Hyflux got only $150 million bank loan for S$890 million project because of cash flow concerns

[SINGAPORE] Even after Hyflux won its bid for the S$890 million Tuaspring project in March 2011, it managed to secure only a S$150 million bank loan.

This was because the banks estimated that cash flows from the desalination plant would support only around S$150 million to S$170 million of debt, a court heard on Sep 2.

To finance Tuaspring, Hyflux had sought a term loan of about S$527 million from a consortium of banks. In October 2010, six banks signed in-principle commitment letters indicating their willingness to lend the money.

But they raised “serious concerns” after learning of Hyflux’s plan to build a power plant and sell excess electricity to the grid. In January 2011, they told Hyflux that they could not lend money on the terms previously indicated as the power plant introduced new “merchant sale risk and operational risk”.

“The banks were saying: ‘Without the benefit of due diligence or extensive financial modelling, we estimate that the cash flows generated under (Hyflux’s) water purchase agreement may be able to support around S$150 million to S$170 million of debt,’” noted Deputy Public Prosecutor Kevin Yong on Day 8 of the criminal trial.

“Therefore, the rest of Tuaspring’s project cost has to come from an additional base equity commitment from Hyflux.”

“That’s the worst-case scenario,” the prosecution’s third witness, Nah Tien Liang, told the court. Nah was Hyflux’s former vice-president of investment. Part of his testimony was heard earlier in private.

The banks were concerned because Hyflux had no track record in operating a power plant. They also had misgivings about the tech capabilities of Shanghai Electric, a sub-contractor which was being considered to build the power plant, as well as fuel price risks, and a new termination clause introduced by PUB.

Singapore’s national water agency wanted the option to take over only the desalination plant, without the power plant, in the event of termination.

This was because “the original tender called only for the desalination plant. There was no power plant”, Nah said.

‘Need to do a lot of convincing’: Lum

In a Dec 4, 2010, e-mail, Hyflux founder Olivia Lum had told several senior management officers: “Need to do a lot of convincing job in energy strategy to the banks.”

She had also noted that Island Power, another power plant under construction at the time, was having a “financing challenge”.

When asked what Island Power’s financing challenge had to do with Tuaspring, Nah replied that both were power plants.

“Whatever concerns the lenders had on the power market would also apply to the lenders of Tuaspring and Island Power,” he said.

In the end, only three of the original six banks – DBS Bank, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation – extended financing of S$150 million for the construction of the desalination plant.

Hyflux had to promise to provide a base equity of S$252 million to the Tuaspring project for the loan.

This condition was set out in a Jul 4, 2011, deed between Tuaspring Pte Ltd, Hyflux and DBS. The parties had to commit to the deed before the banks would make advances under the loan.

DPP Yong asked why Hyflux needed to provide a base equity of S$252 million for a S$150 million loan.

Nah responded: “Because if you want to complete the desalination plant, the construction… costs more than the S$150 million the banks are providing. Therefore, the remaining has to be funded by equity.”

The court heard that Hyflux had confirmed in a Jan 7, 2011, letter to PUB that should it be successful in its bid for Tuaspring, it was willing to commit an equity injection of S$363 million.

In this letter, Hyflux listed various sources of funding. This included “cash at hand of S$307 million as of Sept 30, 2010”, as well as increased debt financing from project finance, cash from operations and a new issue of medium-term notes.

The S$150 million financing was eventually terminated by Hyflux.

Tuaspring was ultimately financed by a shareholder’s loan of S$840.4 million in October 2011. This loan, in turn, was refinanced with Maybank Singapore and Maybank Kim Eng Securities in September 2013.

In an Oct 31, 2011, announcement to the Singapore Exchange, Hyflux said: “In view of internal resources and funds raised from issuance of perpetual preference shares and medium-term notes, Tuaspring will rely on corporate funding to complete the development and construction of the Tuaspring desalination plant and power plant installed on site.”

Hyflux eventually issued preference shares to fund the integrated water and power project. The company’s collapse, due to weak electricity sales, left about 34,000 investors of perpetual securities and preference shares, who had sunk in a combined S$900 million, with nothing.

When asked by DPP Yong if perpetual preference shares refer to the April 2011 preference share issue, Nah agreed.

Lum, Hyflux’s former chief financial officer, Cho Wee Peng, and four independent directors – Teo Kiang Kok, Christopher Murugasu, Gay Chee Cheong and Lee Joo Hai – are contesting several charges. These relate to non-disclosures of material information about the Tuaspring project in a regulatory announcement in March 2011 and in the information document for the issuance of preference shares in April 2011. THE STRAITS TIMES