IHC – seems a case of poor PR, bad luck and past catching up

In the business of investing and managing medical facilities, IHC – International Healthway Corp – is in a recession-proof industry which should be an enviable position today. Yet, its woes don’t seem to end. I am writing on this counter mainly to use it as an example to flag out the issues of corporate PR and governance for Singapore catalist companies, and the bigger issue about regulatory guidelines on bond issuers, arranging banks and trustees when events occur. It’s the usual blackout from this latter group that should worry investors.

Long and short, if I read the IHC matter correctly, it’s a sad case of confluence of bad luck with its past catching up with them and some hostile bidders lurking in the background.

Past deeds and present PR skill. This whole matter with Crest Funds probably arose because IHC’s Aussie subsidiary took up a credit facility from Crest Funds once upon a time.

Question 1: why go to a small-time funder and not a bank? Is this not like going to a loan-shark? Loan-shark or not, the fact that today, Crest pounced on the company’s Aussie subsidiary on a claim which was subsequently overturned by the Aussie court, does suggest Crest’s intention is not wholesome. In fact, it has to withdraw its receivership order but not until it managed to change the management of the IHC Aussie subsidiary.

Question 2: why didn’t IHC manage to prevent that from happening?

Questions 1 and 2 above remain unanswered by IHC – this is where its PR could have done a better job to seize the moment of the day to explain the matter.

So now the company has fairly successfully convinced us that they are a going-concern and things are pretty ok because those Aussie properties are deep in the money. In fact, they said they were already planning to sell these properties when the two Aussie banks and real estate finance company decided to place their receiverships on the properties as well. We believe IHC’s claim that the Aussie financiers’ moves were solely motivated by Crest’s success in replacing the IHC Aussie subsidiary’s management with their own people. We also subscribe to IHC’s view that by law, these Aussie banks must ensure that the properties are sold at fair market price. Hence, IHC is probably happy that the banks stepped in to protect their properties which should reassure the unsecured bondholders as well.

IHC clarification 16 September 2016

This whole IHC episode – which really isn’t quite over yet until they sell the Aussie properties, pay off the debts and move on – begs the question on where are the trustees and the arranging banks throughout this period? In IHC’s own notice, they acknowledged that an event of default (EOD) has occurred as the Aussie subsidiary has come under receivership. That in turn was because the subsidiary had reneged on an interest payment because the new Crest-appointed management blocked it, deliberate surely. As the Aussie subsidiary can be considered a principal subsidiary because both its revenue and profit contributions to the IHC group are well above the 10% minimum to qualify as a principal subsidiary, this EOD gives an option to noteholders to react.

Question 3: what exactly is the fiduciary duty of bond trustees? Do they subscribe to the same motto that I was decades ago in the “civil service” – it goes as, “never volunteer, never refuse”. In other words, shouldn’t the trustee be following up on the matter with the issuer/ IHC while simultaneously updating noteholders of the situation?

Of course, given that there is sufficient comfort that IHC is very much a going-concern, noteholders in this instance are best advised to keep calm and carry on. This is clearly the reason why there is a group of significant shareholders eager to knock over the current board of directors and possibly, launch a hostile takeover bid.

Going back to the bit about the past catching up with IHC. The company has two notes issued under its 2015 MTM programme. The 2018 6% note was issued a few months before the 2017 7% note that year and they were arranged by two different banks, with the first note being arranged by the same bank which worked on their MTM programme.

Question 4: what do you make of a company that got one bank to issue a note and then three months later, got another bank to issue another note of a shorter maturity but with a coupon step-up by 100bp? They were lucky the first time round and/ or the second bank was not very proficient with DCM? We really don’t know. But it’s a lesson for companies, especially catallist companies to be more careful with its public forays in the markets or else, the past always catches up one day.

Notwithstanding all the questions above, I think there is still sufficient comfort for noteholders to keep calm and carry on. IHC has enough assets to cover debt by nearly 2x. The seemingly hostile takeover bid will ensure the management stays afloat to ward off these bidders. On the other hand, the bidders are clearly looking at the cheap valuation of its shares because of the assets and it would be hard to imagine them dumping the assets if they are successful in taking over the management and/ or company.