UPDATE: PUB issues default notice to Hyflux’s Tuaspring, potentially complicating takeover bid

This article was originally published on Tuesday, 5 March 2019 at 22:09 SGT; it has since been updated to include comment from Hyflux. 

Singapore’s national water agency PUB issued Hyflux’s desalination plant, Tuaspring, a default notice and said on Tuesday it would exercise its right to terminate its water purchase agreement (WPA) and take over the plant if contractual obligations aren’t met.

In response, Hyflux said if PUB terminates its WPA with Tuaspring, it may entitle its strategic investor, SM Investments, to terminate the restructuring agreement.

“The company and Tuaspring are presently seeking legal advice on the matters asserted in the default notice, and will commence consultations with PUB immediately,” Hyflux said in a filing to SGX late on Tuesday.

PUB said that Tuaspring hasn’t been operating as reliably as required and hasn’t produced documentation showing it’s financially able to keep the plant running for the next six months.

“PUB is taking steps to ensure that our water security is safeguarded,” the agency said in a statement. Singapore’s desalination plants are one of four sources used to ensure water supply.

PUB’s move could complicate troubled water infrastructure and power generation company Hyflux’s efforts to restructure.

In October, consortium SM Investments entered a binding agreement to invest S$530 million for a 60 percent stake in Hyflux, which had filed for court protection in May, saying the oversupply of gas in Singapore’s market had resulted in depressed electricity prices, which hit earnings in 2017 and drove losses in the first quarter of 2018.

In addition, the company said in May that its plan to divest the Tuaspring project in Singapore and the Tianjin Dagang plant in China had taken longer than expected, adding stress to the business.

It’s unclear if SM Investments would keep the deal on the table if Tuaspring isn’t part of the package.

The restructuring process has proved controversial for a company long touted as a home-grown Singapore success story.

Some of Singapore’s Mom and Pop investors had purchased Hyflux shares and notes via their CPF, or Central Provident Fund, mandatory retirement accounts. That program limits which individual shares can be purchased, which may have been perceived as providing a quality indicator on the stock.

A Change.org petition appealing for the Singapore government to “take back Tuaspring to save citizens [sic] retirement fund” has garnered nearly 2,500 signatures as of late Tuesday. It called for the government to acquire the plant as a strategic national asset. The petition marked an unusual criticism of government policy.

Last month, investor watchdog Securities Investors Association (Singapore), or SIAS, sent Hyflux a list of critical questions seeking clarification over various aspects of the business and accounting. The company provided explanations in response.

In steps which may have been aimed at defusing criticism of the SM Investments deal, Hyflux founder and CEO Olivia Lum said earlier this year she would be giving up her founding stake if the restructuring is approved. She also said she and the company’s board of directors would contribute all of their shares and entitlements as holders of preference shares and perpetual capital securities, or the PNP, to be distributed to other PNP holders.

In its SGX filing late on Tuesday, Hyflux said the Tuaspring WPA has a “default cure period” of 30 days, which will last until 5 April or potentially longer, to consult with PUB. After that period, PUB has “sole and absolute discretion” to terminate the WPA with at least 30 days written notice, Hyflux said.

Hyflux shares have been suspended from trading since May 23.

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