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Are Genting Singapore Perpetual Bonds at 5.125% Attractive?

03.04.2012 · Posted in Bonds

That seems to be a lot of interest in bonds nowadays, with the recent CapitaMalls Asia retail bond offering and now the Genting Singapore Perpetual bonds offering. On first look, the Genting bonds are issued at 5.125%, while the CapitaMalls Asia (CMA) bonds are issued at 3.8% so the coupon yield for Genting looks better. However, it’s not an apples to apples comparison as they are of different bond tenors. Genting bonds are perpetual bonds while CMA bonds are 10 year bonds.

Now the bonds are available to retail investors, see Genting Perpetual Bonds Now Available to Retail Investors

img resorts world sentosa

General Information on the Genting Perpetual Bonds

Issue Size : $1.8 billion

Denominations : Min $250k

Coupon Rate : 5.125%

Rating : Baa1 by Moody’s and A- by Fitch

Callable : Callable after 5 1/2 Years from Issue Date

Maturity: No maturity date but will pay additional one percent in interest if not redeemed within 10 years

 

What Are Perpetual Bonds?

First, let’s look at the difference between standard bonds and perpetual bonds. Most bonds are issued with a certain maturity date, hence the bonds can be short term, mid term or long term based on the length of maturity. For more information on standard bonds, see Buying Singapore Government Securities Bonds (SGS) and Retail Corporate Bonds on SGX Part 1. Perpetual bonds are special as in they do not have a fixed maturity date. Basically, it means that the issuer does not need to repay the principal if it does not want to and can just keep paying the coupons in perpetuity. In this manner, they are similar to preferred stocks and should be valued similarly to a preferred stock.

 

Valuation of Perpetual Bonds and Discount Rate Used

As discussed earlier, the valuation of perpetual bonds should be similar to a preferred stock.

Valuation of Perpetual Bond = Annual Coupon Payment / Discount Rate

For example, a $100k Face Value Bond x 5.125% = $5,125 annual coupons

If you take Discount Rate at 4%, Value of Bond would be $128,125

If you take Discount Rate at 6%, Value of Bond would be $85,417

If you take Discount Rate at 5.125%, Value of Bond would be $100,000

 

So basically, if you assume discount rate to be lower than the coupon rate, then the bond is undervalued. If you treat discount rate as the same as coupon, the bond is at fair value. The important point comes down to the discount rate, is 5.125% good enough? The returns net of inflation has to be high enough to sufficiently reward the investor for taking the risk.

 

Perpetual Bonds Are More Sensitive to Changes in Interest Rates

In general, the longer the tenor of the bond, the more sensitive it is to interest rate changes. Since perpetual bonds have virtually unlimited tenor, that puts them at the highest risk of changes in interest rates. As such, the bond yield should also be much higher to sufficiently compensate for this risk.

 

Fundamentals of the Issuer Genting Singapore

At FY 2011, Genting Singapore has gross borrowings of $3.2 billion and cash of $3.4 billion, putting them in a net cash position. Cash flows are very strong with free cash flow of $118.3mil. Annual coupon payments for the perpetual bonds will be about $92 mil per year. Genting Singapore looks comfortable with the free cash flows and is expected to use the cash for funding casino opportunities overseas in Japan or South Korea.

 

All in all, I maintain that bond interest rates are currently very low due to the low interest rate environments. 5.125% is simply not enough to compensate me for an illiquid perpetual bond investment with no set maturity date considering my equities easily yield dividends of 6% and up. Also, with the denominations set at $250k minimum, it puts this issue out of reach of most retail investors except the high net worth individuals.

 

For further reading, you may be interested in:

Genting Perpetual Bonds Now Available to Retail Investors

Understanding Government Securities and Retail Corporate Bonds Part 2

Buying Singapore Government Securities Bonds (SGS) and Retail Corporate Bonds on SGX Part 1

CapitaMalls Asia did a public offering of 10 Year Retail Bonds

My Asset Allocation as of January 2012

19 Responses to “Are Genting Singapore Perpetual Bonds at 5.125% Attractive?”

  1. Richard Ng says:

    Good article on Genting bond. However what is yr view where some are able to borrow funds from bank at 1.5% pa.and buy this bond which gives a coupon rate of 5.125%., effectively making a profit of 3.625% , using bank’s money.

