Singapore Post

Not that i am a fan of them, but there is always a price for them. Before we pan perpetuals and preferreds, they do form a part of the capital structure and are used by companies AND investors. Who can forget that Warren Buffett invested in the preferred shares issued by Goldman Sachs and GE during the crisis and more recently, by BAC last year?

To temperament, perpetuals are treated as equity in the books precisely because it is most equity like in the respect that once it is issued, the issuer need never pay you back. In theory, you can always get your money back by selling into the secondary market, exactly like shares, except that it is traded over-the-counter instead of on an exchange. So far most of the perpetuals/preferreds have done reasonably well in the secondary market due to the mad rush for SGD products..

While it is true that perpetuals/preferreds will not enjoy the upside, in some industries it may be worth considering. For example, SPOST...while the dividend is ~6% currently, and am reasonably confident that they will not go bust the 6% div yield is based on the assumption that they will continue to maintain that level of dividend. thus, the question we would ask is - are we confident that they are able to sustain the payment considering that they are operating in a somewhat sunset industry and also the recent spate of acquisitions they have embarked upon. Perhaps then, it may be fair to give up the higher yield for the greater certainty of the payment?

For the record, I am not a big fan of perpetuals/preferreds but just want to share my thoughts so that we don't ignore the asset class totally for the wrong reasons.

> Who can forget that Warren Buffett invested in the preferred shares issued by Goldman Sachs
> and GE during the crisis and more recently, by BAC last year?

He got a 10% coupon, with a term to expiry, and an option to convert.

If the same terms are offered... I am sure the take up rate will quadruple.

(06-03-2012, 12:08 AM)bran Wrote: Not that i am a fan of them, but there is always a price for them. Before we pan perpetuals and preferreds, they do form a part of the capital structure and are used by companies AND investors. Who can forget that Warren Buffett invested in the preferred shares issued by Goldman Sachs and GE during the crisis and more recently, by BAC last year?

To temperament, perpetuals are treated as equity in the books precisely because it is most equity like in the respect that once it is issued, the issuer need never pay you back. In theory, you can always get your money back by selling into the secondary market, exactly like shares, except that it is traded over-the-counter instead of on an exchange. So far most of the perpetuals/preferreds have done reasonably well in the secondary market due to the mad rush for SGD products..

While it is true that perpetuals/preferreds will not enjoy the upside, in some industries it may be worth considering. For example, SPOST...while the dividend is ~6% currently, and am reasonably confident that they will not go bust the 6% div yield is based on the assumption that they will continue to maintain that level of dividend. thus, the question we would ask is - are we confident that they are able to sustain the payment considering that they are operating in a somewhat sunset industry and also the recent spate of acquisitions they have embarked upon. Perhaps then, it may be fair to give up the higher yield for the greater certainty of the payment?

For the record, I am not a big fan of perpetuals/preferreds but just want to share my thoughts so that we don't ignore the asset class totally for the wrong reasons.

Of course, there a lot of people in the Market who may think like what you said above. But there are a lot of people who like to have a chance to sell at anytime they want and maybe enjoying the upsides. For me, i have said i may invest in this perpetual preference shares ( and only NCPS) when i think i have more than enough money to let some of my money tie down "perpetually". Though there are secondary markets, i think it is not as "lucrative" as the Main Market.
Anyway, i believe as long as any financial products still existing in the MARKET means they benefited some people in the MARKET. Another words, MR Market has the final say, not anyone of us.
Incidentally, i think WB. almost always buy/sell in his "own terms". Usually, better than the Market's.
Thanks for your point of view. It is one why this product exists in the Market.

"The game of HEAD they win Tail we lose". as i like to coin it.

May i borrow this article posted in Singapore Investment Blog by Wilfred Ling (hope he doesn't mind sharing it here with valuebuddies.)

The RISK of Perpetual Bonds by Wilfred Ling

In the fixed income world, duration is defined as the percentage change in price of the bond when there is a change in one percentage change in interest rate. What is the duration of a perpetual bond?


The full article can be read from here http://www.wilfredling.com/content/view/1616/9/

Notes : I edited the post to a quarter of the article and provided the link to the full article as requested by the writer, Wilfred Ling.

"The game of HEAD they win Tail we lose". as i like to coin it.

Interest rate goes down (Head) they win (callable).
Interest rate goes up (Tail) you lose.(perpetual) Your bond worth a lot less in the market. If there is still a market.
That's one of the main reasons, i don't touch perpetual preference shares.

I witness the magic of Perpetual securities on net asset of a company, the SingPost. The SingPost net asset magically goes from ~332 Mils to ~660 Mils, PB ratio goes from 6.71 to 3.15 without any "real" increase in asset, but a perpetual loan of ~347 Mils.

What a power perpetual security!

(29-04-2012, 10:10 PM)CityFarmer Wrote: I witness the magic of Perpetual securities on net asset of a company, the SingPost. The SingPost net asset magically goes from ~332 Mils to ~660 Mils, PB ratio goes from 6.71 to 3.15 without any "real" increase in asset, but a perpetual loan of ~347 Mils.

What a power perpetual security!

I wonder what they're planning to do with the war-chest (Cash = $617M). Their previous acquisitions had been small and they may be preparing to do some bigger acquisition?? I worry they are going to do something silly..

If they don't deploy it soon to make some earnings accretive acquisitions, their EPS are going to suffer the moment they have to start paying the coupon for their PERPS..

(29-04-2012, 10:10 PM)CityFarmer Wrote: I witness the magic of Perpetual securities on net asset of a company, the SingPost. The SingPost net asset magically goes from ~332 Mils to ~660 Mils, PB ratio goes from 6.71 to 3.15 without any "real" increase in asset, but a perpetual loan of ~347 Mils.

What a power perpetual security!

Magically, there goes the 15% ROA and 50% ROE that this company has.

So should it be kick out of my ROA and ROE watchlist? A very interesting question...

(29-04-2012, 10:33 PM)KopiKat Wrote:

(29-04-2012, 10:10 PM)CityFarmer Wrote: I witness the magic of Perpetual securities on net asset of a company, the SingPost. The SingPost net asset magically goes from ~332 Mils to ~660 Mils, PB ratio goes from 6.71 to 3.15 without any "real" increase in asset, but a perpetual loan of ~347 Mils.

What a power perpetual security!

I wonder what they're planning to do with the war-chest (Cash = $617M). Their previous acquisitions had been small and they may be preparing to do some bigger acquisition?? I worry they are going to do something silly..

If they don't deploy it soon to make some earnings accretive acquisitions, their EPS are going to suffer the moment they have to start paying the coupon for their PERPS..

I guess SingPost will pay down their long term debt using the proceeds from the preference shares. In fact, i think SingPost got a very very good deal. SingPost shareholders should be glad that management took advantage of the low interest rate environment to borrow money forever at a low interest

(29-04-2012, 10:56 PM)money Wrote: I guess SingPost will pay down their long term debt using the proceeds from the preference shares. In fact, i think SingPost got a very very good deal. SingPost shareholders should be glad that management took advantage of the low interest rate environment to borrow money forever at a low interest

The PERPS pays 4.25% coupon.
SingPost borrowings are at 3.5% and 3.13%, so, very unlikely. See their latest financials, extracts (pg6),

The Group’s borrowings comprised S$200 million 10-year Fixed Rate Notes (the “Notes”) issued in March 2010 and S$300 million 10-year bond issued in April 2003. Both the Notes and the bond are listed on the SGX-ST and carry a fixed interest rate of 3.5% per annum and 3.13% per annum respectively.