Just a few days ago, the headlines for the recent Hyflux Saga read: “Taxpayers’ money cannot be used to help investors recoup their losses, says minister,”.
There was also a protest by disgruntled Hyflux investors at Hong Lim Park over the weekend.
I chanced upon the article on Hyflux story so far in BT Weekend, 23-24 March 2019. Given that it had listed the debts raised in the past years, I decided to compile them into a timeline in hope to have a better picture of Hyflux’s current predicament. What really puzzled me was the perpetual raised in 2016. It was stated that the perpetual of $500m was raised to redeem the two tranches of perpetuals raised for institutional and accredited investors. The first was $300m perpetual @5.75% raised in January 2014 and the second was $175m perpetual @4.8% raised in July 2014.
Just purely from a financial management point of view, why is Hyflux willing to raise perpetual at 6% to redeem perpetuals at lower coupon rates. After all, the 4.8% and the 5.75% perpetuals were hardly 2-year old 3-year old respectively when they were redeemed. Why was Hyflux so anxious to redeem those perpetual bonds when the perpetuals are still so recent by any standards.
Without considerations of the administrative costs involved, the $175m @4.8% would have cost Hyflux $8.4 million annually while the $300m @5.75% would cost them $17.25 million. Adding these two coupons, it would cost Hyflux $25.65 million. Why would Hyflux wanted to raise $500 million @6% just to redeem the two earlier perpetuals. The $500m @6% would have cost Hyflux $30 million annually. Why does Hyflux willing pay additional fund of $4.35 million to the new perpetual holders instead of just staying status quo to continue to serve the two institutional perpetual bonds. After all, the bonds are still very new especially when they are also of perpetual status. Are there some non-financial reasons that investors do not know?
In fact, from financial point of view Hyflux should redeem the $400 million preference shares @6% as by Call Date in April 2018, the coupon would be stepped up to 8%. Based on calculations, the $400 million perpetual coupons would have increased by $8m from $24m to $32m. So, wouldn’t it be more critical to clear (or redeemed) the higher coupon rate first.
All these make no sense to me.
Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and
Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.
Once again, this article is a guest post and was originally posted on Brennen Pak‘s profile on InvestingNote.
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