Investing in Corporate Bonds

[Musicwhiz]

Interesting - SIA is issuing corporate bonds worth up to S$300 million and for the first time, are offering S$50 million (1/6) of it to retail investors. The yield is 2.15% per annum and the tenure is 5 years, and I think this opens up a potentially new area of investment for retail investors (basically the majority of us who are not in the HNW category!).

I understand that the USA Bond Market is very mature and allows for the trading of many corporate bonds, even for retail investors. But this is the first I know of corporate bonds being offered to retail investors. Thus far, I've only focused on the equities section of The Intelligent Investor by Benjamin Graham; but I guess I have to eventually start digging into the section on bonds, as together with equities this will make my portfolio more balanced (i.e. mixture of equities and bonds).

Any comments?

SIA to sell five-year bonds worth S$300m
By May Wong | Posted: 21 September 2010 1247 hrs

SINGAPORE: Singapore Airlines (SIA) said it will sell five-year bonds worth S$300 million.

The bonds will offer a return of 2.15 per cent and will comprise a Public Offer and a Placement.

The public offer will amount to S$50 million.

Retail investors can subscribe to the bonds though DBS, OCBC and UOB ATMs.

This is the first time a corporate institution is making its bonds available to retail investors.

Bond issuances made in Singapore are usually offered to institutions and wealthy investors.

In a statement, one of the coordinating bookrunners, OCBC said this public offer will now offer retail investors an opportunity to put their money into an alternative instrument compared to areas like equities and structured deposits.

Nicholas Tan, OCBC Bank's Head of Global Wealth Management, said: "Retail bond offering is an attractive alternative for a retail investor looking for higher yield and a steady stream of income in the current low interest rate environment.

"Typically, a bond pays a higher coupon than a savings account. In addition, in a low interest rate environment where bond prices can potentially keep rising, an investor can also look towards potential capital gains.

"As more companies start to offer retail bonds, investors will be presented with more choices. However, investors must be aware that each bond may present different level of risk depending on the credit worthiness of the issuer.

"They must also be aware that the price of the bond will change in line with interest rates. Lastly, buying a bond at issue and holding it until maturity means investors must be prepared to commit their funds for that length of time."

Fundsupermart.com's General Manager, Wong Sui Jau, said it remains to be seen whether the issuance of retail bonds will result in higher bond trading volume for SGX anytime soon.

He added that "more investors buy for the yield and less will be looking at it from the trading perspective."

Still, Wong believes the bonds market here has a lot more room to grow and the move is in the right direction, adding that a Singapore corporate bond like SIA's will be attractive to investors since it's a well-known blue chip and default risks are low.

Since early this year, over 70 investment grade corporate bonds have been issued in Singapore, according to data from Thomson Reuters.

Some of the biggest issues came from Temasek Financial, DBS Bank and CMT. - CNA/fa/ls

[d.o.g.]

It is a good start that SGX will finally list these bonds for retail investors. It is way overdue given that Singapore is a major financial hub for Southeast Asia. There are also Japanese, Korean and Indian companies who have bonds listed here, but those bonds are still only for institutional investors. The next logical step is for SGX to make all the SGD corporate bonds it already lists, available for retail investors. After that, all the non-SGD bonds.

As for the SIA bonds themselves, clearly SIA is taking advantage of the low interest rate environment to lock in cheap financing. SIA is among the world's best-run airlines, and these bonds could be considered fairly safe. However, the coupon is terrible. No sensible investor should buy the bonds at par. IMHO they would become a good investment only if there is a big crisis and the bonds plunge in price, raising the yield to maturity significantly e.g. to 10% or more.

[yeokiwi]

The yield is even lower than the LTA bonds that are trading in SGX market. Except that, there is no way to buy large quantity of LTA bonds due to low liquidity.

I used to see HDB bonds listed in SGX but it seems that most of the stat boards had stopped raising funds using public listed bonds???

I believe even at 2.15%,there will be lots of retail investors that will apply for it.

[Musicwhiz]

This is the article published in BT today.

Business Times - 22 Sep 2010

SIA flies the flag for retail bond buyers

In a pioneering move, the carrier is offering retail investors $50m of its $300m bond issue

By JAMIE LEE

(SINGAPORE) Singapore Airlines (SIA) has set aside part of its latest corporate bond offering for retail investors - the first listed company to do so.

The move also marks a coup for the Singapore Exchange (SGX), which has been eager to build interest in the fixed-income market, and comes against the backdrop of the Singapore bond market touching new highs.

Funds raised through Singapore-dollar bonds stand at $17.7 billion to date - a record in the debt issuance market, Bloomberg data shows.

SIA will issue $300 million of five-year bonds, of which $250 million will be placed out to institutional and other investors, and the remaining $50 million offered to retail investors, SIA said yesterday.

The fund-raising exercise - meant for capital expenditure and working capital - comes after SIA sold $500 million of 10-year bonds in June this year. The bonds to be issued, which are un-rated, will pay interest of 2.15 per cent per annum.

