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6 Things Investors Should Know About Hyflux Ltd’s New Perpetual Securities

Water treatment firm Hyflux Ltd (SGX: 600) announced on Tuesday that it will be offering S$300 million worth of perpetual securities that will yield their investors a 6.0% annual “dividend.”

Of the S$300 million sum, S$230 million is meant for the general public, S$20 million for Hyflux’s insiders, and S$50 million for private placement deals to wealthy investors.

Here are six crucial things investors may want to know about Hyflux’s new perpetual securities:

  1. The offering may be increased to a total sum of S$500 million in the event that the perpetual securities are oversubscribed.
  2. As mentioned, the perpetual securities have an annual interest rate of 6.0%. But, this rate will change on 27 May 2020 to a rate of 6.2% plus the four-year swap offer rate (SOR) that’s seen two business days before 27 May 2020. There’d be subsequent rate changes that will occur every four years after 27 May 2020 – the new rates will be 6.2% plus the four-year SOR seen two business days before the rate-change dates.
  3. Hyflux has the right to redeem the perpetual securities at certain dates, but is under no obligation to do so. This is important for investors to note as there’s a chance that their capital will be permanently locked up if Hyflux does not redeem the securities. Of course, there’s the option for an investor to sell his or her perpetual securities on the open market – but in this scenario the sale price would be determined by market conditions.
  4. Hyflux’s financial condition is perhaps one of the most important things to note as it determines how risky the perpetual securities are. On this front, there are some areas of concern in my view.
  5. Hyflux has a chronic inability to generate cash flow. According to data from S&P Global Market Intelligence, Hyflux has been generating negative cash flow from operations in each year from 2010 to 2015. Meanwhile, the company currently has a net-gearing ratio (net debt to equity ratio) of 0.98, which isn’t low. (Note: This 0.98 figure does not account for the change in Hyflux’s cash and debt levels that could occur after it issues the new perpetual securities.)
  6. The payment of the dividends for the perpetual securities works out to S$18 million annually (based on a S$300 million issue size) and that money has to come from somewhere. At the moment, Hyflux’s business is burning cash (even in the first-quarter of 2016, the company’s cash flow from operations is a negative S$33.8 million, down from the negative S$26.3 million seen a year ago). The company could issue more shares, borrow more, or sell assets to raise cash. But, to borrow more would further weaken Hyflux’s already debt-laden balance sheet and thus add even more risk to the equation. Selling assets would not be a very palatable choice either as it could weaken the company’s ability to generate cash in the future.

Hyflux’s new perpetual securities offering does have an attractive yield given the low interest rate environment we’re currently in. But as is the case for each and every investment, the risks involved have to be considered as well. Hyflux’s balance sheet and cash flow picture could be areas for investors to keep in mind when considering the new perpetual securities.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.