Hyflux&rsquo s shares, preference shares, perps suffer selloff

Goola Warden

SINGAPORE (Aug 23): Securities issued by Hyflux have been under selling pressure since Aug 12. Besides its shares falling 5.7% to 50 cents, a tranche of perpetual securities the company issued only in May with a coupon of 6% have fallen 6.5% below par to 93.7 cents. On top of that Hyflux&rsquo s preference shares have fallen 5.8% to $94.37 on relatively high volume, sparking a query from Singapore Exchange on Aug 19 about unusual trading activity. Hyflux promptly responded to the query, stating that it &ldquo is not aware of any information not previously announced concerning the company or its subsidiaries which explain the trading&rdquo .

In fact, announcements from Hyflux over the last few months explain a lot about its current situation. The issue of perps in May was upsized from an initial $300 million to $500 million due to strong demand at time from investors hunting for yield. Yield instruments issued by companies like  Aspial  and  Perennial Real Estate Holdings  around that time were also warmly received by investors. Hyflux said that the funds it raised would be partly used for the redemption of $100 million of 3.5% bonds, and some $175 million of 4.80% perps. The company still has some $300 million of 5.75% perps issued in January 2014 outstanding. This tranche of perps are also trading below par.

Since May, however, the mood in the market has changed, with investors becoming more concerned about defaults and financial stress at companies with large debt burdens and looming debt maturities. In the case of Hyflux, its debt costs are also on the rise following the issue of its latest tranche of perps in May. Annual interest on the $500 million would top some $30 million, which it is to pay semi-annually. The first payment is in November. It also pays some $12 million annually on its preference shares. The next semi-annual payment is in October. However, these financing costs will be mitigated somewhat by the redemption of its 3.5% bonds and 4.80% perps.

On Aug 4, Hyflux reported a 174% increase in revenue to $260 million, helped by contributions from Quarayyat independent water project in Oman and the TuasOne waste-to-energy project in Singapore. However, earnings slumped 84% to $4.2 million due to higher raw material costs, subcontractor costs and amortisation charges. Free operating cash flow for the quarter was negative $97 million. As at June 30, the company had a net gearing of 49% excluding the perps, . Its shareholders&rsquo funds stood at $1.7 billion including some $964 million of perpetual securities. It had a net asset value of 44.3 cents per share as at June 30, down 18% y-o-y.   Its Ebitda coverage has fallen to 2.52 times as at June 30, compared with four times a year ago.

In the months ahead, Hyflux sees continued contributions from the Qurayyat and TuasOne projects as well as projects in Saudi Arabia. However, it expects weak financial performance from its Tuaspring power plant due to weak electricity prices. In the meantime, Hyflux is moving into the consumer space by producing ELO drinking water in Singapore from 3QFY2016.

Credit Suisse is forecasting a net loss of $11.1 million at Hyflux for 2016, versus earnings of $41.3 million last year.

What can Hyflux do to avoid the risk of financial stress? Interestingly, some companies are turning to banks to redeem their bonds. On Aug 19,  Mencast Holdings  said United Overseas Bank has agreed to provide it with a secured loan facility of up to $50 million and secured facilities of up to $24.9 million, comprising term loan facility, trade facility and money market credit facility. Some of these loans will be used to redeem $50 million of outstanding Mencast bonds due on Sept 12, and to refinance existing loan facilities and general working capital. The UOB loans are secured by mortgages over several properties, and guarantees from Mencast and its subsidiaries.

Hyflux has 31 banks including the three local banks listed in its annual report. DBS Group Holdings was the sole lead manager of the most recent perp offering and also of its preference shares back in 2011. If these preference shares are not redeemed by Apr 25, 2018, their dividend rate will be stepped up to 8% per annum.