What Does Singapore Telecommunications Limited’s Latest Bond Issue Mean for Investors?

Singapore Telecommunications Limited (SGX: Z74), the largest of the 30 blue chip shares that make up Singapore’s market benchmark the Straits Times Index (SGX: ^STU), announced earlier today that it will be issuing US$500 million worth of 10-year notes.

Singtel’s notes, which are essentially debt instruments, carry an annual interest of 3.25% and will mature in 2025. In other words, the telecommunication services provider will have to pay US$16.25 million (3.25% of US$500 million) in interest payments to holders of the notes every year. The company will also have to repay US$500 million to the note-holders in 2025 when the notes mature.

The Singapore government 10-year bond currently has a yield of around 2.6% and that’s not far from the 3.25% yield on offer with Singtel’s notes. Given that the US$500 million bond from Singtel is given a very high rating of Aa3 by credit ratings agency Moody’s (a high rating indicates a low rate of default), the small spread between the telco’s notes and the sovereign bond should not come as a surprise.

No problems with handling more debt

In any case, Singtel’s latest bond issue should have little impact on its financials.

According to S&P Capital IQ, Singtel already holds about S$8.6 billion in long term debt as of its fiscal year ended 31 March 2015 (FY2015). The additional US$500 million in borrowings stemming from the notes issue should increase Singtel’s annual interest expenses by about 5% to 8% going forward (for perspective, the telco had incurred S$305 million in interest expenses in FY2015). That is not a significant amount for investors to lose sleep over given Singtel’s very stable and large cashflows – the company has generated upwards of S$5 billion in annual operating cashflow over its last four fiscal years.

All told, it appears that Singtel would be more than capable of absorbing the financial demands of its new notes.

The birds and bees of bonds and shares

Singtel’s a very consistent payer of dividends and with its payout of S$0.175 per share in FY2015, Singtel’s shares carry a historical yield of around 4.1%. Given that this yield is a fair bit higher than the 3.25% yield offered by Singtel’s latest notes issue, why would an investor choose Singtel’s bonds over its shares?

We have to understand the difference in risks that investors in shares and investors in bonds face. Bondholders are given first-claims (or are usually at the front of the queue) on a company’s assets in the event of the company defaulting on its obligations; meanwhile, shareholders are the last in line.

Also, a company is contractually obligated to pay interest for the bonds and notes it has issued; there are no such law-clad guarantees when it comes to paying dividends.

With Singtel’s Aa3 rating for its latest notes issue, investors in the notes don’t have much to worry about when it comes to the company defaulting on its interest or principal payments. But, there’s nothing to guarantee that Singtel’s dividend will remain the same as it did in FY2015; the telco has the right to reduce or stop its dividends at any time it deems fit.

These are risks with a company’s dividend that shareholders in general need to be aware of.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.