Tuesday, December 30, 2014

LP minibonds 20k

I was setting up the stage for LP mini bond for my parents' friend for 20k, so naturally I've to do some homework. I started by looking up the yields for the different bonds and preference shares listed at SGX.

Do take note that the yields I calculate is based on my own way stated here. It basically included all the coupon/dividends payment until the first date of maturity, subtracted from the guaranteed capital loss from buying the bonds/pref shares above par.

Retail bonds

1. Genting SP5.125% Perp - 7.8 yrs to maturity (YTM) - 4.47% pa
2. Olam6.75%b180129 US$ - 3.1 YTM - 5.70% pa (USD)
3. LTA n4.17%160510 10k - 1.4 YTM - 1.59% pa
4. CapmallA3.8%b220112 - 7.0 YTM - 3.09% pa
5. SIA 2.15%b150930 - 0.8 YTM - 2.19%pa

Pref shares

1. OCC5.1% NCPS 100 - 3.7 YTM - 3.76% pa
2, CityDev NCCPS - perp
3. DBS Bk 4.7% NCPS 100 - 5.9 YTM - 3.67% pa
4. Hyflux 6% CPS 10 - 3.3 YTM - 4.98% pa
5. OCBC Bk4.2% NCPS - perp
6. OCC 3.93% NCPS 10 - 0.2% YTM - 8.97% pa

I noticed a few things:

1. The price of most pref shares either dropped or stayed the same. The drop is understandable, because the numbers of payments before maturity decreases, hence the price will have to drop so that the yield remained good enough to entice people to buy. But I noticed that the price drops lesser decrease in future payments, meaning that the yield actually drops a little.

In other words, I'll have a better deal buying earlier than later, despite the drop in market price of these bonds/pref shares.

2. OCC 3.93% is selling at par value right now. It'll mature on 20th Mar 2015 (optional), so there's still one more payment left. They pay twice every year, on Mar and Sept so one more payment means 1.965% returns with zero capital loss (since you're buying on par). Only commissions. Since 20th Mar is an optional redemption date, they can choose not to redeem, and therefore pay a 1.85% + 3mSOR quarterly starting on 20th Mar, Jun, Sep and Dec. The 3m SOR is about 0.42% now, expected to rise further, so minimally after 20th Mar (if they choose not to redeem), you can expect to get at least 2.27% pa, split into 4 times a year.

To sum up, it's 1.965% this year. If they redeem, they redeem at par, so net net just lose commission for buying. If they didn't redeem back, at least 2.27% pa every quarter from 20th Mar. But it might be some time before they will redeem back, so the market price might keep dropping, which is still fine as long as you don't sell it. Your capital is just locked up.

Good deal? I leave it to you.

In the end, I decided on 2 holdings for the 20k portfolio. Too little to diversify.

1. Capmalla3.8% b220112 (47.0 % of portfolio)
2. DBS Bk 4.7% NCPS 100 (52.9 % of portfolio)

The earliest maturity date is 5.9 yrs, and the guaranteed capital loss because of buying above par will be $900. My plan for this minibond is as usual, pay 2% pa and build up the cash reserves for that guaranteed loss. Thereafter, pay a higher % pa but always reserve some cash in case the person wants to redeem back and the market price is lower than par. This is no longer a capital guaranteed bond, but I'll still treat it as such. The only difference is that now, I didn't say it's capital guaranteed, haha

A big difference it'll make ;)


Lizardo said...

I suppose a more risky proposition would be to go for the Olam and Hyflux options. Requires higher risk tolerance for the higher returns.

If the Hyflux 6.0% NCPS doesn't get redeemed by 25 Apr 2018, the distribution goes up to 8%.


la papillion said...

Hi lizardo,

I'm aware of this two - I also listed it down in my post. Buying it today at the sell price for olam bonds will get me 5.7% pa (USD) and getting Hyflux pref shares will get me 4.98% pa. For their returns, I assume both of them will redeem on their earliest redemption date. The returns include all the coupon payments till their earliest redemption date minus the capital loss from buying above par at today's sell price.

Looks enticing. If I'm managing my own, I'll have put in some small amount there, but I'm not. The person whom I'm managing for just wants fixed D returns, so I might as well don't try to be too smart.

I'll stick with banks and super blue chips. Thanks for your suggestion though.

SMK said...

Lol dear butterfly, are you starting to be so energetic as to do bo hua and chi li bu tao hao things?

You dont need 3 years to find out.

la papillion said...


You also think it's chi li bu tao hao hor? It's a family friend, ok lah, I don't earn anything.

Can lah, this minibond 20k should be safe, because I don't longer do capital guarantee for them! If they find that the interest too low, can go and find other places to park their money LOL

K said...

Hi Lizardo/La Paillion,

Going with the Olam bond to get 5.7% pa (USD) seems like a good deal given that USD seems to be strengthening as well.

What is the risk that Olam will not make quarterly payment or loss of capital?

Is it Olam going bust?



la papillion said...

Hi K,

A bond is only as stable and safe as the company issuing it. You can see the risk, roughly, by the face value of the yield of the bond. Olam (and Hyflux) must entice investors by offering a higher interest for the more risky bonds that they are issuing.

The risk is that Olam might not be able to pay the coupon, which means that it has cash flow problems, leading to higher borrowing costs and possibly leading to going belly-up. How remote that risk is, we have to look at the financials of Olam itself. I'm just not willing to put other people's money into something risky like this lol

K said...


Company has to pay the coupon first, follow by preference shares and then equity shares?

And if the company goes belly-up, payment will also be paid in this order; bond, preference share, equity share?

la papillion said...

Hi K,

Yup, bond is a debt, so it must paid first, followed pref shares then dividend to ordinary shareholders. But if it goes belly up, most likely you won't get much. If you're paid 100% of 0, it's still zero.

So knowing that bond holders are paid first don't give me assurance.

Lizardo said...

If you recall, Olam got into a bit of a spin when Muddy Waters went after them as a target, suggesting that the business is not viable. If it were true, the seniority of the bond isn't going to help since the company has gone belly up - i.e. it's liabilities outstrip its asset value; so there would be nothing to pay out with. So there's definitely certain risks involved.

OT83 said...

hi Lp,

just curious why u didnt choose genting perp?

la papillion said...

Hi OT,

Genting? If I don't dare to buy the mothershare, I also don't dare to lend them money, which is what a bond holder is doing actually. I just feel uneasy holding anything with Genting...it's high risk loh. Not my money, so I better don't risk it for the higher % which they don't need.