Martin Lee @ Sg
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Genting Bonds for Retail Investors

After Genting launched a perpetual bond issue that was only for institutional or high net worth investors last month, they have decided to launch one for retail investors too.

Up to S$500 million of perpetual subordinated capital securities at an issue price of S$1 will be offered to the public in Singapore. Each bond will have a minimum subscription of $5000, with increments of $1000.

If the demand is good, Genting can increase the size of the offer by another $200 million. On the other hand, if the amount raised is less than S$100 million, Genting can choose to cancel the public offer.

The bond offers a coupon of 5.125% p.a. but the coupon will rise to 6.125% p.a.  if it is not redeemed after ten years. Note that Genting can choose to defer a coupon payment at anytime which makes this not 100%  like a normal bond. The offer document actually calls it as a perpetual security rather than bonds.

Being a perpetual security (like a preference share), the bond will not have any maturity date. This means that the only way for an investor to exit the investment is to sell it on the secondary market at prevailing market prices.

One of the key factors of the market price will be interest rates movements. And since this is a perpetual bond, it will be quite sensitive to interest rates movements.

You can read this other article that I wrote to understand it more :

What Exactly Are Preference Shares?

Genting will have the option to recall the bonds twice a year starting from October 2017.

Application can be made by way of ATMs or internet banking belonging to DBS/POSB, OCBC and UOB. The application process starts from today and will close on 16th April 2012 at noon.

Those who are considering buying the Genting bonds for a quick punt might want to think twice as the institutional tranche is currently trading at slightly below the issue price. So any capital gains upside might be limited in the very short term.

Of course, if you are happy with an investment that pays you 5.125% p.a. despite the lack of a maturity period, you can consider this.  Just remember not to put all your eggs into one basket.

Personally, I find the yield slightly on the low side.

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34 comments
B. C. says 7 years ago

Okie all, just for the record:
==========
The Straits Times; Published on Apr 16, 2012
Perpetual securities not the same as perpetual bonds
THERE are major differences between perpetual capital securities and perpetual bonds, and these terms should not be used interchangeably (‘Genting S’pore reaches out to retail investors’, last Tuesday; and ‘Genting may be a sure bet but know risks of perpetual bonds’, last Wednesday).

A bond is an IOU, and is listed as a liability on the balance sheet of an issuer, whereas perpetual capital securities are accounted as capital of the issuer.
Also, a bond receives regular coupon payments; perpetual capital securities receive dividends/distributions (at the discretion of the issuer). A missed coupon payment on a bond can result in a credit event or default. In contrast, perpetual securities can afford to miss dividends/distributions without any credit event.
A bond is ranked above a preference share and, in some cases, has the same ranking as creditors; perpetual capital securities may rank lower than creditors, or in line with preference shares.
It should also be noted that bonds, preference shares and perpetual capital securities are all plain vanilla or straight instruments and have been in existence for a long time.
In the case of the various perpetuals that have been issued in the Singapore market in the first quarter of this year, for example, those by Genting and Ascendas, they are not convertible; giving the impression that these products are hybrids is inappropriate.
A hybrid refers to a product that has equity and bond features, for example, convertible preference shares or convertible bonds. Thus only those securities that have both the characteristics of bonds and equity would qualify as hybrid securities.
I am unaware of any current perpetual bond issue in the Singapore market, though they may exist elsewhere.
Mano Sabnani
Perpetual securities not the same as perpetual bonds

Reply
B. C. says 7 years ago

Me thinks that regarding all this distribution stuff. Although someone put it the other way around at http://forums.hardwarezone.com.sg/stocks-shares-indices-92/genting-singapore-perpetual-subordinated-capital-securities-5-125%25-3679888-6.html#post65821831 i.e.: Bond –> Preference Share –> This current issue of perpetual securities –> Ordinary shares.

I still think that this current Genting perpetual securities issue SHOULD be senior to preference shares (and in consequence, ordinary share holders) since as I understand, preference share holders can attend AGMs and KPKB etc should they not receive the preceding year’s dividend.

As such, in exchange for the fact that Genting ‘perpetual subordinated capital securities’ holders can only ‘suck thumb’ if Genting decides to defer the ‘distribution’ payouts. me thinks that other than Genting ‘bondholders’ (if such exists and other secured creditors) NOBODY else down the gravy chain ought get ANY payouts if ‘perpetual subordinated capital securities’ do not get their ‘distributions’- am I right to say this?

