Fundsupermart.com
Licensed Custodian, Dealer and Financial Adviser.   CPFIS Registered Investment Administrator
Genting Singapore PLC: Retail and Wholesale Pricing Discrepancy
Bonds

Genting Singapore PLC: Retail and Wholesale Pricing Discrepancy

In light of the prevailing pricing discrepancy between Genting Singapore PLC's retail and wholesale perpetual bonds, the wholesale tranche currently presents an attractive opportunity for investors to gain exposure to a potentially short-tenor investment-grade rated paper

Investors who have been following us closely would know from our previous articles that we expect Genting Singapore PLC to call its two perpetual bond issues (GENSSP 5.125% Perpetual Corp (SGD)s and GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retail) upon their first call dates later this year. This is by virtue of the company's excellent liquidity profile (as of end-Sep 16, the company sports a net cash position of S$1.32b after including its perpetual bonds), and the fact that it would make economic sense to redeem the perpetual bonds upon its first call date due to the negative spread (interest paid on the perpetuals versus interest earned on the company's cash balance) the company incurs by keeping the perps outstanding, which will eventually be compounded by the coupon step-up penalty of an additional 1% (if the notes are not called by 2022). We also note that the rating agencies may potentially withdraw its 50% equity credit treatment of Genting's perpetual debt upon a non-call (at first call date), which will worsen its assessed leverage levels as 100% of the bonds will then count as debt in assessing its credit profile, further incentivizing Genting to call on its outstanding perps.

Wholesale tranche currently trading at a more attractive a yield-to-call

We note that as of 7 Feb 16, the GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retails are currently quoted at 101.89 on a "clean" price basis (ex-accrued interest) over the exchange, while the GENSSP 5.125% Perpetual Corp (SGD)s are trading at 100.28 in the interbank market, representing a discount of about 1.58%. While the two bond issues were issued separately and not fungible (with the wholesale tranche issued in March 2012, followed by the retail tranche one month later in April 2012), they nonetheless share very similar terms which implies that they should be priced at fairly similar levels in their respective markets. While the pricing premium of the retail tranche may reflect the smaller lot sizes of 1,000 nominal amount which are traded over the exchange (compared to the minimum 250,000 nominal amount for the wholesale bonds), it is conceivable that this price "discrepancy" may be reflecting deferring expectations of a call later this year, with the wholesale tranche pricing closer to par and in line with an anticipated issuer call in September 2017.

After taking into account our prevailing fees (processing fees and platform fees), the GENSSP 5.125% Perpetual Corp (SGD)s are trading at a more attractive 3.87% compared to 1.64% for GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retail on an annualized yield-to-call basis, representing a yield pick-up of 223bps over the retail bonds. It would thus make more sense for investors to invest in the wholesale tranche, which offers a decent return compared to the retail bonds. Although the retail bonds are still trading at positive yields, it may serve investors well to note that a peculiar situation of a negative yield-to-call may occur for the GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retail bonds if investors miss out the fact that the bonds may be called from October 2017 onwards (and every 6 months thereafter) and further bid up the prices for the bonds. Our previous article highlighted negative yields for another retail bond issue, CapitaMalls Asia's CMASP 3.800% 12Jan2022 Corp (SGD) - Retail, which was trading at a negative YTC of -0.17% in July 2016 prior to being called in January this year, illustrating the potential risks to investors if they do not fully understand the specific terms that comes with each bond issue.

Yield-to-call not indicative of actual returns; cash returns still provide decent yields for less than one year holding period

Given that both bond issues have less than one year remaining to its first call date, with a potential holding period of about 7-8 months, we note that the yield-to-call figures are not indicative of the actual cash return that investors may gain from investing in these bonds up till its first call date. To illustrate this, we refer to Table 1 and 2 where we compare the annualized yield-to-call with the cash returns for investing in the GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retails and the GENSSP 5.125% Perpetual Corp (SGD)s till its first call dates in September and October 2017 respectively.

Readers may note that based on a holding period of less than a year, investing in the wholesale tranche still presents a better return compared to the retail tranche. For illustration, if we assume an investment in a S$10,000 nominal amount of the GENSSP 5.125% Perpetual Corp (SGD)s at 100.28, with estimated cash outlay of S$10,286.75 (inclusive of our standard processing fee of 0.35% of nominal value, along with a platform fee of 0.05% per quarter; note that GST is applicable), investors will receive S$10,512.50 if Genting calls on the issue in September, returning S$225.75 net of fees with a simple yield of 2.19%. This is almost double the S$113.33 profit for investing in the same nominal amount of GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retails till its first call date in October, which is a yield of 1.09%

Implications for investors

As discussed above, based on a likely call of Genting's perpetual bond issues this year, investors with an appetite for exposure to a short-tenor investment-grade bond may want to look at the GENSSP 5.125% Perpetual Corp (SGD)s (the wholesale tranche is rated Baa3/BBB by Moody's/Fitch; Genting PLC Singapore has an issuer rating of A3/A- from Moody's/Fitch), offering a decent return for a holding period of around 7 months. However, even under a scenario of a non-call, the wholesale tranche still offers an attractive return for an investment-grade rated credit in the SGD space, with a yield-to-maturity of 5.78%.

The GENSSP 5.125% Perpetual Corp (SGD)s are now available on our Bond Express platform, where accredited investors may purchase this wholesale issue at smaller denominations of S$5,000 nominal value per transaction. Please refer to the bond's factsheet here.

Table 1: Cash flows for investing in Genting Singapore's perpetual bonds

GENSSP 5.125% Perpetual Corp (SGD)

Cash Outflow (S$)

Transaction amount (at current "clean" ask price of 100.28)

10,028

Accrued interest (based on 215 days holding period)

212.02

Transaction fees (0.35%)

35

Est. platform fees (0.2% p.a)

11.73

Total investment amount

10,286.75

Cash Inflow (S$)

Coupon payment (12 Mar 2017)

256.25

Coupon payment (12 Sep 2017)

256.25

Call Value (if bond is called on 12 Sep 2017)

10,000

Total amount received upon Sep 2017 call

10,512.50

 

GENSSP 5.125% Perp/Callable 2017 Corp (SGD) – Retail

Cash Outflow (S$)

Transaction amount (at current "clean" ask price of 101.89)

10,189

Accrued interest (based on 250 days holding period)

161.47

Transaction fees (0.35%)

35

Est. platform fees (0.2% p.a)

13.70

Total investment amount

10,399.17

Cash Inflow (S$)

Coupon payment (18 Apr 2017)

256.25

Coupon payment (18 Oct 2017)

256.25

Call Value (if bond is called on 18 Oct 2017)

10,000

Total amount received upon Oct 2017 call

10,512.50

 

Table 2: Summary of returns

Bond

Cash return (S$) Simple yield Yield-to-call (Annualized)
GENSSP 5.125% Perpetual Corp (SGD) 225.75 2.19% 3.86%

GENSSP 5.125% Perp/Callable 2017 Corp (SGD) - Retail

113.33 1.09% 1.62%

 

The Research Team is part of iFAST Financial Pte Ltd.

Switch to desktop view Switch to mobile view