Distressed utilities

https://www.businesstimes.com.sg/companies-markets/perpetual-securities-wont-be-called-until-tuaspring-is-divested-hyflux

HYFLUX will not redeem its retail perpetual securities until the divestment of Tuaspring is completed, it said on Tuesday.

A S$400 million tranche of Hyflux's perps reach their first call date on April 25. Hyflux has the right but not the obligation to redeem its perps at the first call date. The coupon yield on these perps will step up from 6 per cent to 8 per cent per annum until they are redeemed.

Hyflux aimed to partially divest up to 70 per cent of Tuaspring water desalination and power plant last year, but has not. Tuaspring is held on its books at a value of S$1.3 billion.

Since October 2016, Hyflux has also been trying to sell the Tianjin Dagang desalination plant in China, which had a book value of S$150 million.

Ms Lum said that she is still looking for a buyer, although the asset has been brought back into Hyflux's balance sheet as it no longer meets the criteria to be classified as held for sale.

"The are people who submitted certain prices, but we are not happy with the prices. People think we are going to fire sale the asset by lowering the tender price, we will not accept it. There is still upside potential for Tianjin Dagang, so it's not right for us to accept those offers."

Group revenue excluding Tuaspring fell 57 per cent to S$353.6 million last year, on lower EPC work done.

Tuaspring made a net loss of S$81.9 million, from a restated S$114.5 million in 2016, as Singapore's electricity market remains oversupplied.

Ms Lum said: "We have put out an industry representation letter recently (signed by all seven generation companies) to the regulator.

"If the whole industry is losing more than a billion dollars every year, it makes the whole industry very vulnerable. I feel that it's just not sustainable."

This was literally the worst case scenario that I could ever envisioned. High leveraged company that is hit hard by losses, failed investments out of its circle of competence, increased interest rates and borrow costs, as well as declining business revenue. Not even its assets which served as its greatest moat, can be liquidated for a profitable margin.

Buying troubled utilities takes a very strong stomach. The only comfort I have is that I have only a small position in the company due to its distressed balance sheet. To be frank, it is so bad that the too big to fail scenario could have a chance to kick in.

If the company really goes under, 50% of Singapore water supply will be exposed to foreign ownership and control and this is a much more scary thought than any government shutdown. The parliament can probably close down for a week and nothing bad will happen. Switch off the taps for 3 days and the very survival of the country can even be threatened.

I can never be certain if a white knight or government intervention will be there to pump in capital to keep the business afloat. Ironically, I believe the CEO did the right thing by not relenting and giving in to the vultures haggling for a fire sale. Any weaker management will take the easy way out to liquidate the assets for a loss keep his position and transfer the losses and risks to the shareholders. Only a long term shareholder with guts of steel will make the best long term decision.

Sitting on 50% unrealised losses is not a fun position to be in. This Hyflux journey is indeed a bumpy one. But I believe the way forward will be better and I will ride it though