Why LMRTSP 7% Perpetual is better than Lippo Malls Tr (D5IU.SI)

Since July 2017, the shares of Lippo Malls Tr (D5IU.SI) has fallen 29%, while LMRT 7% Perpetual bond has dropped 6.2%.

Key issues that has plagued Lippo Malls Tr :

  • Downgrade by Moody’s
  • New withholding tax laws
  • Weakening Rupiah against SGD
  • Increased property operating expenses and high financing expenses

I believe these have already been factored in the price. In fact, the price probably dropped more than it should. However, there is one more issue that is bothering me – how are they going to raise money?

How will they continue to raise money?

Investors at the recently AGM seems unhappy that Lippo Malls Tr issued perpetual bonds at 7% and 6.6% (I own the 6.6% !).

Their CEO told their investors Lippo Malls Tr wants to continue to grow. 7% is cheap compared to the 12% if they were to raise money in Indonesia. But said they are not likely to issue more perps for the time being.

S$280M of their debts is due to be financed in 2018. Their average cost of debt excluding the perpetuals is 4.59%. This cost of debt can only increase because of SGD recent increase of interest rates.

With their gearing standing at 35%, and MAS ceiling at 45%, they are also not likely to issue more straight bonds. Which leaves equity fund raising. There has been rumours of a possible upcoming rights issues. I think this is probable. Share prices usually drops on announcement of rights issue. Have this been factored into the price? I do not think so.

How will the Lippo group look upon a rights issue? They have about 30% ownership of Lippo Malls Tr. Do Lippo group want to pour more money into Lippo Malls Tr?

Lippo Malls Tr trades at the annualized yield of 8.4%. For me, 0.30 is a nice price to start to accumulate some.

LMRT 7% perpetual bond

On the other hand, LMRT 7% perpetual bond looks very attractive to me now. A bond yielding 7% YTC and its shares yielding 8%.

Why do I like LMRT 7% perpetual bond

  1. Upside for Lippo Malls Tr is still questionable with possible upcoming rights issue.
  2. Bonds are much more resilient than shares. Although there is little upside for bond, there is also little downside to bonds. Its volatility is much lower than shares.
  3. Although its a perpetual, the next call date of LMRT 7% perp is Sept 2021 (only 3 years away) and the reset is 5Y SOR rate + 5.245%. The 5y SOR rate is currently 2.408%. If this bond were to reset today, the new coupon would be 7.653%. Most investors believe that the 5Y SOR can only increase going forward.
  4. The current spread of LMRT 7% Perpetual is 4.9538%. This is still tighter than the initial spread when it was launched Sep 2016, which was 5.245%. This current tighter spread relative to its initial margin, makes it more likely that LMRT will redeem this perp in Sept 2021.
  5. Recent negative news did not affect Maybank Kim Eng in still allowing LMRT 7% Perpetual to be margined as Grade A security. At the current price of 99.75, and funding $85,000 and financing $165,000 at 2.28%, the net supercharged return is 16%.

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