My thoughts on T2023-S$ Temasek Bonds

Following on from the Astrea IV private equity bond issue in June, Temasek Holdings has made the latest tranche of Temasek Bonds (known as T2023-S$ bonds) available for retail investors to subscribe. Personally, I’m not a fan of bonds due to my risk profile, but I support any move to convince more Singaporeans to invest / diversify away from property investments. So here’s a quick overview of the Temasek Bonds and a comparison to its competitors that are available to retail investors.

More information and offering circulars on the T2023-S$ bond can be found here.

Product Overview

Features

Tenure: 5 years
Maturity: 25 October 2023 (expected)
Interest rate: 2.70%
Interest payment: Semi-annual payments
Credit ratings: Aaa (Moody’s), AAA (S&P)
Minimum application: $1,000 or higher, in increasing multiples of $1,000
Application period: 17 – 23 October 2018

How to Apply

The process is pretty much the similar to applying for Singapore Savings Bonds (SSBs). You just need a CDP account and a bank account with the 3 local banks to apply through the following channels:

Application channels

Sample application screens:

DBS application

DBS Internet banking application

OCBC application

OCBC Internet banking application

Comparisons

For the purposes of this comparison, I will only look at bond options easily available to retail investors as well as examine the main risks associated with bonds – Default risk and Interest rate risk.

Comparison

SSB figures based on Nov 2018 SSB issuance

As you can see, the Temasek bond provides a slightly better yield compared to SSBs for a similar level of risk. If you compare the SSB’s 5 year yield of 2.12%, it is a much better bond for you if you have a 5 year bond timeline.

The main downside of the Temasek bond is the relative lack of flexibility should you wish to sell your bonds before maturity as you are subject to market forces. Given that interest rates is expected to continue to rise, the value of your bond in the market is likely to continue to drop as the years go by. However, this is not a concern if you hold to maturity.

Astrea IV and Corporate bonds are comparatively riskier due to the assets backing the bond is not as strong compared to Temasek bonds. However, you are compensated accordingly by the much higher yield.

My thoughts

The Temasek bonds is a mid term low risk investment instrument, as such you should avoid using the Temasek bonds as a vehicle to park your emergency funds or funds you expect to use within the next 5 years.

As for CPF funds, I may consider using CPF OA funds for a little bump in interest but definite not use SA funds as Temasek bonds are lower yielding. Personally, I would avoid using OA funds as well as 0.2% more interest is not worth the effort. I’ll rather keep the funds to boost my equity warchest when the market becomes depressed.

Other than the above, if you are prepared to hold to maturity, Temasek bonds can be a useful tool in your portfolio if you have a low risk profile and are using it as a instrument for capital preservation.

Remember to make your application by 23 Oct 12 pm should you decide to subscribe.

Happy Hunting,
KK

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OCBC 360 Account Interest Changes (November 2018)

Competition between the local banks for your deposits have been heating up recently as they try to one up each other on savings account interests rates. The latest salvo from OCBC relates to the changes in interest rates for their OCBC 360 Account effective 1 November 2018. As a account holder, I thought I’ll review the changes and share my 2 cents.

Current interest structure can be found here, while revised interest structure can be found here.

Overview

Summary of Changes

Source: OCBC Website

That is a lot of mambo jumbo to describe the changes. To illustrate the changes, here’s a practical comparison between the old and new interest structures.

Comparison

Interest rate comparison

*Interest only applies to first $70,000 of balances

For core interest, I’ll assume most people are able to satisfy the $500 per month credit card spend requirement. At face value, most account holders are worse off as core interest has been reduced for balances below $35k. Actually, due to the tier system, account holders with balances below $70k but more than $35k are also worse off. Here’s a graph to illustrate:

Interest Curve As you can see from the graph, Core Interest has suffered mainly due to the removal of the payment category, which accounts for 0.3% interest. Core interest is only unchanged if you have exactly $70k in balances.

That said, if you include the new Step Up interest category, which requires you to have at least $500 more in month on month average balance (which I assume most Singaporeans are able to satisfy), you will then be able to push your interest to exceed the old rate of 1.8% to the max of 2.25% for balances more than $35k.

