We have received numerous enquiries about these two instruments issued by Hyflux. We, at Shares Investment, decided to look into this as the price for the Hyflux 6% (CPS) Cum Preference Class A 10 dived from more than $90 on 1 February 2018 to as low as $62.80 on 20 February 2018. The Hyflux 6% Perpetual Capital Securities, too, dived from more than $0.80 to as low as $0.53 during the same period.

What Is Preference Shares?

According to Investopedia, “preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do”.

In the case of the Hyflux 6% Cum Preference Class A 10, it is a preferred share that encompasses the rights of a preferred shareholder, but it is a Cumulative Non-voting Non-convertible Perpetual Class A Preference Share.

What?

In laymen terms, a preferred shareholder will get priority when the company declares dividend but he or she does not get to vote. Cumulative means preference shareholders, be it now or in the past who have been ignored when dividends were paid, will get paid ahead of ordinary shareholders. Non-convertible means cannot convert into ordinary shares while perpetual means the company has the right not to redeem the preference shares and can allow it to be listed for as long as possible.

But preferred shareholders, including some who contacted us, told us that they “believed” that Hyflux 6% CPS will be redeemed (called back) on 25 April 2018! Yes, these preferred shareholders are both right and wrong because while Hyflux had indicated that they have the right to redeem this instrument on the stipulated date, they also have the right not to make the redemption. However, the interest (coupon) payable on this instrument will increase to 8% per annum!

What Is Perpetual Capital Securities?

According to Investopedia, “a perpetual bond (securities) is a fixed income security with no maturity date. One major drawback to these types of bonds is that they are not redeemable. Given this drawback, the major benefit of them is that they pay a steady stream of interest payments forever. A perpetual bond is also known as a “consol” or a “perp”.

While a perpetual bond works quite the same as a perpetual capital securities, the latter is not a bond! In the case of Hyflux 6% Perpetual Capital Securities (Perps), it is supposed to be callable on 27 May 2020 and every six monthly thereafter (27th Nov 2020, 27th May 2021, 27th Nov 2021). Similar to the Hyflux preference share, the company does not have the obligation to do a call back. Moreover, this Hyflux Perps pays coupon according to SIBOR (4-year SIBOR plus 4%), adjusted higher if not called back at 4-year SIBOR plus 4.2%.

As at 22 February 2018, Hyflux has $400 million worth of Hyflux 6% CPS and $500 million worth of Perps to be redeemed.

We believe the prices of these two instruments have fallen because of rumours circulating in the market. Rumours believe that Hyflux may not be able to redeem the $400 million Hyflux 6% CPS come 25 April 2018. This is pure rumour and nothing has been confirmed.

We note that the gearing ratio of this company is at 1.07X as at its third quarter results announcement last year. There have been concerns about Hyflux not being able to generate positive cash flow all these years.

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