New York-based international publication Bloomberg has called the Hyflux saga a “tale of corporate ruin” that has left 34,000 victims in its wake, in a recent article published on Wednesday (10 Apr).
About 34,000 perpetual securities and preference shareholders who invested in the water and power company are owed a total of S$900 million, but only stand to receive a recovery rate of 10.7 per cent comprising of 3 per cent in cash and 7 per cent in equity.
Bloomberg reports that most of these retail investors are “moms and pops” who have been left empty-handed and are in especially dire straits after the rescue deal with Indonesian consortium Salim-Medco fell through with no assurances of another such deal.
Salim-Medco was touted to be a “white knight” and the only hope for the retail investors of Hyflux who have been left high, and dry.
The Bloomberg writer, Andy Mukherjee, wrote that he supported the nationalisation of Hyflux’s Tuaspring desalination plant in the past.
“The moment has passed,” Mukherjee wrote as he reported about how the authorities have said that there will be no government intervention.
The authorities are also preparing to take over the water plant at “zero dollars” if Hyflux does not resolve its defaults.
Reporting that the “2016 Hyflux perps promised a 6 percent coupon, when 30-year Singapore government bonds yielded 2.5 percent,” Mukherjee argued that it is not uncommon for the ageing Singapore society to target cash returns.
Investors may have put Hyflux on a pedestal, what with investment from sovereign wealth fund Temasek and the rags to riches story of CEO Olivia Lum who went on to become the first woman to win the Ernst & Young World Entrepreneur of the Year award. Prime Minister Lee Hsien Loong had even praised Hyflux in his national day rally speech in 2009.
He had said: “Local companies with strong capabilities are building, expanding, gaining a march on their competitors, like Hyflux.”
Indeed, several investors at a recent Speaker’s Corner protest said that they only invested in Hyflux and Tuaspring because they saw it as a national asset, because of strong government support and “because Temasek invested.”
While retail investors may have been gullible or greedy, Mukherjee asserted that the blame does not lie entirely on them and that “Hyflux shouldn’t have been allowed anywhere near yield-starved Singapore retail investors in 2016.”
Mukherjee’s source S&P Global Ratings said that the numbers in 2016 “already suggested that the company’s capital structure was hardly sustainable, with a ratio of net debt to Ebitda above 10x in 2015 and negative Ebitda in 2014, driven by performance issues at the company’s Tuaspring desalination and power plant.”
S&P Global Rating’s assessment and Mukherjee’s views appear to match that of Mak Yuen Teen, an associate professor of accounting at the National University of Singapore.
In a recent interview with the national broadsheet, Mak said that ordinary shareholders and creditors could have chosen to get out of Hyflux earlier if the audit firm had given an adverse opinion. He added: “It is often the case here that auditors do not challenge assumptions enough.”
Shareholders and investors are also asking why Hyflux’s audit firm gave the organisation a clean bill of health in its annual reports over the last decade, instead of flagging up the risk that Hyflux would become embroiled in heavy debt.
KPMG has audited Hyflux since 2008. Hyflux slipped into the red for the first time in 2017 since it was listed in 2001. Two months later, it filed for bankruptcy protection.
The move shocked investors who had believed the company was healthy. Indeed, Hyflux’s financial statements before this point did not give cause for concern since it was prepared on the basis of an accounting method that assumes the company will remain solvent and operational indefinitely until proven otherwise.
Auditors are required to question this assumption, assess any risks to the company’s solvency and remain alert to any events showing otherwise, under Singapore’s accounting standards.
In February this year, Hyflux curiously claimed that there were no events to cast significant doubt on the assumption that it would remain solvent and operational indefinitely until proven otherwise.
Interestingly, Hyflux recorded the S$500 million perpetual securities it issued as equity instead of debt in its books, which could have given auditors an impression of recovery as it possibly improved the organisation’s debt-to-equity ratios.
It is curious that KPMG did not seem to investigate this more deeply, especially since Hyflux had been generating negative cashflow for consecutive years.