Hyflux to Hold Scheme Meeting for Creditors on 5 Apr 19
https://www.bondsupermart.com/main/...-Scheme-Meeting-for-Creditors-on-5-Apr-19-633
The scheme will involve three classes of creditors, the first being
Unsecured Scheme Parties (“USP”) holding ~S$1.65 billion of claims, including bank lenders, holders of medium term notes (“MTN”), trade and other creditors, and contingent claimants. Investors in Hyflux’s S$900m of perpetual securities and preference shares constitute the next class of claimants (collectively, “Debt Securities Scheme Parties” or “DSSP”). Finally, intercompany claims and claims of HyfluxShop Holdings Ltd totaling ~S$72.3m represent subordinated scheme claims, which will essentially be wiped out following the restructuring.
For Hyflux’s SOA to become effective, it requires the approval of a majority in number (above 50%) representing at least 75% in value of each class of the scheme parties voting at the meetings. This means both the USP and DSSP must agree to the restructuring proposal, and both classes have the power to throw out the deal.
But Court has discretion to cram down on dissenting class
In principle, this measure allows the Court to bypass a minority group of dissenting creditors and prevent them from blocking a scheme. In practice, it is uncertain what the outcome would be in the event that Hyflux is unable to get enough votes from the DSSP while other classes are in support.
Firstly, there is no precedence of a cram down utilization that we can take reference from. The concept of “fair and equitable” may also prove tricky to enforce due to the incorporation of what is known in the US as the “absolute priority rule”. This rule requires that creditors or shareholders subordinate to the dissenting creditor class to retain zero shares or assets in the company, unless the unsecured creditors are paid in full.
In any case, given that preference shares and perpetual securities holders reportedly totaled over 34,000 in number, and they hold ~34% of total scheme claims (according to our calculations that included subordinated scheme parties), the DSSP certainly has the ability to swing the outcome of Hyflux’s SOA.
Scheme payouts
Out of the total consideration for USP claims, ~S$93m of cash and 10.87% equity will be set aside in an escrow account as the recovery amounts for contingent claims. The Scheme Manager (representatives from Ernst & Young Solutions LLP) will only distribute these amounts to the relevant parties if their contingent claims crystallize before the expiry date—two years after the restructuring effective date.
80% of the cash payouts set aside for contingent claims, which eventually expire or extinguish, will be distributed to the USP in two tranches (after the first and second anniversary of the restructuring effective date). The Scheme Manager will distribute the remaining 20% cash payouts to Hyflux (“Contingent Claim Management Payouts”), which will allocate the monies to its employees as incentives for project completions. All the equity payouts initially allocated for expired/extinguished contingent claims will be distributed to the USP.
Looking at Hyflux’s explanatory statement, most of the contingent claims relates to engineering, procurement and construction, and operations and maintenance contracts, which are within the company’s core competencies. As such, we think it is likely for Hyflux to extinguish a significant amount of these contingent claims eventually. In the best-case scenario, where all of the contingent claims are extinguished or eventually expire,
Hyflux’s senior unsecured creditors may recover up to 39.9% of their principal amount, with 21.7% in cash and 18.3% in shares (see Figure 1 and Figure 2).
The scheme payout for DSSP (for holders of its S$900m of perpetual securities and preference share) is relatively straightforward, the payout indicates a recovery rate of 10.7% for holders of perpetual securities and preference shares, with ~3% in cash and ~7.7% in shares.
Completion of the scheme requires the approval of shareholders
Assuming an equity value of S$26.7m for the 4% stake, that would imply a haircut of ~91% on the investments (at book value) of existing shareholders. The implementation of the scheme is contingent upon Hyflux getting the blessing of its shareholders at an extraordinary general meeting (“EGM”), currently scheduled to take place any day between 12-15 April. That means even if the scheme manages to get pass Hyflux’s creditors,
existing shareholders may still block it from happening. We estimate that Ms Lum and her fellow directors hold around 34.6% of existing Hyflux shares.
Key Considerations for Scheme Parties
We think Hyflux could have done a better job in terms of setting the right expectations early for stakeholders, especially the perpetual securities and preference shares holders. From our conversations with investors and observations of the company’s town hall meetings, many retail investors were clueless that they are likely to face hefty haircuts on their principal, at least until the preliminary restructuring framework was revealed in January. Vague statements made during the town hall meetings, like “our goal is to protect small investors”, have likely introduced more misconceptions among the junior creditors.
According to the explanatory statement, Hyflux’s search process yielded 16 interested parties in the initial rounds of discussions, eventually zoomed down to eight interested parties. The company received bids ranging from a total investment of S$400m to S$600m, with the equity portion ranging from S$250m to S$530m (for equity stake between 51.0-86.4%).
It is difficult for us to judge whether the offer by SMI is the best overall package for scheme parties, as a key requirement of the Indonesian consortium is the
complete extinguishment of Hyflux’s unsecured obligations. On the monetary value of SMI’s offer, the equity investment implies a S$667m valuation on Hyflux, or ~3.4 cents per Hyflux share post-restructuring according to our calculation. Hyflux’s pro-forma financial statements (on a consolidated basis and assuming the restructuring is implemented), as provided in the company’s affidavit dated 1 Mar 19, show a total equity of S$1.11 billion (as at 30 Sep 18) and 19.63 billion shares outstanding post-restructuring.
Together, they translate to a price-to-book (“P/B”) ratio of approximately 0.60x for SMI’s equity offer.
In any case, in a competitive marketplace, if SMI is indeed investing into Hyflux at a giveaway price that is obvious to everyone, we have to wonder why hasn’t anyone else came up with a much better offer.
Timeline of restructuring is crucial
SMI has already indicated that it is unlikely to improve the terms of the restructuring agreement. “We have reached the maximum ceiling of what we can pay,” SMI CEO Mr Arief Sidarto said in January during one of Hyflux’s town hall meetings.
That said, the scheme parties may still negotiate between themselves on the distribution of the scheme consideration. There may still be time for the USP and DSSP to establish another (and preferred) allocation jointly before Hyflux’s SOA is put to vote on 5 Apr 19. Hyflux’s debt moratorium has an expiry date of 30 Apr 19. If more time is needed,
Hyflux can apply to the Court for another extension of the moratorium period.
And even if we assume that the Court is somehow willing to extend Hyflux’s debt moratorium beyond April, we have to bear in mind that the company is in a capital-intensive business and projects typically take years to complete. Without providing clear visibility of its financial viability to trade creditors and potential clients, Hyflux is unlikely to win or carry out new projects. That is to the say the
prospects of the company restoring financial health (and financial recoveries for creditors) may deteriorate correspondingly to the duration of time it stays insolvent.
