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What Investors Can Take Away From CapitaMall Trust’s Bond Offering for Retail Investors

Singapore’s first publicly-listed real estate investment trust, CapitaMall Trust (SGX: C38U), announced this morning that it will be offering S$150m worth of bonds to individual investors in Singapore under its S$2.5b retail bond programme that was set up in Feb 2011.

The REIT owns 16 shopping malls in Singapore and is managed by CapitaMalls Asia (SGX: JS8), with the latter also owning slightly more than a quarter of the former. The two shares – CapitaMall Trust and CapitaMalls Asia – are in turn housed under the corporate umbrella of the real estate outfit CapitaLand (SGX: C31) and incidentally, all three shares carry big-enough market capitalisations to be part of the Straits Times Index (SGX: ^STI).

In conjunction with the S$150m bond offering to individual investors, CMT is also offering another S$50m worth of bonds under the same programme to institutional investors (i.e. big fund managers). These bonds, worth a collective S$200m, would mature in seven years and would carry a fixed annual interest of 3.08% per year.

Bond investors who are interested in the offering would be looking at a minimum subscription sum of S$2,000 with incremental multiples of S$1,000. The public offer for the subscription of the bonds would be open at 9am tomorrow on 11 Feb 2014 before closing on 18 Feb 2014.

For the trust, the bond offering would mean additional interest expenses of S$6.16m per year. To put things into context, the trust had net property income of S$503m in 2013, so this new bond offering would likely not have a huge impact on CMT’s financial picture.

But for individual investors who want a piece of the action in this particular offering by CMT or in other bond offerings in general, there a few things to consider:

1) The stability of bonds

An investment into bonds for income is generally considered as safer than say, banking on dividend payments from a share. That’s because bondholders are legally entitled to an annual payment unlike dividends, which can be removed or reduced at management’s discretion (and often at considerable cost to shareholders).

In addition, bondholders have the rights before shareholders to the assets of a company or entity that’s undergoing bankruptcy, which gives the former group an added layer of protection.

2) The income provided by bonds

The interest payments that bondholders are entitled to are normally fixed or have a fixed-peg to a moving target such as the Singapore Interbank Offered Rate (SIBOR). In CMT’s retail bond offering, as mentioned previously, bondholders would be getting a fixed coupon payment of 3.08% per year.

What this also means is, the purchasing power that the coupon payments have would be gradually eroded by inflation over the next seven years before the retail bonds are redeemed.

For bond investors who are looking at CMT’s retail bond offering for income, some consideration has to go into whether the coupon payments would be adequate for their spending needs in the future. This consideration can also be applied to other types of fixed-income investments.

3) Forgoing future growth

While a bond investment can be thought of as being less risky than dividends, the former loses out in terms of potential for growth. The dichotomy in the difference between the incomes an investor can receive from bonds and dividends can be illustrated by how the distributions of CMT have grown over the years.

Year

Distributions per unit

2008

S$0.0752

2009

S$0.0885

2010

S$0.0924

2011

S$0.0937

2012

S$0.0946

2013

S$0.1027

Source: S&P Capital IQ

Looking at the table above, we can see that CMT has grown its dividends by an average of 6.4% a year since 2008. If we just assume that CMT’s distributions can grow at the same historical rate over the next seven years, such growth would be absent for bond investors in CMT’s retail bond offering, who are only guaranteed an annual interest payment of 3.08% as long as the trust remains solvent. This brings us to our final consideration.

4) Financial stability of the entity issuing the bonds

Bonds are perhaps a fancy way of naming debt. When an entity borrows money from others, there’s always the risk that the borrower would over-extend itself and collapse under a mountain of debt, leaving lenders with nothing.

And even though bond investors are often one of the first few parties in line to lay claim to a company’s assets in the event of bankruptcy, the proceedings can be messy and lengthy and there can be even cases where the bondholders are unable to reclaim the full amount they have lent.

As such, it pays for a would-be bond investor to carefully consider the financial stability of the company it is lending money to. Would the annual interest payments cause undue stress on the finances of the company and would the company be able to repay those bonds without difficulty when they mature? Those are key questions to think about.

Foolish bottom line

There are always risks to consider with every investment. While bonds can often be hyped as a type of fixed-income instrument with low risks due to the legal obligation of the borrower to dole out fixed interest payments, there are still some important areas investors need to consider.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.