"I told my mom she was very lucky she lost just $2,000 in Hyflux."

That's what my friend said during our kids' birthday party at McDonald's. He said his mom would have lost her entire investment in Hyflux if she had not cut losses earlier.

Otherwise, she'd lost all her money.

That reminded me: Hyflux went bust. And the 50,000 retail investors who invested in its bonds have lost their entire investment — Wiping out S$900 million of retail investors’ money.

In the early 2000s, Hyflux was a star performer. It had growing revenues and earnings. It bagged new projects from the Middle East and North Africa countries. And was making good money.

In 2010, shares hit its all-time high of S$2.31.

But I realized one thing - Its enormous leverage.

I too quickly sold off my Hyflux shares at a loss.

In May 2018, Hyflux declared bankruptcy.

Built to fail

Hyflux had a great business idea. Its goal was to make drinkable water accessible to poorer countries. Even in Singapore, we don’t even have our own source of water. We buy it from our neighbours. But the trouble was, Hyflux’s had poor financial management.

A utilities company is often known to be a stable, “defensive” business.

Yet in 2011, Hyflux had S$830 million of debt. It was also bleeding with a negative free cash flow of S$140 million.

You might wonder: Why would any company still borrow so much, despite its negative free cash flow?

To build all these water treatment plants, you needed huge capex. And Hyflux had a voracious appetite to grow — build treatment plants, R&D facilities and hire talents.

What not many people know this

After a plant is built, the fees you collect from operating each water plant is stretched over a long period of 20 to 30 years. Hyflux will take many, many years to make a good profit for its shareholders. What's more, if your projects are located in an “emerging” country with huge political risks, sooner or later, a crisis will affect the business.

And it happened.

When the Libyan crisis struck in 2011, Hyflux lost many projects. It couldn’t collect fees from its water treatment plants. All their billings were stuck.

Even management said in its annual report 2011: “We saw a shift in the geographical mix of group revenue in FY2011 from MENA to Asia. Contributions from the MENA market decreased from S$343 million in FY2010 to S$114 million… as a result of lower EPC activities.”

Hyflux scrambled for new projects and turned to Singapore. But Hyflux simply couldn’t compete with other big utilities players — Keppel Corp and SembCorp Industries.

By 2013, its free cash flow ballooned to a negative S$422 million and had racked up a massive S$1.2 billion in debt. It was over-borrowed.

Losing S$900 million in a “rock-star” business

So what did Hyflux do? In 2014, Hyflux raised its first perpetual bond (or a preference shares) from the public. It paid a high yield of 6%.

Imagine this: Your friend borrows $1,000 from you but tells you he can choose never to pay you back that $1,000. That’s exactly what Hyflux’s perpetual bond does.

Ask yourself: If a company like Hyflux is indeed a strong company, why would it need to pay you 6%/year for borrowing your money?

Other companies I’ve seen could borrow at a much lower interest rate of 2% to 3%.

It just doesn’t make sense (of all things, you could buy Hyflux perpetual bonds with your CPF. I’d never understood that).

Giant red flag.

By then, Hyflux shares sank 49% to less than a dollar. From its peak in 2010.

My biggest lessons learnt

Temasek invested in Hyflux in the early 2000s. But what many people didn’t know was Temasek exited all positions in 2006. I believed many investors were sold Hyflux’s story with the perception of a “government support”.

Even Temasek had to explicitly tell people about their divestment from Hyflux.

When we invest, we can only rely on our due diligence.

Hyflux’s CEO was a celebrity CEO. She was often touted in the media. And had faced way more publicity than any other CEOs I’ve known. This created trust amongst many investors. And investors felt safe in a company whose CEO was often in the media.

But what I found more frustrating was this. Hyflux was often a “Buy” recommendation by analysts from top banks. Even though the company’s fundamentals was deteriorating.

I’ve invested for over 14 years now. I still make mistakes. Even Warren Buffett has his bad days. We are human after all.

But we can always learn our lessons and reduce our errors. So that we can continue to safely compound our wealth in retirement.

If there’s another thing I’ll remind myself in the Hyflux saga: Watch for massive debt.

They say: “The devil is always in the details.”

No one looks after your money better than yourself.

And I take my lessons seriously: I’ve also avoided China’s biggest bond default.

Sometimes, investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan