Consortium sends18 questions to company upon finding out about the higher-risk power plant
[SINGAPORE] The consortium of banks which considered financing Hyflux’s Tuaspring project sent the water treatment company a list of 18 questions upon finding out the project included a higher-risk power plant.
Jeanne Soh, an executive from Sumitomo Mitsui Banking Corp (SMBC), said this on Monday (Oct 27) in the trial of Hyflux’s ex-chief Olivia Lum and five others.
Soh, now a managing director for structured finance in Asia-Pacific at SMBC, told the court that the consortium of banks was initially not told that the Tuaspring project had a power plant.
SMBC, DBS, Mizuho Corporate Bank, BNP Paribas, MUFG and ANZ came together at the time with an intention to finance Hyflux’s bid for the desalination project tender from national water agency PUB.
The consortium issued in-principle commitment in October 2010 to Hyflux’s S$527 million term loan request, with one of the conditions being that the debt service coverage ratio of the project must be at least 1.2 times.
Soh explained that this means the cash flow – revenue less operating expenses –must be at least 1.2 times the debt payment amount.
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“(1.2 times) is quite in line with market for this project nature, because it was not subject to market risk or volume risk. The capacity payment from PUB was stable, and PUB is a high-quality offtaker,” she said in response to a question from deputy public prosecutor Eric Hu.
However, the consortium did not know until about a month after the commitment was given to Hyflux that the Tuaspring project comprised a power plant as well.
Hyflux founder Lum, ex-chief financial officer Cho Wee Peng, and four independent directors are contesting their non-disclosure charge(s) in this trial. The prosecution said Hyflux had failed to disclose material information required under the Singapore Exchange (SGX) listing rules in March 2011 and offer information document in its issuance of S$200 million, 6 per cent preference shares in April 2011.
The material information was related to Hyflux’s venture into the power business with the Tuaspring project, that the project would derive the significant majority of revenue from the sale of electricity from its power plant, and that the profitability of the billion-dollar project was contingent on revenue from that sale of electricity.
“We were all very surprised, we were not expecting they were going to build a power project with the desalination plant,” recounted Soh about the banks’ reaction when they learnt of Hyflux’s plan for a power plant.
Different risk profiles
The consortium then informed Hyflux that the two plants had “completely different” risk profiles, given that the power plant had no contract from any buyers to purchase the output and there was potentially overcapacity in Singapore’s electricity market.
The banks and Hyflux had numerous meetings and calls to clarify the consortium’s concerns and risks, the court was told.
Despite these interactions, the consortium still had unaddressed concerns, so a list of 18 questions, mainly related to the power plant, was sent to Hyflux in December 2010.
On Jan 4, 2011, the consortium sent Hyflux a letter to “formally put it in writing over the concerns” they had of the power plant and highlighted it had a risk profile different from the desalination plant, and therefore the debt quantum and the terms and conditions would be different from the desalination plant.
“Based on my memory, all lenders (felt) strongly to put it in writing, to avoid any ambiguity of our concerns, that’s why we issued this side letter,” added Soh.
On Jan 14, 2011, the lenders sent Hyflux another letter on its request for submission to PUB, saying that they had in-principle management support to provide a credit facility of up to S$283 million for the water desalination plant and up to S$244 million for the power plant of the Tuaspring project.
Soh explained that the two plants had different risk profiles and it was thus important for them to split the two. The different debt levels for the two plants were derived from the conditions the lenders set. The conditions were debt service coverage ratio, loan tenure and interest margin from the loan.
The debt service coverage ratio for the desalination plant was set at 1.2 times but that for the power plant was at least 1.5 times with an average level of 1.75 times.
When the consortium informed Hyflux in October 2010 of its in-principle approval for the loan facility, they had not known about Hyflux’s plan for the power plant. The word “approval” was subsequently replaced by “management support” when the consortium informed Hyflux in January 2011 that they were willing to explore granting loans to the project.
Soh said both terms were non-binding, but the lenders were “not comfortable” with using “approval” and the word “support” was preferred. “(This was) not to give the impression we had obtained approval, particularly (when) we didn’t have a lot of details about the power plant.”
The change in comfort level was because the lenders had more visibility of the desalination plant’s cash flows.
As Hyflux needed to meet PUB’s deadline for obtaining financing commitment, it decided to get a loan facility for the desalination plant first.
DBS, Mizuho and SMBC pooled S$150 million for the desalination plant on the basis of their projection that the plant was worth S$150 million to S$170 million, said Soh.
But that loan was subsequently prepaid when Hyflux managed to secure full financing for both the desalination plant and power plant from Maybank in 2013.
The hearing continues.
