Bonds In Conversation : Junkies Paradise
There is a mental connotation that if junk sells, stocks will fly. And thus junk bond prices are usually positively correlated with stock indices.
And I was right. Higher and higher coupons coming. Future Land launched yesterday at 10.2% and down 2.5 cts. Today, Mingfa 5YNC3Y coming at 13.25%. All I can say is this. If you will buy into a company called Longfor, Powerlong, Futureland, I would assume you know what you are doing.
There is a cyclical switch into equities as we speak and the more junk comes, the better equities will do. Yesterday’s Tata Communications is best testiment to that – loss making and caught up in new regulations that will choke revenues and lapped up readily in Singapore. This leaves me to guess that it is easy money parking, because easy come and easy go. Hard earned money does not behave in this way. And so I conclude my case.
An interesting observation on the markets this week besides the rapid issuance frenzy, that could be potentially due to the great cyclical rotation coming up, is what the leading SGD corporate bond bank is doing. DBS bank, does not appear to be trying too hard this month and have largely kept her fingers clean after walking away from the Ezion perpetual last week. They have issued 2 chunks of high grade papers, the NUS 5Y 1.038% and the HDB 5Y 1.23%. Their involvement in Tata Communications is cursory, along with 3 other banks which does not say much.
Personally, I do not know many buy-side professionals who are enthusiastically buying into anything so far. To me, that is an ominous sign which is perhaps not so much a sign of credit concern at the moment, but portending towards the cyclical shift towards equities and the fact that yield levels are not compelling enough for the names that are coming out. I would trust them because they did sit through the near misses last year where many a Chinese name was looking rather shaky. The same names that are being hawked on the street now as acceptable credits in a junk bond revival while Govis are suffering led by the best performer of 2012, the 30Y SGS which has fallen by 6 cents since the start of the year.
I leave you now with the usual table of prices for 2012 issues and little time to verify the accuracy of the data as it has been a frantic week for me which has left me feeling like I have walked under a bus or hit by a train.
- New Issue Review : Tata Communications 3Y SGD 4.625% (tradehaven.me)
- Analysis: Asia’s junk bond rally near exhaustion (news.yahoo.com)
If this is a dumb question: then please ignore it.
In the tabulation at the top of your posting I looked at the quoted yields of the Perpetual bonds. I tried to replicate the arithmetic of those Perpetuals which are currently trading below par. The only way I can do this is assume that the mid-price will one day revert to par (on the call date?). Now my question: doesn’t this give an overly rosy portrayal of those perpetual securities which are underwater? e.g. the Olam 7% perpetual – the quoted 11.2% is in my view a rather optimistic view of the true yield – only if this price gets back to par or the issuer redeems will this be achieved – and for a perpetual this can never be assured. What am I missing here?
Additionally, one observation: Despite the derision that is sometimes associated with perpetual offerings, if I stand back from the tabulation (and disregard the Olam 7% Perpetual), it looks like the larger recent Perpetual issues are doing OK. I realise that some of the recent smaller issue size perpetuals have not fared so well (e.g. the Ezra 8.75% paper).
Thanks again Tradehaven,
Aha ! You caught my short cut there.
Technically we should not price the perpetual to par if it is underwater. However, there is no way to price it to maturity(or worst) because it does not have a maturity date.
Therein lies the quirks of each individual perpetual, whether it has a re-fixing or staggered calls. For the purpose of the table, I just use yield to call, assuming a call, for the purpose of easy computation. Afterall, this is a table of 2012 benchmark bonds ie. >250 mio and they can hardly go wrong (wry smile on Olam).
The larger perps are often of mature companies and have a larger audience. That is why they could sell the larger size but investors are sometimes subject to distressed pricings when they have to liquidate, although the price is not captured in the system.
Hope it helps and best regards.
Thank you for the very clear clarification Tradehaven. Sincere appreciation for taking the time.