Moody's: Maybank has limited exposure to Singapore based Hyflux

KUALA LUMPUR: Moody's Investors Service expects Malayan Banking Bhd (Maybank) to sustain limited losses following its loan exposure to Singapore-based infrastructure company HYflux Ltd of S$720mil.

KUALA LUMPUR: Moody's Investors Service expects Malayan Banking Bhd (Maybank) to sustain limited losses following its loan exposure to Singapore-based infrastructure company of S$720mil.

“Potential losses to Maybank should be limited. We assume that most or all of Maybank’s exposure is secured by the Tuaspring project or related cash-flow receivables, or both,” it said on Friday.

The international rating agency said this should mitigate losses for Maybank in a worst-case scenario where Hyflux goes into bankruptcy. 

“If the entire S$720mil exposure is still with Maybank, and the exposure is classified as impaired, this will lead to a manageable 50 basis points increase in its impaired loans ratio, from 2.3% as of Dec 31, 2017. 

“We believe Maybank’s exposure has decreased since 2013 because of loan amortisation,” it said. 

In 2013, Maybank agreed to provide an 18-year S$720mil financing facility Hyflux project called Tuaspring, which is a desalination and electricity generation plant in Singapore. 

The loss-making Tuaspring project has become the centre of Hyflux’s problems because low electricity prices have dampened its electricity generation revenue. 

At the same time, Tuaspring’s desalinated water output will continue to be in demand in Singapore, which still relies on imported water to meet its total water needs. 

To recap, Hyflux had on May 22 had applied for court protection to facilitate restructuring of some of its S$1.5bil in outstanding debt. 

The company also announced that it plans to skip the upcoming coupon on its S$500mil perpetual capital securities. The restructuring could include a combination of haircuts, debt maturity extension or adjustments to interest rates, and could lead to financial losses for its creditors. This is credit negative for Hyflux's creditors. 

According to Hyflux's annual report, its creditors include around 30 financial institutions, mostly Singapore branches and subsidiaries of foreign banks. These institutions, in addition to other investors, could suffer losses on their Hyflux exposures. 

“The company has a large amount of secured debt, which heightens the risk to its unsecured creditors,” it said.

“The Singapore branch of Maybank (A3 stable, a3) and its related entities is likely to be one of the key secured creditors of Hyflux. 

Moody's said Hyflux’s problems are related to large debt and excess capacity in Singapore’s power generation sector that keeps electricity prices depressed.

Electricity prices have decreased since 2012 mainly because of low fuel prices and excess capacity, the latter reflected in a low load factor of 43% for Singapore’s electricity generation sector in 2017, down from a peak of 51% in 2011.

Moody's does not view Hyflux's problems symptomatic of a general deterioration in the asset quality of banks' loans to other large infrastructures companies in Singapore. 

Most of these companies have strong shareholders with diversified portfolios of generation assets. 

Also, the companies' power assets were mostly commissioned years ago, implying that debt load on these projects would be more manageable compared with Tuaspring, which was commissioned in 2015. 

The risk that they would follow Hyflux’s restructuring path is low.