Frasers Property is offering S$420Mil worth of 5 year green notes with a seemingly attractive coupon rate of 4.49% per annum for investors. Out of these, S$300Mil are being offered to retail investors while the remaining will be offered to institutional investors- this is indeed a rare instance whereby we see a fund raiser reserving up to 70% of the exercise for retail investors like us. If there is oversubscription, the total offer size maybe increased to up to S$650Mil. Noteholders will receive semi-annual interest payout on 16th March and 16th September per annum from 2023 onwards. While the interest rate of 4.49% appeared to be one of the highest we have seen so far, I think that it will be risky for investors looking into buying these debts for investment. I don't mean to rain on the parade of enthusiastic fans of Frasers Group, but personally, I think it is suicidal to be holding on to debenture instrument in this particular economic climate which I should further elaborate below:
1. US Federal Reserve expected to hike borrowing rates by 0.75% in late September 22 meeting.
Folks, don't forget, we are still in the midst of fighting inflation at this critical juncture. With the hawkish tone still being adopted by Jerome Powell, the majority of investors all believe that the upcoming interest rate hike will be between 0.5% to 0.75%. There are also more series of hikes coming to ensure the inflation monster is being contained. Singapore will not be an exception to interest rate hikes. By subscribing to this tranche of debentures, one will be locked up with 4.49% for 5 whole years (in case you are thinking that one can always liquidate the bonds in the secondary market at any time, please see pt 2).
Folks, don't forget, we are still in the midst of fighting inflation at this critical juncture. With the hawkish tone still being adopted by Jerome Powell, the majority of investors all believe that the upcoming interest rate hike will be between 0.5% to 0.75%. There are also more series of hikes coming to ensure the inflation monster is being contained. Singapore will not be an exception to interest rate hikes. By subscribing to this tranche of debentures, one will be locked up with 4.49% for 5 whole years (in case you are thinking that one can always liquidate the bonds in the secondary market at any time, please see pt 2).
There is a substantial risk that future tranches of Singapore Saving Bonds, Singapore Government bonds or other debentures from private companies will have similar or higher interest rates.
I thought that Frasers Property should be offering this debenture issuance at a higher 5% interest rates to compensate adequately for mid-term risk premium over risk free bonds, in order to cater for the upcoming interest rate hikes.
2. Capital loss during early selling off on secondary market
As alluded to pt 1 above, the price of this particular debenture issuance looks very likely to drop immediately in the face of an inflationary environment and ever increasing borrowing rates that is required by investors. Economics theory 101 states that the price of a bond is inversely related to the market interest rates, that is, when the cost of borrowing money rises in the market, bond prices will fall.
A high inflationary global environment, like the current climate, is one of the worst time to be subscribing for fixed rate debentures as one will be locked in for 5 whole years. Any resales of the dentures (in the secondary market) will most likely mean that the bondholders faces an immediate capital losses in valuation.
3. Risk of bankruptcy ever present despite being held by renowned shareholder.
Frasers Property group is controlled by Thai billionaire Charoen Sirivadhanabhakdi. I think that the overall Thai group's financials has weaken after the COVID pandemic with the share price in bad shape. Even related companies like Thai Beverage is trying to raise funds through an internal beer business unit IPO spin off (which it had cancelled once again due to unfavorable economic climate). My preference is to stick with Temasek linked instruments if one die die want to invest in corporate bonds. Look at SIA, it managed to magically survive the COVID downturn with the might of Temasek bull-dozing through the re-capitalization exercise during crunch time.
Parting thoughts
I will be staying far away from this issuance by Frasers Property. I personally think that the fixed rate on offer of 4.49% fixed rate being put up for 5 long years smacks of shortchanging retail investors. If it had been a higher fixed rate on offer or having certain component tied to a variable rate that is linked to inflation, I will probably then be more willing to participate in its issuance.
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