Hyflux saga

Hyflux saga: Flood of questions over debt debacle

Once the darling of the entrepreneurial scene, Hyflux is now vilified by investors and its affairs closely watched by regulators. Insight looks at the questions that have arisen.

Retiree Alice Chong thought she found a safe product where she could park her savings when Hyflux launched its perpetual securities in May 2016 touting a 6 per cent annual return "forever".

It was easy. All it took was just a few minutes at an ATM, and she received notification soon after that she had successfully bought nearly $200,000 of these perpetuals.

But, exactly two years later, the much-lauded home-grown water and power company filed for bankruptcy protection. Weighed down by a massive $2.95 billion debt, it said it needed to reorganise its liabilities and businesses.

The promised yields for Ms Chong, who is in her 50s, disappeared.

"Everything was so positive about this company," she says.

At its peak in 2010 when its shares were trading at $2.15, Hyflux was worth nearly $2.1 billion, according to media reports. But, by the time its shares were suspended last May, its value had shrunk to around $165 million, based on Singapore Exchange (SGX) data.

Hyflux's future was thrown further into disarray on Thursday when the firm announced that a rescue offer by Indonesia's Salim-Medco Investments was off the table. Its court-sanctioned reprieve from creditors is set to expire on April 30.

  • Perps, prefs not complex products, can be offered via ATMs: MAS

  • Perpetual securities such as those sold by Hyflux are "not complex" products, and thus can be offered at ATMs, said the Monetary Authority of Singapore (MAS).

    It was responding to concerns by retail investors that these have been made too easily available without ensuring that intermediaries exercise due diligence.

    "Preference shares and perpetual securities are allowed to be offered via ATMs as they are not complex products and have terms and features generally understandable by retail investors, such as regular coupon payments and repayment of principal upon redemption (should the issuer choose to redeem)," said an MAS spokesman in reply to questions from Insight.

    Banks are required to remind investors on the ATM screen to read the disclosure documents before making their applications.

    Some 34,000 retail investors sank a total of $900 million into Hyflux preference and perpetual securities in recent years.

    But the firm soon ran into trouble and sought bankruptcy protection last May. A bailout plan by SM Investments of Indonesia fell through last week.

    Hyflux's court-sanctioned reprieve from creditors is set to expire on April 30 and it sought to reassure stakeholders on Thursday, promising to "relentlessly pursue all other viable strategic opportunities" as part of the court-supervised restructuring.

    In hindsight, retail investors are now asking if the authorities could have done more to protect ordinary investors from these products (see main story).

    But MAS said: "MAS does not judge the merits of investment products sold in the market or supplant investor judgment on an issuer's financial position or business performance. However, MAS requires issuers to disclose all relevant information to allow investors to make informed decisions.

    "All investments carry risks," MAS added.

    Analysts gave mixed responses when asked what they thought of perpetuals.

    "Perpetuals are more complex than straight equity and straight bonds because investors also need to consider the structure," said OCBC analyst Wong Hong Wei. "Most perpetuals include a call, and their distribution can be deferred. They can also have structures like step-ups, resets. Is it subordinated or senior?"

    iFast's Mr Ang Chung Yuh concurred: "In general, perps are more complex relative to plain vanilla straight bonds." But "we can't give a blanket statement saying that all perps are too complex for retail investors".

    He noted that perps come in many varieties - some are relatively straightforward. Others are less so, for instance, if they are bank capital instruments with loss absorption triggers and non-cumulative deferrals.

    "Using Hyflux's perpetual securities as an illustration, the structure is not too difficult to comprehend," he said.

    What was important was to explain these products thoroughly and simply so that the client can understand, said the analysts.

    Mr Ang added: " I think the bigger problem is that too many investors bought the securities without a good understanding of Hyflux's financials and company profile - for instance, it does not have Temasek on its list of shareholders."

    Temasek had a stake in Hyflux in the early 2000s as part of an initiative to support small and medium-sized enterprises but it exited Hyflux by 2006 - well before the company issued its preference and perpetuals securities in the 2010s.

Ms Chong is among 34,000 holders of perpetual securities and preference shares in listed Hyflux, whose chief executive is engineer-turned-entrepreneur Olivia Lum.

