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 was 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 and 3-year old respectively when they were redeemed. Why was Hyflux so anxious to redeem those perpetual bonds when the perpetuals were still so recent by any standard.

Without any consideration of the administrative costs involved, the $175m @4.8% and the $300m @5.75% would translate to $8.4 million and $17.25 million annually. Adding these two coupon cost together, it would cost Hyflux $25.65 million annually. 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 compare to paying the coupons of two earlier bonds that cost $25.65 million annually. Why did Hyflux willing pay additional fund of $4.35 million per year to 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? Wouldn’t the additional $4.35 million very crucial for Hyflux in view that they had been suffering negative cash flows for at least 5 years before Year 2016?

In fact, from financial management 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 crucial to clear (or redeem) 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.



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