Bonds In Conversation : Throwing Pearls AT Swine ! Why No Inflation linked bonds in Singapore ?
Inflation linked bonds ? How about a perpetual instead ?
A credible source informed me that inflation linked bonds (aka “linkers”) will not be a public feature anytime soon.
By punishing the savers, the government has better ways to “reward/aid the “poor” via each year’s budgetary handouts. So that leaves the general public in limbo especially when interest rates are at record lows and our inflation is still the second highest in SE Asia (after Vietnam) until Myanmar start publishing their numbers. And our interest rates will remain low because our government relies on uncovered interest rate parity to remove the effects of the strong SGD policy and interest rates should be negative at the rate we are going (Obama just won the US elections).
Well, it looks like they addressed inflation concerns by issuing alot of corporate bonds this year for the public to buy. Some of the coupons are even higher than the CPI rate. Wow !! Be thankful !!
For the record. Inflation linked bonds issued by the government IS NOT EQUAL to perpetual debt issued by gaming or shipping companies !
I dug out every single subordinated paper I could find in Singapore Dollar and voila ! Over 40% of all these subordinated (higher risk) papers were issued THIS YEAR !
Disclaimer : Prices and yields are just indicative and for illustration purposes.
The market has done well to prey on the fears of the public to issue a whole lot of papers that could possibly NOT MATCH the NEEDS OF INVESTORS whose primary concern is with the rising cost of living.
Why buy Olam Perpetual just because its coupon is 7% and the latest Sep inflation number is 4.7% y.o.y. ?
I have doubts on the extent of public awareness but I am sure that surely someone must be aware that they are buying OCBC 5.1% at a negative yield (unable to verify the accuracy of the yields on the table) from the stock exchange. Yet the poor chap must be worried about inflation to do that and given that OCBC trades in lots of 20,000 it looks like an attractive buy except that the investor is perhaps, unaware that there is a CALL next July at 100.00 without a step up special feature (which means it will definitely be called).
Subordinated debt are not bad, in fact. Perpetuals too. For instance, Singapore Post Limited which is not listed above because it is considered a Senior Perpetual, which means it reverts to a Senior bond if the company should default but in all other circumstances, the bond functions as a perpetual. Thus
some perpetuals are better than the subordinated or senior debt of other companies. So do your homework well and you will be rewarded.
The trend, however, is worrying. The SGD dollar market has 40 of these perpetuals and subs. 19 were issued this year.
Dear MAS, it does not say that the market has turned sophisticated investors overnight.
It just says that there are alot of people out there who are interested in hedging themselves from the high CPI rate here. And now it would appear that you are denying the ordinary Singaporean citizen saver the opportunity to just hedge for inflation by giving them additional credit risk on instruments they do not understand for the sake of growing the capital markets here.
Dear Readers, do note that the banks that sell you this stuff are not obliged to buy it back from you. And banks, as a general observation, do not have much limits to buy alot of perps and subs for themselves because these are heavier on their balance sheets.
Just some food for thought.
Link to an old article I wrote on SGD Perpetuals.
| STAYING AFLOAT IN THE POOL OF SGD PERPS |
Hi Tradehaven,
Thanks for sharing with us more insights and knowledge on bonds again and this time on inflation linker. There’s something which I have been thinking about but cant find the answer. If a bond is issued by SG government, I supposed its almost risk free. Corporate bonds issued by companies have much higher chances of defaulting. What I am trying to find out is in bond market history of Singapore, approximately how many companies have defaulted on their bonds before? Any details of it? Does such events usually happen abruptly or it happens when a company underwent many years of non-profitable business and its bond price has been slowly decreasing over time?
I have the impression that perpetuals usually give out a fixed amount of coupon every year but they reserved the rights not to do so as well under certain circumstances. Though in some cases, if they do not give coupons for the perpetuals they cant give dividends to shareholders. In Singapore, how often is it that preference shares/perpetual bonds failed to give coupons? My friend was telling me that perpetuals/preference shares may not pay coupon at times but pure bonds with fixed maturity have to pay coupon under all circumstances and if they fail to do so they have to declare bankcrupcy, not sure if its true.
Thanks for everything again.
Regards
Wow. Many questions.
1. Most of the new perpetuals are now issued under the new guidelines, with no step up coupons and yes, most of them are non cumulative. Meaning they can choose not to pay dividends/coupons if they have good reason not to and the dividends/coupons will not carry forward to the next year.
2. As far as I can remember, there has not been a case of a perpetual denominated in SGD that has failed to pay a dividend/coupon. But I have to remind you that these were mostly local bank perpetuals till recently and that trend cannot be taken as precedence for the future especially now that we have a variety of new names issuing perpetual bonds. (You can read the latest Bonds in Conversation to realize that perpetual bond issuances rose dramatically in the past 2 years)
3. Around the world, we had many perpetuals stop paying out coupons. Spanish household name banks have caused a lot of distress amongst local savers this year alone.
