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
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: