Bonds In Conversation : Let Me Eat Bread, I Don’t Want Cake
Market lapsing into year end lull as origination desks wind up after a highly charged 2nd half year. I am also seizing the opportunity to take a short break with the kid to balmy Melbourne (top 10 most liveable city in the world ?) and get away from the wintry and cheerless trading market of Singapore.
It does look like next year will be an extension of the current sobriety and we should be looking out for new excitements. Spoke to an bond origination chap yesterday and his mood is pretty sombre. He says most of the new issues so far have not made money, not that he is feeling guilty for afterall, it is a market of willing buyers and sellers.
So I dug up the most recent SGD issues and their respective bid prices to prove his point. Here goes.
From a pure price appreciation perspective, the recent issues have not been promising. In fact, I did a rough average of the bonds issued in the 1st half vs the bonds issued in the 2nd half, just for very rudimentary comparisons. The average price of issue in the 2H, not weighted with issue size, is about 100.58 while the mean price of bonds issued in 1H is 101.32.
Who’s to blame when you indicate a coupon of 4.75% for say, the recent Lippo Mall and then issue at 4.48% ?? That is from 100 to 101.35 (approx) !
The 30 year government bond has the honour of being the best performing bond this year in Singapore. The issue has a coupon of 2.75% and was issued at 98.191 in Mar this year. It is trading at 108.00 now.
I dont want cake. Give me bread ! Simple things in life are sometimes overlooked. Like the 30Y SGS. Who would have thought that you could have gone to your local ATM machine and got yourself SGD10,000, 20,000 or 500,000 of this paper in March and now be over 1,000, 2,000 or 50,000 richer ?
I am so uncomfortable with the headlines out of Genting these days yet I cannot pray for Singaporeans to gamble a bit more to save them.
Yes, we are ending a long year indeed and going headlong into an even longer and drearier one. For this has been the year of actions, but the next will be the year of consequences and in my opinion, capital preservation will no longer work. The answer will be in active portfolio management.
I leave you with the latest prices and time for thought.
Thank you so much for sharing with us more of your wisdom and views before your holiday. It appears that Olam 6% seems to be one of the worst performing bonds recently issued from the data above. Perhaps NOL 4.4% is trading below par partly because NOL has been quite unprofitable for quite a while and Indian Oil Company perhaps wasnt too well known locally, I am not too sure. But I am quite puzzled why the Olam 6% went so much below par. Its a senior bond, I think, and the coupon seems quite decent though not exceptionally attractive for a ten year bond. I have the impression that most other Olam bonds seems to be doing quite okay apart from the Olam perpetual which has been trading below par for quite a while. If I were not wrong, another Olam 6% bond that matures 3 years sooner is trading a bit above 103. From your view, do you think the Olam 6% 251022 maturity bond will stay around this price or it will probably weaken further (maybe to 95, 94?) ? I was wondering whether the uncertain global economy condition (eg Fiscal cliff) and poor performance of stock market conditions recently has contributed to it. If the poor market sentiments did contribute, am I right to expect its price to stay around this price or perhaps even improve a bit closer to par value once the situation improves? The Olam perpetual bond has been trading below par for quite a while, if I am not wrong, but it didnt progressively deteroriate I think, not sure if you have any projection about the Olam 6%. I apologise, should my reasoning make no sense or sound too layman. Hope to hear your respected views on the recent Olam 6% bond and be blessed with your words of wisdom soon. Have a great holiday ahead, Sir!
There is a price for everything and when something trades under its issue price, it serves to suggest that the demand is pretty poor.
Senior or not, I thought that the coupon was insufficient as with the case of NOL and Indian Oil.
But who knows, someone out there could be buying it off their banker at 101.00 (price intransparency at work).
Poor stock market performance does make credit spreads crap out, so we can have a case where government bonds keep rallying but corporate bond prices go down.
Olam is a great company. It is like the De Beers of cashews and Temasek has a small stake in it. However, I thought the 10Y should have come at >6% and closer to 6.5% for investors not to be short changed. They are very highly geared and will have more borrowing needs in the near future.
I believe the price level dropped because bank books are perhaps a just too full of this name and are making lower prices to discourage investors from selling, like a poker game.
Thanks for sharing your valuable knowledge and insight. I have a few more doubts that may need your kind enlightenment.
I got some idea from Olam’s official website that 16% of it is owned by Temasek, 20% by KC group and 55% made up by public, which means no one actually owns more than 50% of the share (assuming the 55% owned by public is not dominated by a few single individuals). Does this situation whereby no one owns more than 50% has any significance on its the volatility of its bond price or default risk?
Sir highlighted to us that Olam is highly geared and needs more borrowings soon. May I ask, when would that plausibly be? (matter of few months or a year or so or more?). I am not sure what form such borrowings will take. But from a highly simplified, layman point of view, given that the latest 6% bond is trading below par somehow imply that the demand is quite bad. As such, does it mean Olam has to issue bonds with more attractive coupons? (eg perhaps 6.5% for ten year bond or 4% for a 3 yr bond). When this happens, am I correct to assume that it will make the price of current Olam bonds with not so attractive coupon go even lower? The consequences seems quite catastrophic to current Olam bond holders.
From the bid bond prices that I see in this website and elsewhere, it seemed to me that currently those bonds (SGD Corporate bonds) not performing so well are trading just slightly below par eg. beyond mid 90 close to high 90s or close to hundred. I do not remember seeing any bonds trading significantly below 100 (say 70s or 80s). Is this the actual picture or there are actually quite a lot of SGD corp bonds that are trading well below 100 but because they are doing so badly it has become quite dormant and their prices will be excluded from most price list. I hope there arent any bonds doing that badly trading far below 100 now and these few new issues such as 6% will not be an excpetion.
I came across some articles last few days that Fed may wish to increase interest rates before mid 2015 should the unemployment rate goes down sooner. I wonder how much impact will it have on the bond (SGD corporate) price if interest start to rise. Are there any previous documented cases? I was wondering which kind of bonds will be most badly affected by the increase in interest rates. (those with low coupons?)
Thank you so much. May Sir and family have a really great vacation ahead!
Sorry about the Olam bond.
I heard about the Muddy Waters report on Monday but couldn’t get this website to post anything on the wifi of this hotel. I am impressed that they dare to attack a Singapore company (Olam = Temasek = SIngapore). Singapore – a land where they hang drug traffickers (but maybe won’t touch the drug lord).
So conclusion – no smoke without fire, never been comfortable with that company anyway even though I have had dealings with their bonds many times. The trick to Olam trading is DO NOT BUY AND HOLD.
If there is indeed evidence for a case, then I suggest the 1Y 2013 Olam paper is at higher risk than the 2022.
Muddy Waters is not a fly by night company. I am so glad they brought up the Sinoforest fraud. Sinoforest was listed in Canada as well (not 3rd world listing). I have deep respect for them and even if Singapore manages to side step they accusations, I would not be straying 3 miles near Olam for a long time. Never liked their BoD anyway and its a free world.