Singapore has been hit with a string of bond defaults since late 2015. These defaults, especially retail bonds, have caused investors to lose quite a sizable amount of money.
Some prominent defaults are as follows:
1) PT Trikomsel Oke: Nov-2015
2) Pacific Andres Resources Development Ltd: Jan-2016
3) Swiber Holdings Ltd: Aug-2016
It is always easier to blame the bankers for misrepresenting the product and their lack of integrity. However, the final choice is still left to us. Knowing whether a retail bond will default is a science that no one has provided a correct theory to thus far. Nonetheless, here are 3 indicators that will help us make wiser bond investment choices.
Read Also: 3 Common Characteristics Of Junk Bonds
Make Sure We Know The Company
Currently, there are 12 retail bonds listed on the Singapore Exchange (SGX). Depending on how savvy each individual is, there are companies that are household names, while others are foreign to the average person.
At the time of writing (1st Sep 2016) the retail bond with the highest coupon rate is “AspialTrea 5.3%b200401”. Aspial Treasury Pte. Ltd issued this bond, with Aspial Corporation Limited guaranteeing it.
The key question we would ask ourselves is – Do we know exactly what the company does?
Aspial Corp runs three lines of businesses, namely jewelry, property development and financial services. Amongst the businesses owned and operated, we would only recognise famous brands like CITIGEMS and Maxi-Cash.
How well versed are we with understanding this corporation and its various lines of businesses? If we are not confident in saying that we know the company well enough, then we would suggest staying away from the bond.
We are not suggesting that the corporation will default, but rather it is important to understand how well we know the company.
On the other hand, we have another bond “CapMallTrb3.08%210220” which is issued by CapitaMall Trust Management Limited, a wholly-owned subsidiary of CapitaMalls Asia.
This firm is a household name that manages a bulk of malls that we physically see every time we exit our homes. Bugis Junction, ION Orchard, Plaza Singapura, Raffles City, and WestGate are just some of the brands.
Being able to breathe and feel the corporation’s bread and butter businesses always provides us with an understanding of its viability and their ability to meet their debt obligations.
Make Sure We Know The Direction Of The Company
It is always hard to start reading a company’s annual report. It comes with terms and jargon that are extremely hard to digest. Unless we are professionals, we tend to feel a little drowsy after a few pages into the reading.
However, the annual report would have expectations and guidance set by the board of directors. The senior management (CEO, CFO, etc.) would also lay out their plans and strategies. We can roughly predict how the company would pan out going forward, whether they will be more aggressive and risky, or they will look to make safer strategic bets to grow the business.
Make Sure We Know Financial Health Of The Company
Once we are done with the qualitative portion, we would then look at the financial statements. It is equally important to understand the quantitative part. SGX has provided some fundamental ratios that would help us better understand the financial profile of the company.
1) EBITDA* / Interest Expense – Tell us how many times its earnings can cover its interest expense
2) Current Assets / Interest Expense – Tells us how many times its liquid assets can cover its interest expense
3) Net Debt / EBITDA* – Shows us how many years it would take for the company to pay back its debt if net debt and EBITDA* are held constant
*EBITDA refers to Earnings Before Interest, Taxes, Depreciation, and Amortization.
By understanding both the qualitative and quantitative portion of the company, that would put us in a better position to evaluate whether should we buy this company’s bonds.
Should We Invest In Retail Bonds?
Bonds or fixed income investing strategy should never be the same as equity, as the upside of a bond is not as fantastic as equity. The maximum gain through bond investing is always capped to the yield of the bond.
Fixed income investing is also a lot tougher to understand. On top of what is required for equity investing, we will need to know other tough topics such as duration and interest rate analysis.
Nonetheless, if we intend to build a consistent income-generating portfolio, it would be better to invest largely into bonds.