Perpetual securities are high-yield corporate bonds.

The Monetary Authority of Singapore (MAS) said on Friday that such instruments are "not complex products" and so are allowed to be offered via ATMs (see other story).

Analysts and investors are now rummaging through what remains of the embattled company.

Questions loom, ranging from the company's fundamentals and state of its health, to whether enough warnings were given to investors to help them make informed investment decisions.

Insight examines some of these key questions.

Did Hyflux bite off more than it could chew?

At the centre of the Hyflux saga is Tuaspring, a water desalination and power generation plant at Tuas - which helps secure the water needs of this resource-challenged island state. Apart from desalinated water, Singapore's four "national taps" include water from local catchment, Newater and imported water.

To power its desalination operations, Hyflux built a power plant and intended for excess electricity to be sold to the national grid.

Observers say the firm took a hit when electricity prices crashed in 2016 to as low as $44 per megawatt hour (MWh). That figure was nearly $280/MWh in 2011, the same year when Hyflux won a contract to supply the island with desalinated water. The average price last month was $104.30/MWh.

But analysts say such market volatilities should have been factored in by the firm's management.

A fixed income analyst at wealth management firm iFast Corp, Mr Ang Chung Yuh, says: "Unforeseen circumstances in the economy happen regularly but you don't often see companies folding in such a spectacular manner because of industry downturns. If a single factor like market (volatility) can bring you down, that tells you about your risk management."

He adds: "Companies should look out for risks that some shock factor can bring them down."

Mr Ang asks if Hyflux's decisions on how it funded its projects were suitable. "Does it really have the capacity to absorb such a project? Given the scale and size of its projects, they should have been funded with more equity rather than debt-like perpetuals. They took on a capital structure that was clearly unsustainable to fund their expansion plans."

Apart from Singapore, Hyflux has water treatment projects in China, the Middle East, North Africa and India.

Why weren't its woes disclosed earlier?

Investors and observers were left bewildered when national water agency PUB served a default notice last month, saying Hyflux failed to keep its water plant "reliably operational" and did not produce financial proof that the plant can be kept running for the next six months.

These operational problems dated back to early 2017.

Tuaspring was unable to replace poor-performing membranes promptly, which affected the quantity and quality of water produced and PUB threatened to seize the plant if these defaults were not corrected by April 5.

In response to queries on Friday on the status of the proposed takeover of Tuaspring, PUB said it was "monitoring developments".

Analysts are puzzled why the defaults with PUB were not disclosed earlier so that investors may be better informed.

OCBC credit research analyst Wong Hong Wei says: "If this information is so material, then it should have been disclosed back in 2017."

Warning signs about the state of health of the company were not adequately flagged, say some analysts.

OCBC's Mr Wong says: "Back in 2016, it should have been loss-making already if you take away the distribution to perpetual and preference (shares) holders."

Although the company reported a restated net profit of $3.8 million in 2016, this included payments it owed to its perpetual and preference debt holders. Stripping away this, it instead incurred a net loss of $59.9 million in 2016.

Hyflux's 2017 annual report, which was published in March last year, also gave little hint of the firm's deep-seated problems that have since surfaced, Mr Wong says.


"It's very strange that, in 2018, the auditor would give an unqualified opinion on the company's financial health and, two months later, Hyflux files for bankruptcy protection. Nothing was flagged about the company as a going concern, given the subsequent impairment, weak cash flow and low electricity prices," Mr Wong adds.

KPMG, the auditor which signed off on the 2017 report, has declined to comment, citing client confidentiality. The Accounting and Corporate Regulatory Authority told The Straits Times earlier it is monitoring the situation closely and will "assess if further action is warranted" .


Unforeseen circumstances in the economy happen regularly but you don't often see companies folding in such a spectacular manner because of industry downturns. If a single factor like market (volatility) can bring you down, that tells you about your risk management.

MR ANG CHUNG YUH, a fixed income analyst at wealth management firm iFast.


It's very strange that, in 2018, the auditor would give an unqualified opinion on the company's financial health and, two months later, Hyflux files for bankruptcy protection. Nothing was flagged about the company as a going concern, given the subsequent impairment, weak cash flow and low electricity prices.