4. Yes. Perpetuals that are non cumulative will not be considered in default if they stop paying dividends/coupons.
Hi Tradehaven,
Much thanks for sharing with us your precious knowledge and experience again. Thank you so much. I hope I am not excessively “questionful” but I I honestly do have quite a few more doubts that need to seek your valuable advise if you dont mind. But before that, you mentioned non-QFD bonds are liable to tax. Mind I ask, what does QFD stand for? Are most of these bonds under our discussions QFD bonds?
You mentioned 40% of the higher risk papers are issued in 2012, is it possible to give some examples on such. Most recent bonds issued by Olam, OUE, NOL are they considered “higher risk” papers as well? Its hard for a bond noob like me to judge if a paper is high risk unless there’s some S&P rating on it etc
If I were not wrong, there is a 7% new issue by Ying Li just one or two weeks ago, was it successfully launched? If it were not, I wonder what is the reason behind? Is it because it is not fully subscribed? If so, you have any idea what is the subscription rate?
I got the impression from the papers that the stock market may see a quite major correction because of the fiscal cliff problem in US. I am wondering, what effect will such a correction in the local stock market have on the local OTC bond market. Are the bond prices exepected to drop significantly too? Or is the bond market expected to remain about there or even edge up a little as more cautious investors are staying out of shares and are channeling the funds into bond market instead. Not sure if it is wise to sell away whatever bond one holds now and buy back later if its expected to drop.
It was reported in the papers including BT that a Temasek backed company given AAA ratings Clifford Capital will be issuing some form of notes/bonds worth total $1b very soon. I wonder if you have any information or news on it. Will any of the bonds be denominated in SGD? Wonder what type of bonds are they going to issue, perpetuals or long term maturity bonds? Given its solid credit rating, will the coupon probably be miserably low like some recent HDB bonds? Some Temasek related companies such as Mapletree treasuries seem to have issued a perpetual that give quite decent coupon of 5.125 too, not sure which case is Clifford Capital likely to be.
Thank you so much for everything again.
Hi Wilson
Yes, all the bonds we mentioned are QFDs.
I should clarify higher risk. I meant higher risk in terms of being subordinated to the senior papers in the case of a default. (will amend in the post to avoid confusion)
Yingli failed to launch. You can read my post on it – most of the reasons should be valid enough for investors to run shy then. We should see them again soon, either in the USD or in equity space.
Bond funds are seeing huge inflows. My personal opinion is that capital preservation in bonds will be in vain which goes against most of the market. So better not ask me. What can you hope to achieve by chasing 1.25% to 1% ? What can you hope to lose when 1.25% goes to 2.5% ? The US and Japan fiscal cliffs are quite paradoxical. Should we buy more because of more supply ?
Like Seatown (the other Temasek issuer), I suspect the papers will be in USD with perhaps a SGD tranche.
Mapletree is Temasek backed but not guaranteed and the 5.125% is the coupon of the perpetual is under justified and cannot be confused with Clifford Capital’s senior debt.
Hope this helps.
Hi Tradehaven,
Thank you Sir for the helpful explanation. Looking forward to your next post and maybe even a section on the potential or probable SGD denomination bonds that may be issued in the coming weeks/months and your views on it. Thank you so much.
I believed the last time a company in Singapore failed to pay its coupon is TT International.
“Calm before the storm” this is what exactly is happening in the Singapore bond market. As long as there is no default, the party will continue…..
It just take one incident to wake up everyone including MAS, remember minibond saga that change our finance industry. It’s time for another wake up call soon MAS, I hoped it will come later than sooner because I’m pretty much vested into the local bond market too. If you can’t beat them, join them right?
Hi Barnes,
Thanks for your information. I am sorry if I sound really noob on this but can I ask, do you have any details of the TT bond default issue? How long ago as it actually? Wondering other than TT international are there any others.
Btw as far as you know, are there any preference share/perpetuals which has failed to pay coupon?
Your mention of MAS has reminded me of another question that has always puzzled me. When a company want to issue a IPO to be listed in mainboard SGX etc, MAS usually screen through the company’s financial statements thoroughly ensure that they have some degree of sustained profitablility etc. Does it apply to bonds too? Can a company issue bond as and when they need money and as long as there is interested buyer? Or does it has to submit certain information to MAS and after MAS assess that its reasonable to assume they can pay the coupon that MAS will approve of the new bond issue?
Wilson,
The answer is pretty simple. The duty of care to bond investors is not as high because most of these bond issues are meant for accredited investors with 250,000 to spare.
Retail bonds and stocks are different – a lot more paperwork because the amounts are smaller and the public at large would be at risk. There is no guarantee, of course, that your money is entirely safe because there is no such thing. Even bank deposits are only guaranteed for 50,000.
Another company can issue bonds, even private ones. If the bonds are not QFD then the coupons will be liable for tax.
All these listed bonds have to be lodged with the SGX and MAS. But the duty of care is not with the MAS or SGX who just ensures that the paperwork is done.
The viability of the bond is not the responsibility of the authorities ie. whether they can pay their coupons on time. Surely, that is an impossible task especially when a perpetual DOES NOT HAVE A MATURITY DATE.