SGD New Issue Review : Hyflux Subordinated Perpetual NC3 High 5%
Issuer: Hyflux Ltd.
• Issue: SGD subordinated perpetual capital securities
• Ratings: Unrated
• Format: Regulation S only and S274/275 of SFA
• Issue Size: TBD
• Tenor: Perpetual NC3
• Ranking: Subordinated to senior notes, pari passu to existing preference shares
• Call option: 2017 and at every distribution date thereafter at par
• Distribution: Fixed. Reset in year 3 based on prevailing SGD 3y SOR and every 3 years thereafter
• Step up: 200bps from year 3 onwards
• Timing: This week, as early as today
• Distribution deferral: Subject to dividend stopper and dividend pusher (with a look back period of 6 months). All payments on junior or (except on pro rata basis) parity obligations must be stopped while any distribution remains unpaid
• Information above from person familiar with the matter, who asked not to be identified because the details are private
• Price guidance: High 5% area, said a separate person familiar with the details
A reader mentioned about his Hyflux 6% perp (callable 04/2018, step up to 8%) last week and that it looked ripe to sell.
That is a retail issue traded in notional lots of SGD 1,000 on the stock exchange. Its last price was 105/105.75 (clean), 107/107.80 (dirty), yield 4.69/4.50%. The SGX price is 107.80/108.80 (dirty), implying a lower yield.
Hyflux is marketing a new subordinated perp today at high 5% coupon with 3 yearly resets with a 2% step up.
Some say they are paying up because of management problems with their board of directors quitting en masse, I will not speculate on matters of their corporate governance.
Here is a table of their outstanding debt.
Company Facts :
Market Cap SGD 974 million
Dividend Gross Yield 1.2%
Financial Leverage 4.4 times
Debt/Equity 239%
Debt/Assets 47.6%
Key Person risk 32.31%, Olivia Lum
Looking back in 2013, we note that there was a consent solicitation exercise for outstanding Hyflux bonds. This was to amend a certain covenant that would allow Hyflux to include “intangible assets” into their “Consolidated Tangible Net Worth” ratio which they had apparently busted (unverified as the exercise was a private exercise that I was not privy to).
I can imagine (note that I am using the word “imagine”) that they are building water plants for foreign governments which, of course, they would not be allowed to own for it is a strategic asset. The foreign governments do not pay for it and Hyflux is, instead, allowed to operate the plants for an extended concessionary period to recover their costs. Thus, classified as “intangible assets”.
As such, we note that their “intangible assets” on their balance sheet has swelled from SGD 226 mio in 2012 to SGD 747 mio in Sep 2013. This will be accompanied by heavy amortisation/depreciation over the years as they realise the income from their operation of the plants.
The key risk is in the jurisdictions that they operate in and whether they will be able to carry out their work for their entire concessionary period i.e. for governments or new governments to honour their agreements.
We note that their revenues have not grown between 2012 and 2013, suggesting perhaps maturity in their business model. And a perpetual bond is perhaps the most ideal way to raising funds because it is classified as equity and they will not be looking to raise money via the stock market with their stock price in the doldrums.
Having said all that, Hyflux is the market darling of Singaporeans and the pride of our country including, I am sure, Temasek. I am slightly dismayed that they managed to run themselves from lowly leveraged to a highly leveraged company. Paying up for the new perp is a necessary cost for them, so I would not settle for less than high 5%. Afterall, the Sembcorp Industries Perp came out at 5% last August and it trading at about 4.75% now.
We hope they will find greenfields to boost their revenue and continue to give us delicious Newater everyday.
Hi tradehaven, judging from all facts available, you think it will be a good buy? Or buy from secondary market? Thank you
Hi Tradehaven, very much appreciated your insights and analysis. I am wondering if you have any idea what is the issue size? Are they trying to borrow a lot from this tranche? 🙂
I understand the issue size to be SGD 250 million and the books are currently over 500 mio.
Just wanted to check the coupon rate after Year 3 – am I right to say the fixed coupon for the first 3 years disappears, and then it is that 3-year SOR rate + 0% margin + 2% step-up?
Any idea what the 3-year SOR is now and whether it is a “volatile” number?
Thanks!
Many thanks for the kind info on issue size. Will look ou here for further details such as final coupon rate and debut price if and when they are available. Thank you so much for everything once again.
They could not resist… SGD 300 mio.
“Hyflux to Offer S$300m in 5.75% Perpetual Capital Securities”
3Y interest rate is 0.92/0.95, so I guess the 3Y refix coupon = 3Y interest rate + 4.8x% + 2%
3Y interest rates have averaged 1.12% for past 5 years, high was 2.49% (2009) and low was 0.16% (2011).
Thanks!
Thanks again Tradehaven,
With reference to your comment QUOTE That is a retail issue traded in notional lots of SGD 1,000 on the stock exchange. Its last price was 105/105.75 (clean), 107/107.80 (dirty), yield 4.69/4.50%. The SGX price is 107.80/108.80 (dirty), implying a lower yield. UNQUOTE …. when Hyflux issued Perpetual Paper they did so with both a retail tranche and an institutional tranche (for accredited investors). I got some of the latter thru my bank; like the retail paper this trades on a dirty basis.
If I recall correctly (I’m getting old so correct me if I’m wrong), the retail tranche was lauded as the first Singapore non-banking, non-financial-services paper to be traded on the SGX.
I note that the price of Hyflux’s 6% original Perp paper has retracted a tad since the announcement of this further Perp. Deals were done on the 6% stuff today at the S$ 107.3 level.
Lest I come across as winging, I should be clear that I’ve been pleased with the performance of Hyflux’s 6% Perp – a decent reliable coupon & some capital appreciation (if I was to bail now).
Best
Article in the Edge : New wave of opportunities in China focused water treatment companies
http://www.theedgesingapore.com/component/content/article/1182/47039-main-cov.html
some highlights of Hyflux:
– submitted “a stunningly low bid” for worlds largest seawater desalination plant project in Algeria; 55 US cts vs nearest competitor at 79 US cts
– CEO Sam Ong; right hand man of the founder Olivia Lum for 7 yrs, will be leaving for SMRT
– water coy stocks in the spotlight currently are those with exposure to China after the govt committed to high water standards during its 3rd plenum meeting in Nov 2013
– earning ability of Hyflux in the near term will be hampered by up from costs on the Algeria project which Hyflux has complete in 28 months (vs 36 mth proposal by competitors)