1. MAS scraps $50k issue limit for Singapore Savings Bonds (The Straits Times on March 02, 2018)
2. Trading of Hyflux shares, perpetual securities halted (The Straits Times on May 24, 2018)
3. Investors can consider Temasek's first retail private equity bond to help supplement retirement income: Ho Ching (The Straits Times on JUN 4, 2018)
Introduction
1. The burgeoning demand of the growing wealth of retail investors seeking higher yield.
2. A cautionary tale that sometimes all that glitters may not be gold
3. The "right" way to introduce a new product to the retail market
First, it was often thought of as unusual that Singapore, a first world country with one of the highest GDP per capita in the world does not have a thriving retail bond market.
- Most bonds are only opened to sophisticated institutional investors
- Minimum size of $250,000 per bond
- Lacking liquidity (hypothetically given the size of each bond)....this likely also contributes to a wider Bid-Ask spread
Part 1 - SSB
When the SSB was introduced in July 2015, I took part in it as it was a great way to take part in a new instrument backed by the Singapore Government.
1. Better rates than bank deposits
2. Flexible in terms of exit ($2 admin fee only)
3. An interest rate effectively anything from 1 year - 10 year bond depending on when you exit
4. Another advantage is that as it is not traded, you do not risk any capital losses should you need to exit early. The trade-off is that you do not get capital gains should the general interest rates fall.
Recent news of the removal of $50k application limit simply just tells that while you can apply for more....it doesn't mean you can get more (allocation limits still apply)....which really points back to the original question of why a $50k application cap was there to begin with - probably more of an administrative issue.
Conclusion: SSB remains a great tool for income building as an area for rainy day fund. The rising interest rates also allow Singaporeans to get better returns on their buck in time to come. The $100k ceiling also ensures that this remains open to the man on the street.
Part 2 - Hyflux 6% Perps
Subscribing to Hyflux latest 6% Perps felt like a good deal in 2016. I too took part in that event being fully cognizant of the risks. For one, 6% return was a really good payout and utilities (power and water) being a very center piece of Singapore security would mean that it is unlikely that it would be allowed to fail.
How wrong everyone was on that assumption...
In 2018, Feb - I begun to be quite concerned about the falling price of both Hyflux (mainboard shares) and the price of the perps. It was the facts that stood out
1. Chronic inability to generate cashflow
2. Current ratio falling alarmingly low (as of 1Q2018 - a simple look would have seen it as 1.46 but actually it was more likely closer to 0.41 given that an "asset for sale" was parked under the current assets listing)
3. Loss-making huge asset (Tuas Spring)
I asked myself in my quarterly/annual review....if I had to sell everything and buy them back. Which would I buy?
Would I buy a company that was losing money? Would I buy a company with huge debt burdens that could not be serviced within a year? Would I buy companies with high capex yet the cashflow cannot meet the working capital needs?
I begun to saw similar trends in the power business. Olivia Lum (Hyflux CEO) herself stated that a bunch of them (utilities operator) wrote to the government and "complained" about the glut in the business environment - that it was not sustainable.
Certainly not music to my ears!
I exited Hyflux at about 17% losses after taking into account 2 semi-annual payouts that I received.
Certainly a painful decision! However, not as painful as what was to come in the next 6 months.....
When the notice of delay in redemption and payouts of the perps became news on the straits times...it became increasingly clear that the cash pile had run dry.
How will Hyflux work this out? I certainly do not know....it is quite possible that there are several options out there:
1. Declare the equivalent of "chapter 11" bankruptcy
- This would result in an appointment of a Judicial Management that will manage and sell the assets of the companies to pay back the debt.
2. Infusion of new capital (White knights to the rescue)
- Unless there's a good viable business that remains...or a new strategy out of this issue...it can be hard to convince new (or even existing) investors to put money in there as it may tantamount to throwing "good money" after bad.
- Other questions also remain whether this business is "cyclical".....I think utilities are anything but cyclical...it tends to be more stable with the exception of cost of production (e.g. crude oil prices).
3. Exchange of debt for equity deal
- Existing debts (banks, bonds, perps) will have to be exchanged for equity in addition to new credit lines for the company....this scenario was common in the recent offshore crisis where many smaller O&M companies like MarcoPolo Marine, Ezion made deals to manage their cashflows through the downcycle.
I am thankful for getting out of this with my hat. Looking back, I think it was a very risky investment with high idiosyncratic risk. Current debt holders face a big headache and a very lengthy journey in getting back a portion of their money (my guess is probably somewhere between $0.15-$0.30 on the dollar if they are lucky)
Imagine the losses - at last traded 0.50. I would have lost 44% of my capital and possibly up to 79% of my capital in the worse case ($0.15 on the dollar estimate).
