Hyflux 6% Perpetual Security

There seem to be quite a few stock and bonds offerings coming up for the market recently. Now, there's a 6% perpetual capital security being offered by Hyflux.

Some information on the perpetual security. The earliest date that the company can redeem these perpetual securities is 27 May 2020, which is 4 years away. But it can also choose not to redeem it then and redeem it at another distribution date (which is on 27 May and 27 November of each year) after that. But if they do not redeem the bonds on 27 May, the interest rate will change to the sum of the 4-year SOR at the reset data + initial spread (which is 4.2%) + step-up-margin of 2%

They can also choose not to pay the interest unless they (or their subsidaries) have (1) paid a distribution, dividend or any other payment on their junior obligations (think shares) or (2) redeemed, reduced, cancelled, buy-back or acquired any junior obligation for the six months ending on the day before the scheduled distribution day. If they choose to defer distributions, they will have to pay interest on those distributions as if they were principal

So, basically, Hyflux can choose when they want to redeem the securities on and after 27 May 2020 as well as defer payments of distributions. Just as a reference, Hyflux has paid dividends biannually in May and Aug-Sep since 2010, so if this trend continues, they would have to pay their distributions on time as these dates are within the 6 month period of the scheduled distribution dates. (Even if they revert back to the once a year dividend in May, they would have to pay the distributions at least once a year at the May distribution date)

Reading the offer document is getting quite confusing already with all the terms and conditions. Now I'm going to look at the financial statement to see if they can sustain their payments.

At first glance, the profit and loss statement looks ok-ish. For 2015, the interest coverage ratio (if I take the tax credits into account) is slightly over 2. But the earnings per share seem to be negative while the net profit attributable to owners of the company is positive. If we look at the notes to the financial statement for this, the reason is because of the dividends paid out to perpetual security holders and preference shares of the company, which is what these securities are going to make up. So for 2015, after paying all its obligations to bondholders, capital security holders and preference share holders, the company actually lost money, which is not a good sign. But if we look back further into the past, the company has been able to generate money for its shareholders (looking at the earnings per share), which may provide some form of cushion in case the profits of the company drops further.

The balance sheet is quite similar. Debt to equity is almost 1.1, but if we look at the equity, around 35% if made up of perpetual capital securities. Nothing else much to comment here.

The cash flow statement doesn't look very good either with the company generating negative operating cash flow for 2015 and 2014. One thing to note is that there have been treasury shares purchased, which is one of the conditions that make distributions mandatory.

I'm not really well-versed in Hyflux's businesses so I wouldn't make much comments. But from the numbers and the much more complicated nature of these perpetual securities compared to regular bonds, I don't think I'll be investing in this issue as I think that it is too risky, especially with the company having an option not to pay the distributions. If it was a normal bond, I would have invested some inside it though.

For the interest of those thinking in investing in this issue, the last traded price of 6% preference shares by Hyflux, which I think have similar terms as this perpetual security, is above par at 102.2

If you have enjoyed this post and would like to receive notifications on new posts, you can subscribe to my blog via email or like our Facebook page