One difference with bonds tailored for retail investors is the size of the minimum subscription.

Under the public tranche, or retail bond portion, offered by SIA, the minimum subscription is $10,000 of bonds.

Based on the $1,000 value of each lot of bonds this means that retail investors need to hold at least 10 lots. Trading will be done per lot at $1,000 as well.

However, the minimum subscription for institutional and other investors of the SIA bond is $100,000 - 10 times that for retail investors.

In comparison, bonds from statutory boards such as the Land Transport Authority trade in lot sizes of $10,000 each, the SGX website shows.

And while Singapore government bonds can be bought with a minimum of $1,000, these instruments are currently not listed.

SGX has said investors will soon be allowed to trade government bonds.

Another difference is the level of disclosure required by SIA.

Companies that issue bonds to institutional and sophisticated investors - as traditionally done - do not need to submit a type of prospectus to the authorities.

This, known as the 'offer information statement', is a 113-page document in SIA's case that discloses information on the bond issue, including risk factors associated with investing in bonds.

Companies have always been able to offer bonds to retail investors but have been reluctant to do so, given the extra paperwork required by regulators to protect such investors.

'It is a more time-consuming process,' said George Lee, OCBC's head of group investment banking, adding that there are also higher distribution costs involved with the retail offer.

But bringing in retail investors can help companies diversify their investor base, Mr Lee added.

'SIA is a well-recognised brand. Tapping the retail investor base does create a lot more goodwill,' he said.

'Clearly, they could have just tapped the institutional investor base and easily closed off the issue, but they are testing the retail market. This will also help develop the retail bond market, and probably SIA sees it as its national agenda.'

Mr Lee said other companies will take a wait-and-see approach before deciding whether to offer bonds to retail investors.

Ling Peng Meng, regional head of capital markets in South-east Asia at Standard Chartered Bank, told BT: 'Conditions are favourable for potentially good take-up from retail investors, given robust retail liquidity generally and the limited availability of suitable investment alternatives for these investors.'

One remisier said there has been some interest from retail clients in the SIA bond issue, adding that clients in general are looking for yields of about 6 per cent.

Investors can apply for the SIA bonds from today until Sept 28. The bonds are expected to be issued around Sept 30.

DBS Bank, OCBC, and UOB are the underwriters of the retail offer. The three banks and Standard Chartered Bank are also involved in the placement.

[PassiveReturns]

Does anyone know how subsequently this bond is traded ? Must it be traded in 10 lots per transaction ? Or am I allowed to buy just 1 lot that's worth $1000 ?

[edragon]

Wondering how much is the brokerage and other fees when trading the bonds. ?

[mrEngineer]

I almost puked blood when I tried to convince my parents against this bond deal..

1) If you are paying at par for this bond, basically you are getting a market rate less than 2.15% factoring the default, yield and liquidity risk premium.

2) With inflation and housing bubble in the next few years, the chances that interest rate to go up is quite high. When i/r goes up, naturally bond prices fall.

3) Why are retail investors even interested in this bond when they can put their monies into CPF that generates higher interest? Even if you have more than the cap limit to put into the CPF, you still invest into high dividend yielding stocks which pays more than 2.15% now.

Can someone enlighten me?

[PassiveReturns]

In investing, we always stress that it is impossible to consistently predict what the next market direction will be. Similarily, it is also very difficult for us to identify when the i/r is going to go up.

In view of the current very low i/r environment, a 2.15% return looks much much better than the petty saving rates offer to depositors. So just like water will flow to where the low ground lies, money will follow where the higher yield offers.

Of course, we all agree that no single investment, be it in stocks or bonds, exists without risk, so investors will have to take into all known factors, and weigh their pros and cons, before they buy their investment. Between the two, stocks or bonds, it is almost a traditional view that bonds are the lesser of the two devils in term of risk. And I believe this is why it generates a wide interest in such bond issues.

A lot of people are unwilling to put their cash into CPF, me included, even it may earn a higher return for me. The reason is very simple, I won't want to have my money be locked in without my ability to withdraw it at any time if I wish to.

I think a better way to migitate the risk in investing in bonds in the long run, is to build a bond ladder over time. In this way, should the interest rate is to stay low for a long period of time, we will be able to reap a higher return than putting our money in the banks; if on the contrary, should the i/r shoots up, we will still be able to enjoy a higher income bring by the newer bond offering with a better yield.

All in all, we always try to strike a balance between high return with high risk, and low risk with low return.

[mrEngineer]

Ooops. Its been some time since I last touched my fixed income materials.. The risks involved for this issue should be credit (default and downgrade), reinvestment, interest rate and liquidity risk.

I agree with you that a long term fixed income strategy works for some. Its a matter of preferences. Over here, I am not against fixed income strategy but I am scrutinizing on this SIA bond issue itself. The risks involved does not justify the returns you are getting (not because that 2.15% is low) and there are probably better alternatives in high dividend equities now.