Tag Archives: Oxley Holdings

Yield hungry? We need to change of our investing paradigm

The much anticipated interest rate hike in December had caused a sharp recent drop in the price of REITs recently. Many REITs are now trading at the 2016 low, retreating generally about 7-10% from its peak level at 2016 high and around 15-20% from their all-time high. During the low interest rate environment like in the past few years, many have seen buying into REITs as a no-brainer investment, with yield of between 5% and 8% of passive income, depending on the type of REITs. With the recent falls, many people see them as opportunities. Whether, these REITs are going to be good investments…well, seriously, I do not know. It is too early to tell. There are actually several other factors apart from the REITs price itself to determine if one is buying into a gem. The income of a REIT can fall drastically because state of economy or a change in the customer mindset, resulting in a drastic fall in the DPU going forward. The REIT manager could also take advantage of the generally depressed property price to add more properties into the REIT portfolio or it could be the REIT has some issue with re-financing such that it has to issue rights at depressed price to get existing unit-holders to support the corporate action. All these could happen with swipe of a pen, to get existing unit-holders to fork out more funds instead of the note-holders getting passive incomes out of the REIT.

In fact, by now many bond-holders or note-holders have experienced rude shocks of bond prices falling off the cliff. Several offshore and marine notes are now trading 35-40 cents on a dollar, erasing two-third of the value. Yes, the note holders had enjoyed 6%-7% in the last one or two good years of coupon distribution, but these returns simply are not able to offset the huge fall in the bond price. Many note-holders are now having legal tussles with the note-issuers. These tussles will take months and even years to resolve with no guarantee that note-holders can get their money back.  After all, it is a situation of a willing buyer and a willing seller when the transaction was made. The promise of high return is bundled together with the risk that the issuer could get into a default.

With the local low interest cycle apparently coming to an end, there came a herd of companies trying to tap into pockets retail investors by issuing notes and perpetual bonds with seemingly high coupon rate ranging between 4.5% and 6% in the first half of the year. These companies are highly indebted. The reality came when Swiber Holdings default its coupon payment in July 2016 and all these bond prices are now trading below the IPO issued prices. Even before the first coupon was issued for all these bonds, the yield has already shot up showing that retail investors are probably paying too much in exchange for the risk assumed. In fact, those that missed the over-subscribed IPOs enjoyed a better yield by buying from the open market. However, the crux of the matter is whether any of these companies will default. It is still too early to know. But we do know that these companies are highly indebted and may get into serious financial trouble when the interest rate perks up.   

 

With the spectre of interest hikes coming up soon, investors are now off-loading interest rate–sensitive financial assets in exchange for safer assets such as bank stocks, which are said to benefit when interest rate rises. After all, the bank stocks just one week ago, were trading either below book value or close to book value. But again, this is just a flight to safety. While the banks delivered fairly good results in this quarter, it is not expected that they would perform extremely well going forward given the state of the economy and their exposure to the offshore and marine sector. But still, over a short span of a few days, the banks shot up between 3.5% and 8%. While I am generally happy with this situation due to the components of my portfolio, the interest rate increase may be a double-edged sword for the banks. It’s not the time to be too aggressive.

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Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Post-Swiber: Expect more difficulty for companies to raise funds

The past 12 months have been dominated by companies raising funds through bonds or perpetual issues in anticipation of interest rate hike by FED. There were no short of investors.  Many of the issues were over-subscribed, and most of these companies up-sized their bond issue way above the originally amount. Just by a stroke of their pens, they could easily raise another $50m to $100m. Aspial Corp made 2 issues within 7 months, and in the latest issue recently raised to a maximum of $200m against the original public offer of $50m for a 4-year bond at a coupon of 5.3%. Perennial Real Estate originally planned a $200m 4-year bond issue at 4.55% increased the offer size from $200m to $280m. Hyfux, whose original $300m offer of the 6% perpetual bonds also increased to $500m, even bigger than the market-cap of the company. Whether in the full-fledge corporate bond for high net worth individuals (HNWIs) or sliced tranches for retail investors, there were no short of takers. Investors see these investments as passive incomes in comparison to the bank’s paltry interest rate of less than 1%. Until late last year, defaults on bond coupon payments were almost non-existent. Even when PT Trimkosel Oke and Pacific Andes Resources defaulted more than six months ago, they seemed to be widely ignored as these companies were foreign based. Unfortunately, these bonds were sold through the private banking network, which also meant that some of the local High Net-worth Individuals (HNWIs) had also been affected.  Now with the default of Swiber, investors now suddenly realise that many high-yield bonds are prone to default and the expected return might not duly compensate for the risk. Unfortunately, the damage has already been done. Bondholders suddenly find the recently purchased notes and perpetuals now trading below par. Going forward, at least for the time being, it is unlikely that companies are able to raise funds through this avenue any more. Certainly, banks with their private banking network, are likely to scrutinize the bonds more closely before selling them to their clients.

Following the default of Swiber, banks are also likely to become more cautious with their lending programs. With the ever-increasing non-performance loans (NPLs), company financials will be scrutinized closely and asset value will be assessed with higher safety margins before banks lend out to them. It is certainly not going to be easy for companies to borrow from banks without quality collaterals on the table.

With the bank network being almost severed from them after the Swiber saga, companies may have a hard-time raising funds for their operations. They may have to resort to scaling down their operations and to sell off some of the assets, especially the inoperative ones. Unfortunately, inoperative assets are more of a liability than an asset during bad times because no company would want to stifle their own cash flow by buying assets that not revenue-generating. Even supposedly good assets that are able to preserve values over time, such as properties and land, may not fetch good prices when times are bad or when seller companies are in dire straits.

So what are other options can a company explore to raise funds? Perhaps, issue rights or raise notes or perpetual bonds from retail investors. When a company has to resort to issuing rights during such times, it is likely that company is not in a good shape. In all likelihood, the company share price is trading at their lows. Hence raising rights can be a huge challenge. Many companies, even after shares consolidation, were trading even below 20 cents, which is the Minimum Trading Price (MTP) threshold for SGX shares. Certainly, a right issue will set the trading price below the MTP putting a lot of pressure for them to make good on their share price in future.

So, in summary, even though a company may have several avenues to tap funds, the real situation may not be as rosy. We may say that some companies were lucky to be able to raise bonds before the Swiber saga. In fact, some might have felt even luckier to have raised more than their expected needs. However, we will only know if they are really that lucky somewhere in the future. Paying out coupons of 5%, 6%, 7% and even 8% is no small matter compare to paying a smaller interest to the banks. Paying a bigger quantum as coupons for an enlarged debt is even worse. They may be able to solve their operating needs now, but it is really kicking the bucket down the road because they have to pay for a higher price in future. In all likelihood, companies may have exhausted all the channels of getting cheaper funds, and they have to resort to paying a higher interest to attract investors. Investors, instead of zooming and be attracted the expected return, should now turn the table around and ask himself a critical question. Why does the company willing to pay me 6% (or 7% or 8%) per year in coupons when the bank rate is only around 1%. Only when one starts to ask himself such critical questions would he then become less bias in his thoughts.

Take Care!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.