Commentary: Hyflux saga: Judicial management not the panacea for company’s restructuring

Date: May 23, 2019

First published in The Business Times on 17 May 2019

It is almost exactly one year since water treatment firm Hyflux applied for a moratorium while it sought to restructure its finances. A crucial part of that restructuring process involved finding a suitable “white knight” investor who could inject much-needed cash into a business that although was loss-making was seen as being still viable and attractive enough to attract the interest of several parties.

Granted, the one investor which stepped forward in October 2018 – Indonesia’s SM Investments – is no more, but other white knights have just last week come forth, most notably Utico from the United Arab Emirates and Oyster Bay Fund, with potential investments of S$400 million and S$500 million respectively. A third has appeared and yet to be named.

Their presence should be viewed positively and offers hope that Hyflux can be saved. Indeed, Sias continues to believe that there is value and also opportunity still in Hyflux which remains a globally recognised brand name in the engineering, procurement and construction sector that owns sophisticated proprietary skill and technology through the leadership of Olivia Lum, the founder.

Transparent process

With only a few days to go until the May 29 moratorium deadline, Sias’ view has not changed – if there is a chance, no matter how slim, to steer Hyflux away from liquidation, then that chance should be taken. Nothing should be allowed to derail the restructuring process.

In this connection, Sias notes that a minority group of seven banks had made applications to be carved out of the moratorium so that they can commence judicial management proceedings against Hyflux and Hydrochem.

DBS Bank and the lenders for the TuasOne waste-to-energy project (“TuasOne WTE Project”) opposed such applications, arguing that a judicial management would endanger the completion of the TuasOne WTE Project.

The majority of the other senior unsecured lenders comprising the medium-term noteholders and more than 10 banks chose not to be party to the applications for the carve out. The court declined to allow a carve out at this time.

Sias believes that it is premature to place Hyflux into judicial management at this stage for the following reasons:

(a) Firstly, the TuasOne WTE Project is close to completion. Delays at this critical stage due to the added complication of a judicial management process would deny or delay much-needed revenue that Hyflux can earn from the TuasOne WTE Project. It may also lead to Mitsubishi Heavy Industries exercising its default call option to acquire Hyflux’s stake at a reduced valuation.

(b) Secondly, the appointment of judicial managers could cast doubt on the continued participation of potential strategic investors like Utico and Oyster Bay Fund. Indeed, the appointment of judicial managers would jeopardise the continued participation of Oyster Bay Fund, which has stated that its letter of intent is to automatically terminate in such an event.

(c) Thirdly, it is unclear that replacing a company’s management with judicial managers will lead to an improvement in the company’s fortunes in the near term, as they may not possess in-depth knowledge of local conditions in a highly specialised area like water treatment.

Sias understands that some retail investors have written to the Court to express their concerns on accountability of Hyflux’s management and dissatisfaction on the preliminary restructuring terms.

These concerns may be addressed by setting up a creditor committee consisting of financial and legal advisers for the creditor groups (including the P&Ps) to meet on a regular basis, where the members of management and/or the board will attend and address the committee, among others, on the progress of the restructuring and Hyflux’s ongoing projects.

Sias will, in addition to the ISC, extend updates directly to all P&Ps and other creditors who have provided their email addresses to Sias on the status of the restructuring.

Sias will also continue to facilitate the feedback received from P&Ps and these other creditors to Hyflux, its advisers and the Court, where appropriate.

An extended moratorium coupled with heightened conditions for disclosure and engagement with creditors, in our view, would provide creditors with the benefit of an orderly and transparent restructuring process, less the potentially negative effect of the judicial management on Hyflux’s search for strategic investors as well as ongoing projects.

At this delicate stage of the restructuring with two potential lifelines on the table, this, in Sias’ view, appears to be the most sensible route ahead.

Beneficial outcome

The upshot of these considerations is that at this advanced, delicate stage and with at least two potential lifelines on the table, it would be very unwise to radically alter the situation by placing the company under judicial management.

With the clock rapidly ticking, notwithstanding the legal rights of the lending banks, Sias urges the breakaway coalition of banks, which are seeking judicial management, to bear all of the above in mind and consider that if Hyflux is saved, then all stakeholders – particularly the thousands of retail investors who are staring at the prospect of having hard-earned life savings and retirement money wiped out – would surely be better off.

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