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Frasers Centrepoint's Perpetual Bonds.

Tuesday, March 3, 2015

A reader sent me a note in FB today, asking me what I thought of this:

FRASERS Centrepoint on Monday is selling Singapore dollar perpetual bonds, the first perpetual deal in 2015. A term sheet seen said that the SGD subordinated Perp NC 5 has an initial price guidance in the low 5 per cent. NC 5 means that the perpetual bonds will not be recalled before year 5.

Source: The Business Times.




Well, I would generally avoid long term bonds especially since I believe that interest rates are more likely to go up than not from here on. With perpetual bonds, there isn't any maturity date. So, they are more long term than long term bonds. There isn't a date when the bond matures and when the principal is returned to the bond holder. Having a maturity date when the principal is returned to the bond holder is a feature that makes bonds safer.

Reader:
What do you think about this, as compared to CPF minimum sum?

So, can we compare this with the CPF which locks up some of our money for a very long time? The expected coupon of 5% is similar to what is being paid on our funds in the CPF-SA, isn't it?

Well, it isn't an apple with apple comparison, actually. One is a bond backed by a business entity while the other has a built in annuity and is backed by a AAA rated sovereign bond. Definitely, they are quite different animals.

As always, whether something is good or not depends on where we stand. Generally, I think this is a good thing for Frasers Centrepoint's shareholders as the company diversify their sources of funding and a 5% coupon might appear quite cheap several years from now (and they only have to keep paying the coupon and not worry about paying the principal).

However, for the bond holders, they could find themselves holding the shorter end of the stick and it could become more apparent as time goes by.

Related posts:
1. Perpetual bonds: Good or bad?
2. Nobody cares more about our money than we do.
3. Bonds, REITs and the instant gratification of yield.

11 comments:

Bruce said...

Hi AK,

how does a retail investor subscribe or purchase such bond?

AK71 said...

Hi Bruce,

It would depend on whether there is any set aside for retail investors or if everything is to be sold to institutions and accredited investors only.

If there is a tranche for retail investors, then, you might want to give your broker a call to get the details. :)

l0nEr said...

This is for institutional and individuals (through banks) 250k per lot size.
The interest rate risk is limited to 5 years as there is a reset every 5 year to 5 year swap offer rate plus initial spread. Meaning if they issues the bond at 5% (5 year sor + 300bps), in 5 years time it will reset to the 5 years swap at that time + 300 bps. Hence, depending on the swap curve then. There is also a 100 bps step up in Year 10, so there is a small incentive to call in Year 10.
For your info. The Genting perpetual does not have such a structure.

AK71 said...

Hi l0nEr,

Thanks for sharing the details. Much appreciated. :)

anon said...

Hi AK,
My query does not relate to the topic.
Viewed your income investing interview (video) yesterday, courtesy of 5th Person.
Towards the end of interview, your advice was "1) prudence in personal finance, 2) go for low hanging fruits, 3) lots of patience".
May I ask you, what do you mean by "low hanging fruits"?
Thanks.

AK71 said...

Hi jojo,

Alamak, I didn't say anything about the interview in my blog and you still found it? -.-"

"Low hanging fruits" are fruits that are easy to pick. We don't need to climb high into the trees to reach them.

It is a metaphor for investments and financial products which are rewarding but do not demand too much from us. I mentioned the CPF as an example and, of course, this is something I blog about quite often too. :)

anon said...

Thanks AK, for your prompt answer.
Ha, ha, you probably don't realise how popular you are ... more important, how relevant and approachable.
Am sure many have recommended your blog to friends. Well, I have told a friend to tune into your blog for sound advice every now & then.
Oh yes, one more thing, stop calling yourself an opportunist like you are apologising for a negative trait. It isn't. I'd call it street-smart pragmatism.

AK71 said...

Hi jojo,

Aiyoh, don't liddat say. You are making me pai seh. -.-"

You must be able to tell the good from the bad in my blog. I talk a lot of rubbish and nonsense also. Sometimes, they are disguised like words of wisdom. OK, you have been warned. -.-"

Right, I shall start making a distinction without a difference (as my language prof used to say) and call myself a "street-smart pragmatist" instead of an "opportunist"! Thanks! ;p

seefei said...

AK
As a Fraser Cpt holder, like to ask u a newbie question? does this perp bond has implication on the performance of the share as bond is also "debt", right?

is the bond affect the share price as i see Fraser CPT ran up a bit recently. Thanks in advance.

AK71 said...

Hi seefei,

I said this in a reply to another reader in the comments section of related post number 1:

"A reason why many are expecting other S-REITs to hop on the bandwagon and issue perpetual bonds is because they are treated as part of the equity structure. So, gearing would actually drop and in the case of MLT, gearing dropped from 42% to 38%, post bond issue."

Good news. ;)

wx said...

"Property developer and manager Frasers Centrepoint Limited is offering seven-year bonds of up to S$200m (US$149m) at par to yield 3.65%.

Of the total, it is selling S$150m to the public and S$50m to institutional investors.

DBS is sole bookrunner and underwriter of S$50m of the offering, if subscriptions fall short when the offer ends on May 20.

The issuer said it might cancel the offering if it received orders of less than S$75m, and could also increase it to as much as S$500m if the demand was good."


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