Photo of TuasSpring power plant from Hyflux’s website

Following the High Court’s approval of troubled homegrown water treatment firm Hyflux’s application to convene a scheme meeting with its creditors, the company will be holding the meeting on 5 Apr as a part of its financial restructuring process.

The application was made on 16 Feb jointly with three of Hyflux’s subsidiaries: Hydrochem, Hyflux Engineering and Hyflux Membrane Manufacturing.

The meeting will comprise two classes of creditors: Firstly, unsecured creditors, including medium-term noteholders and 29 banks; secondly, holders of perpetual securities and preference shares.

Channel NewsAsia reported that the voting is likely to take place during two separate meetings on the same day for each creditor class.

At least 50 per cent in number and 75 per cent in value of each creditor class must approve the scheme before 5 Apr in order for it to pass.

“If one class fails, the scheme fails,” Hyflux said, according to The Straits Times.

In the event that the scheme receives the green light from both classes of creditors, an extraordinary general meeting will most likely be convened with ordinary shareholders to vote on the issue of new shares to SMI before 16 Apr.

More than 50 per cent of Hyflux’s ordinary shareholders are required to vote “yes” for the issue of new shares to SM Investments (SMI), a consortium of Indonesia’s conglomerate Salim Group and energy giant Medco Group.

Additionally, Hyflux will be holding a town hall meeting with its shareholders on 13 March.

Hyflux’s reorganisation plan entails the following:

  • Approximately 34,000 registered holders of Hyflux’s perpetual securities and preference shares will receive a total of $27 million in cash and a 10.26 per cent share of the company after the restructuring plan is implemented, with them being owed $900 million by the firm;
  • For every $1,000 invested, a holder of Hyflux’s perpetual securities and preference shares will receive only $106.54, or an implied return rate of 10.7 per cent, which will be distributed in the form of $30.15 in cash payout and $76.39 of implied value in the firm’s shares.
  • Unsecured creditors who do not hold such securities and shares will receive a total of $232 million in cash and 27 per cent of shares;
  • Medium-term holders are expected to receive $246.35 for every $1,000 they have invested, or an implied return rate of 24.6 per cent, which will be distributed in the form of a cash payout of $138.72 and $107.63 of implied value in the company’s shares.
  • Around 60 per cent of Hyflux’s share capital will be handed to SMI, which has agreed to inject $530 million in the firm.

CEO Olivia Lum and BOD to give up shares and entitlements in Hyflux as part of firm’s financial restructuring plan

Previously on 16 Feb, Hyflux’s executive chairperson and group Chief Executive Officer Olivia Lum announced that she, along with Hyflux’s Board of Directors (BOD), will be giving up their shares and entitlements as holders of preference shares and perpetual capital securities as a part of Hyflux’s restructuring plan.

The company indicated that Ms Lum’s shares, as well as those of members of Hyflux’s BOD, will be “distributed solely to all other holders of perpetual capital securities and preference shares of the Company upon completion of the proposed Restructuring Plan”.

Ms Lum said: “This Company was started by myself some 30 years ago, and is very dear and precious to me. This current situation is not something I ever envisioned nor is it something I ever wanted.

“I have volunteered to give up receiving any management shares in the Company. I have also undertaken that if this Restructuring Plan is approved, all of the interests of mine and the other Board members in Hyflux will be given solely to this group.

“In this way, it is my hope that they may reap the future benefits which the Salim-Medco consortium deal can offer them,” she added.

Salaries of key executives frozen since 2016; Olivia Lum’s salary unchanged since 2011: Hyflux, in response to SIAS queries

A day prior to the announcement on 15 Feb, Hyflux had published its answers to the queries posed by the Securities Investors Association Singapore (SIAS) to Ms Lum and the BOD, dated 8 Feb, among which included a query over Ms Lum’s apparent lack of participation in restructuring efforts despite receiving a payment of more than S$60 million in dividends from her 34 per cent ordinary shareholding in the firm.

The statement by SIAS also read that Ms Lum had also “received significant salary, benefits and bonuses and earned between SGD750,000 and SGD1 million in 2017, a year in which Hyflux reported losses of SGD115.6 million”.

The remuneration for key executives has decreased from SGD2.9 million in 2016 to SGD2.7 million in 2017. Since 2016, the salaries of key executives have been frozen, and no variable bonuses have been paid out. Further, since 2011 the CEO’s salary has remained unchanged.

President and CEO of SIAS David Gerald highlighted that during the same period, “Hyflux reported losses of S$115.6 million and a period which was five months prior to Hyflux Group filing for court protection from creditors and when Hyflux has been losing huge amounts of cash and building projects”.

Mr Gerald questioned Ms Lum’s role in the firm’s restructuring efforts, as well as the reasons behind not contributing her gains from Hyflux Group to the restructuring process.

Hyflux indicated in its response that Ms Lum was very much aware of the financial situation of the firm, and that following her knowledge, she “will suffer a significant loss” as “her current equity stake” will be “diluted substantially on the same terms as all other stakeholders, and she will lose her controlling position in the Company”.

“She has also volunteered to relinquish all rights to any management retention shares that would otherwise be awarded to her pursuant to this restructuring process”, added the firm.

He also raised the question as to why the Board continued to pay dividends even “when the operating cash flow was negative and accumulate more debt during this time”, on top of asking “how it was possible that despite the negative operating cash flow, Hyflux continued to report profits in each year” prior to FY2017.

Hyflux, in response, claimed that there have been “inaccuracies recorded in various news articles surrounding Olivia’s dividends from her shareholding in Hyflux.

“In contrast to the newspaper reports and the SIAS narrative suggesting that Olivia had received over SGD 60 million in dividends from her shareholding in Hyflux in 2017, the Company wishes to clarify that she did not receive any cash dividend for financial year 2017.

“Over a period of 10 years from 2007 to 2016, she received about SGD58million in proportional cash dividends declared and paid to shareholders.

“During the same period (2007 to 2016), Hyflux recorded cumulative profit after tax and minority interests of SGD527 million and total ordinary shareholders dividends was SGD186 million,” it added.

Hyflux’s annual report indicated that the firm’s top executives had received a total remuneration of S$2,695,134.20 in the 2017 financial year.

Tuaspring “expected to generate profits from day one”: Hyflux, in response to overvaluation of the plant

Hyflux’s Tuaspring plant was also the subject of scrutiny by SIAS.

Tuaspring provides up to 318,500 m3 or 70 million gallons of desalinated water per day to Singapore’s water supply under a 25-year design build-own-operate arrangement with PUB.

Citing a partially-funded shareholder loan of S$57 million, Mr Gerald raised the question as to how Hyflux had obtained funding for the loan to Tuaspring, as “Tuaspring has been loss-making since it commenced operations in 2015”.

He also probed on the overvaluation of Tuaspring at S$1.4 billion for sale, which he claims has been proven to be “at least S$900 million” over its actual value.

He added that Hyflux has confirmed any bids received in the 2018 sale process for Tuaspring were for less than Maybank’s outstanding project finance debt of approximately S$500 million.

“What is the monthly cash burn at Tuaspring? What are Tuaspring’s current cash reserves? What is the current market value for the Tuaspring asset?” Mr Gerald asked.

Hyflux replied that when it was first awarded the Tuaspring project in 2011, “based on the financial model which modeled the cashflow projections from the project, the power plant was expected to generate profits from day one”.

“This financial model was audited by an external financial model auditor and furnished to the offtaker. In 2013 when Tuaspring was able to secure a non-recourse project financing loan, the lender commissioned an independent market study of the project which arrived at similar conclusions supporting the book value of approximately SGD1.4 billion.

“When the Tuaspring power plant entered into commercial operations in 2016, the lender commissioned another independent market study before the drawdown of the second tranche of the project finance loan, which valuation also then supported the book value ascribed to the Tuaspring project.

“However, while the 2017 divestment process attracted three preliminary non-binding bids that also supported the book value of the project, the 2018 sale process for Tuaspring during the moratorium did not yield a similar bid due to the limited number of parties pre-qualified to perform due diligence at such time,” added the firm.

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