How interest rate affects perpertuals- Genting

A reader commented that interest rates were at the historical low and that the only way is up. That i totally agree. What i am unsure of is just when. When interest rate increases, price of bonds will go down, especially so for bonds without maturity, a..k.a perpertuals like Genting. Looking at the 12 month Sibor from 1987 - 2012, the highest it has reached is 7.75% and the lowest it ever reached is right now, 0.59%.

Genting perpetual was offered at $1 par value with 5.125% coupon at the time when the 12 month Sibor was about 0.59%. This implies that the market is willing to take on the risk of holding the perpetual with an additional interest rate spread of 4.535% ( 5.125%-0.59%) over the 12 month sibor.

Assuming the market expects this spread of 4.535% forever and we keep it as constant. ( Please note that this spread changes based on the market perception of Genting's risk. Obviously, MAS is causing some negative perception!) Below is the worst case price one can expect given the different 12 month sibor rates.

Yield = 4.535% + 12-month Sibor
Genting Perpetual Price = 5.125% divided by Yield

The questions now are:

When do you think interest rates will rise?

What other investment classes available to retail investors will not be affected by changes in interest rate?

Do you think property (which is leveraged by the way) will also be affected by interest rates or not?

How about equities(Shares)? Will it be affected by interest rate too?

If a severe market crash like Lehman occurs again, which will fall more, Genting Perp or shares in general?

I feel that investing is not only about the possbilities, but also the probabilities. Given the severity of the recession in Europe and the US, how high are the probability of them raising interest rates? Read the news and realise that many countries surrounding us have also been cutting interest rates, like Australia, India, Brazil,Morocco e.t.c. Sure inflation is a concern, but which is a bigger evil, unemployment or inflation?

I for one am preparing ( and hoping) for a Lehman-like crash. If it occurs, i am pretty sure that my Genting Perps will still fall but definitely not as much as shares.

Having said the above, a sharp rise in interest rates to 7.75% is still possible. Thats why keep it as a small percentage of your portfolio.

BTW, the issue i have with MAS is that there are many much more risky ,complicated and non-transparent investments out there compared with perpetuals! Regulate those first before regulating perpetuals! Come on!

Perpetual bonds should not be a cause for concern

I ,being a small fry, have an investment in Genting Perpetual 5.125% retail which i bought during IPO for diversification. It's only takes up about 5% of my investible assets, excluding property. Now that you know that i am vested,i want to say that i totally do not agree with MAS being alarmed by people buying perpetual bonds. By being alarmed and placing restrictions on these kind of investments, it will simply reduce investment alternatives and push retail investors into more exotic and more risky products.

I feel that for retail investors who do not know how to invest, perpetual bonds offer a relatively safe store of value, with Genting 5.125% matching inflation. The risk of perpetuals are as follows: Genting going bankkrupt being the worst case scenario or interest rate rising, making the price of Genting lower.

Let's look at the worst case scenario, Genting going bankrupt. Holding the perpetuals is still safer than holding the shares as pertpetual holders are paid first from the proceeds of any sale of Genting's assets.

Let's look at the risk of interest rate rising and the price of Genting getting lower. How low can it get? Can you forsee it dropping more than 20%? How about Genting Shares,can you forsee it dropping  more than 20%? In fact, the longer one holds Genting perpetuals, the less risky it becomes as it's accumulated coupons would have reduced the invested outlay by 5.125% every year, and raising by 6.125% in 2022. How much dividends does Genting Shares give?

When i, a small fry retail investor, bought the perpetuals, i did it to hold it to provide me an income after my retirement or sell it when QE3 is announced and funnel it into shares. It was crystal(Internally Flawlessly) clear to me that i can forget about any meaningful upside capital appreciation. The bullshit about it being a perpetual and the company never going to redeem it is irrelevant. I knew i could sell it in the open market to get back my principal, and true enough it was hovering at 1.012-1.011 in the open market, till MAS came up with restrictions and it fell to 1-1.002, still above IPO price.I also took into consideration Ben Bernake's (US Fed) comments about interest rates staying low till at least 2014 when i bought it. 

The announment above, was the last straw that broke the camels's back for me. SRS not being able to buy Genting Perp but allowed to buy shares?????????Huh! My gosh! The longer one holds the perpetual bonds, the safer it is and now SRS, which is for retirement purposes, is not allowed to be used to Genting Perp? Some people do need to wake up.

Having said that, perps is just for diversification. Bonds having maturity is better than perps. Keep perps or bonds to a small percentage of your assets as a store of value only. Market looks like its falling,look at volume and prepare for some firing at shares!