2 Key Things to Note With Frasers Centrepoint Ltd’s Latest Retail Bond Offering

Real estate outfit Frasers Centrepoint Ltd (SGX: TQ5) made a big splash last week when it announced that it’d be issuing a total of S$200 million worth of bonds to both retail as well as institutional investors. While companies issuing bonds is not something unique, it’s actually relatively rare to see a firm issue bonds to retail investors (i.e. individual investors like you and me).

The bonds will carry an annual interest rate of 3.65% (payable semi-annually) and will mature seven years after they’re issued on the expected date of 22 May 2015. Frasers Centrepoint will be offering S$150 million of those bonds to retail investors.

Investors who are keen have until 12 pm on 20 May 2015 to subscribe for the bonds (the offer had opened last week on 13 May 2015 at 9 am) through various channels, including the ATMs of banks like DBS Bank, OCBC Bank, and UOB Group.

A 3.65% yield on the bonds look sweet for anyone who’s interested purely in income as it’s certainly higher than the 2.66% dividend yield that the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI) – carries at the moment.

But, there are still important risks to note with Frasers Centrepoint’s latest bond issue. Here are two:

1) The callable nature of the bonds

Most bonds (unless otherwise stated) have to be redeemed by the issuer at the date of maturity. But, there are some types of bonds, usually termed as callable bonds, which can be redeemed at the discretion of the issuer before they mature.

Frasers Centrepoint’s bonds in question are callable in nature.

The company is obligated to redeem all the bonds in question at their principal amount of S$200 million (split into S$150 million for retail investors and S$50 million for institutional investors) when they mature on 22 May 2022. But, Frasers Centrepoint can also redeem all of those bonds on various interest payment dates at a slight premium to the principal amount. These are shown in the table below:

Interest Payment Date Redemption price
(% of principal amount)
22 May 2019 (earliest redemption date) 101.825%
22 November 2019 101.46%
22 May 2020 101.095%
22 November 2020 100.73%
22 May 2021 100.365%
22 November 2021 100.1825%

Source: Frasers Centrepoint’s filings

The callable nature of the bonds that Frasers Centrepoint’s issuing is important to note for cash-flow-planning purposes. If you’re depending on those bonds for cash flow, then you might have to prepare for the possibility that the company may redeem its bonds before the maturity date.

There can be a number of reasons why Frasers Centrepoint may choose to redeem those bonds earlier and a key one would be the presence of even cheaper sources of debt. If the company manages to secure lower interest rates in the future when it borrows money, it may choose to redeem its bonds earlier to save on interest.

2) The possibility of capital losses

Bonds are often thought of as a less risky financial asset when compared to shares as the former gets a claim on a company’s assets before the latter does.

But, that doesn’t mean investors in bonds won’t suffer losses.

For instance, if a company goes bust, bondholders may not be repaid in full. This is a remote possibility given Frasers Centrepoint’s gearing (total debt over total assets) of only 45% as of 31 March 2015, but it’s still something to keep in mind.

Also, the tradable nature of Frasers Centrepoint’s latest bond issue (the bonds are expected to start trading at 9 am on 25 May 2015) would mean that investors in those bonds are susceptible to quotational losses.

Generally speaking, the quoted price of a bond tends to fall when the interest rate environment climbs. Given that Singapore has been seeing low interest rates for a while now, there’s a chance that rates may start creeping up in the future. If that does happen, Frasers Centrepoint’s bonds may see a fall in price and thus cause investors to suffer a loss of capital if they choose to sell.

It should be noted however, that quotational losses can be negated simply by holding onto the bonds until Frasers Centrepoint redeems them; as mentioned earlier, the company will be redeeming the bonds at either their full principal amount or higher (depending on the date of redemption). Nonetheless, investors would still need to be aware of the potential for quotational losses.

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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.