercise its rights to take over the desalination facility if defaults are not fixed by to-day. It later granted an extension to April 30 but with the termination of the restructuring deal, the deadline has reverted to the original.

Tuaspring also comprises apower generation plant. The inte-grated model was meant to enable profits from the power plant to sub-sidise operating costs of the desali-nation plant. However, the weak electricity market, coupled with op-erating losses from the desalination plant, sank Hyflux into debt.

The water treatment specialist’s

total liabilities stood at $2.95 billion as of March 31 last year.

The company thus announced a court-supervised reorganisation of its business last May.

Prof Loh, who is also the director of the Centre for Governance, Insti-tutions and Organisations, said: “Mi-nus the water part, the energy sec-tor, particularly energy generation, is not going to be attractive to poten-tial investors, given the current mar-ket situation of overcapacity and de-pressed prices.”

If things do not pan out, Hyflux faces the ignominy of liquidation. This means that a number of credi-tors and investors, including50,000 retail investors and 3,000 Central Provident Fund members who had used their money tobuy Hyflux ordinary and pre-ference shares, stand to lose all their money.

Nanyang Business School’s Asso-ciate Professor Kevin Koh said that money from the liquidation will first be used to pay the costs and ex-penses of the liquidation process.

“It seems that other than Hyflux employees and the senior unse-cured creditors, such as the banks, other parties are unlikely to recover any money from Hyflux liquida-tion,” he added.

Prof Loh said: “There is a cost in-curred holding on to the opera-tion, and it may not be in the inter-ests of the claimants... for the com-pany to continue to burn cash in-definitely. Hyflux may then need to activate the ultimate option, which is liquidation.”

At least one stakeholder is calling for calm, and is asking “senior credi-tors to give the company a chance... and not put the company under liq-uidation hastily”.

Securities Investors Association (Singapore) president David Gerald yesterday called for stakeholders to give Hyflux “time and space”.

“I had called Olivia Lum to deter-mine whether there is an alterna-tive solution that can be presented to investors and creditors,” he said, referring to the Hyflux chief execu-tive and founder.

“According to her, the board will quickly re-engage with previous in-terested parties who had shown keen interest and were bidding for Hyflux with SMI.”

Mr Gerald said that he has “con-veyed to her (investors’) dissatisfac-tion with the last offer for them and had requested to bear that in mind when discussing a new deal”.

awcw@sph.com.sg

Hyflux believes PUB’s takeover of its Tuaspring desalination plant (above) “could potentially enable the company to reach out to a wider pool of investors”. LIANHE ZAOBAO FILE PHOTO

Back to square onefor Hyflux as it seeks new white knightChances of liquidation have risen; experts say another saviour not likely to appear

News analysis

Water firmin raceagainst timeto stay afloat

LIQUIDATION LIKELY

(Hyflux ) now faces the real likelihood of liquidation unless it receives an unlikely reprieve.

’’LAW DON EUGENE TAN of theSingapore Management University.

HYFLUX NOT GIVING UP

According to her, the board will quickly re-engage with previous interested parties who hadshown keen interest and were bidding for Hyflux with SMI.

’’MR DAVID GERALD, president of the Securities Investors Association (Singapore), on his call to HyfluxCEO Olivia Lum.

Hyflux and SMI clash over what led to death of rescue deal

BACK TO DRAWING BOARD

It is now back to square onefor Hyflux.

’’ASSOCIATE PROFESSORLAWRENCE LOH of theNational University of Singapore.

LITTLE HOPE OF RECOVERING FUNDS

It seems that other thanHyflux employees and thesenior unsecured creditors suchas the banks, other parties are unlikely to recover any money from Hyflux liquidation.

’’ASSOCIATE PROFESSOR KEVIN KOHof Nanyang Business School.

A8 TOPOFTHENEWS | THE STRAITS TIMES | FRIDAY, APRIL 5, 2019 |