Hyflux potentially placed under judicial management order after bank lenders file application; What does this mean to the shareholders?

The Singapore-based water treatment firm, Hyflux, has incurred a snowballing mountain of debt for years.

In 2017, Hyflux’s Tuaspring Integrated Water and Power Project (Tuaspring IWPP) registered a net loss of S$81.9 million, with wholesale electricity prices clearing at levels below fuel costs. The company marked its first full-year losses of S$116.4 million that year and reported losses in the first quarter of 2018.

Subsequently, the project – which cost about S$1.05 billion – was taken over by Singapore’s national water agency Public Utilities Board (PUB) in 2019 after PUB terminated its Water Purchase Agreement (WPA) with Hyflux, due to the company’s financial debt.

In May 2018, Hyflux applied to the High Court to commence a court-supervised process to reorganise its liabilities and businesses, claiming that its earnings have suffered from “prolonged weakness” in the local power market.

Last year in March, at least 500 people gathered at Hong Lim Park to protest against Hyflux after losing 80 to 97 per cent of their life savings and retirement funds that they invested in the firm’s preference shares and perpetual securities (PnP).

The firm currently owes about 34,000 retail investors the amount of S$900 million in PnP principal value. Its outstanding notes are also due, with the amounts S$100 million (4.25 per cent) in 2018, and S$65 million (4.6 per cent) and S$100 million (4.2 per cent) in 2019.

What’s more, the authorities said on 2 June that Hyflux’s current and former directors will be investigated for suspected false and misleading statements, breach of disclosure requirements, as well as non-compliance with accounting standards.

The investigation was jointly launched by the Commercial Affairs Department (CAD) of the Singapore Police Force, Monetary Authority of Singapore (MAS), and the Accounting and Corporate Regulatory Authority (ACRA). However, the authorities clarified that the investigation will not interfere with the firm’s reorganization plans.

In response, Hyflux pledged to provide full cooperation to CAD in its investigation and said that it will make further announcements as and when there are any updates.

Shortly after (3 June), Securities Investors Association Singapore (SIAS) urged Hyflux’s current directors to “step aside and allow new directors” to “deal with new offers” from prospective white knights in its restructuring process.

In a statement, SIAS president David Gerald highlighted that the association has called on the firm’s board of directors to step down since January this year due to its failure to successfully restructure the firm.

“Hyflux Board has to decide whether it can or cannot find the white knight to salvage the company. Two years have passed and to-date it has not succeeded in successfully restructuring the company,” he said, referencing the failed agreements with Middle Eastern utility firm Utico and SM Investments (SMI), the Singapore unit of Hyflux’s debt consortium Salim-Medco.

Utico said earlier on that its offer could “save” Hyflux from judicial management and guarantee the highest possible recovery for the holders of Hyflux’s PnP, but the unsecured working group (UWG) and an informal steering committee of medium-term note holders that represent 73 per cent of Hyflux’s senior unsecured debt have said that they will vote against the deal.

Later on 13 August, Hyflux announced that the UWG of bank lenders has sought to place it under judicial management, adding that the High Court has extended the deadline of application for judicial management to 12 August, from its initial deadline on 7 August.

The group – comprised of Mizuho, Bangkok Bank, BNP Paribas, CTBC Bank, KfW, Korea Development Bank, and Standard Chartered Bank – was granted to carve out of Hyflux’s debt moratorium by the High Court last month after it argued that Hyflux’s management is no longer reliable to lead any restructuring effort.

Meanwhile, the firm has until 5pm on 30 August to accept Utico’s proposed rescue package. Business Times reported that the Emirati utility firm’s offer is open even if Hyflux is placed under judicial management.

Hyflux’s shareholders would lose authority throughout judicial management order

The question remains, what would happen to the shareholders of Hyflux if the company falls under judicial management order?

The Singapore Academy of Law Journal cited that “the underlying principle behind restructuring or reorganisation proceedings is that a business may be worth a lot more if preserved, or even sold, as a going concern than if the parts are sold off piecemeal”.

In situations where the company’s financial distress is caused by the poor management of the company, judicial management may be an approriate debt restructuring method to go to as it seeks to rehabilitate a potentially viable company with the administration of an independent third-party.

The applicant of judicial management order will nominate an independent judicial manager who is not the auditor of the company. However, the Court can decline the applicant’s nomination and choose another person to take on the role of a judicial manager, who may not necessarily be a public accountant.

The appointed judicial manager will take control of the company’s affairs, business and property. As a result, the board of directors will lose their management powers and functions to the judicial manager. In fact, they are obliged to provide all the information needed by the judicial manager throughout the judicial management order.

According to Yahoo’s report, in the case where the judicial manager has mismanaged the company’s affairs, the company’s creditor or member can apply to the Court to have the order for judicial management discharged, with a proof that the judicial manager has unfairly prejudicial to:

  • The company’s creditors or members, in general;
  • Some part of the company’s creditors or members;
  • A single creditor representing 25 per cent in value of the claims against the company

As for the duration of the judicial management order, it will last for 180 days from the date that the order has taken into effect.

The judicial manager must apply to the Court to discharge the order if he or she has achieved the goals specified in the order, or has found that the goals are incapable of achievement. Additionally, the judicial manager can also apply to the Court for an extension of the order.

Hyflux’s potential white knight Pison extends offer deadline

In recent news, Pison Investments Pte Ltd announced that it will extend its offer for senior creditors to accept its buyout offer of Hyflux until 4 September 2020, after it saw positive responses from creditors requesting for additional time to submit their application.

The company issued an invitation memorandum to Hyflux on 9 July, offering to purchase the company’s debt and its affiliates. The offer deadline was initially set on 17 August 2020, but it has been extended after receiving positive submissions and responses from creditors.

“We have received tenders after the expiration deadline and have also received numerous requests from eligible creditors seeking an extension of the expiration deadline as they were unable to submit their tender applications in time,” it stated.

This means that Pison Investments will have until 25 September 2020 to accept or decline the offers.

According to its invitation memorandum, each eligible creditor will only be able to submit one bid for an amount of all or certain eligible debt. Additionally, the discount outline in the tender application form stated that the offer must not be less than 91 per cent on the offered debt.

Hyflux may be getting the lifeline it requires to reorganise the firm if it has sufficient creditors to accept Pison Investments’ offer.

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