Saturday, June 10, 2017

About Corporate Bonds: My nearly itchy fingers

My banker called me one day and asked me if i wanted to participate in a certain OTC ( over-the- counter means its not on any exchange like Singapore Exchange) Singapore company bond issue denominated in SGD in the primary market ( meaning IPO of bonds). It's really HOT, she said...many people subscribing ! Buy Buy Buy Buy ...and im feeling a little bit dizzy already.  Ok she can't say that by regulation...Many times i exaggerate..

1)Unrated, perpetual. This means the company has a choice not to pay back the principal.
2)Dividend stopper . This means equity holders won't be paid dividends if  bondholders aren't paid their coupons.
3)Cumulative coupons if coupons are deferred. The company will have to pay the accumulated coupons if they missed any.
4)Coupon reset in 10 years. The company will have to add 100bps ( aka 1%) to the coupon.
5)NC5 . This means Non-callable within 5 years. After 5 years, the company has the right to redeem the bonds if they have a cheaper source of funding.

The Conversation  ( exaggerated again but the gist is there)
" The bank allows you to leverage on this unrated bond at a Loan-To-Value of about 50%. at about mortgage loan rates. You can pay back anytime with no penalty and you can withdraw anytime in cash the build-up value of the bond" - Her
" Unrated can lend meh????" - me
"Yes" - Her
" That will nearly double the yield and give me a source of funds when opportunity strikes..." - me thinking
"Yes, pls give me the minimum denomination as i don't have balls of steel ...... " -me
" You are so handsome and you are the sweetest guy i ever met...." Her, before putting down the phone.

As with all things in life, a few days later, i was told i wasn't allocated ANY and i guess i will have to wait by my phone like a forlorn puppy for my beautiful Angel to call me back again and call me handsome...i miss her ..truly.... On hindsight, i was kind of relief i wasn't allocated.

Now, the part on being able to loan an unrated bond at a high LTV with a low interest rate kind of piqued my interest. Goh Eng Yeow from Straits Times wrote about ratings in a local context before here

In summary about MY views about ratings

1) It is a tool for justification. To put it in an ah beng way, cover backside.  To an analyst or accountant, they will have more than enough skill to check if a company is able to pay back its debts but no, they still can't go ahead with the investment for their fund house even if it is perfectly safe, they need to get a chop (rating) from the rating agencies who uses the same information as them. If the investment goes awry, at least one can say it had a AAA rating when they purchased the investment

2) It is so ingrained in society, Many fund managers are only permitted to buy bonds with these AA ratings, some banks i heard are only permitted to loan on rated bonds . It's all about investor confidence. Even governments need these ratings.

3) It is bullshit. I don't mean it has no value. It has value in giving people confidence ( however needless), giving people justification on their actions, giving time-starved people who don't have the time to look through the financial statements, or people who are not skilled to look at the financial statements. ( It really has value for those who are not skilled in reading financial statements which is the point of Goh Eng Yeow which i agree to a certain extent).

4) It is hard to believe it has no bias-ness. The company who is being rated is the one who PAYs the rating agency. 

5) It could be more risky to have a a good rating. As the saying goes, the higher one goes, the harder one falls. Some examples:
QNBK 2.125% 07Sep2021 Corp(USD). It's  A+ gets lowered to A and the price dropped. Currently, it is about USD$95, compared to it initial price of  USD$100.
RCOMIN 6.5% 06Nov2020 Corp(USD). It's B+ got lowered to CCC. Currently, it is about USD$74, compared to its inital price of USD$100.

6) Ratings agency have the means to earn unlimited money. They are powerful. Just imagine you are able to predict with 99.9% accuracy the direction of the bond or share price just because you know the timing of the change in rating. ( note: i bold timing, because astute investors would have already picked up the deterioration of fundamentals and the rating agencies play catch up). For the above bonds , the price immediately changed when the rating change is announced. And these ratings agency rate thousands of companies and governments, not just a lame CEO who insider trades his one and only company.
I believe ( i hope) there are regulations but come on, life is not so simple and furthermore, they rate governments too.

So why would a company not rate its bonds?

Life sucks! Believe me...its really does...


  1. Even more exciting when it defaults. Then you lose the bond investment, plus the leverage. Double whammy.