7. Based on the year of redemption, the non-compounded returns are indicated in the table:
(Thanks to SRSI for the gentle reminder of the possibility of early redemption! I forgot about it!)
A few risks needs to be highlighted now:
1. What's the chance of them redeeming the bond?
Capitalmalls asia had the bond set up in Jan 2012. For lack of a better gauge for borrowing costs for companies from banks, I used 3 mths SIBOR to see the risk premium of them borrowing money from investors at 3.8% (which is the face value of the bond). The 3 mths SIBOR back then was 0.39%. So to entice investors to invest, they are giving a premium of 3.41% (3.8-0.39) pa.
There is a step up component of this particular bond. If they did not redeem on 12-Jan-2017 and every year thereafter (until 2022), they will have to pay a higher interest of 4.50% instead of 3.80%, which is an increase of 0.7%. Assuming everything else stays the same, if Capitalmalls asia still has a risk premium of 3.41%, the 3mths SIBOR have to be 1.09% (4.5-3.41) by 2017.
If 3-mth SIBOR is higher than 1.09% by 2017, then the borrowing cost for Capitaland from banks will also rise, making them less likely to redeem back the bond since they have a low cost of borrowing through the bonds. The last time 3 mth SIBOR is 1% or more is back in 2009 before the financial crisis. The current rate now is 0.46% and is very likely to hit 1% in 1 or 2 years time, with the US Fed Reserve set to raise the rates by Q2 or Q3 2015.
I take it that therefore it's unlikely for them to redeem back the bond in 2017. But it's a very simplistic way to see this, I realised. Capitalmalls asia might, for example, not require the debts at all and choose to redeem it.
2. The quality and safety of the bond is as good as the underlying
Capitalsmall Asia is under the big umbrella of Capitaland. To me, a bond by Capitaland family is as good as gold, and as safe as fixed deposit, maybe just a little riskier. The returns stated are non-compounded. To raise it further, you can invest the money received for a higher returns. And technically, I should use XIRR since the cashflow are pretty consistent and even, but I didn't. You can try it out if you wish.