I would have considered myself financial and investment savvy. But still, in our journey, there is still a possibility of losing some hard-earned money. The most recent case was in Hyflux. It was Hyflux’s first retail tranche, 2011 6% CPS.
Looking back, the only bad situation surround Hyflux was probably the stock price had dropped 50% from one year ago. This can happen because Hyflux is a project-based company, and the company’s revenue and profit can be quite lumpy, just like many engineering project companies such as Keppel Corp, SempCorp Marine and a host of companies that fell one-by-one after the oil price tanked in the second half of 2014. (Lead me to a free beta-mode course on looking at engineering companies.) As of mid-2011, there was no history of negative cash flow nor negative profit for year 2010 and before. Even if there was, it would be difficult to fault a one-off situation that could happen to companies from time to time. Armed with some liquidity, I decided to put some $10,000 in the 6% CPS. After all, at that time banks were ‘paying peanuts’ for our deposits and there were no apparent signs of interest hikes. In fact, FED was still pumping $80b per month into the system through bond purchases. Certainly, at that time, an interest rate hike would have been an extremely remote possibility. In such a highly-liquid situation, it would have been rational to put a bit of money at risk in hope of better returns than just leaving it in a bank. That said, I still observe the basic conventional wisdom not to put in too much for this investment – perhaps $10,000 at most. After all, given the low interest environment at that time, I was very sure there would be many investment opportunities in the pipeline. This certainly would not be the last opportunity. By investing in small bits, we are able to stagger our investments along the way. This would help us time-diversify our investments.
At that time, nobody would dare say that Hyflux would end up seeking court protection in 2018. I mentioned this because there are write-ups both in the mass media and social media about lessons learnt about this Hyflux saga as if they have not lost in any single investment before. Many mentioned about profitability and cash-flow. Talking is cheap. These are all discussions in hindsight. But in 2011, there was no negative cash flow nor negative profit to show at that time. It really takes the eyes of God to see through this. It was not possible to see so far ahead that this investment would have turned bad just from, at most, one year of negative cash flow until 2010 alone. After all, the Tuas desalination plant was not even up yet. It could be a right decision or it could be a wrong decision at that time. Only God knew. The only discomfort I had at that time was why Hyflux did not attempt to borrow from the bank given the low interest rate environment? Perhaps, they had. Or, could they have exhausted their means to borrow from banks and they have to resort to tapping on the retail investors by paying a higher coupon? Given this doubtful situation, I decided at most to park a small ‘bet’ into the investment. It is a situation of capital preservation before inflation started to erode my buying power if this low interest environment were to carry on for the next few years down the road. After all, it was a scenario of no pain no gain. The step-up feature from 6% to 8% was seen by investors, including myself, as a punitive feature for Hyflux to redeem the bond before it got more expensive. In hindsight, I can only say that it served well as a sweetener to attract many investors into believing that the preference shares will be redeemed ultimately.
It was a bit far back to recall why my CDP statement was registered at $5,000 instead of $10,000 as the original denomination mentioned in the prospectus was in lots of 100 shares at $100 per share. Perhaps, it was due to over-subscription, and the company decided to allot 50 shares instead of 100 shares. In hindsight, that was a thankful situation as we all know by now that the more money that we put in, the more losses we would have suffered by today.
Fast forward the next 5 years came the second tranche for retail investors in 2016. Ah, this time, it was a different scenario. The fundamentals were getting from bad to worse. On the record, there were already several years of negative cash flow. In such a situation, it was increasingly possible that the company might not be able to pay coupons and to redeem the capital. That was when the trading price of 2011 6% CPS went below par for the first time. Otherwise, it had been trading at a premium all the time. Note that this was also around the time when FED, either had already started or going to start a series of interest hikes. The risk-reward scenario was completely different from the earlier retail tranche in 2011. In fact, just before this retail tranche, many companies were rushing to beat the impending interest rate hikes. Just a year before, in 2015, four companies issued short-term bonds of coupon rates between 3.65% and 5.3%. (See Table 1.). Even before, there was the issue of Genting bonds and Genting Perpetual bonds in 2012. Investors were indeed spoilt for choice in those few years.
Unfortunately, for the investors, Hyflux’s 6% perpetual bonds was greeted with such a huge fanfare that the bond was up-sized from the original quantum of $300m to $500m. Actually, at that time, financial numbers were indicative of an imminent financial stress:
- There were several years of negative cash flow since 2011.
- The debt-equity was increasing substantially from about 0.7 in 2011 (which was already high) to possibly more than 1.5 by 2015.
Despite the still relatively attractive high interest of 6%, it was certainly be a no-no for me in this tranche. After all, if Hyflux were to fold, I would not want to be slapped twice. The only regret I had was I did not go one step further to sell the 6% CPS in the open market for a small capital loss. But again, it was also not out-of-mind to have held the preference shares as it was still paying coupons. Then, there was also a consideration of re-investment. After all, the amount was not big, and it was only two years away when the step-up feature to 8% would kick in. In fact, it continued to pay coupon even in the first half of 2018. Well, we could only know by now that it had been a bad decision. In just one stroke, all the unsecured debts, irrespective of their seniority, were locked up.
So, as one can see, even if we were to put up safeguards when we execute our investments, such as investing small amounts in each investment and to diversify our investments, there is still some possibilities of a loss. What is more important is in aggregate term, we gain big and lose small. Even the best investor, Warren Buffet did also lose big at times. It may be a self-consolation by saying all these. Certainly, I still hope to get back my capital. But I am not going to lose my sleep because of this. After so many years of investing, we need to embrace the fact that we may hit some snags from time to time. I seriously pity those who plonk in big time. Perhaps, they thought that it was a fixed deposit paying 6% interest. There are huge differences between a perpetual bond and a fixed deposit as far as risks are concerned.
Disclaimer – The above pointers are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.