Types of Bond
There are some who believed that bonds are relatively safer than equities. This is not true. Rather, it is more of lower volatility relative to stocks. The same stringent risk assessment of the fundamental of the underlying business entity by retail investor must still apply. Types of bonds can be generally classified into 2 main types, namely, government bonds and retail/corporate bonds.
(i) Government Bonds
For our Singapore local context, this will refer to Government Securities Bonds (SGS), Singapore Saving Bonds (SSB) and short term Treasury bills. As such bonds are guaranteed by the government, they are usually of a lesser risk for investors relative to Retail/Corporate Bonds. Less risk does not mean ZERO risk. There are countries such as Greek which defaulted on bond repayment before during the Greek financial crisis. Even for SGS or SSB, there are still risk. For example, in a scenario of extreme hostility exercised by the Malaysian government to stop the supply of water immediately to Singapore & eventual escalated armed conflicts, it may trigger exodus of MNCs and people pulling out of Singapore. Singapore ultimately does not have its own natural resources and in such extreme situation, the Singapore Government may have insufficient funds to repay back borrowers.
Not likely, but from the fanatical antics of Mahathir towards Singapore, this is a concern. It may not just be a simple strategy of softening the negotiation for the cancellation or postponement of the High Speed Rail Project.
(ii) Retail/Corporate Bonds
This represents the debt financial instrument issued by companies to raise funds. For corporate bonds, most of the issuance used to be in larger denomination of at least S$250K before an individual investor can invest in it. The trending now seems to be going into smaller bite size minimum S$1K tranche for retail investor. Again the financial strength of the underlying investee company will determine the risk level. Those government linked companies or statutory board (HDB, LTA etc) bonds will be less risky while pure commercial organisation issuance (Eg: Hyflux, Aspial, Perennial) will have a higher degree of risk of default.
Bonds are also subject to interest rate fluctuation risk. If the market interest rates goes up, price of the bond which is inversely related will decline as prospective investors demand a higher yield as compensation.
The Need for Diversification in Investments
The Hyflux episode clearly illustrated a need for portfolio diversification. Too much concentration in one particular bond issuance or equity may lead to an unexpected loss of capital albeit how well known a Company is or how long a company had been in the industry.
The recent Astrea class bond issuance by Temasek Holdings is a good example of a bond instrument that is supported by sub-funds with bond issuances from hundreds of companies re-packaged into this unique product. Hence any failure in one company will be balanced out by the numerous companies in the stable.
Why the Government should step in to rescue Hyflux?
While I always believe in the free market for business to compete and run in the most efficient manner, the shareholders and other stakeholders of Hyflux have all been punished already with the plunge in share price and also expectation of a haircut of debts owing to them.
It may come to a ludicrous situation if any prospective bidders decided to make an offer at a severely discounted fair value. The need for liquidity quickly and the short 6 mth reprieve given by the High Court means that Hyflux has the shorter end of the stick and leverage is on the bidders' side.
The Tuaspring integrated desalination and power plant is clearly a vital strategic asset of the entire nation. Temasek linked companies such as Keppel or Sembcorp should step out to make an offer based on the current selling rates of desalinated water & electricity, expected cost of running and required profit margin and not taking advantage of the current financial crisis that Hyflux is embroiled in by asking for huge discount.
In addition, if the current crisis worsen and Hyflux really goes into liquidation, it would mean the loss of numerous jobs as well as the loss of local expertise in water treatment. This scenario will also mean heavy losses for the shareholders and bond holders. If Temasek can save Olam, surely it can come out and give a bit of help to Hyflux and all its stakeholders.
I do hope that things turn out well and see how the next few months unfold for Hyflux which was once the market darling vaunted for its amazing accomplishments in water treatment projects locally and overseas.
(i) Government Bonds
For our Singapore local context, this will refer to Government Securities Bonds (SGS), Singapore Saving Bonds (SSB) and short term Treasury bills. As such bonds are guaranteed by the government, they are usually of a lesser risk for investors relative to Retail/Corporate Bonds. Less risk does not mean ZERO risk. There are countries such as Greek which defaulted on bond repayment before during the Greek financial crisis. Even for SGS or SSB, there are still risk. For example, in a scenario of extreme hostility exercised by the Malaysian government to stop the supply of water immediately to Singapore & eventual escalated armed conflicts, it may trigger exodus of MNCs and people pulling out of Singapore. Singapore ultimately does not have its own natural resources and in such extreme situation, the Singapore Government may have insufficient funds to repay back borrowers.
Not likely, but from the fanatical antics of Mahathir towards Singapore, this is a concern. It may not just be a simple strategy of softening the negotiation for the cancellation or postponement of the High Speed Rail Project.
(ii) Retail/Corporate Bonds
This represents the debt financial instrument issued by companies to raise funds. For corporate bonds, most of the issuance used to be in larger denomination of at least S$250K before an individual investor can invest in it. The trending now seems to be going into smaller bite size minimum S$1K tranche for retail investor. Again the financial strength of the underlying investee company will determine the risk level. Those government linked companies or statutory board (HDB, LTA etc) bonds will be less risky while pure commercial organisation issuance (Eg: Hyflux, Aspial, Perennial) will have a higher degree of risk of default.
Bonds are also subject to interest rate fluctuation risk. If the market interest rates goes up, price of the bond which is inversely related will decline as prospective investors demand a higher yield as compensation.
