Thursday, December 25, 2014

LP bonds 2014 part 2

Here's part 1. There's an important part that I need to remind myself. Most of the holdings are preference shares and bonds listed in SGX. Here are the holdings:

1. OCBC Bk 4.2% NCPS (perpetual, maybe be redeemed after Jul 2013)
2. OCC 5.1% NCPS 100 (maturity 3.7 yrs)
3. DBS Bk 4.7% NCPS 100 (maturity 5.9 yrs)
4. CapMallA3.8%b220112 (maturity 7.1 yrs)
5. CapMallTrb3.08%210220 (maturity 6 yrs)

Since I bought the bonds/pref shares above par value, there will be a guaranteed capital loss if the issuer wants to redeem back the bonds/shares. That's why I need to keep a part of the cash distributed aside for such an eventuality and not distribute it to my parents 100%. How much do I need to keep for LP bonds?

1. LP bond 50k

Guaranteed capital loss from buying above par: $2,588
Cash from holdings per year: $2,144
Cash distributed to parents per year : $1,000
Cash left: $1,144

Balance sheet wise, I will have enough to pay off the guaranteed capital loss from buying the holdings above par value. I just need about 2.5 yrs and I can accumulate enough to pay off this guarantee capital loss. The only problem here is that the issuer might take it back at different times, especially for the OCBC Bk 4.2% NCPS, which is perpetual and which means they can take back it anytime after Jul 2013. If that's the case, I will have to cough out money and also lose this stream of cash. Double whammy. 

In other words, in the next 2.5 yrs, I need to conserve and pay as minimally to my parents as possible. Once I accumulated enough to pay off that $2,588 from buying above par, I'll be safe. Then I can distribute more out to them. Without caring for the perpetual OCBC Bk 4.2%, the shortest time frame I need to accumulate is 3.7 yrs from now. Any other holdings will mature longer than 3.7 yrs (again, except for the ocbc perps). Furthermore, except the two capmall bonds, not all will mature at the time duration stated above. It's just the date at which the issuer can start redeeming back. 

For a good pref shares or bond, you wish they will keep delaying their redemption. The right time to hold such bonds/pref shares is forever.

2. LP bond 60k

Guaranteed capital loss from buying above par: $2,527
Cash from holdings per year: $2,462.40
Cash distributed to parents per year : $1,200
Cash left: $1,262.40

For this, I will need just 2 yrs to accumulate enough to pay off the capital loss from buying above par, should the issuer redeem back the holdings. The good thing is that once I stashed enough money to make sure I have enough to break even without losing any capital, I can distribute out more. How much more? Both LP bonds will be able to distribute 100% cash received from holdings without worrying about the rise or fall of the market price of the holdings, and by extension, the interest rate environment as long as I hold the bond till maturity. That is the single most important part of this strategy, something that bond fund cannot provide me. 

LP bond 50k will thus pay out 4.29% (2144/50000) and LP bond 60k will pay out 4.10% (2462.4/60000). The first bond pays out slightly more because it is started in Jan while the second one starts off in Feb. That one month means I missed out on one payment cycle for one of the bonds. And the mix of holdings are also a little different. Hey, it's still more than doubled of what is giving out now, at 2% pa. 4%+ per annum will be great.

Either that will happen, or the interest rates rise tremendously within 2 to 3 yrs time so much so that the fixed deposit rate will increase beyond 4+%. If that unlikely scenario takes place, then I will close off both funds, take the loss in capital, distribute back to my parents and ask them to invest in fixed deposit. Lagi better, no longer am I the guarantor! Let others take the hit haha :)


Money Honey said...

By any chance you have regretted going through the LP Bond thingy - by guaranteeing the capital and assuring a returns better than the bank fd become too much of a burden for you?

Apologies for such annoying questions.

la papillion said...

Hi money honey,

Nah, not annoying :)

It's not regret. I learn a lot of things by treating the money with more care and responsibilities than my own. It's just me being afraid. Afraid that I might screw up my parents retirement fund when they can least afford to screw up. There's serious repercussions if I lose their capital,amd that creates the stress. I can lose my own capital and not theirs.

This stress keeps me on the edge and I have to think harder and plan better for different types of scenarios that might happen, so that I won't be caught off guard. Hence the bigger that portfolio becomes, the more responsibility I will have. I just don't think I'm ready to handle 200k of their money at this point in time.

They may trust me, but I haven't trust myself with that kind of portfolio yet.

YAP said...

I started 8 years ago managing my parent's $ only thru FD, around 50k then 100k, 150k and now almost 450k including my own investments.

I seperate two portfolios mainly income generating (corp bonds+Equties) and value (my own).

Trust me, as long as you increase bits by bits is pretty okay and not lump sum like 200k (bang!) else your heart might not take it!!

So far, passive income for parents portfolio is ranges from 4.5% to 6% throughout the 8 years. No capital protection from me but of course we need more care and attention and explain to them the risk of equity investment. I keep 15% in corp bonds, 5% cash and rest all in equities.

Just to share my experience with you. Btw I am 31 yrs old this yr, long way to go. Merry Xmas!! Cheers!

la papillion said...


Wow, you're in the same situation as me :) You're right, I'm not comfortable taking all 200k in one shot, but as long as it's incremental, I'll feel more comfortable. Seems like you have much more weightage on equities, but I guess it depends on your parent's requirements. My parents are quite adverse to stocks. It took some convincing by me to tell them to move out of fixed d.

Hope to hear more sharing from you :)