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Frasers Centrepoint's 7 year 3.65% bonds: Who should buy?

Wednesday, May 13, 2015

Some readers alerted me to a bond that is being issued by Frasers Centrepoint and asked me what I thought of it. After all, investing for income, bonds are relevant instruments.

The bonds in question are 7 year bonds and have a fixed interest rate of 3.65% per annum. So, unlike the perpetual bonds issued earlier in the year by the same entity, there is a maturity date for these bonds.

Bond holders will get back their capital (as long as the entity doesn't default) at the end of the 7 year period. So, they are safer than the perpetuals which, like bond funds, I keep saying, we should avoid.




Of course, I also said that we should avoid long term bonds because as interest rates rise, bond prices will fall as Mr. Market expects higher returns for lending money. Yes, when we buy bonds, we are more lenders than investors.

There is no reason for Mr. Market to buy older bonds at their issue prices when the coupons or yields are higher for newer issues. So, prices of affected bonds will have to decline to give a comparable or more attractive yield.

Then, is a 7 year bond a long term bond? Well, conventionally, long term bonds are 20 year or 30 year bonds. However, I feel that a period of 10 years is also considerably long. What about a period of 7 years? I think it is pretty long.

In the next 7 years, is it likely for interest rates offered by the banks for money in fixed deposits to go to 3% or more per annum? When we consider how they have gone from about 1% per annum to as high as 1.6% per annum in the last one year, it is possible that they could go much higher in the next 7 years. So, we have to be prepared that the price of these bonds could decline in the next 7 years.

So, who should buy these bonds?

Those who are not only happy with a 3.65% coupon but are buying with money they are sure they do not need in the next 7 years and are prepared to hold for the full 7 years.

Read more about the bond in question: here.

Related post:
Frasers Centrepoint's Perpetual Bonds.

17 comments:

Matthew Seah said...

Hi AK,

It should also be noted that institutional investors are only allocated 50mil while retail investors are allocated 150mil.

Generally, investment banks, i.e. insitutionals would tend to take up a larger pie for bond/share offerings. This offering is perhaps not too good for institutions, hence the lower allocation for them.

AK71 said...

Hi Matthew,

Possibly so. Intuitively, I feel that the coupon is a bit too low in an environment expectant of significantly higher interest rates in the next few years...

unluckid said...

Hi AK,

Why do you say that bond funds are something to be avoided?

AK71 said...

Hi unluckid,

I blogged about it before here:
Nobody cares more about our money than we do.

unluckid said...

Hi AK,

Thanks for the link! Not really sure I understand though. As I understand from the ABF Bond Fund ETF, the fund will continually renew its portfolio of bonds as they mature. Would this not reduce the interest rate risk?

AK71 said...

Hi unluckid,

It is a general rule of thumb that we should avoid bond funds in an environment of rising interest rates. How well a bond fund is managed is something else. :)

Rebel said...

Mr ak71,

I will apply for some SSB & FCL Bonds. Just like having some in my portfolio with no fat cat banking employee to wrestle with.

AK71 said...

Hi Rebel,

I believe that there is always a place for risk free and volatility instruments in our portfolio.

Whether available instruments match our expectations is something more personal. ;)

Surviving on dividend in Singapore said...

Hi AK,
Between reits and prepertual shares, which will drop more in a rising interest rate environment?
I see it that when interest rate rises, hyflux perpetual shares will continue paying 6% even if the price drop. If I invest in a reits that is currently paying 6%, would I still be able to be paid 6% based on my current buying price when interest rate rises?

AK71 said...

Hi SODS,

Sorry I used an acronym. Your full name is very long. You might sign off with a preferred name in future. Good idea? ;)

You might be interested in the 3rd and 2nd last paragraph in this blog post:
How should we approach REITs as investments for income now?

LOL said...

Hello AK,

Whats your take on Frasers Centrepoint Limited itself? Such as its financial health etc and the possibility of defaulting the bonds? Your opinion is greatly appreciated :)

AK71 said...

Hi LOL,

I am not the best person to do this as I don't have a stake in FCL and haven't looked at it before. -.-"

I can only share with you a guest blog by Solace which he contributed last year:A Peek into Frasers Centrepoint Limited (FCL)

Solace said...

All corporate bonds carries credit risk. There is no doubt about that.

The guarantee of the the bond is tie to the solvency of the company. In this case it is FCL.

The question to think about is whether FCL can survive until 7 years later? Will FCL still be around for a long time?

Even though FCL has some significant gearing on its books, the last time i check last year, it still has the means to service its debts and loans with no difficulty.

I personally feel that it would take something catastrophic in order for FCL to be insolvent.

AK71 said...

The strong demand for the bonds, which carry a fixed interest rate of 3.65 per cent per year, indicate investors are prepared to take higher risk in order to earn higher interest. For example, most fixed deposits in Singapore pay less than 1 per cent interest per annum, while the yield on 10-year Singapore government bonds is currently around 2.37 per cent.

Frasers Centrepoint is one of Singapore’s top property companies with total assets above S$22 billion as at Mar 31. The FCL Treasury bonds, which are guaranteed by Frasers Centrepoint, start trading on the Singapore Exchange on May 25.


Source:
http://www.channelnewsasia.com/news/business/singapore/frasers-centrepoint-to/1863578.html

AK71 said...

Local property giant Frasers Centrepoint Ltd (FCL) on Wednesday (Aug 5) announced a 43 per cent rise in attributable profit for the three months ended June, helped by project completions as well as contributions from recently-acquired Australand Property Group and six hotels purchased from the TCC Group.

FCL earned S$181 million in the fiscal third quarter, up from S$127 million a year ago. Attributable profit before fair value change and exceptional items was also S$181 million, an increase of 91 per cent over the same period a year ago.

FCL's Group CEO, Mr Lim Ee Seng, said: “FCL’s performance this quarter continues to reflect the benefits of our acquisition of Australand, which has brought us new income streams that enlarge our recurring income base. The completion of Twin Waterfalls EC in Singapore and Gemdale Megacity Phase 2A in China also boosted our results."

Meanwhile, contributions from the six hotels acquired from the TCC Group boosted earnings at FCL's hospitality division.


Source:
http://www.channelnewsasia.com/news/business/singapore/frasers-centrepoint/2031626.html

K said...

Hi,

Can you advise if there is a site I can see the YTM for FCL now?

Thanks.

AK71 said...

Hi K,

I don't know any such site but I am sure you could do some calculations. :)

You might be interested in this: FCL 3.65% bond (part 2).

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