My Thoughts

The objective of the changes made is pretty obvious to me – OCBC wishes to increase their deposit base, as seen by the introduction of the tiered system, the Step-up category and to a lesser extent, the Boost category. It’s clear they wish to drive people to have at least $35k balance in their 360 accounts as that’s where the better interest rates come from.

In general, account holders like me who do not hold large amounts of cash, these changes are bad. However, this will have minimal impact on me due to my minimal cash balance anyway. That said, my guess is that risk averse Singaporeans who love to hold large amounts of cash will love these changes.

As a side point, I find it interesting that they also chose to cut the Wealth category interest to 0.9%, probably to help fund the new Step Up interest category.

What do you think of the changes to the OCBC 360 Account? Share your thoughts in the comments.

Happy Hunting,
KK

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Portfolio @ September 2018

September

Q3 is over! 1 more quarter to go to drive returns for this year.

Portfolio ValuePortfolio Performance

Performance Indicators / Dividends

  • YTD Time weighted return: 4.34%
  • Dividends collected: $2,932.94
  • Upcoming Dividend Receipts:
    • Yuexiu Transportation Infrastructure: HKD 900
    • Bank of America: USD 10.50

Commentary

A roller coaster

September turned out to be a roller coaster month, with US-China trade war fears dominating most of the price action. At one point I was down up to $3k month on month! Ultimately my portfolio turned it around to ultimately settle at almost a wash. Other than that, it was quiet month for me with no transactions made. Gains in portfolio value was mainly due to capital injection into my warchest.

The macro-economic and geo-political environment is getting pretty complicated, with the ongoing trade war, emerging market crises, US White House turmoil and the looming US mid term elections in November. Where all these will lead us and how it will be resolved, nobody knows. I only know that I need to raise cash to be ready for any opportunities.

Till then, keep calm and collect dividends.

Happy Hunting,
KK

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Flash Note: Capitaland Mall Trust acquisition of remaining interest in Westgate

Today, Capitaland Mall Trust finally released more information on its proposed acquisition of Westgate as part of its EGM circular to unitholders. As a unitholder myself, I thought I’ll dive in, give my quick thoughts and speculate a bit.

The circular and presentation can be found here.

Overview

Capitaland Mall Trust is proposing to acquire the remaining 70% interest in Westgate that it doesn’t own from its sponsor, Capitaland. It will be holding an EGM on 10 am, 25th October 2018 to obtain unitholders’ approval to proceed with the acquisition.

Westgate.jpg

As most Singaporeans know, Westgate is a mall located next to Jurong East MRT and is part of a mixed use development of retail and office space. It is also located within the Jurong Lake District, the planned 2nd CBD in Singapore. As such, it is a fantastic property location wise with some growth potential as the Lake District develops and matures.

Financing Details

The main details that were revealed as part of this circular relates to potential funding structures and their potential impact on the key valuation metrics of the REIT. 3 potential models of funding was illustrated: 70% debt funded, 85% debt funded and 100% debt funded, with the balance funded by equity where necessary.

Gearing

Gearing Comparison

Source: Capitaland Mall Trust EGM Circular

As you can see here, the REIT has ability to fully fund the acquisition with debt without busting MAS gearing caps. Whether they choose to do so really depends on economic conditions at the time of fund raising.

Distribution per Unit

DPU Comparison

Source: Capitaland Mall Trust EGM Circular

A key assumption for this illustration is that equity is raised at $2 per unit, which is a 8.3% discount to today’s closing price of $2.18. Under the above conditions (No more than 30% of funding raised by equity and at $2 per unit), the acquisition is yield accretive. This is only true if management keeps the financing structure within these parameters.

Net asset value

NAV Comparison

Source: Capitaland Mall Trust EGM Circular

NAV post acquisition doesn’t change much. This means that the REIT is highly likely to be able to issue equity at a premium to book (based on illustrative price of $2 versus NAV of $1.93), which explains why the acquisition is able to be yield accretive at up to 70% LTV.

My Guess

Here we enter the realm of speculation, let’s assume the acquisition is approved at the EGM, which is highly likely given the merits of the deal.

First question: What would the final financing structure be?

