Small Change

Hyflux bonds are no Lehman Minibonds

Water treatment firm's bonds not complex products targeted at vulnerable investors

Reactions to the financial woes of water treatment company Hyflux have been robust, with several commentators equating it to the Lehman Minibonds fiasco 10 years ago when some 10,000 retail investors lost about $500 million.

Some have asked for retail investors of Hyflux's bonds to be compensated, just as many of the Minibond investors were.

The Hyflux investors on their own are also actively finding a solution to preserve their investment. In March, they held a protest at the Speakers' Corner.

They have also sought the help of the Securities Investors Association (Singapore).

In terms of scale, the Hyflux losses - involving some 34,000 retail investors who had poured in about $900 million into now near-worthless perpetual securities (perps) and preference shares - are certainly bigger than those of the Minibonds. But as far as culpability is concerned, the two issues are very different.

The Government said last month that it cannot use taxpayers' money to help investors recoup their investment losses.

As for compensation from DBS Bank, which managed and distributed Hyflux's perps in 2016, such a proposal is a non-starter. The Monetary Authority of Singapore (MAS) has said that it has not uncovered any impropriety by the bank in arranging the sale of the perps. It found that DBS had conducted due-diligence checks to ensure that material information relating to Hyflux was highlighted in the offer document, which also carried a warning that Tuaspring power plant was expected to incur losses if electricity prices in Singapore were to remain low.

In contrast, there was extensive mis-selling of the Minibonds and similar products such as High Note 5 and the Pinnacle Series. Known as structured notes, these were highly risky, highly complex investment novelties at the time in Singapore.

But they were sold by the banks and stock brokers as low-risk fixed income products to retail investors, including vulnerable ones such as retirees with little education. Following a groundswell of public complaints and an active role taken by the MAS to help affected investors, many received settlement offers from the institutions.

Some say the investors of Hyflux, which supplies drinking water to national water agency PUB, were lulled into believing - erroneously, as it turned out - that it was too important to be allowed to fail.

They may also have been persuaded that Temasek had taken a small stake in Hyflux in the early noughties. (It's not clear if they knew that Temasek pared its stake to 0.89 per cent in March 2005 or that, by 2006, it was no longer on the list of Hyflux's top 20 shareholders.)

Much as I sympathise with the Hyflux investors, I cannot disagree with the laissez-faire approach taken by the authorities as far as their investment is concerned, unless it was marketed as a guaranteed product. So far, there is no evidence that this was the case.

The Hyflux bonds were of the plain vanilla variety, containing no complicated features. Their value is simply dependent on the issuer's ability to stay afloat with sufficient cash flow to service its debt obligations when they fall due.

This is no different from the more than 700 debt and equity listings on the Singapore Exchange (SGX). From among them are plenty of companies that have let down their stakeholders badly.

Some are on the SGX watch list - a kind of purgatory for smallish firms that consistently lose money.

Many have been delisted, put under judicial management or liquidated. They have mostly gone quietly, their passing marked only by the silent grief of the affected minority stakeholders. If there is no compensation for the many failed listings, should there be one for Hyflux stakeholders?

The Hyflux saga has also drawn other questionable conclusions, including a call by some quarters to do away with retail bond offerings.

It is tempting to claim ignorance or a lack of education on the part of unsophisticated investors for their predicament, but doing so risks missing the wood for the trees.

Let's not overlook that Hyflux's insolvency did not catch just retail investors by surprise; it also ensnared bank credit officers, fund managers and auditors - financial professionals who ought to have known better.

Flooding the investor with all kinds of disclosure is not the answer either. Take risk appreciation, for example. Will an investor reading the Hyflux prospectus for its 2016 perps offering from cover to cover be any clearer about a default risk than someone who did not, bearing in mind that a prospectus typically contains a long list of things that could possibly go wrong?

Statistics students know that merely listing possibilities without knowing the corresponding probability level will frustrate any meaningful risk evaluation.

The risk factors in Hyflux's 2016 perps offering prospectus ran over 20 pages long. Its woes today come from an ill-conceived plan to enter the power-plant business, based on erroneous projections that profits from selling electricity would be sufficient to subsidise the cost of producing water.

This did not pan out because of severe overcapacity in the power-generation market. So if you were able to identify "The group is a new entrant to the power business" on page 35 of the prospectus as the factor that would bring Hyflux to its knees, your foresight as an investor is exceptional.

Another piece of conventional wisdom on what went wrong is that investors had not heeded the warning sign intrinsic in the issue's high coupon. But it's debatable whether 6 per cent - the interest on Hyflux's perps - suggests a high risk of default. French bank Societe Generale last month issued a $750 million perp priced at 6.125 per cent, and received overwhelming response from investors.

Aside from company-specific risk, yields on debt issues also take into account industry and country risks, and the prevailing interest rates at the time of issuance.

Rather than continue to play the blame game or look for magic fixes to prevent one from getting burnt, it is useful to reiterate the importance of diversification in investing. Avoid an over-concentration of wealth in individual assets or asset classes.

The Hyflux fiasco is no reason to stop retail bond offerings.

Unlike wholesale bonds, which are sold at $250,000 a pop, you can subscribe for retail bonds for as little as $1,000.

There is also a convenient exit option. If you feel the risk level for holding onto the bond has risen beyond your risk tolerance, you can sell it in the open market.

Meanwhile, all is not lost for Hyflux investors. Utico FZC - the largest private utilities provider in the United Arab Emirates and which is backed by sovereign institutions of the governments of Oman, Saudi Arabia, Bahrain and Brunei - has reportedly submitted a non-binding offer amounting to $400 million in a last-ditch effort to save the embattled water treatment company. Separately, Hyflux last Friday received a second non-binding letter of intent of up to $500 million in investment from Oyster Bay Fund, a global multi-strategy fund.

Unlike an earlier offer by a Salim-led consortium, the Utico offer does not expect retail perps and pref share investors to take a steep loss upfront. Their investment will be kept whole in Hyflux's books, which may accrue value over time if the bailout is successful and the company can be rehabilitated and becomes profitable.

Of course, there is no guarantee and Hyflux investors may have to wait a long, long time to recoup their investments - if ever.