Calamity Rhymes with Opportunity

T2023-S$ Bond
The mentality of institutional investors compared to retail investors when conducting their investment processes are vastly different. As the news continue to espouse on the end of the world and the domino like crashes of the US, China, Japan, Hong Kong stock indexes , Temesek holdings is quietly launching its T2023-S$ Bonds. Ignoring conspiracy theories about how TH is running out of money and thus borrowing from Peter to pay Paul, I believe that they are simply opportunistic and becoming a market maker through averse market sentiment. 

As TH is primarily an equities investor with a 5-10 year holding period, they are borrowing at a discount rate that seem attractive at present, but lacking if considering the opportunity costs of discounted equities and impending interest rate hikes. 

Demand seem to be exceedingly overwhelming and TH managed to raise sufficient capital, and even released additional placements to retail investors out of 'goodwill'.  This is facilitated by investment based blogs / websites, which has demystified the bond covenants and application procedures. As the retail investors and several investment bloggers start to seek refuge inside this safe bond instrument, I will be conducting a cost benefit analysis on whether this product is good or not. This does not constitute as investment advice and simply reflect the individual opinion of this author. 

 

Product details

T2023-S$ bond is a five-year bond, denominated in Singapore dollars, paying a fixed coupon rate of 2.7% per annum. The cash flow line of the bond is detailed above. Interest accrues from 25 October 2018 to 25 October 2023 at a rate of 2.70% per annum, made in two payments to Noteholders on 25 April and 25 October each year.

Guarantor : Temesek Holdings (Private) Limited (Temesek)

Public Offer: up to $200 million to retail investors in Singapore

Issue price $1

Public Offer: $1,000, or higher amounts in multiples of $1,000

Thesis : As a senior debt instrument, bond holders have a priority claim over other stakeholders in the event of liquidation. Holding period is 5 years and TH is unlikely to be bankrupt within this time frame unless unimaginable things occur.(Baring rouge derivatives trader, Ma-doff accounting fraud etc)

Cost benefit analysis

Pros
1) Peace of mind in receiving constant semiannual coupons if held until maturity within 5 years.

2) Portfolio management purposes. Diversification purposes.

Reasonable income tool for the risk averse investor or people with immediate liquidity needs within 5 years. 

3) Counter party risk with the guarantor is extremely unlikely considering Temesek has AAA credit quality

Cons
1) Likely to be discounted at market prices if sold before maturity. A decision must be made to buy and hold prior to buying the bond. There is no liquid secondary market for this issue as the bond market is relatively immature. Despite being trad-able in the market, the liquidity (exit at a price without significant loss) could be considerable lesser compared to OTC Singapore Savings bonds!

2) AAA bonds can dramatically lose its market value if TH credit quality drops. Bankruptcy is very unlikely, but I cannot say the same for the decrease in credit quality. Priority of claims is still high but rank after trade creditors. Value at risk of equity funds can be considerable large. To quote the stress test scenario by Ho Ching at 2009 GFC.

Quote
In our Temasek Review last year, we reported an annual value-at-risk of almost S$40 billion last March. This meant a 16 percent probability for our portfolio value to drop more than S$40 billion by March this year. Indeed, it has turned out to be so, and more
Unquote

3) Unlikely to have further upside unless interest rate swings wildly (US Solomon brothers days). Trading priority to maturity is relative speculative and driven by market sentiment.

4) I have considered depositing excess funds into my SRS account for tax purposes, which earns a measly 0.05% interest rate, and using the funds to earn risk free arbitrage of TH bonds. However, this option seem to have been covered in the offering circular to prevent exploitation. 

CPS funds are actually employable, but in my humble opinion an OA to SA transfer will be more worthwhile at a rate of return of 4%


Conclusion
As I am still at a relative young age, higher risk tolerance, and unwilling to incur the opportunity costs of not diverting capital into stocks, I will give it a pass this time. Nonetheless, others will much modest risk appetite as well as immediate need for money will consider this a very worthwhile investment indeed! SSB serves for immediate liquidity needs, and TH bonds serves as a 5 year fixed deposit. 

Nonetheless, as TH has flown its test balloons and the retail market seem to be very receptive to its bonds issues, there might be subsequent issues from Stat boards / TH / GIC. Singapore financial landscape is evolving and interesting opportunities await!


Sources

https://dollarsandsense.sg/7-things-need-know-temaseks-t2023-s-bonds-investing/

www.businesstimes.com.sg/banking-finance/temasek-upsizes-bond-offer-to-s500m-extra-s100m-goes-to-retail-investors%3famp?espv=1

https://www.temasek.com.sg/content/dam/temasek-corporate/our-financials/bond-offer-2018/Temasek%20Product%20Highlights%20Sheet%20(16%20October%202018).pdf