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.