Whether they ultimately choose to fund it entirely through debt or partially fund it with equity really depends on economic factors like interest rate and cost of equity. As the REIT is currently trading at a premium to NAV, cost of equity is low as it is able to issue equity at a premium to valuation. Coupled with the fact that the REIT potentially might need the debt headroom for other acquisitions or to complete the construction of Funan, it definitely makes sense for the REIT to issue equity.

Second question: Since equity is likely to be issued, will there be a rights issue? In order to answer that, let’s take a look at a hypothetical scenario – if it was a rights issue for 70% LTV scenario, what would be the likely structure of the deal?

Rights issue ratio.JPG

For convenience, I ignored the effects of the acquisition fee. I also included a “worst case” scenario where the Managers fund the acquisition at NAV.

A whopping 3.5 units per 100 shares! Given a rights issue / preferential offering is much more expensive to conduct as compared to a private placement, my money is on the REIT managers doing a private placement instead, should they choose to partially fund it through equity.

So my best guess is that the acquisition will be funded by a mix of debt and equity, while equity will most likely be raised via private placement. So don’t feel too compelled to raise cash to participate in a potential rights issue. Let’s see if I’m ultimately right 😛

Do you agree with my guess? Let me know your thoughts!

Happy Hunting,
KK

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OUE Commercial REIT rights issue – a case study of value destruction

Logo

Regular readers would know that I have shifted to a more income approach over the past year and as part of that strategic shift, it involves purchasing more REITs for my portfolio. Also, I have in the past espoused my love of rights issues / preferential offering as seen in my participation in the Frasers L&I Trust preferential offering.

Unfortunately, just as stocks are not born equal, REITs are also not born equal. Whether a rights issue is value accretive or destructive very much depends on the structure of the deal, with that heavily influenced by the REIT Sponsor and Manager. If you invest in a REIT that has a Sponsor who’s interest is not aligned with the interests of minority shareholders, you can get shafted with some pretty bad deals.

Today, I’ll examine one such example – OUE Commercial REIT’s proposed acquisition of OUE Downtown from its Sponsor, OUE Limited, and its associated rights issue.

“Art” of the Deal

Here’s a summary of the significant effects of the acquisition and associated rights issue:

Issue summary

*Calculated based on 10 September 2018 closing price
#Based on REIT data from The Fifth Person website

Right out of the gate, you can see that the rights issue is ridiculously dilutive to your investment, with your distribution yield falling from 7.02% to 6.21% if you only take your own entitlement of rights. Pay you my hard earned cash and I get less dividends as a result?

Thanks bro.

The market rightfully recognised this and the REIT’s price corrected over the past week.

OUE Commercial Chart

How low must the price be before you get the same yield post acquisition as pre-acquisition?

Let’s work this out backwards, pre-acquisition distribution yield was 7%, as such for distribution yield to remain at 7%:

Target TERP = $0.0354 / 7 x 100 = $0.505.

Target Price cum rights
= (0.505 x 2,852,129k post acq units – $587,500,000 proceeds) /  1,546,769k pre acq units
= $0.55

That is a whopping 17.3% drop from the 10 Sep price and a further 9.1% drop based on yesterday’s closing price of $0.605!

The worst part of this, this is of no fault of the REIT’s existing property portfolio performance. It’s like passing the ball to your soccer captain and he takes the ball, turns around and scores an own goal, leaving you wondering what you did wrong.

Moral of the Story

Investing in REITs require close examination of Sponsor and Manager behaviour, and not just studying them from a numbers perspective. Some REITs tend to have management and sponsors who couldn’t care less about minority shareholders and it is important to understand management before investing. If not, you risk being exposed to such value destructive behaviour.

For those invested, I feel you and I hope the rights issue works out well for you (ie you get a lot of excess rights, and I mean A LOT). For me, I’ll avoid this REIT like the plague until it is at a much much cheaper price.

Happy Hunting,
KK

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Keppel Corp Retail Shareholders Briefing 2018

img_2296

Keppel Corp held a retail shareholders briefing in collaboration with SIAS at the SGX Centre yesterday. It’s the 2nd year this briefing was held and it presents a rare chance to interact with the C suite, with CEO Loh Chin Hua and CFO Chan Hon Chew in attendance. I joined a predominantly Merdeka/Pioneer Generation audience to find out more.

