Global Logistic Properties (GLP)

[kazukirai]

I realise I am in a tiny minority of forummers, possibly a minority of one, on the subject of Preference Shares/Bonds attractiveness. But I do believe that Preference Shares and Corporate Bonds have their time and they have their place - i.e. sometimes they are a smarter investment.

Hi RBM-san,

I believe you're right when you say that Prefs/Corp Bonds have their time and place (in a bearish environment like the one we've currently been in). As your own experience has shown, Prefs provide a floor.

But how's the comparison vs. alternative equities? After all, when deciding where to invest, it doesn't have to be Hyflux common vs Hyflux prefs. It could be Hyflux prefs vs Non-cyclical Commons.

[greypiggi]

guys, just put in order for 250K of this preferred too. Quite good yield. 5.5%

[bran]

great discussion RBM...
i am not vehemently against prefs/perps. As an asset class, it will have its place in the portfolio but for the prefs/perps in SGD, the rates investors are getting at the moment- 5 1/8th or ~6, in my opinion, it represents very low returns for investors who are pretty much taking equity-like risk. Why do i say so? they rank similar to equities in default plus the payments may be deferred. yes many of them have features that the deferred payments are cumulative but once they have skipped once, it pretty much sounds the death knell.

RBM, you grouped prefs/perps and corporate bonds together but I'm sure you're aware that they are really different asset classes. Sorry if i'm repeating something you already know but for those who don't, corporate bonds get the additional seniority in the event of default, the assurance of the coupon and the return of capital at its stated maturity, giving it less risk (assuming the same company) as the equity.

The point I wish to make is that pref/perps are not bonds and do have equity-like risks. It may not hit the market right now, but may eventually do so at some stage. At an extreme, investors in Citi prefs across 08/09 would remember when the viability of the bank started to come into question, the prefs crashed at as fast a rate as the equity. Bonds declined but to a much lesser extent.

Admittedly, the SGD pref/perp market have held up well at the moment, and may I add, surprisingly so, in my opinion. I've nothing against prefs but I think Hyflux should logically be paying up more for their pref....their earnings and cash flow profile is rather choppy (and i'm not sure why too...anyone familiar with the company, pls do share...) Nonetheless, purchasing a pref is like buying a stock, you will still need to do the homework on the company AND the structure of the pref/perp

The point I was trying to make in the earlier post is that @ those low cost of equity (5-6%), it becomes easier for companies to (at least optically) increase returns, without actually increasing accounting leverage. Let me illustrate this:-

For instance, if the company had 100mn in equity to start, and he can generate 8% returns... He is able to borrow at 2%. Logically, he should borrow as much as he can and invest it but that will make the company very risky...so say, he decides to gear up 2x. Thus, he now has 200mn, generating returns of 8% or 16mn while paying out interest cost of 2% on 100mn or 2mn, giving it profit of 14mn or ROE of 14%. But now, it has a debt/asset ratio of 100/200 or 50%, making it a riskier company than before.

Now, if he is able to issue 100mn of this pref at say 5% and we layer it onto the above geared company. He is now making 8% returns on 300mn, giving profits of 24mn. He pays cost of 2% on 100mn and 5% on the second 100mn, ie total cost of 7mn, giving a pretax profit of 17mn. But his ROE is really 17%...and guess what, his debt/asset ratio has actually fallen to 100/300 or 33%, making it a less risky company? ...

Again, back to my point, if the company can pull off a pref at low rates and have a suitable business model (i'm thinking anything with stable profits/cash flows over expected life of the pref) it is actually beneficial for the company equity.

please do share your thoughts

[D123]

Side note: Preferred dividends are not tax deductible and are paid out of net profits, not pre-tax.

[KopiKat]

I realise I am in a tiny minority of forummers, possibly a minority of one, on the subject of Preference Shares/Bonds attractiveness. But I do believe that Preference Shares and Corporate Bonds have their time and they have their place - i.e. sometimes they are a smarter investment.

Hi RBM-san,

I believe you're right when you say that Prefs/Corp Bonds have their time and place (in a bearish environment like the one we've currently been in). As your own experience has shown, Prefs provide a floor.

But how's the comparison vs. alternative equities? After all, when deciding where to invest, it doesn't have to be Hyflux common vs Hyflux prefs. It could be Hyflux prefs vs Non-cyclical Commons.

The "floor" here is not the bottom. It may also crack and head towards a new bottom. Yes, the risk is always there. Imagine in the case of Hyflux, they're already so highly geared and if for whatever reasons (so many Financial Crisis raging around in recent times) the Cash Inflow doesn't come in, they'll have not enuff $$ to pay the dividends/interest. Altho' they'll rollover and pay the next time round, there's always a risk that next time round, the Cash Inflow is still insufficient. Key point is, it's not as low risk as many imagine it to be.

[greypiggi]

great discussion RBM...
i am not vehemently against prefs/perps. As an asset class, it will have its place in the portfolio but for the prefs/perps in SGD, the rates investors are getting at the moment- 5 1/8th or ~6, in my opinion, it represents very low returns for investors who are pretty much taking equity-like risk. Why do i say so? they rank similar to equities in default plus the payments may be deferred. yes many of them have features that the deferred payments are cumulative but once they have skipped once, it pretty much sounds the death knell.

