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Thursday, 26 May 2016

Hyflux 6% p.a. Perpetual Capital Securities - Balloting Results

Hyflux announced that its public offering of Perps were oversubscribed by around 3x and as a result, the overall offering was upsized the tranche to $500m. All investors who applied will receive something. The Perps will start trading on 30 May 2016 at 9am.

Ms Olivia Lum (林爱莲), Executive Chairman and Group CEO of Hyflux, said, "We would like to thank investors for the enthusiastic subscription for the Offer, and thereby believing and participating in our growth as we continue to execute our strategies and strengthen our global leadership position in providing sustainable solutions in the areas of water and energy." 

The balloting ratio is as follows:

Not sure if it is a good thing to issue such a large tranche. The effect is that everyone is allocated and that Hyflux has raised sufficient funds to redeem the prior Perps (see announcement below). Let's see how the Perps perform on Monday ^_^

Saturday, 21 May 2016

Hyflux Ltd - 6% Perpetual Securities

Hyflux is offering up to S$300m perpetual securities at 6% per annum with an option to up-size to S$500m ("Perps") and a majority of the Perps are made available to retail investors.  The offer will end on 25 May at 12pm.

The key terms are as follows:


ISSUER:                Hyflux Ltd ("Issuer")
STATUS:                Direct, unconditional, subordinated and unsecured
TENOR:                 Perpetual NC4
CALL OPTION:           To redeem all on 27 May 2020 or thereafter at par
OFFER/ISSUE:           Up to S$300m:
                       $230m Public Offer; S$20m Directors ; S$50m for Institutional
DISTRIBUTION:          6.00% p.a. subject to reset on 27 May 2020 and every 4 years 
RESET COMPUTATION:     Prevailing SGD 4Y SOR plus the Initial Spread plus the Step-Up Margin
INITIAL SPREAD:        420 bps
STEP-UP MARGIN:        200 bps
DISTRIBUTION PAYMENT:  Semi-annually in arrear, actual/365 (fixed)
DISTRIBUTION DEFERRAL: At issuer's discretion. Any deferred distributions are cumulative and on a compounding basis
DIVIDEND PUSHER:       Yes, with 6 month look back period
OTHER REDEMPTION:      At par for taxation reasons, accounting reasons, tax deductibility reasons and in the case of minimal outstanding amount
DENOM:                 S$1,000 each or in integral multiples thereof
MINIMUM SUBSCRIPTION:  Public Offer - S$2,000 or higher. Placement - S$100,000 or higher

What are Perpetual Securities ("Perps")

Given that this is the first time i am writing on Perps, i will probably start with the basics for the benefit of myself and newbie Perp investors. Perps is a neither here nor there instruments as it is neither an equity nor is it a bond.

The key features of Perps is as follows:
  • hybrid form of securities that combine features of both debt and equity
  • ranked lower in priority than holders of bonds or senior creditors
  • won't be paid on time if Issuer decides to postpone the payments
  • won't be redeemed if Issuer decides not to exercise the call option
If you want a 101 on the key risks of investing in Perps, you can find an old article from Edge here. The four key risks highlighted in the article are:
  • Credit risk - Issuer unable to pay regular coupon and refuses to redeem the bonds after the non-call period 
  • Interest rate environment - If interest rate rises in future, there could be "mark to market" valuation losses if the Perps trade below par
  • Coupon deferral risk - Company may defer paying coupons but the coupons are cumulative in nature and if there is a missed payment, Company will not be able to pay dividends to its shareholders (also known as "Dividend Stopper")
  • Liquidity risk - There could be low trading liquidity post issuance and investors may not be able to get out if volume is thin
How institutional investors view Perps?

Hyflux was the first company in Singapore that issued 6% non voting Class A back in April 2011. According to a banker i spoke to recently, investors in Singapore view Perps as a bond and it is supposed to trade like a bond. If Company fails to pay coupon or redeem the Perps at the stated maturity, there will be serious repercussions. 

What are the features that will incentivize Hyflux to pay coupons and redeem the bonds on 27 May 2020?
  • Dividend Stopper. If Hyflux does not pay the regular coupon, it will not be able to pay dividends to its shareholders. That will result in its share price being suppressed and upsetting its equity investors. The Company paid dividend of 1.7 Singapore cents in FY2015. If the Company is in dire conditions, the board of directors would not dare to endorse any payment of dividends on top the dividend paid on the Perps
  • "Punitive" Step-Up interest rate. According to the offering circular, if Hyflux do not redeem the Perps on 27 May 2020, the interest will step up by 2%. Working backwards, the current yield of 6% comprises: SGD 4Y SOR is around 1.80% + the initial spread is 4.2%. Assuming the SGD 4Y SOR remained unchanged, if the Company does not redeem on 27 May 2020, the new interest rate will be 8% per annum. This step up is intended to be punitive in nature so that investors can price Hyflux's Perps as if it is a 4 year bond. As such, there is a lot of repercussions if Hyflux does not redeem the bonds at call date Below is an illustrative example on how the "reset interest rate"works.

I am not too concerned about the 4 year SOR rate. In the event if that crashes to negative, it will probably means the fixed deposit is zero % anyway and 5% is probably a good yield.

Is demand for Hyflux Perps hot?

The Company announced that the placement tranche of $50m was oversubscribed by 4x and they increased the size from S$50m to S$165m. The news is here

Have Hyflux Issued other Perps before?

The previous non voting 4m Class A Perps was launched in April 2011 and throughout the ~5 years, it have traded above par. See chart above. The Company has the option to redeem this tranche on 25 April 2018 and interest will step up to 8% if it is not redeemed. My view is that it will be redeemed.

In Jan 2014, the Company issued perpetual capital securities comprising S$300m bearing interest rate of 5.75% (Issuer can call on 23 Jan 2017 or face a step up) and in July 2014, another S$175m at 4.8% (Issue can call on 29 July 2016 or face a step up). The two bonds issued in 2014 were for the "wholesale" market. In other words, the bonds were sold at minimum denomination of S$250,000. The links are to the prior Perps issued and you can find more information and charts on fundsupermart. The current issue is the latest made by Hyflux and it is for the retail investors.

Ironically, the charts of the Perps is a big "contrast" to its own share price. I am sure equity investors aren't too pleased about the share price performance. It is currently trading at a discount to its book value.

What is Hyflux's yield curve?

Fundsupermarket has an interesting article. Please go read it here. In that article there is a Hyflux Yield Curve chart (see below). All the Perps are trading at below 5%. In other words, the current 6% Perps are priced to sell! 

Financial Performance

If you want to access the credit risk of Hyflux, you would probably need to refer to the annual report. The 5 years financial performance is presented below.

The profit has been hovering around the $40-$65m range and the loss per share of 1.05 of FY2015 has adjusted for the effect of the previous Perps. 

The Company also announced its Q1 results recently where revenue grew to S$248m. The press release is here. OCBC also released its research report with hold rating here. The forecast from OCBC is presented below, which shows a positive EBITDA and net profit.

Can the Company sustain the "dividends"?

The above shows that Hyflyu paid S$24m on the preference shares and $25.65m on the perpetual capital securities in 2015. This will likely "swell" in 2016 post the retail issuance. Assuming a S$300m issuance, the "dividends" will increase by another S$18m per year to around ~S$68m. Based on the EBITDA of S$98 and S$102m for FY2016 and FY2017 (from OCBC), it seemed the interest will be covered for now.

In addition, this issuance is likely to be used to retire the two earlier Perps issued in July 2016 and Jan 2017. As such, the cash needs will drop correspondingly 

Order Books

The Company has also announced record order books. It is no wonder that the Company needs to raise cash for these EPC projects. I like the "water" space as it is a scarce commodity and Middle East seemed to be the place to build desalination plants. However, the key concerns will be the Middle East situation with major conflicts due to ISIS and the depressed oil price may result in non-payment for some of the projects. (Go read the Contingencies in the Annual Report).

Why Hyflux want to issue Perps at 6%?

If I put myself in the shoes of Hyflux management, it actually makes good business sense. Issuing equity will be "expensive" and borrowing from Infrastructure funds or project financing banks will probably cost Hyflux between 9%-12% if you look at the median IRR of infrastructure funds.

Perps are issued when Hyflux has projects on hand and i am assuming governments are good credit customers. In the unfortunate event of projects delay, Hyflux can always "delay" the coupons until the proceeds are received. This delay of coupon payment will not trigger a "default" event vis-a-vis a plain vanilla bonds. In the unfortunate event that the Company needs to raise funds, it can always sell the completed projects to repay the debt.

Mr IPO's view

Based on the above analysis, i quite like the Hyflux 6% Perpetual Securities NC4 for the following reasons:
  • Hyflux is an established MNC with a long track record. 
  • Olivia Lum is a poster child here and her rags to riches story provides inspiration to anyone. Go read it if you want some inspiration!  You can easily google for the stories. ^_^ 
  • 6% is not a bad return under current market environment and the non call period of 4 years is about right 
  • Current issue is priced to sell as similar Perps from Hyflux are trading at ~4%. 
  • Protective features with decent step up in interest rate ensure redemption is most likely after 4 years
  • Issue is priced in SGD. The forex risk is borne by the Company
Please note that Mr. IPO is vested from the placement tranche and is part of his bond ladder portfolio.

Happy Perplexing ^_^

Thursday, 19 May 2016

Manulife REIT - Balloting Results

Manulife announced that its public offering was 1.6x subscribed. Given that this is a big size offering, it was not difficult to get some via the public tranche. The balloting ratio are as follows:

Investors who applied for 50,000 shares will get a 38:50 chance and will be alloted in full. 

The list of placement shareholders have some interesting names like Dymon Asoa and SeaTown. Let's see if it has any impact on share price performance tomorrow. 

