Friday, October 01, 2010

SIA bonds oversubscribed

Sfry, a regular at the cbox, put up a link on the enthusiastic subscription of the recently launched SIA bonds. The bond carries a coupon of 2.15% pa and matures over 5 yrs. To subscribe for it, you need to have a minimum of $10,000 though you can buy off the market (it starts trading on 1st Oct 2010) at around $1k, depending on the price.

I'm just wondering why there are so many subscribers to this. I think one of the main reason is that people are getting the super lousy returns from savings deposits of 0.125%, so this SIA bond of 2.15% seems like heaven sent. Retail investors must be very frustrated with the measly returns they get from the banks, given the low interest rate environment. Recently I was also shocked to learn that the fixed deposit rates for a particular bank gives the same returns for 5k to 1mil if you compare the same periods of lock-up. I thought that the more you put it the better the returns? Apparently not anymore.

I believe that there are so many equally stable alternatives to the rather undesirable SIA bond (to me, at least), but the difference lies in the liquidity of that particular alternative (or the lock up period, so to speak):

1. CPF

Bro8888 mentioned in one of his post that his colleagues asked him if this is a good idea to invest their monies in. He mentioned that by putting it in the risk free SA account, you can get 4% already, so what's the big deal right? The bad thing is that by putting extra money into the CPF, you can put in but you can't take it out, so careful planning have to be done. This is definitely not for people who needed to use the money in the short term because the only time you can withdraw the money is when you touched the withdrawal age, which is increasing all the time. CPF is also subjected to 'government risk', so changes in the policy regarding CPF will affect all CPF members.

2. Preference shares

If you take a look at just those preference shares alone in Singapore, there are quite a few gems that offer greater returns than the SIA bonds.

Disclaimer: Do read up more on the preference shares, their yield may not be what is displayed on the name

Again, with higher returns comes greater market volatility in terms of price. I remembered seeing the price of these preferred shares plummeting in the deepest of the crisis. Just take a look at the historical charts of these preference shares and you can see it. Personally I didn't see it as something bad, unless you happen to want to cash out during the deepest crisis. I see it as a chance to get more below the par value, so when they start redeeming your bonds at par value, you not only get the coupon payment throughout the holding period but also book a good capital gains. But do buy those from companies you can trust. The capital guarantee upon maturity is only as good as the standing status of the companies.

Take a look at the OCC 3.93% NCPS 10, trading at 94.60, it's quite a good one compared to SIA bond. First of all OCC stands for OCBC...Singapore banks, so I think it's as safe as SIA, if not safer. 3.93% yield is on the par value of 100, since the price now is 94.60, you'll actually get a yield of 4.15%. NCPS stands for non-convertible (or cumulative) preference shares, meaning that you can't exchange it for ordinary OCBC shares nor can the payments be accrued to the next payment date should they decide not to payout on this payment date. The payments are not guaranteed, unlike the bonds, but it's almost as good as a guarantee. You can read more about the details here. Do read more about it, because I know that some preference shares change their yield after a certain date, so it might not be the 3.93% coupon rate displayed on the name of the counter.

Most of the other preference shares are trading at 5-6% yield, even after taking into account their price which is trading at higher than par value. Can really take a look at these alternatives seriously.

These are the few alternatives that I can think of. Of course there are other investments that gives dividend yield much greater than the 2+% given by SIA bond, but those are different classes of assets with different risk altogether. I would gladly wait for more bonds to be traded on SGX to see if there are better investment ideas now that SIA started the ball rolling. Price matters a lot in all cases because buying even the most riskiest product at a super cheap price can turn out to be a profitable and not-so-risky experience. I would wait for SIA bond to go around 0.70+ to get a 3%+ yield before entering. Don't laugh at me, it just might happen within the next 5 years .


AK71 said...

This is definitely not a good deal. Don't know how it could be oversubscribed.

la papillion said...

Hi AK,

Yup, indeed not a good deal. As bro8888 mentioned in his latest post, people are concerned about return of capital instead of the returns on their capital. How apt.

Sanye ◎ 三页 said...

Hi AK71 and LP,

Yes you guys are right, this is indeed not a very good deal, but guess what, I actually encouraged my wife to subscribe it. She is such a risk adverse person that she will not even agree to buy stock like SPH but prefer to let her savings "rot" in some FD account. So I encouraged her to buy SIA bond, and this time she heeded my advice. :)

la papillion said...

Hi sanye,

I think for those who compares this against Fixed D, of course it's a much better deal. But that's exclusively for people who have only two places to put their excess cash - fixed D and saving account :)

Shall I congratulate on convincing your wife? haha

Anonymous said...

Can u please kindly explain to me why OCC 3.93% NCPS 10 is trading at price of 95.2 whereas OCC 5.1% NCPS 100 is trading at price of 105.1. These figures were derived on friday SGX.

la papillion said...

Hi anonymous,

You have to do more research on it, namely the following:

1. The maturity/callable date - that's the date in which the bond may be recalled at par value of 100

2. The dividend policy - some of the pref shares will change their yield at par from the stated yield on its name to 3 mth singapore swap offer rate + 2.5%. So, don't take the yield on the name at face value.

I browsed through from different sites and found the following:

1. OCC 3.93% callable date is on 2015. It pays 3.93% pa before 2015, but it pays 3 mth swap offer rate + 1.85% thereafter.

2. For OCC 5.1%, it has a callable date of 2018. It pays 5.1% pa before 2018 and 3 mth swap offer rate + 2.5% thereafter.

Since the 5.1% one pays a higher yield for a longer period of time, and if it's not called back after its maturity date, it still pays a higher rate than the 3.93% one, it makes sense for it to be priced higher.

Based on the last close, OCC 3.94% gives you a yield of 4.14%, while the OCC 5.1% gives a yield of 4.85%. Seems a better deal? But if you consider the total return, assuming both are called back on maturity, you'll find 3.93% occ to be higher than the 5.1% one.

Anonymous said...

Hi LP,

Thanks for the reply, i'm realy confuse as OCC 3.93% NCPS 10 is trading at price of 95.2, this is way below par value of 100. Whereas OCC 5.1% NCPS 100 is trading at above its par value of 100.
I guess somethings must be missing.
Please enlighten me.

la papillion said...

Hi anonymous,

Already mentioned in my previous comment.

Perhaps you should wait a while, let me analyse the things in greater detail first. In the meantime, you can read my latest post on pref shares..might shed some more light on the issue:

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