Fraser Centrepoint Limited 3.65% pa bond (part 3)

Someone asked me what the returns are like when FCL do an early redemption. The bond is widely published as having a maturity period of 7 yrs, but we have to be mindful of the possibility of early redemption. I wrote more about the details here.


They have an interesting way of paying back the investor if they do an early redemption. The earliest optional redemption is on the 4th year, which is 22nd May 2019. They will redeem back at a price higher than the par value of $1. I've not seen such feature before in the bonds that I've studied. I think it's only fair to compensate the investors by giving them a higher par value for the interest payments that will be forfeited if FCL decided to redeem back the bonds early.


I did out a table to show the returns if they decided to do early redemption of the bonds. There are two factors here at work. Firstly, if instead of redeeming the bonds on the 7th year, they choose to redeem back on the 5th year, you will lose out on 2 years worth of interest payment. Secondly, because they choose to redeem back at a price higher than par, you will get a capital gain if you've bought the bond at a par value of $1. Which of the two factors will dominate?


I did out a table below to see the different returns on an annual basis.

You'll notice that it's actually quite a good deal if they choose to redeem back the bonds early. The missed interest payments is much lesser than the effect of boosting the redemption price of the bonds, netting you a return of 4.106% pa. Obviously as the date of redemption approaches the 7th year, the returns get lesser and lesser until it reaches 3.65% pa on the 7th year.


Is the chances of them redeeming early high? I'll say it's not. Interest rates should go up in 7 yrs time. Unless they do not need the money for working capital or have found a cheaper source of financing, I think they will want to drag out the debt to its full term of 7 years. Anyway, for a good bond, you'll want them to continue paying you forever!


What's the implication of this? I think even though the possibility of them redeeming the bonds is low, it still serves as a value point where the price of the bond will hover around. On May, 4th year of the bond, the price of the bond should be lower than 1.01825 and on Nov, it should be less than 1.014600. It doesn't make sense that the market price of the bond is higher than the possible redemption price at that point in time. But 4 years is a long time...who knows what will happen then? I'll still suggest that whoever wants this bond must be willing to wait out for the full term of 7 years, if not, you shouldn't be in this.


The last post I'll do for this FCL bond series is probably on the results of the balloting.

Here's the rest of the post:

1. FCL bond (part 1)
2. FCL bond (part 2)