Bankers caution against race for high-yield perps

Read fine print and study their risks, they urge investors

There is a new share fever in town, the sale of high yield perpetual shares. Even at $250,000 a pop, they’re selling like hot cakes, and some eager investors may forget there are some risks.

Attracted to the higher yields, investors may overlook the fine print such as the right to redeem the securities as early as after five years and coupon deferral, said some bankers.

‘Globally there’s a massive hunt for yields, (but) people are quite confused about the concept of perps because they’re not so widely traded,’ said Arjuna Mahendran, the head of investment strategy for Asia at HSBC Private Bank.

‘If in the meantime you need money, you’re at the mercy of the bank which quotes the spread,’ he added.

The sale of Genting Singapore perps which ends today is said to have attracted over $2 billion in orders for a benchmark issue typically believed to be a minimum of $500 million. The perps is guided to pay 5.375 per cent coupon.

Some private bankers have hiked up the cost for Genting to 0.75 per cent from the usual 0.20 per cent due to the strong demand, complained one investor.

Last Friday SingPost perps paying 4.25 per cent received overwhelming subscription, with orders hitting almost $2.5 billion or seven times more than the $350 million issuance.

‘That was an absolute blowout,’ said Clifford Lee, DBS head of fixed income.

‘Out of 10 clients, only one got it,’ said one relationship manager who had some pretty upset customers.

SingPost’s attraction was because it ticked all the right boxes such as ties to the government. SingPost is 26.01 per cent owned by Temasek Holdings (Private) Limited.

‘Deals that have done well in the market tend to have one or more of the following attributes,’ said Todd Schubert, head of credit research, Bank of Singapore. ‘Strong brand name such as SingPost and Genting, a new issuer that provides portfolio diversification, perceived ties or importance to the Singapore government and bondholder friendly structures,’ he said.

Right now there are probably many investors who do not read the fine print. Perhaps they should, especially if they think perps are bonds which they are not.

There are a number of commonalities such as a non-call 5-year structure with a coupon step-up in year 10, said Mr Schubert.

However, there are a number of subtle differences with respect to coupon change, coupon deferrals, call options etc that make each structure unique, he said.

‘At Bank of Singapore, our criteria for analysing perpetual securities is even more stringent than that of other bonds, as they rank only ahead of equity in the capital structure,’ he said.

But Anurag Mahesh, head of global investment and key client solutions, Asia Pacific, at Deutsche Bank Private Wealth Management, said investors do understand that the higher yield comes at a risk.

And for many non-Singapore investors, the perps are popular because they offer exposure to the Singapore dollar, he added.

Bankers caution against race for high-yield perps

Read fine print and study their risks, they urge investors

There is a new share fever in town, the sale of high yield perpetual shares. Even at $250,000 a pop, they’re selling like hot cakes, and some eager investors may forget there are some risks.

Attracted to the higher yields, investors may overlook the fine print such as the right to redeem the securities as early as after five years and coupon deferral, said some bankers.

‘Globally there’s a massive hunt for yields, (but) people are quite confused about the concept of perps because they’re not so widely traded,’ said Arjuna Mahendran, the head of investment strategy for Asia at HSBC Private Bank.

‘If in the meantime you need money, you’re at the mercy of the bank which quotes the spread,’ he added.

The sale of Genting Singapore perps which ends today is said to have attracted over $2 billion in orders for a benchmark issue typically believed to be a minimum of $500 million. The perps is guided to pay 5.375 per cent coupon.

Some private bankers have hiked up the cost for Genting to 0.75 per cent from the usual 0.20 per cent due to the strong demand, complained one investor.

Last Friday SingPost perps paying 4.25 per cent received overwhelming subscription, with orders hitting almost $2.5 billion or seven times more than the $350 million issuance.

‘That was an absolute blowout,’ said Clifford Lee, DBS head of fixed income.

‘Out of 10 clients, only one got it,’ said one relationship manager who had some pretty upset customers.

SingPost’s attraction was because it ticked all the right boxes such as ties to the government. SingPost is 26.01 per cent owned by Temasek Holdings (Private) Limited.

‘Deals that have done well in the market tend to have one or more of the following attributes,’ said Todd Schubert, head of credit research, Bank of Singapore. ‘Strong brand name such as SingPost and Genting, a new issuer that provides portfolio diversification, perceived ties or importance to the Singapore government and bondholder friendly structures,’ he said.

Right now there are probably many investors who do not read the fine print. Perhaps they should, especially if they think perps are bonds which they are not.

There are a number of commonalities such as a non-call 5-year structure with a coupon step-up in year 10, said Mr Schubert.

However, there are a number of subtle differences with respect to coupon change, coupon deferrals, call options etc that make each structure unique, he said.

‘At Bank of Singapore, our criteria for analysing perpetual securities is even more stringent than that of other bonds, as they rank only ahead of equity in the capital structure,’ he said.

But Anurag Mahesh, head of global investment and key client solutions, Asia Pacific, at Deutsche Bank Private Wealth Management, said investors do understand that the higher yield comes at a risk.

And for many non-Singapore investors, the perps are popular because they offer exposure to the Singapore dollar, he added.