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Jason says 7 years ago

Hi Martin, what Jack has pointed out is of significant from both a Corporate and Individual investor point of view. The terminology must be understand from an accounting perspective. Under FRS39 Genting perpetual securities should be classified under equity than non current liabilities, if the distribution is regarded as non-contractual; seems to be since the distribution can be deferred unilaterally without limit (see quotes below extracted from the prospectus). A bond typically has contractual obligation such as CapitalMall3.8% recent issue would be classified under non current liabilities. There are major differences in the accounting, finance and tax treatments, which i will not elaborate as that is more relevant from a Corporate’s perspective than to retail investors. The mentioned payment obligation part is important for individual retail investor to bear in mind. Yes, i didn’t notice the thread has “*bond*” as a headline and i have come acrossed seasoned analyst using the same word “*bond*”. I agree it ought to change. Seem like I kaypoh quite a bit this time…

“The Issuer may, at its sole discretion, elect to defer
Distribution which is otherwise scheduled to be paid on a
Distribution Payment Date to the next Distribution
Payment Date by giving notice to the Holders (in
accordance with Condition 15 (Notices)), the Trustee and
the Principal Paying Agent not more than 20 nor less
than 15 Business Days prior to a scheduled Distribution
Payment Date.”

Any Distribution deferred pursuant to Condition 4(c)
(Distribution — Distribution Deferral) shall constitute
“Arrears of Distribution”. The Issuer may, at its sole
discretion, elect to further defer any Arrears of
Distribution by complying with the foregoing notice
requirement applicable to any deferral of an accrued
Distribution. The Issuer is not subject to any limit as to
the number of times Distributions and Arrears of
Distribution can be deferred pursuant to Condition 4(c).”

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    sender says 7 years ago

    Jason’s take is right. I have attached an extract of Genting’s OIS here for avoidance of any doubts. Genting squarely stated the previous $1.8 billion perpetual subordinated capital securities would be treated as EQUITY CAPITAL of the Group. As this retail tranche is alike the one offered earlier to institutional investors, it would be treated the same. (See Note 1). Also, note that Genting stated squarely to date, it has no loan capital issued and outstanding. So, how did the seasoned analysts ended up calling it a perpetual bond. Even worse, some analysts say it is like a HYBRID. IT is dangerous to use such terms loosely.

    +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
    (d) the equity capital and the loan capital of the relevant entity as at the latest
    practicable date, showing –
    (i) in the case of the equity capital, the issued capital; or
    (ii) in the case of the loan capital, the total amount of the debentures issued and
    outstanding, together with the rate of interest payable thereon;

    As at the Latest Practicable Date, the equity capital of the Issuer is as follows:
    Share capital – issued and fully paid (rounded to the nearest thousand)………… S$ 5,728,254,000
    Number of issued and paid-up ordinary shares ……………………………………… 12,198,444,817
    Amount of 5.125 per cent. Perpetual Subordinated Capital Securities issued
    and outstanding(1)(2) (rounded to the nearest thousand) …………………………. S$ 1,800,000,000
    Notes:
    (1) The 5.125 per cent. Perpetual Subordinated Capital Securities will be recognised in the
    financial statements of the Group as equity capital.
    (2) This reflects the gross proceeds from the offering of the 5.125 per cent. Perpetual
    Subordinated Capital Securities and does not take into account commissions, fees and
    expenses incurred in connection thereof.
    – 91 –
    As at the Latest Practicable Date, the Issuer has no loan capital issued and outstanding.
    +++++++++++++++++++++++++++++++++++++++++++++++++++++++++

    Reply
      B. C. says 7 years ago

      You said: “As at the Latest Practicable Date, the Issuer has no loan capital issued and outstanding.”
      ———
      “loan capital issued and outstanding”= ‘bonds’ issued is it?

      So ‘Perpetual Subordinated Capital Securities’ is more like a Preferred stock- right?

      Reply
        sender says 7 years ago

        Dear BC

        Loan capital would include bonds. Isn’t it?

        I don’t know if your new term here Preferred Stock is referring to Preference Shares. I do not know what is preferred stock but i understand with some limitations what are preference shares.

        Perpetual capital securities look like a preference shares but it is not exactly.

        It is generally understood that Companies must pay full dividends to their preference shareholders first before ordinary shareholders can get theirs. It is also possible, depending on the securities agreements, for Companies to pay partial dividends to preference shareholders when ordinary shareholders are not paid. And we know dividends can only be paid out of earnings. For preference shareholders, it is possible to be paid additionally from retained reserves.

        In the case of pepetual capital securities, the payment of a “distribution” is up to the sole discretion of the Board Directors. Hopefully, the Board Directors are decent enough not to postpone paying the due distributions indefinitely.

        Someone had earlier mentioned about attending AGMs and how that differ for the different classes of securities, so I won’t repeat that.

