What S$400 million rescue deal means for Hyflux share price

Troubled water treatment company Hyflux Limited may have received some financial relief just in the nick of time, but it appears that retail shareholders might wind up getting the short end of the stick in the company’s new restructuring deal.

On Tuesday 26 November, Hyflux announced that it had entered into a S$400 million restructuring agreement with United Arab Emirates utility group Utico. Its debt moratorium expires on 2 December.

The deal would see Utico procure new ordinary shares equating to 95% of the Enlarged Issued Share Capital for an aggregate subscription amount of S$300 million, split into three tranches.

The Emirati company has no plans to merge with or acquire the Singapore firm. It plans to issue 7% of its stake to institutional investors eventually, in a bid to meet the Singapore Stock Exchange's free float requirements for Hyflux to be re-listed.

Utico will also extend a working capital line of up to S$100 million to Hyflux, of which up to S$50 million will be allocated to paying existing holders of debt securities, with the remaining funds to be chanelled toward the working capital needs of the group, professional adviser fees, as well as future business requirements.

How will individual shareholders be affected?

An additional S$250 million will go to paying unsecured creditors, including banks and retail medium-term noteholders.

While the deal finally ends Hyflux’s long search for a lifebuoy, it might leave some retail investors feeling short changed.

That is because according to the terms of the deal, all debt securities (or Hyflux preference shares and perpetual securities) holders are given two exit options: receive an upfront payment of up to 50% the aggregate value of the shares with a cap of S$1,500; or the same pay-out amount paid out over two years in five instalments with an annual interest of 1.25%.

These two options have been capped at S$50 million.

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Source: Bloomberg

Investors who select the latter option will also be entitled to receive an additional pro-rated cash pay-out sum amounting to the cash equivalent of 4.0% of the issued share capital, and an additional S$50 million, if Utico shares are listed within two years of the signed agreement.

If such a listing does not occur within two years of the deal, the pay-out will be S$50 million.

Such an arrangement could mean some 34,000 private investors who are owed S$900 million in all, are looking at a pay-out amount closer to the range of S$50 million to S$100 million, or 90% below market value.

Reactions to the deal

David Gerald, president of Securities Investors Association of Singapore told Channel NewsAsia that ‘this is not the best deal, but this is the only deal on the table now’.

He added: ‘Something is better than nothing… We have always been against judicial management or liquidation, which brings no benefit to retail investors.’

However, Utico CEO Richard Menezes told The Business Times that the deal is ‘more than fair’, and that the offer to retail investors is ‘substantially more than the last offer that the Salim-Medco consortium (Hyflux’s previous potential investor) made’.

In that first rescue plan, it was proposed that debt securities holders be given a 10.7% recovery of their original investments.

iFast Corp senior fixed income analyst Ang Chung Yah told Channel NewsAsia that the deal will favour shareholders with smaller investments since it would not be scaled accordingly.

‘For example if I invested S$4,000, I will be able to get back S$1,500 and that will be a recovery rate of about 38%. Basically the smaller your investment, the higher your recovery rate will be,’ said Ang.