Thursday, October 15, 2015

Perennial 4.65% 3 Year Retail Bond Thoughts

Perennial is offering retail bonds for 3 years at 4.65%. Let's take a look-see.

I know I'm late for the party with LP, AK and B already covering it, but hopefully I can value-add to what they have wrote, especially since I have some additional observations. I have to say I really enjoy our local finance blogosphere because there is always someone writing on an interesting subject that will perk up other bloggers to opine in as well. "Ownself check ownself" is not always possible especially due to oversight, so I think that it's good that there are other pairs of eyes watching.

When Aspial released their 5 year 5.25% bonds, I was not very impressed. However, as predicted, yield-focused retail investors lapped it up are the public placement was massively 8.7 times subscribed. In the end, Aspial increased their tranche size from $75mil up to $100mil. Overall, they raised $150mil. I feel that this will likely happen to Perennial as well.

Perennial is also looking to raise $150mil, and while it is shown that it is going to the Public, it also states that there will be re-allocation from the Public tranche to the Placement tranche. Of course, this is the smart way for the company to do it. Retail investors are more yield hungry than institutional investors and have lower expectations. The company doesn't have to worry if institutional investors don't fill up the Placement tranche and make it look bad, since there isn't a specific one.

An interesting indicator that might show how well-priced this bond is would be the results to see the institutional vs public take-up rate. Perennial just announced last night that they are fully subscribed for the Placements of $100mil and I think that this is a rather good sign that institutional investors view this note as attractive. There is still $50mil for the public, and this could be expanded to $100mil if it is oversubscribed (which I think it would be).

Like in this case, if institutional take-up rate is high, it would mean that the bond is priced rather well and retail investors shouldn't worry that much that they got a not-as-sweet deal just because they are retail investors. However, if majority of the bonds go to retail investors due to the lack of interest by institutions, then the conclusion can be drawn that the individual retail investors have a much higher risk appetite than the institutions. Someone has to be miscalculating, and more often than not, it is the retail investor that is underestimating the risk of the investment, not the institutions.

However, I think Perennial was gunning for more than 2X institutional subscription and also looking for 2X public subscription, which is why they wrote they could issue up to an additional $150 mil if there is excess demand to soak up. They "failed" to get more institutions really interested, but they did fill up $100mil of orders. I'm not sure what to make of it, but that's just an extra tidbit of information that I noticed which is good to know, I suppose. I am fairly certain that the public offer would be oversubscribed.

Of course, oversubscription has nothing to do with the long-term aspects of an investment, but rather the heat-of-the-moment excitement and hype of it. The Starburst IPO was 9.5 times oversubscribed, but 1 year on it is still at IPO price. The POSH IPO was 3 times subscribed and it is 70% below it's IPO price. Oversubscription does not necessarily mean a good investment.

Perennial seems to be raising this $150mil as capital for their JV with Shangri-La into an integrated mixed development in Ghana. The JV partners intend to fund the project through the sale of the units at the development and from internal funds and external borrowings. If you don't know where Ghana is, it is in Africa. This is Perennial's maiden investment into Africa.


Total development cost of this JV is more than USD $250 mil, and since Perennial has a 55% stake in this JV, their share is approximately ~$200mil SGD.

If you think that Perennial is leveraging up for this expansion, it is noteworthy to see that they had just redeemed $130mil worth of notes which were at 6.375%. So while their gearing might be increasing by $20mil (or more if excess bonds are issued), their interest expense actually dropped by $1.7mil instead when using the $150mil number.

I think being a bond investor isn't like being a stock investor. While it might be great that the company is growing, expanding and doing well, these are not requirement to a successful bond investment.

I think that a bond investor should only be focused on 2 things. Does it have enough cash to pay out interest payments? Is it able to repay the principal amount at the redemption date? (Through rolling over the debt, profits from the business or sale of assets)

In my opinion, if an investor's investment horizon is short and he is willing to take on risks of being a corporate bondholder to an unrated company, this might be an attractive investment if assessed that the company can make the interest payments and also repay the principal. If an investor has a longer investment horizon, the stock itself might be more attractive.

So, from the bond investor in me, I actually think that Perennial looks rather good as a bond investment. Unlike the Aspial bond where I raised an eyebrow towards it, I am much less reserved about this bond. However, I am a biased shareholder of Perennial. I would rather own the stock than to own the bond. Also, I really don't think that this investment vehicle is suitable for my financial goals.

Keep in mind that what I said is coming from a biased equity holder. At least if they go bust, bondholders will usually recover something, while I would end up with nothing.

Will you buy applying for the Perennial bonds?

Disclaimer: I am a Perennial shareholder



Will you apply for the Perennial 3-year 4.35% bonds?

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4 comments:

  1. Hi GMGH,

    Under what scenario would Perennial fail to meet their bond obligations (interest payments and returning principal)

    If they go bust will they liquidate to repay the bonds?

    Is their high debt of concern?

    Thinking of buying but taken aback by their high debt/ebitda

    ReplyDelete
    Replies
    1. Hi Anon,

      Perennial has debts which are 38% of their total assets.
      However, Aspial has debts which are 79% of their total assets.
      (both numbers are from their financial statements before their debt issue)

      If push comes to shove and the companies are required to liquidate their assets, Perennial has a lot of buffer to apply discounts when it is liquidating its assets and would likely be able to pay back its bondholders without a haircut.

      Aspial seems to be in a much more precarious position for both its equity and bond holders.

      I would not specifically recommend if their bonds should be bought or not, but I personally think that this is probably a key consideration to think about if doing so.

      Unlike equity holders that are able to sell out and various degrees of losses if the shares are tanking, bond holders are in a much more binary position of their bonds being worth something, or nothing at all.

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  2. Thanks for your reply, as always. Just wondering, why do you use Aspial as a benchmark of comparison? Comparing anything to what is seemingly a bad apple would make anything look good right? Anyway, I hope I didn't come off as looking for a recommendation, the choice is ultimately mine to make. Thanks again!

    ReplyDelete
    Replies
    1. Hi Anon,

      I used Aspial because I think it is the closest comparison in the retail bond landscape.

      Both Aspial and Perennial bonds are unrated.
      Even though Aspial seems to be "diversified", 50% of its revenue comes from its real estate business, and that generates almost the entirety of its profits. Perennial is a real estate business as well.
      With 3 and 5 year tenors and 4.35% and 5.25% yields, it also doesn't make them too far from each other.

      All the best with your decision Anon!

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