Accuracy of the evaluated prices from Bond Pricing Agency

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Every quarter, Bond Pricing Agency Malaysia will publish their report card i.e. the accuracy of their evaluated prices vis-a-vis actual traded prices for bonds. Below is the report.

Research Report - Pricing Performance 3Q 2010

Credit Card versus Charge Card

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This is one of the most important question that a user must answer first before embarking to get a 'plastic'. The benefits are different for each type (as well as the downside) and therefore, potential users must not get confused.


If you are a transactor (definition: someone who uses it only as a medium of exchange), best to get the charge card or the credit card if need be.


If you are a revolver (definition: someone who uses it for the credit facility), best to get the credit card. Do not get the charge card.


A charge card does not need to follow the standard interest rate (as set by Bank Negara Malaysia and the Association of Banks) for any amount outstanding since it is not a credit card. If any of its users have an amount outstanding, charge card starts charging penalty fees which can be more exorbitant than credit cards. Moreover, you will be barred from making further purchases using the card.

Yields for the benchmark 5-years MGS trending downwards

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The yield for the benchmark 5-years Malaysian Government Securities (or MGS) has been trending downwards for the last 10 months. From a yield of 3.84%, it has trended down to 3.48% (as at yesterday).

Double Click on image to enlarge.

Do not expect the yield to go down any further. I believe, yields will start to trend upwards as regulators starts to execute extra monetary measure to reduce the possibility of another round of recession.

Malaysian Bond Index Performance to date - going higher!

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Below is the performance of the Malaysian bond market as tracked by the BPA Malaysia All Bond Index, BPA Malaysia Islamic All Bond Index and the BPA Malaysia Conventional All bond Index.

Double-Click on image to enlarge.

As you can see the performance of all the indexes are positive. Interestingly, Islamic sukuks or bonds generate the best return compared to conventional bonds.

Process flow of issuing a bond - what to look out for and key risk areas

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Below is a simple presentation of what to do and what to focus on at the various stages of the bond issuance process. Full details on the various stages can be found in previous postings such as:

The Flow of a Bond Issuance - Part 1 - Pre-issuance stage

The Flow of a Bond Issuance - Part 2 - Primary Level

The Flow of a Bond Issuance - Part 2 - Primary Level (continuation)

The Flow of a Bond Issuance - Part 2 - Primary Level - Users of FAST

The Flow of a Bond Issuance - Part 2 - Primary Level - Primary Trading Process and Procedures

The Flow of a Bond Issuance - Part 3 - Secondary Level - Trading process and market conventions

 

Process Flow of the Bond Issuance Process

Bond Defaults - Rights of Bondholders

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In theory:

•Unsecured bondholders:

–Ranked parri-passu with all other unsecured creditors

•Secured bondholders:

–Rights to the assets secured to the bondholders

•Subordinated bondholders:

–Ranked lower than the unsecured creditors

In Practice: There are a few loop holes that bondholders can exploit. This is especially so with bonds that was issued when then the market initially boomed. As time progresses, lessons learned from previous defaults have been incorporated into the latest legal documents so as not to provide the legal means to do something that goes again the original understanding.

Bond Type: Exchangeable Bonds

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This kind of bonds is a relatively new concept whereby issuers will exchange the bonds with shares from another company. An example is the Berjaya Holdings which issued exchangeable bonds to be exchanged for Berjaya Sports Toto shares.

The motivation behind issuing such a facility is to piggy-back on the share price performance of the other company. If planned correctly, issuer need not pay back the bonds as bond holders will see better value in exchanging it into shares than redeeming it at nominal or face value.

The risks to both issuers as well as the bond holders are as follows:

1.For the issuer, it must have the shares in the target company before issuing such a bond.

 

2.Issuer may dilute its holdings in the target company is bond holders exercise their rights to exchange. 

 

3.As the reference asset is not the issuer, the issuer may not have control over the whole life of the bonds.

 

4.Due to the convertibility factor, an overestimation of the company’s share price performance may caused the investors to overpay for the bonds.

 

5.The volatility of the equity markets can caused similar volatility in the shares of the bonds.

Bond Type: Convertible Bonds

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Issuers which listed shares can issue convertible bonds. The motivation behind issuing such a facility is to piggy-back on the share price performance of the issuer. If planned correctly, issuer need not pay back the bonds as bond holders will see better value in converting it into shares than redeeming it at nominal or face value.

The risks to both issuers as well as the bond holders are as follows:

1.For the issuer, there is a very strong possibility of share dilution. There is an opportunity for new shareholders to enter the company.

 

2.Due to the convertibility factor, an overestimation of the company’s share price performance may caused the investors to overpay for the bonds.

 

3.The volatility of the equity markets can caused similar volatility in the shares of the bonds. Generally, the volatility of bond market is less than the equity market (hence the lower returns).

Bond Type: Subordinated Bonds

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Issuers can issue bonds with varying degree of subordination. Unlike the junior/senior bond structure which is a split from a bond programme, subordinated bonds are stand-alone programme.

In the Malaysian context, banks are the most prolific issuers of subordinated bonds. This is because due to the Basel capital requirements for banks, subordinated bonds can be recognised as quasi-capital.

Because the subordination can be done at anytime, it is possible for issuers to have multiple bond issues with varying degrees of subordinations i.e. The most subordinated will take the first loss for the rest, the second most subordinated will take the next loss for next set of subordinated bond above it etc.   

In reality, investors are not keen to participant in bonds issued by such issuers as their priority may just change with a new issuance.

Bond Type: Commercial Paper versus Medium Term Notes

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Commercial Papers (CP) and Medium Term Notes (MTN) are bond that is different in terms of tenure. Generally, CPs are short-term bonds that have maturity of less than 1 year whereas MTNs are long-term bonds that have maturity of 1 year of more.

In terms of ratings, due to the peculiarity of the tenure classes, the way credit risk is assessed is different with different rating scales.  Generally, the purpose of the two types of structures are as follows:

1.CP: usually used for short-term cash flow management purposes.

2.MTN: usually used for mid- to long-term capital investments

Risks:

 

1.Issuers using CPs to finance mid- to long-term capital investments can face liquidity issues if no investors wants to rollover a CP programme upon maturity.

 

2.Moreover, the cost of a CP programme cannot be locked. Re-pricing will happen upon rollover.