Oxley 5% bond - Good buy or Goodbye?

I realised that my bond articles are quite widely read. It was quite shocking to see that all my highest read post are bonds - Aspial, Perennial, Frasers, hyflux pref shares (kind of a bond) etc - all of them are up there in the highest number of pageviews throughout the entire history of nearly 10 yrs,  So let me say this in the clearest way possible. You don't just read what others write about bonds and then you decide whether you want to follow. Even if I decide to buy a certain bond, it doesn't mean that it's suitable for you. Even if it's suitable for you, it doesn't mean that you bought the right amount according to your portfolio allocation. Even if you bought the right amount to diversify in your allocation, it doesn't mean you have the holding power. So many unknowns. I'm writing for myself and for my own situation, so please do your own due diligence. At best, this is just a platform for discussing the virtues (or sins) of any particular investment and at worse, I'm just a idiot not knowing what I'm talking about. You should assume and learn towards the latter. I hold no more special knowledge than any of you.


Okay, that should be clear enough.


Oxley, mentioned that they are going to issue bonds of 5% pa for a duration of 4 yrs. The details are as follows:

Issuer and guarantor: Oxley MTN Pte. Ltd is the issuer and Oxley Holding Limited is the Guarantor.
Issue price and board lot: $1 par value, board lot size of 1000
Maturity date: 5th Nov 2019 (4 yrs from now)
Payment: Twice a year, 5th May and 5th Nov every year, from 5th May 2016 onwards until 5th Nov 2019
Credit rating: Unrated
Amount of bonds issued: $125 mil in total with $100 mil for public retail tranche and $25 for institutional investors. Option to increase up to $300 mil in total.

Application: Opens from 27th Oct 2015 9am to 3rd Nov 2015 12 noon. Min $2k and incremental of $1k thereafter

Expected timetable of key events:

The surety of a bond depends on the solvency of the underlying company, so let's take a look at Oxley.

Here's a few pointers:


1. This company has many many bonds, issued at various year and matured at different years ranging from 2015 to 2018. They have a total of $725 million fixed rates notes (i.e. bonds), all listed in the table below:

If you look at bond number 3 and 4 which expiring in 23rd Sept and 6th Nov 2015 respectively, the total amount is $135 + $90 = $225 million. Both are at a rate of 4.75% maturing for 2 yrs. Based on the overwhelming response from the most recent Aspial and Perennial bonds, it seems they are likely to increase the size of the offering. Perhaps the bond is to replace these 2 that are expiring at the end of this year.

Considering that they had been issuing bonds every year since 2013, I think they are also going to issue bonds next year, possibly at a higher rate than 5%, though not necessarily to retail investors. I think they are using a series of bonds/notes to fund their business.


2. The total liabilities to total asset had been dropping steadily since 2011. They are listed in 2010. The TL/TA ratio is shown below.

2012 - 0.90
2013 - 0.89
2014 - 0.86
2015 - 0.85


3. Having debts is okay if they can pay off the debts with their earnings. (The) Boring Investor posted an excellent article that inspired me to pick up my dusty copy of Security analysis again to review the fixed income investing section. Will do that during the holiday season to sharpen my skills. Till then, I'm referring to his clear and concise method of calculating earnings coverage ratio. Any error in calculating it is solely due to my sucky skills at reading financial statements.

Here goes the earnings coverage:

2012 - 8.21
2013 - 15.46
2014 - 12.17
2015 - 3.98

The aim is to be more than 3 times, and Oxley passed in all the years since listing. I would wish for a longer period of listing to see how they performed during the crisis years, but that's the data I have.


4. ROE

I'm not so concerned about ROE, more about the Asset/Equity ratio. You can see that this is really a business that is funded by debts. Dupont analysis of ROE shows us what drives the business forward. Assets/Equity is also known as a kind of financial leverage. As we can see from the total liabilities to assets in point 3, it is dropping, but it's still freaking high.


Conclusion: This is probably more risky (to the bookmakers) than Perennial, based on the yield and duration of the bond. Oxley offers 5% pa for 4 yrs, while Perennial is 4.75% pa for 3 yrs. Perennial don't have a long history to see their results, while Oxley has a history mired in debts and bonds. What's the chances of Oxley defaulting? I don't know, but I think they should be able to repay off their bond debts since it's not floating, so nothing really to do with interest rates. The only problem is whether their business can still do well if we're expecting higher interest rate environment, with the cost of borrowing money to buy property going to be higher, which invariably affects their bottom line.

Man, this is a hard one for me to decide. I'm sitting on the fence for the decision - I really don't know.