Goh Eng Yeow’s 18 Sep 2017 ST article about Bond Perpetuals

Mr Goh Eng Yeow wrote an article in the Straits Times “Perpetual market – too much risk, and too little reward”.  http://www.straitstimes.com/business/companies-markets/perpetual-market-too-much-risk-too-little-reward?

This is a nicely written educational article from a good text book author. Let me take it a step or two further, to shed further light on investing in perpetuals, and also to share some of my personal views on perpetual bonds.

Mr Goh mentioned that perpetuals issues “allows an issuer to defer payments under certain circumstances, without having to worry about getting sued for bankruptcy”. For me, I get around this by investing in perpetuals of SReits and well known banks. Here are my reasons:

  • Its mandatory for SReits have to distribute 90% of their taxable earnings to shareholders. Before the SReit can pay to their shareholders, they must pay to their perpetual holders first. What is the probability that a perpetual bondholder of an SReit do not get paid the coupons? Very, very low indeed.
  • Many well known banks have been paying dividends to their shareholders for donkey years. Checking the corporate actions page on SGX web site, which begain recording since 1992, OCBC have been paying dividends to their shareholders through the Asian Financial Crisis, Dotcom Bubble, Global Financial Crisis. I have heard an unverified tale that OCBC has been paying dividends since WWII. What is the probability that a perpetual bondholder of OCBC do not get paid the coupons? Very, very low indeed.

Mr Goh mentioned a certain perpetual bond issue by Wing Tai. Just want to make clear in case readers do not know, that the 4.08% perpetual bond issued by Wing Tai mentioned in Mr Goh’s article is a senior bond and not a junior debt, which means that it will NOT “be counted as equity, rather than debt on the issuer’s books”.

My Goh asked why do people invest in Starhub 3.95% and Semb Corp 3.7% perpetuals when CPF SA pays > 4%. I really do not think it is a fair comparison. The maximum amount that can be transferred to CPF SA is $166k. The people who invest in bonds definitely has way more than $166k to invest. They probably have already maxed out their CPF SA. Where to put their extra money? Anyway, the minimum amount to invest in 1 lot of bond is already $250k, way more than CPF SA current maximum limit.

Mr Goh correctly gave an example of Noble that recently deferred on their coupon payout on its perps. In my humble opinion, we should only consider Perpetuals of investment grade bonds. Even better, these must should ideally be issued by companies whose shareholders are “Ah Gong” and “Ah Ma”, such as Temasek, GIC, or by a government or rich billionaire you trust. My rationale is that, I am more willing to lend money to a young friend – if I know his father has deep pockets.

Mr Goh and MAS are worried that “many of these riskier bonds are not rated by a credit rating agency”. Yes, credit rating will help determine whether a bond is an investment grade or not. However, I have a different view with regards to rating. Anyone who needs to rely on the credit rating before buying a bond should NOT be dabbling in bonds. Bonds investment are typically long term. Just as you do your own homework before buying shares, buying bonds is the same. Good investor education on bonds are far more important than spending tax payers’ money to rebate bond issuers who send their bonds to be rated. I know a few people who strongly believe that credit rating can be bought.

By the way, there is no excuse for anyone for not knowing how to evaluate bonds. I teach a 9 hour bonds investing course at no charge. Register for the first 3 hours here:  http://sb1.eventbrite.sg