The company update came as a surprise, as Hyflux was a company known for seemingly having the golden approval of the country's government, and at one point, even promised its shareholders an annual 6 percent interest forever.
Of course, many investors expected the government to step in and help. However, this wasn't the case, as the government deemed it as a commercial matter and rejected any calls for intervention. In fact, Hyflux was even given only 30 days to make good on its operational and financial lapses, lest the state would terminate the contract and shut down the plant.
Hyflux raised $400 million from perpetual preference shares in 2011 and $475 million in perpetual capital securities in 2014. These instruments carry a cumulative dividend of 6% a year and would be classified as financial liabilities — but for the company’s right to defer the cash payments indefinitely. Under FRS 32, this unconditional right allows the instruments to instead be presented as equity.
Such financial engineering means the company was able to remove the “dividends” as opposed to “interest payments” from its profit-and-loss statement, thereby giving the illusion of higher profits.
The chart below compares the company’s reported net gearing and our adjusted net gearing, if we simply reclassified the perpetual securities as liabilities. Should we also make adjustments for the higher reported profits under INT FRS 112 and capture the perpetual dividends as interests, it is certain profits would have been even lower — and net gearing even higher.
Would Hyflux’s investors have made the same decisions if all of these factors were made clear to them at the outset?
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Retail investor's weightage increased. If we give a resounding NO-VOTE to the junior unsecured creditor class, there is more ethical-basis for the judge to NOT cram down on us, given a higher weightage now.
Besides certain trade and other claims, Hyflux also rejected S$776 million in contingent claims - including the S$502.6 million claimed by project company Tahlyat Myah Magtaa for contracts dealing with a Hyflux desalination plant in Algeria.
Meanwhile, HSBC Institutional Trust Services (Singapore), the trustee of Ascendas Reit, had claimed S$120.9 million over the lease of the Hyflux Innovation Centre and the Hyflux building at Kallang Bahru - but just S$41.4 million of that claim was admitted.
And, when it came to the S$150 million claimed by RBC Investor Services Trust Singapore, the trustee of ESR-Reit, for a rent guarantee on Hyflux's Tuas Hub lease, only S$83.3 million of that sum made the cut.
SGX is losing relevance. I am quite sure that it is going downhills like Mediacorp and SPH, despite a state-backed monopoly in their industry.
SGX is facing competition from two MAS-approved disrupters within the next two years. It will be like Uber and Grab sinking the taxi industry. As for NEA, if they let Hyflux sink, I will expose more about them in the days to come.