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Comments on Straits Times Article MAS Worried by perpetual bond rush

05.17.2012 · Posted in Bonds, Singapore

Recently, there has been quite a few perpetual bond issuance, like Singpost, Olam, Mapletree Logistics Trust etc. However, what must have caught MAS eye really is the Genting perpetual bond raising which included a second round to market to retail investors. Now that MAS has made it official that they are concerned, I guess it is probably a good thing.

According to the article, MAS officials are worried that retail investors are taking on too much risk without fully understanding the difference between a perpetual bond and a standard bond with a set maturity date. Likewise, I agree with them as many of my readers were asking me questions regarding the Genting perpetual bond and it was quite obvious that many were not knowledgeable about the product and yet went ahead to invest in them.

The article rightly points out that perpetual bonds come with high duration risk as there is no guarantee of repayment, which I highlighted as well. It is also the reason why I said that the CapitaMalls Asia bonds seem like a better deal to me than the Genting Perpetual bond even though the CapitaMalls Asia bonds had a lower a lower yield at 3.8% compared to Genting at 5.125%. I always recommend investing in bonds with a fixed maturity date so you have much lower interest risk.

Another risk cited by the article is that many of the perpetual bonds often allow for deferral of coupons and some may even have non-cumulative features. What it means is that the bond issuer may choose not to pay out interest payments to investors and does not have to pay back previous unpaid interest payments if it is non-cumulative. If they do that, they would not be able to pay dividends¬† to common shareholders, but issuers like Genting don’t even pay dividend in the first place.

Finally, what is quite shocking to me is that apparently many of the private bankers in Singapore are buying perpetuals on the margin, some with even 100% margin. The leverage is sometimes granted by the lead manager. Maybe that’s why they are able to sell so much paper in such a short period of time. It is a dangerous potential bubble as perpetual bonds are listed at equity rather than debt on the balance sheet of the issuer and the issuer may end up with too much ‘leverage’ without leverage caps setting in.

In short, understand the risks fully before you invest. I still do not recommend prepertual bond investing for retail investors.

 

For further reading, you may be interested in

Genting Perpetual Bonds Now Available to Retail Investors

Are Genting Singapore Perpetual Bonds at 5.125% Attractive?

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

Understanding Government Securities and Retail Corporate Bonds Part 2

CapitaMalls Asia Public Offering of 10 Year Retail Bonds at 3.8% pa

 

10 Responses to “Comments on Straits Times Article MAS Worried by perpetual bond rush”

  1. Dave lim says:

    Relative to perpetual bonds does preference shares of the 3 local banks provide safer returns. Thanks. David

    • Hi Dave,

      Overall, I generally do not like preferred securities. You give up the upside for a slightly higher div yield now. I rather buy the common stock if I am bullish on the bank.

  2. HI Calvin,

    1.I wish to seek your advice on this Unit Trust. There is a proposal to terminate the Eastspring Investments Income X unit trust and we are given 3 options as follows:

    a. To switch the fund without extra cost.
    b. To redeem the fund
    c. Continue to hold it

    2. I am presently down with about $7500 (out of $25,000) and I am thinking of holding on. What is your advice? Thanks.

    • Hi James,

      I checked out the unit trust. The performance is horrible, 5 year returns are -13.4% annualized.

      I also looked at their strategy, very complicated and substantial use of financial derivatives. It’s hard to figure out exactly how they are losing money.

      I would just get rid of it.

  3. Raymond Lim says:

    Hi,

    Tan Kin Lian strongly recommended STI ETF, which track the performance on STI index.

    The ETF invest in all the STI component stocks which spread the risk. The return is relatively conservative, around 2 to 3%.

    How do you see the STI ETF, do you see there could be more upside in dividend distribution ?

    • Hi Raymond,

      The return from STI is not 2-3%. If you look at the NikkoAM STI ETF, it’s actually about 9% annualized for the last 3 years. If you look at the SPDRS STI, its about 5% for the last 10 years. The dividend yield is around 2-3%.

      So it is not fantastic if you are looking for high dividend yielding equities. However, the total return performance is generally quite acceptable, especially for people with limited knowledge or time for individual stock picking. You should not be looking at this for dividends as many of the STI constituents either give very low dividends or no dividends at all.

  4. I am looking at 2 preference shares on the market.

    OCBCBank5.1%NCPS100 – 105.12
    OCBCBank4.5%NCPS100 – 103.23

    After normalizing the closing prices, the 5.1%NCPS share gives 4.85% PA and the 4.5%NCPS gives 4.35% PA.

    My question is why would an investor hold the 4.5%NCPS? I assume the risk is more or less the same.

    • Hi while the preferred shares do not have fixed redemption dates, they do have callable options, for example, the 5.1 is callable by OCBC on 2018. However, I couldn’t find any information with regards to the 4.5 tranch, there are no announcements on it. So I can’t really compare the two. Since the 4.5 tranch is a much older issue, it could be callable at an earlier date say 2015. So the callable option in 4.5 may be the reason it is more expensive.

      Although I don’t really recommend perpetual securities, between these two, the 5.1 tranch definitely looks more attractive absent any other details.

      • More more question for me to be clear.

        Is it possible that the 4.5 tranch has no callable option? or you just cannot find the information?

        Thanks.

        • Hi K, it’s weird that there are no announcements on OCBC website or SGX for the 4.5. Anyway, it’s unlikely that there is no callable option. Most preferred which are non convertible are generally redeemable by the issuer after 5-10 years time.

          So it’s generally either the issuers gets to redeem with a callable option or the investors get a putable option or convertible option or some combination to close out the perpetual tranch.

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