12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

OPINION

Singapore's Hy ux saga shows folly of court-

supervised restructuring
Company's directors have finally lost their liability shield

Mak Yuen Teen

December 16, 2020 05:00 JST

Hyflux's logo: there were plenty of signs of poor corporate governance and questionable decision-making. (Photo by Shinya
Sawai)
Mak Yuen Teen is an associate professor at the National University of Singapore
Business School, specializes in corporate governance.

When Singapore water treatment company Hyflux announced in May 2018 that it
had asked the Singapore High Court to commence a court-supervised restructuring,
investors were left reeling.

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12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

Coming just two months after KPMG had issued a clean audit opinion, Hyflux -- a
market darling -- not only once counted Singapore sovereign wealth fund Temasek
Holdings as an investor, it had won a number of major projects from the Singapore
government. Olivia Lum, the company's charismatic founder, was the first woman
to win the Ernst & Young World Entrepreneur Award back in 2011.

At its peak, Hyflux had a market capitalization of nearly 2.1 billion Singapore
dollars ($1.6 billion). By the time it collapsed, it owed banks S$1.84 billion,
noteholders S$265 million, and 34,000 preference and perpetual security holders
S$900 million.

Last month, after granting 10 extensions, the High Court finally put an end to the
supervised restructuring, approving an application by a group of unsecured bank
creditors to place the company under interim judicial management. Suspicious that
details of another potential investor surfaced every time the company came to ask
the court for an extension, the ruling judge suspected some sort of gamesmanship
was at work.

A successful restructuring is difficult to execute, as it requires the support of

various stakeholders with competing interests. Those who have lost much of their
investment under the existing board may not want the same board to oversee the
company's rehabilitation, especially if there are clear signs of poor corporate
governance or mismanagement.

And because a third party such as a judicial manager may uncover wrongdoing and
take action against the board, the board's preference for a court-supervised
restructuring may be driven by its desire to control the process and shield itself
from potential liability. Thus the board's own interests may affect its judgment
when it comes to potential saviors.

In Hyflux's case, certain potential saviors appeared less than bona fide. Some
included conditions that the current directors be retained and released from
potential liability -- despite the directors being under investigation. Others said that
any offer that released the directors would not be accepted.

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12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

But with judicial managers now in place, there is the possibility of action being
taken against the directors if there has been wrongdoing. This could result in
personal liability, which was never a possibility when the board was overseeing the
restructuring. While it is too early to tell if the directors breached their duties, there
were plenty of signs of poor corporate governance and questionable decision-
making.

Olivia Lum was the controlling shareholder, board chairman, CEO, chair of the
investment committee, and attended most of the meetings of the other committees
despite not being a member. Clearly, she has had a dominant role. Four of the
independent directors on the eight-member board had served for more than 14
years.

Some were former employees or substantial shareholders who were redesignated

from nonindependent to independent or had business relationships with the
company -- such as their companies providing internal audit or legal services. All
this points to a board that is far from independent.

Lum's entrepreneurial skills and perseverance undoubtedly contributed to the

company's early success, but she did not have the necessary experience to manage a
growing company or to oversee investment decisions. Other senior management
also appears to have lacked the necessary experience.

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12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

Hyflux's founder Olivia Lum, pictured in October 2018: she did not have the necessary experience to manage a growing
company. (Photo by Mayuko Tani)

For example, in 1996, Hyflux appointed a business development head who was a
medical doctor specializing in family medicine, and whose previous job was as a
registrar in the health ministry. She was later made an executive director and
became COO and then deputy CEO.

Hyflux's core business revolved around providing water treatment solutions for
municipalities and industries. However, it expanded into power generation and
waste-to-energy solutions. It won the tender for the huge Tuaspring Integrated
Water and Power Plant in 2011 -- a major contributor to its downfall -- through
aggressive bidding, counting on the synergy between water desalination and power
generation. But it had no experience in the power business. The plant has been loss-
making since it began operations.

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12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

Tuaspring desalination plant has been loss-making since it began operations. (Handout photo from PUB, Singapore's
national water agency)

Hyflux sought to have an asset-light strategy but its business model was in fact
highly capital-intensive, relying more on borrowings rather than operating cash
flows to fund growth. While it was reporting high revenues and making profits,
those numbers were subject to high volatility. Operating cash flows told a
consistent and dire story, becoming negative from 2010 and never returning to
positive territory.

As its debt grew, Hyflux resorted to preference shares and perpetual securities
which were accounted for as equity. Yet this did not stem its high reliance on debt.
In 2011, it issued preference shares, or prefs, and in 2014, it issued its first two
tranches of perpetual securities, or perps. Those perps were only available to
institutional and accredited investors.

In May 2016, it issued another tranche of perps that was so successful that it raised
S$500 million, rather than the initially proposed S$300 million. Much of the
amount raised from the 2016 perps came from retail investors, and the institutional
and accredited investors who subscribed to the earlier perps were bailed out.

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12/18/2020 Singapore's Hyflux saga shows folly of court-supervised restructuring - Nikkei Asia

One key lesson from the restructuring of Hyflux is this: when poor corporate
governance and mismanagement is a major contributor to a company's collapse,
put someone else in charge of its rehabilitation.

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