6.4% yield amid business transformation

At a Glance

• 3Q12 underlying profit of S$38.9m (-5% y-o-y, +18% q-o-q) exceeded our S$35m estimate due to lower labor costs; interim DPS of 1.25 Scts in line

• One-off write back of S$1.2m and lower bonus provision led to reduction in labor expenses

• Maintain HOLD for healthy 6.4% yield while the underlying business undergoes a transformation

Lower labor expenses in a seasonally strong quarter. Group revenue was up 6% q-o-q on the back of growth in mail and logistics segments. However, operating cost rose at a much slower pace at only 2.5% q-o-q as labor costs of S$44.5m declined 4%. This was due to a one-off write back of S$1.2m due to negotiation with the union and lower provision for staff bonuses. There was also S$1.1m of mark-to-market gains from equity-linked notes, which is excluded from underlying net profit.

Associate income also improved. Share of profit of associated companies amounted to S$1m, compared to a gain of S$0.1m in 2Q12 and loss of S$0.2m in 3Q11. This was due to the inclusion of contribution from recent investments: GD Express Carrier Berhad (GDEX), Efficient E-Solutions Berhad, Shenzhen 4PX Express Co Ltd (4PX) and Indo Trans Logistics Corporation (ITL).

Management wary of cost pressures. The company is in the middle of a multiyear transformation as it is trying to diversify into “digital services” and “e-commerce fulfillment” businesses. Quantium Solutions is the regional platform for expansion of these businesses in Asia. Management does not rule out cost pressures from investments in technology, people and operations.

Maintain HOLD. We raise our FY12F EPS by 2% but FY13F EPS is trimmed slightly. Our TP is trimmed to S$1.04 (cost of equity: 6%) as we assume terminal growth rate of 0% (1% previously).

STEADY DELIVERY IN 3QFY12

•Results in line with our expectations

•Room for more share buyback and gearing

•Declares 1.25 S cents interim dividend

3QFY12 results in line with our expectations.

Singapore Post (SingPost) reported a 0.6% YoY rise in revenue to S$149.4m but a 5.2% fall in net profit to S$41.6m in 3QFY12. 9MFY12 revenue and net profit were in line with our expectations, accounting for 75.6% and 74.6% of our full-year estimates, respectively. However, 9MFY12 net profit made up 81.0% of the street’s estimate (Bloomberg consensus: S$137.5m). On a segmental breakdown, the logistics and retail divisions posted improved revenues in 3QFY12, while mail saw lower contributions due to a decline in domestic and international mail volume.

Comfortable with net gearing of 2x.

The group’s net gearing has increased from 0.5x as at 31 Mar 2011 to 0.75x as at 31 Dec 2011, but there is still room for further increase as management mentioned that it is comfortable with a level of 2x. The reason behind the higher leverage ratio is not because of higher borrowings, but due to cash deployed for investment purposes (more investments in associates and JVs) and share buybacks (hence more treasury shares and lower equity).

Room for another ~8% in share buyback mandate.

According to its share purchase mandate, SingPost may purchase no more than 10% of its issued shares. The group has bought back about 1.78% of its issued share capital (based on 22 Sep 2011 announcement) and has room for about ~8% more. The price paid per share for its last buyback was S$1.04, which is higher than the current stock price.

Maintain BUY.

In line with its usual practice, SingPost has declared an interim dividend of 1.25 S cents per share that is payable on 29 Feb. The stock price has risen by about 4.8% since we upgraded it from Hold on 5 Jan, but we still see an upside potential of 16.3% (not inclusive of a forecasted dividend yield of 6.4%) based on our fair value estimate of S$1.14. Maintain BUY.

STEADY DELIVERY IN 3QFY12

•Results in line with our expectations

•Room for more share buyback and gearing

•Declares 1.25 S cents interim dividend

3QFY12 results in line with our expectations.

Singapore Post (SingPost) reported a 0.6% YoY rise in revenue to S$149.4m but a 5.2% fall in net profit to S$41.6m in 3QFY12. 9MFY12 revenue and net profit were in line with our expectations, accounting for 75.6% and 74.6% of our full-year estimates, respectively. However, 9MFY12 net profit made up 81.0% of the street’s estimate (Bloomberg consensus: S$137.5m). On a segmental breakdown, the logistics and retail divisions posted improved revenues in 3QFY12, while mail saw lower contributions due to a decline in domestic and international mail volume.

Comfortable with net gearing of 2x.

The group’s net gearing has increased from 0.5x as at 31 Mar 2011 to 0.75x as at 31 Dec 2011, but there is still room for further increase as management mentioned that it is comfortable with a level of 2x. The reason behind the higher leverage ratio is not because of higher borrowings, but due to cash deployed for investment purposes (more investments in associates and JVs) and share buybacks (hence more treasury shares and lower equity).

Room for another ~8% in share buyback mandate.

According to its share purchase mandate, SingPost may purchase no more than 10% of its issued shares. The group has bought back about 1.78% of its issued share capital (based on 22 Sep 2011 announcement) and has room for about ~8% more. The price paid per share for its last buyback was S$1.04, which is higher than the current stock price.

Maintain BUY.

In line with its usual practice, SingPost has declared an interim dividend of 1.25 S cents per share that is payable on 29 Feb. The stock price has risen by about 4.8% since we upgraded it from Hold on 5 Jan, but we still see an upside potential of 16.3% (not inclusive of a forecasted dividend yield of 6.4%) based on our fair value estimate of S$1.14. Maintain BUY.