    • Thanks Richard. The only borrowing which you can get from the bank at 1.5% pa is housing loan, most other loans such as personal loans in general are higher than 5% p.a. Housing loans also tend to be variable rates, so you could reach a point where the coupon rate is lower than the interest you are paying for the loan. Since housing loans are securitized by your property, you also put your property at risk if you overleverage on refinancing.

      If one is able to borrow effectively at 1.5% from somewhere for e.g. Japan and invest in the Genting bond, there is an effective interest rate differential. However, there are other risks to be concerned with such as exchange rate risk and interest rate risk in other countries. That’s what some funds do, in fact a lot of the buyers of the Genting bond are overseas funds.

      • Hi Calvin,

        There is possibility to loan at Sibor + %spread (commonly around 1%).
        All you need is for the bank to recognise your assets(cash, property, etc) under the bank management.

        So for a sgd bond, you can borrow 1.5% sgd loan and buy 5.5% corporate bond to yield 4% spread. The risk therefore would be the rising interest rate and a perpetual would actually be a bad investment. This strategy would be better using short duration bonds like 3-5yrs.

        If you are buying USD bond, it will be the same. Borrow USD fund at 1+% and buy the 5+% usd bond. No exchange risk as far as I know.

        • Hi wealthjourney,

          That’s interesting. It’s the first time I have heard of this. Are you referring to only clients within private banking? I know that some private banks can lend against the stocks held, but the interest is about 4%. Which bank offers this for retail investors?

          Shorter duration bonds at this time are yielding around 2-3%, the spread between the loan and the yield from short term bonds look a bit too small for comfort, unless of course you go for junk bonds which can yield much higher.

          Thanks.

    • John Lim says:

      hi Richard,

      Stop dreaming! Your bank will not forever charge you 1.5% p.a. to borrow money.

  2. Calvin, why do u think companies are borrowing from market rather than banks? Esp now when bank interest rates are so low.

    • Hi Ray, one reason is to diversify the sources of funding. Another reason is that the market cannot withdraw the financing facility like the bank can in a credit crunch. Investors also have generally less bargaining power than the banks, so it is harder for them to take action against the issuer or place restrictive covenants. As you see, the terms of the bond are drawn up by the issuer rather than the lender. For most loans, banks tend to be the ones giving the terms of the loan.

      Another main reason is that banks don’t normally issue perpetual loans, you would have to issue perpetual bonds or preferred stocks for that.

  3. capt eeo says:

    am buying this not just for its 5.125% but for its currency (i.e.SGD) appreciation against many other major currncies.(i’m conveting MYR to SGD).
    What do you say?

    eeo

    • Hi capt eeo,

      Yes, you can view it from a viewpoint of currency play as well. However, you can get the same currency appreciation from any Singapore listed stock and Singapore bond as well. You just have to remember that being a perpetual security, it does not have a maturity date so you won’t know when or if ever the issuer will recall the bonds. There is not much planning involved except having your money frozen there unless you sell, but there will illiquidity costs as well.

  4. Hi Calvin,

    Wonder can you highlight to me how to start as a beginner??
    I know i have to get an account.
    Like this Singapore Genting?? Don’t really understand “perpetual” case??
    They are issuing treasury notes (i.e. less than 5yrs), right…

    Peace

  5. So the news today that Genting will issue perpetual bonds to the retail, would it be traded as if it’s a stock listed on SGX where I can sell anytime?

  6. Hi,

    Could the perpetual be trade on open market like SGX? or, how could the investor sell the perpetual bond?

  7. Hi
    Pls advise when say genting do call back the bonds, wat is the value one will get back? The original par value of say $250k or the mrkt value reflected @ sgx @ tat point in time? Is it the same for CMA too? Tks a 1,000,000

    • Hi Sunzanne,

      When they recall the bonds, it will be at par value. The market value is simply what the bond is trading for on the secondary market.

      CMA is the same thing if they choose to recall the bonds before between the 5th year and the 10th year. Without a recall, CMA bonds will mature and return par value at 10 years.

  8. If the company has committed into giving x% interest, I understand they can withhold coupon payment till subsequent year. Wat happens if economy downturn & they hold off interest Pymt just recall the bond? Wat do holder get back?

    • Hi Sam,

      The interest is cumulative, so they have to repay the coupon payments later if they choose to defer it. For them to recall the bonds, they have to pay up all unpaid interest before they can recall the bond.

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