S&P: Hyflux’s capital structure “hardly sustainable” when it issued perpetual securities in 2016

S&P: Hyflux’s capital structure “hardly sustainable” when it issued perpetual securities in 2016

S&P Global Ratings said on Tue (9 Apr) that more defaults may be happening in Singapore following the Hyflux debacle.

“We believe more defaults could occur in Singapore as earnings may be slowing down and investors becoming more selective,” said S&P Global Ratings credit analyst Bertrand Jabouley.

“Due to very low rates and yields in the past five years, Singapore investors, both institutional and retail, have sometimes opted for riskier bonds, to increase cash returns. Lending appetite driven by abundant liquidity has allowed less-established, often smaller companies to tap the market. Such players are typically more vulnerable to economic up and downs.”

S&P noted that Singapore’s median debt-to-Ebitda ratio (earnings before interest, tax, depreciation and amortisation) is currently high at close to six times.

It added that close to S$4 billion of corporate bonds are maturing by the end of this year with another S$10 billion next year.

Hyflux issues perpetual securities at a time when its capital structure hardly sustainable

With regard to Hyflux’s trouble, S&P commented, “Following some erratic operating performance in the previous years, Hyflux still managed to issue perpetual securities in May 2016.”

“Numbers at that time already suggested that the company’s capital structure was hardly sustainable, with a ratio of net debt to Ebitda above 10 times in 2015, and negative Ebitda in 2014, driven by performance issues at the company’s Tuaspring desalination and power plant,” it added.

After a rebound in 2016 with Ebitda of $179 million, Hyflux went downhill all the way. It posted a negative Ebitda of $68 million in 2017, and deepened its operating losses to $256 million in the first 9 months of 2018.

As at Sept 30, 2018, short-term debt was $508 million and cash $194 million, making a capital structure revamp inevitable in the light of the earnings momentum, S&P pointed out.

S&P also warned that investors should not make assumptions regarding a private company’s importance to the government, and hence expecting the government to bailout the company.

Chance of liquidation of Hyflux increases

Meanwhile, at a court conference today (11 Apr), Hyflux was told that if it wants to extend its court-approved moratorium so as to continue to keep the creditors at bay, it will have until 25 Apr to put together “something fairly tangible” to convince the court why it deserves further lifeline.

Last week, a deal with Indonesia’s SM Investments to restructure Hyflux’s debt was terminated following disputes between the 2 companies.

Market observers said the termination of the deal with SM Investments has raised the odds of liquidation – a scenario that will see tens of thousands of retail investors losing almost of their investments.

Hyflux continues to reassure stakeholders by saying that it will “continue to relentlessly pursue all other viable strategic opportunities”.

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