Conclusion: If something doesn't look right, it is best to exit quickly and decisively. There are tell-tale signs and we can always pay more attention to these first signals.
Part 3 - Astrea IV Class A-1 Retail Bond (4.35% p.a - semi annual payout)
After a big debacle with Hyflux, you would wonder who would be interested in bonds. Hyflux turned out to be a high risk, low return proposition that burnt many fingers. Imagine that original $500m of perps issued....nearly half of it has been wiped out to-date!
Enter a new product which has links to Temasek. The first ever retail bond funded by the cashflows of the 36 PE funds that the money is invested in.
I found this interesting as well as exciting that Ho Ching (CEO of Temasek) actually introduced it in a very similar way to how they introduced the first ever S-Reit Capitaland Mall Trust (CMT). In some way - the "democratization", introduction and allowing the retail investor to have some share in this new asset class excited the investment community (myself included).
To cut the long story short. I invested in the bond and was delighted to have received 4 lots.
Here are some key reasons why I placed my money there:
1. You make some money buying it on day 1 because some "money was left on the table"
4.35% p.a. semi-annual payment (this compares to the average 3.1% for a similarly A-rated 5 year corporate bond). Based on my calculations - the bond is worth $1057.08 on first day of trading so it is really a return of 5.71% just by buying it on day zero.
It also has step up 1% from the 6th - 10th year if it is not called in the 5th....this effectively makes it a 4.85% bond if you hold it for 10 years. This compares very favorably to the average A-rated 10 year corporate bond at 3.65%). Based on my calculations - the bond is worth $1099.05 on first day of trading so a return of 9.9% just by buying it on day zero.
Conclusion 1: Immediate returns of 5.71% - 9.9% does sound good to me.
2. 5 Structural safeguards in place
a) Reserves Accounts - cash build up over time will be used to repay the principal of the class A-1 and A-2 bond. (Basically means it will definitely be redeemed if there are sufficient money available)
b) Sponsor Sharing - after payment of performance fees, expenses are met, 50% of remaining cashflows are allocated to the reserves account. This allows for faster build up of reserves for the 5th year call redemption timeline
c) Maximum LTV ratio of 50% ensures that there is a need to pay the reserves account and redeem Class B bonds until the maximum ratio is no longer exceeded. In this scenario, should the value of the portfolio falls - the sponsors will have to maintain a prudent ship by managing the debt ratios through redeeming bonds.
d) Liquidity Facility allows the issuer to drawdown from the bank to pay senior payments, expenses and interest payments of the Bonds if there are insufficient cash. This is up to USD100m
e) Capital Call Facility, similar to the liquidity facility allows a drawdown from the banks to pay capital calls.
Conclusion 2: Plenty of protection for the retail investor (although probably not everyone understands how they work - I haven't heard of some before)
3. Understanding the tranching of the CDO in the risk/return context
If you recall the 07-08 financial crisis. The nature of the CDOs were rated as top grade, some even argued that this was not wrong as there were good mortgage debt in the top most tranche but these were also mixed with bad debt from NINJA (people w mortgage loans but no income, no jobs)....given the risk drivers was only housing prices rising...it became a very dangerous bubble then.
In this case, we refer to the below picture of being in the A-1 & A-2 top tranche.
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| The most important picture |
Given the risk/return quantum, it would appear that we have a defensive cushion of at least 65% (USD713.96m) made up of Equity and Class B before it would impact our portfolio.
Conclusion 3: The risks are indeed low and we should sleep well knowing that it would take quite a few of that 36 portfolios to go under collectively before it would impact the Class A group (this is what we get for getting a fixed payment while the equity could have many folds on their return)
Possible risks
1. Liquidity risk - Well highlighted by DBS Bank head of fixed income, Clifford Lee accurately stated that this instrument is new and "it may take some time for a secondary market in PE-backed bonds to develop". This actually means you may have trouble in finding liquidity for this bond should you need to sell and get back your cash
2. Interest Rate Risk - Over the next few years, interest rate is expected to rise. The element of interest rate risk cannot be discounted if you need to exit prior to the 5 year / 10 year redemption mark. As interest rate rises, your bond would fall in price. Interest rate acts as gravity on asset prices and it would affect pretty much ALL asset classes (unless the asset has a floating rate element that helps you to capture the upside)
3. Default risk - Expected to be low as the funds are managed by relatively big PE players as well as generally mature profile (7 years since vintage)....these funds are expected to be cash generative as the deals are exit.
Overall conclusion: Buy and hold as we will expect it to be redeemed in 5 years. It is after all one of the A grade bonds that have first surfaced under the Temasek branding and we look forward to more of such issues for the man on the street.
