Many companies are starting to tap retail investors for equity and bonds

[d.o.g.]

Why will this be consider a win for the bank. Are they getting better profits compared to lending out loans ?

Of course. Lending money comes with risk to principal. But when arranging a share sale, underwriting fees are paid no matter what happens. And the "underwriting" actually carries no risk because the investment bank will have already lined up customers to buy all the underwritten shares. It is the same reason the banks all want to sell you funds instead of lending you money - they earn their commissions risk-free whereas loans carry default risk.

[freedom]

The companies have realized they can screw the retail investors, offering just 2-3% in coupons, instead of paying the banks 4-6%.

just got annual report for aspial. it's paying 2-3% for bank loans.

probably floating rate, pegged to some other interest rate, difficult to get fix rate for 2 - 3%, especially for many years.

[Musicwhiz]

Bank loans in the current interest rate environment have rates of about 1.5% to 2%, from my personal experience. Assuming a secured loan with collateral, this will be the interest rate. Unsecured loans will carry higher rates, of course.

Bonds and debentures to institutions and the public come next, with higher coupon rates at about 4-5%.

For securities like CPS, the rates vary from about 4.75% (correct me if I am wrong) for DBS, 5.05% for UOB and now 6% for Hyflux, depending on the credit rating of the issuer.

Highest coupon rates I have seen are 10% for junk bonds.

[d.o.g.]

Highest coupon rates I have seen are 10% for junk bonds.

You have not seen many junk bonds, then...

Here are several companies paying over 10% on their bonds:

Fantasia 14%
Kaisa 13.5%
Renhe 11.75%
Country Garden 11.25%
Central China 12.25%

They are all real estate developers of some sort. You have to wonder what kind of IRRs they are assuming for their projects... and whether the Chinese government's edicts will eventually put a spanner in their operations.

[Musicwhiz]

You have not seen many junk bonds, then...

Here are several companies paying over 10% on their bonds:

Fantasia 14%
Kaisa 13.5%
Renhe 11.75%
Country Garden 11.25%
Central China 12.25%

They are all real estate developers of some sort. You have to wonder what kind of IRRs they are assuming for their projects... and whether the Chinese government's edicts will eventually put a spanner in their operations.

Haha thanks for the info! Yeah I had the impression 10% was the "floor" rate for bonds rated as "junk".

[Drizzt]

but d.o.g, do you have a view on whether current and future interest rates affects the companies' decision?

[Jared Seah]

1) Musicwhiz, I impressed moderator here really "police" the forum! Your're the man!

2) In Athens, Greek govt bonds yield now 13%!? Really impressed with bond investors that still dare to invest..... Now Greek govt will
introduce more austerity measures. More strikes liao. Sigh.....

I have a feeling Greece will default... If countries can default, so can companies.

Before that day of reckoning, companies/countries will entice "greedy" investors with higher and higer yields - but whether they can
repay that's the catch!!!

[d.o.g.]

do you have a view on whether current and future interest rates affects the companies' decision?

Most companies are well aware that current interest rates are at historical lows. It would be stupid to assume interest rates will remain this low in the medium term, let alone the long term. So they are going all out to raise as much money as they can for as long as they can.

The banks also know that interest rates are likely to rise, so they don't want to lend to the companies at fixed rates for long tenures.

That leaves only one source of funds: investors.

With current interest rates so low, pension funds and retail investors alike are desperately looking for anything that can beat the bank's deposit rates.

Pension funds intend to hold to maturity, so the mark-to-market losses when interest rates rise are less of an issue. Retail investors are mostly too young to remember the days of high interest rates, so they cannot imagine mark-to-market losses on their bonds.

Both sophisticated and unsophisticated investor alike are rushing to buy these bonds.

[Drizzt]

i certainly remember the times when your posb bank account interest was 4%!

[wee]

These are extremely advantageous terms for Hyflux and horrible terms for investors, very similar to CDL's NCCPS which are also perpetual and convertible only at CDL's option.

Hi D.O.G

why are the terms horrible for investors? is it largely because its perpetual?
Regards
wee