MR WONG HONG WEI, OCBC credit research analyst.


How can perpetuals be issued via ATMs? ATMs are for normal moms and pops, they are not institutional investors.

MS MICHELLE SIM, an investor in her 60s.

At the end of March last year, Tuaspring water and power plant had a book value of $1.47 billion.

In June last year, in a court affidavit filed then, Ms Lum said the Tuaspring plant had a book value of $1.3 billion.

Last month, Hyflux announced that it had taken a $916 million impairment - when an asset has a market value that is less than the asset's book value - to adjust for a fall in the value of its Tuaspring water and power plant and other write-downs after it asked a valuer to conduct an up-to-date valuation of the plant.

Hyflux's operating cash flow has been negative since 2010, according to the company's annual results reports.

Why were 'complex' products made so easily available?

The perpetuals offered a fixed annual return of 6 per cent, the minimum investment needed was only $2,000, and retail investors could apply for them online and via ATMs across the island.

The question has now arisen whether the perpetual instruments should have been sold via ATMs, a facility where one often has to make brisk transactions because there are people waiting in line.

Retail investors say the only messages of caution they remembered popping up were those asking if they read the issue prospectus and if they understood the terms and conditions - questions to which most would quickly answer "yes".

Now, thinking back, retail investors say they were too trusting.

An investor, Ms Michelle Sim, who is in her 60s, says: "How can perpetuals be issued via ATM? ATMs are for normal moms and pops, they are not institutional investors."

Rival financial hub Hong Kong offers no such convenience, whether for the purchase of stocks, bonds, mutual funds or derivatives.

In December last year, the territory's securities and futures regulator further tightened sales of what it determined were complex and high-risk products. These include perpetuals.

In a circular to intermediaries distributing such products, they were told to exercise due diligence in ensuring the products they were selling were suitable for their clients in terms of their financial situation, risk tolerance and investment experience, among others. These agents were also told to highlight the risks, give balanced views of their products and not focus on only their advantages.

At the same time, retail investors need to do their own checks. They have to remember that investing comes with risks and must be accompanied with proper understanding, say analysts.

iFast's Mr Ang says: "Investment comes with risks. I think compared with restricting the sales or distribution of perps, it is more important to build financial literacy among investors. While bonds are generally perceived as carrying a lower risk than stocks, it is dangerous to blindly assume the bond or perp form as an assurance of safety."

When asked for its comments, SGX said Singapore-listed companies can issue debt securities and are subject to continuous disclosure obligations for the purpose of keeping shareholders informed.


"The disclosure obligations are crucial as the underlying principle of Singapore's disclosure-based regime is that material information must be disclosed clearly, accurately and on a timely basis.

"MAS and SGX are keeping a close watch on the developments at Hyflux. If there is any evidence of potential breaches of the law or rules, including any potential disclosure lapses, we will investigate and take appropriate actions."

Angry, can't sleep and considering legal action

Environment and Water Resources Minister Masagos Zulkifli told Parliament on Monday that, while the Government can understand the concerns and anxieties of retail investors, it "cannot use taxpayers' money to help investors recoup their investment losses".

With no rescuer now in sight, retail investors are stuck in limbo.

"There will need to be alternative plans and/or an application to extend the debt moratorium, or the worst (liquidation) could result," says OCBC's Mr Wong.

Among the 34,000 investors who bought some $900 million worth of Hyflux perpetual and preference shares, a small group of about 50 told Insight it is considering taking legal action against the company.

An investor, who asked to be identified as Mr S.G. David, says: "Many of us want to sue Olivia Lum, the board of directors, the auditor and the banks. What we are asking is for the regulator to investigate and find out if there were any breaches committed. With this, we can get our recovery from the personal wealth of Olivia Lum, the board of directors, the issuer, auditor and the banks. We believe we have a case."

Ms Kitty Chia, who is in her 50s, says: "I can't sleep well. I have insomnia. This is my private money, my savings. I have not even told my family that the money is lost."

She adds: "This is money I saved up for the university fees of my three children. Now I have to work doubly hard to get it back. We were not greedy, we did not invest... for capital gains but just for steady yields. We thought it was safe."