Bonds In Conversation : Bonds Boomerang

And we have a new 10Y SGD 400 mio Indian Oil Corporation deal, 8 times oversubscribed and coming out with a whopping tighter coupon of 4.1% which translates to 4 dollars on the bond price ie. investors should have bought the bond at 1.04 (at 4.5% coupon)  instead of 1.00 (4.1% coupon). Singapore makes India look bad ! That Indian Oil can tap money more cheaply in Singapore than virtually anywhere else.

Or does that make Singapore look bad ? That they so revere yields that any bond would do ? Buying recklessly without proper due diligence ?

That 60% of the issue was bought up by private banks is telling about geographics of NRIs (Non Resident Indians) these days. Indian Oil would be a familiar name.  I will not speculate more.

I wonder if most investment decisions were made on the Event of Default clause in the termsheet.

Event of Default:       If at any time the Government of India ceases to own (directly or indirectly) at least 51.0 per cent. of the voting securities of the Issuer

But if anyone would to read that 381 page prospectus, they would find some disagreeable facts like the one below.

Currently, approximately 78 per cent. of its imported crude oil feedstock is secured from the
national oil companies of Angola, Azerbaijan, Brunei, Iran, Iraq, Kuwait, Malaysia, Nigeria, Saudi
Arabia and United Arab Emirates, under term contracts, while the remainder is secured through
competitive tenders.

The analysis is that it should be highly profitable to deal in Iranian oil as Iran is highly desperate to by pass US sanctions and will sell at any price to a willing buyer.

Well, it is obvious the deal did not make a lot of sense to the money managers who only took about 20% of the issue into their books, probably by virtue of the fact that it is a benchmark deal afterall. Perhaps they had the sense to check the other Indian Oil 2011 paper in USD which would give a healthy 4.5% if swapped into SGD and thought the better of it.

Contrasting this is the SMRT Capital 5Y paper launched end Sept at 1.2% where fund managers and their likes took 99% of the SGD 350 mio issue.  We cannot help but wonder if the private banks are just a bit over exuberent and taking on a bit too much risk these days.

Bonds and Boomerangs keep resonating in my head this week (nothing to do with Michael Lewis’s new book Boomerang, I hope). I have no idea how this stray thought caught hold just like the word inflation keeps popping up in many conversations after Bernanke pulled off QE3 last month.

It is odd then that September turned out to be the most active September on record for bond issuance. If we so fear inflation, why was every other issue so heavily oversubscribed ?

Speaking to some portfolio manager friends who have differing views, I gathered its 2 factors.

A wall of cash sitting on the sides, waiting to be invested as banks continue to divest out of risk to the public. A divine meeting of the willing buyer and the willing seller.

>> Banks are increasingly willing to lend to high net worth individuals for them to buy the debt off their balance sheets. Thus we have even SME names like Goodpack coming to tap the markets possibly because banks will not extend loans to them any cheaper.

Companies are also beefing up their war chests for future cash flows as yields gravitate to their lows.

Ending in a Flood of Tears ?

Its a Boomerang to me. Bonds, that it.

Flying far and wide and stoking our greed before coming back to hit us squarely in the chest.

Retail margins are no fun. It is a game of dominoes we have seen many times. One trigger to bring down the house of cards much like the accumulator craze back in 2007-2008 and the many a good class bungalow lost.

We will end with the usual bond list and wish everyone the best of luck on next Friday’s Monetary Policy Statement where the expectation is for some form of easing in a less appreciating SGD dollar.