Best wishes to those who got some shares. ^_^

Sunday, 15 May 2016

Manulife US REIT

Manulife US REIT is touting itself as the "first pure-play" US office REIT in Asia. They probably have learnt some important lessons from the prior failed attempt to list last year. They downsized the portfolio, lined up a list of cornerstone investors and seemed more able tell a better story this time.  Of course, timing wise, it is definitely better than last year.

Manulife US REIT is offering 396.569m units in total at $0.83 per Unit with about 45.787m units for the public. The IPO will close on 18 May 2016 at 12pm and starts trading on 20 May 2016 at 2pm. The exchange rate has been fixed at US$1:S$1.371 so investors applying for the shares via ATM will not have to worry about forex fluctuations on allocation. The market cap based on the IPO price will be around US$815.2m

There will be an over-allotment option of up to 28.149m units should there be good demand and post market stabilization thereafter. The first distribution will be paid on or before 30 March 2017 and semi-annually thereafter.


The Sponsor is part of the Manulife group, a leading Canada-based financial services group, with more than US$676b assets under management as of 31 Dec 2015. The parent company, Manulife Financial Corporation, is listed on various stock exchanges with a market cap of around C$37 billion. The Sponsor will hold for ~9.5% of the total no. of units in issue at the offering price.

Initial Portfolio

I will not spend too much time on the properties as much is written about them in the prospectus. I will basically copy and paste here if you are interested.


It is good to know that they have come up with structures that will ensure the distributions to investors will be tax-free subject to certain ownership conditions being met. 

They have also sought advanced ruling from IRAS to make sure there will not be withholding taxes on institutions investors, which probably explains why there is 'hot' demand from institutional investors. Individual investors will not be subjected to taxes.

According to the prospectus, in order to ensure that distributions remained tax free, there is a limit of 9.8% shareholding of any investor. If a shareholder acquire >9.8%, there is a "automatic forfeiture".

On one hand, you applaud the measures in place to ensure the REIT continues to qualify for tax incentive, on the other hand, it help the Sponsor "control" the REIT with just a small 9.5%. This is because there will be no one else able to take "control" and acquire the REIT. In fact, the Sponsor's shareholding will drop to 5% if over-allotment is exercised. I really wonder if there is true alignment of interest?

Profit forecast

This is the projected income for the next two years for your reference.

Cornerstone Investors

Cornerstone investors (Credit Suisse, DBS Bank, Fortress Capital, Lucile Holdings and Oman Investment Fund) will subscribe for 169.544m units.

Peer Valuations

The IPO is fairly priced at 1.06x Price to Book. Many of the listed peers are trading below book value and at yields that are close to Manulife REIT. Probably Frasers Commercial Trust offers a better value proposition if you are not seeking diversification.

What I like about the IPO
  • The Sponsor is reputable and highly experience in commercial real estate. If you would like an exposure to the US office REIT, Manulife will be a good name to start with. The Sponsor will have other properties in the pipeline which can be injected into this REIT
  • John Hancock Real Estate is an experienced and reputable US Asset and Property Manager
  • The properties are freehold, "Class A" locations and located in prime areas
  • WALE of around 5.7 years which provide visibility on the cash flows. It is also expected to have positive reversions in rentals renewals
  • High occupancy rate, indicating the properties are in good demand
  • Strong demand from institutions, resulting in the scale back to retail investors from 80:20 to 88:12. 
  • Allocation to long only funds preferred. See news report here.
  • Subject to certain ownership criteria where no single investor holds > 9.8% and where documentations are adequately furnished, distributions to investors will be tax free (which is typically not the case for US investments)
  • Distribution yield projected to grow from 6.6% to 7.1% without any financial engineering. This is probably "refreshing" as Singapore Office space is facing oversupply and downward pressures on rents

Some of my concerns

  • The chart above is more "scary" than soothing? While it is trying to show you "out-performance", it also seemed to indicate that there are a lot of "spare capacity" in the market
  • Two of the three office buildings are pretty "old" and completed around 1991. There could be some refurbishment costs and higher opex that comes with older buildings. According to the IPO prospectus, these offices are recently refurbished.
  • Foreign currency exposure in USD. The units and distributions will be in USD. For retail investors, fluctuations in USD/SGD may be a concern, so you will need to see if this impacts you. 
  • Assuming the over-allotment is exercised, the Sponsor will control the REIT with only 5% shareholding. I am not sure if there is true alignment of interest between Sponsor and investors
  • The units are very widely distributed and whoever wants the shares will likely be fully allocated. 
  • IPO is fairly valued at 1.06x price to book while its peers are trading below book value.
My IPO ratings

This is a straightforward analysis - would you like to have a REIT exposure to US office space and currency exposure to USD. It is somewhat similar to question you ask yourself for REITs like Croesus or IREIT even though in those instances, the manager tried to hedge the JPY and EUR exposures. 

My own view is that if you are already into REITs for passive income and has exposure to local office space, then this is a good name to go with for further diversification. The yield also appear to be attractive enough for the institutional investors.  

I will give it a one chilli rating for reasons mentioned above. 

REITs are meant for longer term hold and not for flipping. You might suffer forex losses from the bid-ask spread through flipping. So flippers beware! ^_^

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