RBM, you grouped prefs/perps and corporate bonds together but I'm sure you're aware that they are really different asset classes. Sorry if i'm repeating something you already know but for those who don't, corporate bonds get the additional seniority in the event of default, the assurance of the coupon and the return of capital at its stated maturity, giving it less risk (assuming the same company) as the equity.

The point I wish to make is that pref/perps are not bonds and do have equity-like risks. It may not hit the market right now, but may eventually do so at some stage. At an extreme, investors in Citi prefs across 08/09 would remember when the viability of the bank started to come into question, the prefs crashed at as fast a rate as the equity. Bonds declined but to a much lesser extent.

Admittedly, the SGD pref/perp market have held up well at the moment, and may I add, surprisingly so, in my opinion. I've nothing against prefs but I think Hyflux should logically be paying up more for their pref....their earnings and cash flow profile is rather choppy (and i'm not sure why too...anyone familiar with the company, pls do share...) Nonetheless, purchasing a pref is like buying a stock, you will still need to do the homework on the company AND the structure of the pref/perp

The point I was trying to make in the earlier post is that @ those low cost of equity (5-6%), it becomes easier for companies to (at least optically) increase returns, without actually increasing accounting leverage. Let me illustrate this:-

For instance, if the company had 100mn in equity to start, and he can generate 8% returns... He is able to borrow at 2%. Logically, he should borrow as much as he can and invest it but that will make the company very risky...so say, he decides to gear up 2x. Thus, he now has 200mn, generating returns of 8% or 16mn while paying out interest cost of 2% on 100mn or 2mn, giving it profit of 14mn or ROE of 14%. But now, it has a debt/asset ratio of 100/200 or 50%, making it a riskier company than before.

Now, if he is able to issue 100mn of this pref at say 5% and we layer it onto the above geared company. He is now making 8% returns on 300mn, giving profits of 24mn. He pays cost of 2% on 100mn and 5% on the second 100mn, ie total cost of 7mn, giving a pretax profit of 17mn. But his ROE is really 17%...and guess what, his debt/asset ratio has actually fallen to 100/300 or 33%, making it a less risky company? ...

Again, back to my point, if the company can pull off a pref at low rates and have a suitable business model (i'm thinking anything with stable profits/cash flows over expected life of the pref) it is actually beneficial for the company equity.

please do share your thoughts

agree with you bran. Preferreds are not the same as bonds with tenor which is also not the same as perp bonds.

All 3 have different risks to the investor. All have default risk but if company fails, Bonds in front of queue over preferreds. And preferred got extra risk over Perp or tenored bonds in that company can choose to not pay dividends and then not pay preferreds.

So need to look carefully what we are investing in... and not just yield number.

Me? I am leveraging on these preferreds for a flip. Will exit once if it hits 1.02!

[kazukirai]

The "floor" here is not the bottom. It may also crack and head towards a new bottom. Yes, the risk is always there.

Hi KK, thanks for pointing out! (as did bran)

[RBM]

Kazukirai, Greypiggi,

Trying to answer some of your questions ..............
- Yes, I did compare the 6% p.a. Preference Shares of Hyflux (and for that matter the DBS 4.7% p.a. Bond) with other invrestments, i.e. not just Hyflux Equity and DBS Equity, when I went in. In my situation, for a chunk of my portfolio at that time, I needed something where I could be confident that I wouldn't lose my shirt and which had a darn good yield...... and where I could get in at par. Hyflux had a darned attractive coupon and in a low-interest environment this appealed. People sometimes forget that Bond and Preference Share prices are NOT fixed. Hyflux went up to 108 at one stage! And it has never gotten near dropping below par since listing.
- Good point on needing to be crystal clear regarding the difference between Preference Shares and Bonds - bonds are more secure. Also darned important to be aware if the issue is cumulative or non-cumulative, and to understand the potential consequences of a cumulative offering.
- Fully agree with bran's point about doing your homework on both the "nother" equity company AND the structure, coupon, tenor, maturity considerations etc. of the Corporate Paper offerring. No quibbles on this one. And yes, if the "mother" equity company goes down, so do the Bondholders funds with it.
- In addition to the points made in earlier posts regarding the attractiveness of bonds and preference shares to issuers, please bear in mind that when Company BoD's consider methods of raising debt or capital, they also factor in how their company will be encumbered, restricted, "covenented", "liened" etc. etc. The conditions that Banks insist on for major loans can be a real pain in the bottie, and we all know the general effect of rights issues on equity share prices. With Preference Shares and Bonds you don't get all the restrictions and hassles beloved of banks and, in the cases I have been involved in, equity shareholders don't have to entertain an erosion in their share price when they go down the PS/Bond route.
- Its worth asking the question "why do Banks go down the Preference Share route" for so much of their debt raising?" They don't do it because its more expensive for them.

Isn't it wonderfull how the subject of Preference Shares and Bonds brings so many and so diverse views amongst VB forummers?

I have lodged my application for the GLP 5.5% Bond. Told that my chances are slim - even though its likely they will now raise S$ 700 Million, rather than S$ 500 Million, the offering getting over-subscribed.

Vested (in Hyflux 6% Preference Shares, DBS 4.7% Bond, Cheung Kong 5.125% Bond)

[touzi]

Anybody can explain how does this rate reset thing work for the GLP pref shares? Thanks.

[AlphaQuant]

CHANGE IN CAPITAL :: PLACEMENT :: PROPOSED PLACEMENT OF 160,000,000 NEW ORDINARY SHARES


poof. 5% dilution. more to come?