S'pore investors turn to riskier bonds

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#1
What happens when interest rates start to rise?

The Straits Times
www.straitstimes.com
Published on May 12, 2013
S'pore investors turn to riskier bonds

Persistently low interest rates are forcing buyers to look beyond investment-grade debt

Singapore's yield-starved investors are buying riskier bonds in a move that is allowing many smaller companies to issue debt for the first time, IFR reported.

Auric Pacific Group, best known as the owner of food courts offering cheap meals to Singapore's workers, is set to join a growing number of small and mid-cap companies hoping to appeal to fixed-income investors when it serves up its first offering from a $500 million debt programme.

While Auric's share price has doubled over the past 12 months, its market cap of $161 million makes it one of the smallest companies to try a bond sale. But it is far from the only issuer to spot an opportunity.

Persistently low interest rates in Singapore are forcing investors to look beyond investment-grade bonds, with at least five small and medium-sized enterprises completing local debuts since March.

The five-year benchmark government bond was yielding 0.49 per cent last Thursday, while consumer prices in March were up 3.5 per cent on the previous year.

Oxley Holdings, a mid-cap property developer, provided the latest indication of that hunger for yield last Wednesday with a $150 million, 5.1 per cent bond that attracted orders of more than $1.7 billion.

Hong Fok, another developer, had already offered evidence of the trend. The issuer attracted orders in excess of $320 million for its $120 million, 4.75 per cent debut in March. Raffles Education, another small-cap, has come to market twice this year via an $80 million, 5.8 per cent deal in February and a $50 million, 5.9 per cent offering late last month.

Companies of Oxley's size have traditionally relied on Singapore's bank loan market, while the city's fixed-income investors have tended to prefer rated, investment-grade issues or companies with larger market capitalisations.

The rush of financings from these smaller companies, however, shows that dynamic is changing.

"In a sense, the loan desks are now competing with the debt capital markets desks for business from these small companies," said one loans banker.

Alongside Auric, companies including Tuan Sing Holdings, Nam Cheong and Tat Hong Holdings are gearing up for their first bond sales after setting up medium-term note programmes in the past few weeks. The biggest of those, crane leasing company Tat Hong, has a market cap of US$744 million (S$921 million).

The enthusiastic response to this year's high-yield deals shows that fixed-income buyers are moving down the credit curve in search of higher returns.

While that allows companies to improve their funding flexibility and access a wider investor base, it also raises the risks for the local fund managers and private bank clients who buy the debt.

Singapore bond buyers are more accustomed to studying the credit risk on large, frequent issuers such as the state-backed National University of Singapore, but many of those large-cap companies pre-funded much of their 2013 needs when borrowing rates plunged last year.

Moving down the credit curve comes with an obvious appeal. While Oxley paid 5.1 per cent on its bonds, NUS - one of the few investment-grade issuers in the Singapore dollar market this year - priced a five-year bond in January at a yield of 1.028 per cent.

Meanwhile, the yield on the five-year Singapore government benchmark hit a record low of 0.31 per cent in January and was still below 0.5 per cent last Wednesday. The 10-year benchmark dropped below 1.5 per cent for the first time last year and was at 1.47 per cent last Wednesday, close to last December's record low of 1.29 per cent.

Such low interest rates have made the bond market competitive even against cheap bank debt from Singapore's deposit-rich lenders.

Senior unsecured bonds also offer greater operational flexibility over bank loans, where smaller borrowers are often required to pledge assets as security or collateral against the debt.

"This allows SMEs to diversify not only their funding sources but also the structures of their debt portfolios," said one Singapore-based banker.

The added flexibility has a cost. Small companies pay a premium of some 50 to 100 basis points for the unsecured structures, although bankers argue the benefits of bullet repayments and flexibility outweigh the additional cost. A basis point is equal to 0.01 per cent.

Should interest rates remain near historic lows, Auric is unlikely to be the only one to find hungry investors queueing up for more.

