Commentary: Can the Hyflux restructuring be resurrected?

Date: April 11, 2019

First published in The Business Times on 11 April 2019

It was hugely disappointing to learn last week that troubled water treatment firm Hyflux Ltd has terminated its agreement with SMI, the only “white knight’’ that has emerged over the past year with funds to help Hyflux. Ever since SMI announced its $530m rescue package last October, SIAS had consistently maintained that no effort should be spared to ensure that SMI stayed in the game, whilst urging all stakeholders to show up and vote at their respective restructuring extraordinary general meetings in order to stave off liquidation and save Hyflux.

After last week’s shock announcement, many questions are puzzling. The obvious one would be whether the contract between Hyflux and SMI had been breached and if so, what exactly is the breach. It appears to be this: SMI obviously underestimated the level of capital required to run Hyflux post restructuring and had disagreed with the allocation from the $400m cash injection to pay out creditors. Hyflux in its announcement last week said it wrote to SMI asking for a clear and unequivocal written confirmation of SMI’s commitment whilst also stating that if none was forthcoming, Hyflux would have no choice but to terminate the agreement.

“Regrettably, (SMI) in a letter from its lawyers dated 4 April 2019, declined to provide the written confirmation sought’’ said Hyflux. Meanwhile, adding to the confusion for stakeholders is that Business Times in its report last week said SMI is surprised by Hyflux’s unilateral move and will be seeking legal advice.

There is little doubt that the focus of that legal advice will be aimed at recovering the S$38.9m deposit which SMI put into escrow last October when the agreement was first signed. It also appears that Hyflux’s decision to act as it did was motivated by a desire to secure that money before SMI could reclaim it, money that although small in quantum, could still be put to good use in paying off its debts.

It looks very likely that both sides will now battle it out in court to see who gets to keep the deposit; but until then stakeholders and all concerned should not lose sight of the fact that although a central player is no longer in the game, the original objective remains the same – to stave off liquidation, ensure the company continues as a going concern and to try and preserve the investments made by  50,000 retail investors in Hyflux’s perpetual, preference and ordinary shares.

Firstly, all concerned should recognize that it will be an arduous task to find another party to play the role of rescuer before Hyflux’s moratorium deadline from winding-up action ends on 30 April. Arduous yes, but impossible, no. Hyflux’s finances in a mess but its focus on water is not – water is a strategic asset not just for Singapore but every other country around the world and the company’s expertise in this area must count for something.

Secondly, the 30 April 30 deadline is not necessarily definitive and final. If the Court can be shown evidence that active efforts are being made to find alternatives to liquidation, an extension may be granted. This, I am sure, is being done already by the company’s lawyers.

Thirdly, there is a likelihood that national water agency PUB will take over the running of Hyflux’s local desalination plant, Tuaspring because the latter has been unable to fulfill the terms of its agreement with PUB. If this occurs it would mean the removal of a major problematic asset, which was a burden to the company, from the books, which may actually help Hyflux in finding another rescue partner. SIAS notes that when we sought clarity from PUB on reasons for its actions, its reply included the following:

“Hyflux has also noted that PUB’s actions, in the event PUB elects to terminate the Water Purchase Agreement, would alleviate the pressure on the rest of the Hyflux group, and also positively impact Hyflux’s value and hence the value of the Hyflux shares being offered.’’

“It is beneficial to all stakeholders, including about 50,000 retail investors as well as about 3,000 CPF members who used their monies to purchase Hyflux ordinary and preference shares. This will also increase the chances of Hyflux being successfully restructured’’.

Last but by no means least, whilst SIAS sympathises with the plight of Hyflux investors, it is important for them to bear in mind that liquidation serve no one’s interest. Investigations are ongoing and it is not dependant on liquidation. The regulators are all looking into whether there have been breaches. The legal rights of investors, as it is, are also intact.

The focus must be now for all stakeholders and creditors is to give the company time and space to find an alternative white knight and if this cannot be done by 30 April, then to apply to the Court for a moratorium extension. As noted earlier, it will be very difficult but not wholly impossible if everyone concentrates on the tasks at hand. All other considerations should be secondary.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)