Wednesday, May 16, 2012

Perpetual bonds should not be a cause for concern

I ,being a small fry, have an investment in Genting Perpetual 5.125% retail which i bought during IPO for diversification. It's only takes up about 5% of my investible assets, excluding property. Now that you know that i am vested,i want to say that i totally do not agree with MAS being alarmed by people buying perpetual bonds. By being alarmed and placing restrictions on these kind of investments, it will simply reduce investment alternatives and push retail investors into more exotic and more risky products.

I feel that for retail investors who do not know how to invest, perpetual bonds offer a relatively safe store of value, with Genting 5.125% matching inflation. The risk of perpetuals are as follows: Genting going bankkrupt being the worst case scenario or interest rate rising, making the price of Genting lower.

Let's look at the worst case scenario, Genting going bankrupt. Holding the perpetuals is still safer than holding the shares as pertpetual holders are paid first from the proceeds of any sale of Genting's assets.

Let's look at the risk of interest rate rising and the price of Genting getting lower. How low can it get? Can you forsee it dropping more than 20%? How about Genting Shares,can you forsee it dropping  more than 20%? In fact, the longer one holds Genting perpetuals, the less risky it becomes as it's accumulated coupons would have reduced the invested outlay by 5.125% every year, and raising by 6.125% in 2022. How much dividends does Genting Shares give?

When i, a small fry retail investor, bought the perpetuals, i did it to hold it to provide me an income after my retirement or sell it when QE3 is announced and funnel it into shares. It was crystal(Internally Flawlessly) clear to me that i can forget about any meaningful upside capital appreciation. The bullshit about it being a perpetual and the company never going to redeem it is irrelevant. I knew i could sell it in the open market to get back my principal, and true enough it was hovering at 1.012-1.011 in the open market, till MAS came up with restrictions and it fell to 1-1.002, still above IPO price.I also took into consideration Ben Bernake's (US Fed) comments about interest rates staying low till at least 2014 when i bought it. 
The announment above, was the last straw that broke the camels's back for me. SRS not being able to buy Genting Perp but allowed to buy shares?????????Huh! My gosh! The longer one holds the perpetual bonds, the safer it is and now SRS, which is for retirement purposes, is not allowed to be used to Genting Perp? Some people do need to wake up.

Having said that, perps is just for diversification. Bonds having maturity is better than perps. Keep perps or bonds to a small percentage of your assets as a store of value only. Market looks like its falling,look at volume and prepare for some firing at shares!

8 comments:

  1. Agreed! MAS trying to play catch up...reactive than proactive

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  2. MAS is taking one step back and making the environment more risky...

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  3. The risk from rising interest rate reducing the sale price of the bond is almost 100% certain.

    Current low interest rate can only go up.
    Bank interest rate just needs to increase 3% (to around the long term average pre-recession) and you will lose about 35% of the value of the bond. You will need 7 years interest to make up for it and you are only back to square one after that.

    That is why MAS wants to protect the layman from this certainty.

    However, if you treat the perpetuity similar to an annuity scheme - ie. without need to get back the capital, then it is probably ok (with only risk of Genting becoming bankrupt).

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    Replies
    1. yes if bk interest rate increase to 3%! but how soon do u think the interest rate would rise!? i had been this low since 2008, and mostly likely i will follow the FED thus 2014 than i might move by 25-50bps at most!
      thus for this 2 yrs its not a problem :)

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  4. Yes, for smart investors who know when can still get out, it's great.
    MAS is trying to protect those who have no idea how bonds work.

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  5. hey bro totally agree with your comments. Retail investors should be given more alternative investments to choose from. And i that regulators should educate instead of restrict. It can do some by posting the PROS and CONS of PERPS for investors to do their own reading up before commiting. After all investing is about making the right choice and investing in what you only know.

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