The Need for Diversification in Investments
The Hyflux episode clearly illustrated a need for portfolio diversification. Too much concentration in one particular bond issuance or equity may lead to an unexpected loss of capital albeit how well known a Company is or how long a company had been in the industry.
The recent Astrea class bond issuance by Temasek Holdings is a good example of a bond instrument that is supported by sub-funds with bond issuances from hundreds of companies re-packaged into this unique product. Hence any failure in one company will be balanced out by the numerous companies in the stable.
Why the Government should step in to rescue Hyflux?
While I always believe in the free market for business to compete and run in the most efficient manner, the shareholders and other stakeholders of Hyflux have all been punished already with the plunge in share price and also expectation of a haircut of debts owing to them.
It may come to a ludicrous situation if any prospective bidders decided to make an offer at a severely discounted fair value. The need for liquidity quickly and the short 6 mth reprieve given by the High Court means that Hyflux has the shorter end of the stick and leverage is on the bidders' side.
The Tuaspring integrated desalination and power plant is clearly a vital strategic asset of the entire nation. Temasek linked companies such as Keppel or Sembcorp should step out to make an offer based on the current selling rates of desalinated water & electricity, expected cost of running and required profit margin and not taking advantage of the current financial crisis that Hyflux is embroiled in by asking for huge discount.
In addition, if the current crisis worsen and Hyflux really goes into liquidation, it would mean the loss of numerous jobs as well as the loss of local expertise in water treatment. This scenario will also mean heavy losses for the shareholders and bond holders. If Temasek can save Olam, surely it can come out and give a bit of help to Hyflux and all its stakeholders.
I do hope that things turn out well and see how the next few months unfold for Hyflux which was once the market darling vaunted for its amazing accomplishments in water treatment projects locally and overseas.
Hyflux don't really employ a lot of citizens or even a lot of workers. I have an acquaintance inside who has recently resigned, and already many of his colleagues have left over the last 2 years.
ReplyDeleteMoreover their expertise in membrane desalination tech is common knowledge now, from US to Mid-East to China to Oz. China can do it at 20% of Hyflux cost.
Govt should come in & offer cut-throat vulture price for Tuaspring, maybe 10%-20% of the asking price (which is way overpriced). If low enough price, got chance to make profits when the power gen market improves.
I hope the government step in to help Hyflux too. But i doubt it is going to happen, as if they want to do so, they would have already done so.
ReplyDeleteGovernment should no use taxpayer money to bail outdying companies.
DeleteI invested most part of my saving heavily into Hyflux perpetual bond too for kids education thinking very safe.
ReplyDeleteNowaday very worry about the all my hard earn money and future for the kids education fees.
Hyflux bonds were unrated and offered at 6%+ when interbank rate was at almost 0%. Obviously its a high risk instrument that is not suitable as an significant asset class for retirement income portfolio. Simply put... the investors were greedy.
ReplyDeleteYes, investing in unrated corporate bond in extremely high interest is ondicative of higher risk. The technology is not exclusive and their plant is a inhouse development so cost is higher.
ReplyDeleteThe water desalination plant is a critical infrastructure in Singapore. Without water, this country cannot survive for more than a few days. Together with the water from Malaysia that is in trouble right now, we are talking about more than 50% of our water supply at stake here. This is a very serious matter. We have seen our Government pumping money into OLAM, UBS through agencies like Temasek and GIC. Why not Hyflux? I really doubt our Government would stand by and watch Tuas Spring falling into foreign hands.
ReplyDeleteEven if water desalination technology is so common that many companies could do it easily (I am not really sure whether that is true), it will take at least a couple of years to build one. In the meantime, what are we going to do? Hope for the best? Our Government would not take this lightly and I believe it will act pretty soon.
Tuaspring is loss making and burning cash everyday. This is a free mkt economy. Dont think govt will bail it out unless the price is 20%. If they do, how to answer to taxpayers? Will also not reflect well on corporate governance and may affect Temasek and GIC credit rating since we are talking abt >$1B investing in a near bankrupt company. All investments hv risks. Can only pray some China or Arab tycoon come in.
ReplyDeleteHyflux has a huge $2.6B debt. Anyone wants to bear this by bailing her out?
ReplyDeleteMost of Hyflux's Singapore assets were acquired through the government's DBOO (Design, Build, Operate and Own) contract which typically lasts for 25-30 years. Such schemes often favours the lowest bidder in winning the contract and as a result, tenderers often bidded very low without sufficient profit margins or risk buffer just to get awarded. In the case of Hyflux, this might just be the reason, resulting in them making perpetual losses in running the business. In this respect, the DBOO deserves a second look in the selection and monitoring of their tenderers, and the government must be held responsible when the eventual outcome falls below expectations.
ReplyDeleteAs an investor, shouldn't you already know there are risks involve in investing? Basics of investing right?
ReplyDeleteIf you want the government to bail out Hyflux, what about the thousands of companies bankrupting each year? People are losing their job! So should the government step in and bail them out? Seriously, bailing out a company that poses a systematic risk can be debated. But bailing out a company without systematic risk? It is just lunacy.
Investing comes with risk. Investing 101.
Totally agree, abide sad for those whom are greedy for yield.
ReplyDeleteYou guys forgot about Hyflux building the Tuaspring on promise by someone important that the projected 8m pop that will drive up demand for water. MAS and SGX also wanted to develop our bond market but failed to setup strong regulations. EMA also failed to reduce supply of electricity and Hyflux did not report Tuaspring problem early etc etc.
ReplyDelete