Presentation slides used at the meeting can be found here.

Presentation

keppel-business-model.jpg

As previously described in my piece on Tianjin Eco City, Keppel has embarked on a strategy to be the one stop shop for sustainable urbanisation solutions. What this means is trying integrate the 4 disparate divisions into providing a single proposal for mega projects like smart cities in other countries. This has been part of Keppel’s business for the longest time with the Sino-Singapore Suzhou Industrial Park and Tianjin Eco City, just that they are now actively pursuing this as a future business focus.

The presentations by the CEO and CFO didn’t yield anything very different from my previous understanding of the business as mentioned in my Tianjin Eco City article.

Q&A

Questions were mostly answered by CEO Loh. Here’s a summary of topics asked that I felt was more informative:

1) Rationale for recently taking a 50% stake in Watermark Retirement Communities

The stake cost about $80 million and it was identified as a urbanisation trend that Keppel wanted to pursue as part of its sustainable urbanisation strategy. Watermark adopts a asset light strategy, where they are operators but not owners of Retirement Communities. This allows for rapid expansion through the use of others’ capital and ties in with the Keppel Capital platform. This is very much like the hospitality industry that I’m part of.

The ultimate aim is to bring this concept of retirement living to Asia, with potential countries like Singapore, China and Australia mentioned.

2) Upcoming Keppel Marina East Desalination Plant – Given Hyflux’s Tuas Spring woes, how is this project better?

Keppel was conservative when bidding for the project, the project is that currently on schedule and on budget. They are confident that the water prices negotiated with the Government as part of the tender process is set such that the plant is able to turn a profit.

3) Given the recent property cooling measures enacted by the SG Government and the ongoing rumblings of trade war between the US and China, how do you feel the company will be affected?

Sentiment will obviously be affected. That said, the company is not big in the SG residential market. Also the company’s land bank in Singapore and in China is relatively old (70% of China land bank is >7 years old), with a low resulting cost basis. This enables a higher likelihood of profitability when developed. Lastly, their land bank does not have deadlines for development, so they have the option to develop at a more favourable time if need be.

4) Keppel-KBS REIT – Co-sponsor KBS Realty is reported considering listing another US REIT in Singapore. As reliance is on KBS to bring deals to the REIT, do you have any concerns or comments on this news?

We exercise tight control by we providing the CFO for the REIT, but we will continue to work with our partners for the best of the REIT. (So a non answer haha)

5) Rationale for recent Keppel DC REIT divestment

The portion divested related to the portion owned by Keppel’s subsidiaries. It was decided that it was better to recycle the capital into their core business projects.

Summary

Staying on top your investments is a must. Attending such investor relations events can fast track your knowledge of the company you own through learning from management and from your fellow investors. I certainly learnt a lot.

Happy Hunting,
KK

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Retirement planning is as much about self sufficiency as it is about love

By now, at least some of you should have watched this heartwarming ad from NTUC Income about “The Worst Parents in the World”.

In the ad, the groom at his own wedding dinner described how he had a “terrible” childhood, no piano lessons, no expensive tuition, no expensive overseas trips or birthday celebrations. However, he expressed his gratitude that they did it, so that they could be self reliant in retirement and not be a burden to him.

Amid all the concern over Singapore’s cost of living and the cost of raising a family here, the ad reminded us that it is possible if you live within your means. It also shined a light on the consequences insufficient retirement planning can have on your children and the society.

It also reminded me of stories Mom would tell me of growing up with Ah Gong, Ah Ma and all her brothers and sisters. Of how Ah Gong and Ah Ma was generous with their money and didn’t control it well. Of how they had to support Ah Gong and Ah Ma in their old age. Of how Mom chose to forgo an overseas scholarship as it would mean years without income for her family, and of how she chose to forgo a career fast track so that she could spend more time raising my brother and I.

Lastly, it reminded me of how blessed I am to have grown up in a middle class family without worry or care, with my parents having the foresight to have sufficient funds to retire without having to rely on me. In the process, I am allowed the freedom to choose any career path that I fancy.

Don’t plan for retirement only because its about being self sufficient, do it because of the love of your family.

Thanks Mom & Dad.

Happy Hunting,
KK

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