        It is certainly more attractive for Companies to issue Perpetual Capital Securities as an option over issuing Preference Shares. So many companies are rushing to issue such perpetual capital securities this year. It must be very attractive and good for the Companies. (So far, from my understandings, Companies won’t go the preference shares route unless it have past records of paying dividends consistently to ordinary shareholders. It is not true in the case of Perpetual Capital Securities. Example: GLP has not paid a single dividend yet but it had issued one such Securities. Genting has only paid one for last year.) From Companies perpective, both are equity capital but one is easier than the other to implement plus less costly.

        For me, i just want people to not use terminology loosely as that can cause misinterpretations, misunderstandings, and confusions in discussions. Good luck and I hope to learn from you too. Please share what you know.

        Ps: The differences/similarities so highlighted may not be exhaustive. I am in process of trying to find out more the between them.

        Reply
          Martin Lee says 7 years ago

          Dear Sender,

          Indeed, the terminology can become confusing.

          I had to use the word “bond” in the title because that is what most people would be searching for although more accurately, it should be called Genting perpetual securities.

          Reply
    Martin Lee says 7 years ago

    Dear Jason,

    Yes, you are right. It’s actually classed as a security and would fall under equity than debt.

    Reply
Jason says 7 years ago

Hi Anon, thanks for the addon. For Hyflux I have calculated based on the simplistic assumption of perpetuity as that is an option at the hand of Hyflux. Of course your calculation to first call date is definitely a more conservative assumption here and commonly practice. Not sure is there a typo in your message but my calculation for first call date to Apr 2018 is 4.95% taking traded price at $106.

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    anon says 7 years ago

    4.25% compounded for six years, then multiplied with today’s price = (1.0425^6)*106 = $136 = $100 + $6*6

    Reply
      Jason says 7 years ago

      Basically you are taking total end cash flows = $100+$6*6=$136. Take compounded annual rate over six years = (136/106)^(1/6)=4.25%. This formula assumes all the cash flows occur at year 6. As Hyflux pay semi-annual dividend IRR is more suitable and the yield will be higher.

      Reply
        anon says 7 years ago

        yes that is true, but i think the difference is small unless you can find something to reinvest your semiyearly interest which returns much higher than say FD. what i was trying to point out is that the yield will not be 4.95%

        Reply
          Jason says 7 years ago

          yes you are trying to point out reinvestment risk and i agree that the realised yield will be +/- IRR yield depending on future reinvestment rate. One of the underlying assumptions of IRR is that you can reinvest all interim cash flows at IRR rate. In your statement if you replace the word “FD” rate with “IRR” rate you will do better than 4.95%. Since we do not know future reinvestment rate, which can be higher/lower than IRR, in terms of yield presentation usually IRR is presented and people ought to know the limitation.

          Reply
          anon says 7 years ago

          Just curious – how did you arrive at 4.95%?

          Reply
Gugu says 7 years ago

I miss the deadline as it close application on 12am today. Is there any way can I purchase it again? I heard secondary market what is that means?

Reply
    Martin Lee says 7 years ago

    Dear gugu,

    you can just buy it on the secondary market on SGX after it has listed.

    Reply
sender says 7 years ago

I would like to highlight that Genting is not issuing a BOND to retail investors. No where in the issuer’s offering document mention that it is BOND or even perpetual bond. It is the market and the media that cooked it up as a perpetual bond. Read carefully, it is perpetual capital securities, not BOND.

Rewind back to before the financial crisis of 2008, when financial institutions marketed mortgage backed securities as minibonds. The market thinked it was BOND that they were buying.

Looks like a repeating saga is underway …. but this time no one can cry foul for they (the issuer and issue managers) never say it is BOND. It is the market analysts and medias that tout it a perpetual bond.

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    sender says 7 years ago

    Expanding on my comments. It seem few people now starting to mention Genting perpetual capital securities is a preference share issue like Hyflux. REALLY?

    While the perpetual capital securities are like preference shares and are parity obligations on the capital structure, the similarity ends there. Perpetual capital securities in the case of Genting pay a “distribution at predefined distribution rate” while that for Hyflux pay a “dividend at predefined dividend rate”. I think the financial terms tell us something that they are different beasts, otherwise why confuse. Well, it could be the bankers and issuers want to confuse us anyway.

    In the case of plain vanilla bonds like SIA, FNN and CapitalmallAsia, the payouts are referred to as “interests at predefined interest rates”.

    I think it is important to get our terminology right. Otherwise, misinterpretations will lead to further confusions in discussions. I think a good start would be amend the title of this forum thread and not call it “Genting Bonds…” Martin, i leave it to you; it’s your call.