Reuters
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
Hi musicwhiz,

I am asking this as a question: isn't interest rate rise of no importance if u buy bonds and hold them till maturity? The price of bonds might fall due to fall in relative yield. But from the company perspective, the bonds interest is already fixed regardless of prevailing rates, an for bond holders ... They should have calculated the yield over the number of years before maturity. So spike of Interest should not have any impact on bond holders. Or am I missing something here?
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#3
(12-05-2013, 09:49 AM)Greenrookie Wrote: Hi musicwhiz,

I am asking this as a question: isn't interest rate rise of no importance if u buy bonds and hold them till maturity? The price of bonds might fall due to fall in relative yield. But from the company perspective, the bonds interest is already fixed regardless of prevailing rates, an for bond holders ... They should have calculated the yield over the number of years before maturity. So spike of Interest should not have any impact on bond holders. Or am I missing something here?

Absolutely right, Greenrookie. If you HTM, then you would not see any impact of higher interest rates as you would enjoy the stated yield. Only for people who are trading bonds (buying and selling), then they would suffer a capital loss when bond yields rise and prices fall.

Then again, my view is that holding on to say 5-year bonds till maturity doesn't let you enjoy any upside in growth of the Company, unlike holding on to its equity (and receiving dividends).
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#4
Thanks for the answer. I have been investing for almost a decade. Sometimes I really wonder if I can beat the bond rates over the long run. Thinking of increasing Bond weight age. Grant there are times I make 50 percent gain over months... But hey my overall performance is far less stellar... A simple 4 percent bond over 5 yrs will yield 20% gain in 5 yrs. I would scoff at such returns at my earlier days... While I easily beat such returns during this recent bull run, I wonder my investment strategies can stand the test of time?? Sorry out of point for this topic
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#5
Coincidentally, Howard Marks, chairman of Oaktree Capital, author of 'The Most Important Thing' had already warned of the plunge into high yield fixed income earlier in the year in his 2 memos:

Jan2013: http://www.oaktreecapital.com/MemoTree/Ditto.pdf
Feb2013: http://www.oaktreecapital.com/MemoTree/H...on%201.pdf

A couple of memorable quotes from this 2 memos:

"What the wise man does in the beginning, the fool does in the end. The wise man invested aggressively in late 2008/early 2009, only the fool is doing so now"

"While we believe spreads are attractive given the risks we see in our portfolio, it is true there is little room for PRICE UPSIDE, making the reward for risk taking limited. In this type of environment, superior returns are more likely to be earned through minimising mistakes than stretching for yield"
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#6
Sorry, if I may ask, are such high-yield bond issues available to retail invetors or only for HNWI? If available, then worth subscribing to? & how to apply for them?
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#7
(12-05-2013, 10:11 AM)Greenrookie Wrote: Thanks for the answer. I have been investing for almost a decade. Sometimes I really wonder if I can beat the bond rates over the long run. Thinking of increasing Bond weight age. Grant there are times I make 50 percent gain over months... But hey my overall performance is far less stellar... A simple 4 percent bond over 5 yrs will yield 20% gain in 5 yrs. I would scoff at such returns at my earlier days... While I easily beat such returns during this recent bull run, I wonder my investment strategies can stand the test of time?? Sorry out of point for this topic

Can't help but would like to quote d.o.g's teachings on bonds/equities again, something that is counterintuitive against conventional wisdom:

(1) Buy high yield distressed bonds at a discount to par, to lock in on the the CAPITAL APPRECIATION when they mature.
(2) Buy large cap equities with competitive moats to enjoy the REGULAR PAYOUTs, which is sustainable and has potential to grow in good or inflationary periods.

Hi Green rookie,
It has been regularly quoted (and accepted) that asset allocation is a very important factor on a portfolio's capability to stand the test of time. There are no good or bad assets (the only exception are frauds) - the only issue we are dealing with here is all about PRICE of the ASSET - which determines the risk-to-reward weightage and hence lock down its future profit potential.
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#8
If you hold a bond to maturity the current interest rate changes shouldn't affect you. But who doesn't like to hold a new bond with a higher to maturity yield due to interest rate change? That's why there is bond secondary market. Right or wrong? Any comment?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#9
if you hold a bond to maturity, the rate of inflation matters a lot
example if inflation rages up from 2% to 10%,
then holding a 10 year bond that pays 5% would be a bad investment
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#10
(12-05-2013, 04:23 PM)Temperament Wrote: If you hold a bond to maturity the current interest rate changes shouldn't affect you.

In THEORY, this is true.
But in PRACTICAL, I think many folks who want to hold their bond to maturity, over estimate their capability to be emotionally unaffected when their bond holding drops in price! Tongue
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