Soild corporate bond with 13% return

Even though the US Fed increased interest rates 3 times in the last 7 months, corporate bond prices are still very high. For bond investors, it is very hard to find bonds with good credit quality giving reasonable returns at current prices.  The following highlights a perpetual bond that I have recently invested, that was launched last week.

LippoMalls 6.6% Perpetual bonds

  • Date of issue : 12 Jun 2017
  • Denomination : S$250,000
  • Ranking : Subordinated (lower than senior bonds, higher than shares)
  • Next Call date : 19 Dec 2022
  • Reset (on Dec 2022 if not called) : 5Y SGD Swap offer rate (now 1.8%) + 4.755%
  • Bond rating : Unrated
  • Issuer rating : Baa3 (Moody)
  • Custody charge of 0.12% per year (because this bond is held in Euroclear)
  • Current price : 101.3 / 102.05 (commission embedded)
  • YTC (offer) : 6.03%

There are a few ways to compare. LippoMalls 7% perp was issued 9 months ago, and is now trading at 103.75/104.55 (YTC of 5.7%). Hence it is possible that there is some upside to this new LippoMalls 6.6 perp.

Taking a look at LippoMall Reit shares:

  • Price : 0.435
  • Yield : 7.98%
  • Gearing : 32.2
  • P/NAV : 1.18
  • Market Cap: $1.228M

Buying the share with 8% yield comes with higher volatility. It really depends on your individual risk appetite. I am also investor of the LippoMalls shares, albeit at much lower quantity.

It is also possible to supercharge LippoMalls 6.6% perp to give returns in excess of 13% annually. Fund $85,000 and finance the remainder at borrow at 2.3%. Here is how I arrive at 13%.

  • Annual coupons received =  $250k x (6.6-0.12)% = $16,200
  • Annual finance fees paid = (255k-85k) x 2.3% = $3,910
  • Annual profit = $16,200 – $3,910 = $12,290
  • Capital loss in 2022 if called = $255k – $250k = $5,000
  • Amortize this loss over 5.5 years = $5,000/5.5 = $909
  • Annual profit after capital loss = $12,290 – $909 = $11,381
  • Annual net yield = 11,381 /85,000 = 13.39%

13% is a very good return for a regulated asset. Of course there are risks in any investments. If you would like to know more about how to supercharge bonds, sign up for my next bonds introduction class http://sb1.eventbrite.sg

Latest update (27 Jun 2017) :

Maybank Kim Eng has ceased financing for LippoMalls 6.6% perp. To supercharge, consider LippoMall 7% perp.