    Reply
      Jack says 7 years ago

      Sender,
      Thanks for pointing out the differences in terminology. For a layman though, it’s hard to understand the subtle differences. Perhaps you could help us understand in layman terms what those differences are.
      For example, what are the obligations of bond issuers and perpetual capital securities? Are they not obligated to pay what they declared; e.g. “5.125% p.a. but the coupon will rise to 6.125% p.a. if it is not redeemed after ten years”. What are the risks involved; apart from bankruptcy? For a layman like me, the bottom line is whether I get the “5.125% p.a. but the coupon will rise to 6.125% p.a. if it is not redeemed after ten years”. I understand the risk in the event of bankruptcy.

      Reply
B.C. says 7 years ago

Hi Mr Lee,
As I understand, all preference share holders are allowed to attend their respective companies AGMs if they have not received dividends in full for the preceding year.

According to an answer by ‘final1’ at http://forums.hardwarezone.com.sg/stocks-shares-indices-92/genting-singapore-perpetual-subordinated-capital-securities-5-125%25-3679888-6.html#post65821831 based upon info from 09/04/2012-Genting Singapore PLC- Offer Information Statement (S277) : page 18- ‘Status of the Securities’-

It seems that these Genting Subordinated Capital Securities holders do not get to attend nor vote at AGMs unlike Preference Share holders (under the condition whereby dividends for the prior year are not fully paid), besides being paid as like the most junior of preference share holders would in the case of the company going bust.

Could it then be said that Genting Capital Securities holders are having a worst deal than that of a preference share holder should such a position come into existence later?

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Irene says 7 years ago

Hi Martin – Can you elaborate on:

“Those who are considering buying the Genting bonds for a quick punt might want to think twice as the institutional tranche is currently trading at slightly below the issue price. So any capital gains upside might be limited in the very short term.”.

Where can you see that the price is trading at slightly below the issue price?

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    Martin Lee says 7 years ago

    Dear Irene,

    It was quoted in the newspapers but you can also check with your stock broker.

    Reply
Jason says 7 years ago

kay poh a bit here..

Kong, the perpetual dividend on Genting is rather low. Based on my calculation it should be at 8.25%! Alarming. Yes at the prevailing market interest rate a 5.125% is indeed attractive. Interested to hear what Martin says on this.

Yvnette, yes coupon is 6% for Hyflux but that is not crucial. The yield is ~5.68% for Hyflux now.

Frankly if you have to choose between perpetual pref shares Genting vs Hyflux pref shares perhaps Hyflux is a better choice.

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    anon says 7 years ago

    Hi Jason, I think the yield for the 6% Hyflux is currently about 4.25%. My calculation is based on assumption that Hyflux redeems the shares on Apr 2018 and today’s SGX trading price of $106. The yield will be lower than 5% as long as the shares trade at around $100 + $6.

    I am speculating that the Genting preference will trade up to around $102.50-$105 within six month’s time when the first interest payment is due. I remembered that the Hyflux preference did not trade up to around $106 until after 3 months.

    But of course, that’s just a speculation.

    Reply
Tanker says 7 years ago

Hi Martin,I intend to sell some of my OCBC pref.share and buy this,what is your opinion?thanks.

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kong says 7 years ago

why did u consider 5.125% p.a. on low side? Is there any Preference Shares offering more than 5.125% p.a. previously ? Care to explain ?

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    Yvette says 7 years ago

    Hyflux is paying 6%

    Reply
    Martin Lee says 7 years ago

    Dear Kong,

    I consider it quite low as the yield for preference shares of banks are already 4.xx%. The credit rating of banks are genting are quite different and I feel the difference should be more.

    Reply
    sender says 7 years ago

    Dear kong,

    you should compare apple to apple, and oranges to oranges. It is wrong to compare Genting subordinated perpetual capital securities to Preference Shares. The more correct comparisions would be to recent perpetual capital securities issued by GLP, Hutchison, Olam, SingPost, etc. I would caution while it looks like comparing apple to apple now, in reality, one may be a Gala apple vs another, a Fuji apple. The worst one, a seductive rotten apple that give investors no sleep.

    Reply
Jack says 7 years ago

Hi Martin,
Where can I find the daily institutional tranche pricing information?
Thanks.

Reply
    Martin Lee says 7 years ago

    Hi Jack,

    Can check with your broker.

    Reply
sender says 7 years ago

Martin, thanks for the info. I am giving Genting the miss this time round.

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Jasmin says 7 years ago

A coupon of 5.125%pa is quite attractive to me. Selling it at the secondary market is only possible if there is a buyer.

Reply
    Martin Lee says 7 years ago

    Dear Jasmin,

    You should be able to find a buyer, as long as the price is right. 🙂

    Reply
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