Newbie's bond portfolio - Trade #9

I bought USD100k notional of CNP Assurances 7.5% USD Perp as my ninth trade.

At a client price of 107.65, it works out to:
YTM = 6.92%
YTC (first call date 18th October 2018) = 5.91%

I will be using USD loans to fully fund the purchase.

Assuming this bond is fully supported by USD loans up till the approved lending ratio, the projected Net leveraged yields are:
Leveraged YTM = 28.58%
Leveraged YTC = 23.53%

Rationale for purchase:
I had bought this USD perpetual at par in my main portfolio and I have been keen on adding more of it as I find its risk/return ratio very attractive. Unfortunately, when my mini portfolio was built up, the price had shot to 110. The moment I noticed its price retreating to the 107 levels, I decided to buy it for my mini portfolio.

This USD perpetual pays 7.5% till 2018 and then resets to 6 year swap rate + 6.481% from 2018-2024 and 6 year swap rate + 6.481% + 1% thereafter.

CNP Assurances is the largest life insurer in France. It has a Market Capitalisation of just under EUR10 billion. French Sovereign entities own close to 40% of CNP Assurances and I believe that there will be sovereign support when necessary. CNP Assurances policies have an interesting loss-sharing clause with the policy holders which reduces the loss amounts CNP Assurances will bear should investments turn sour.

The coupon structure is very favourable as it resets to buffer for future interest rate hikes. Given CNP Assurances is subject to Basel/Solvency rules, I believe there is a high chance that this perpetual bond will be called back at par on the first call date.

Newbie's bond portfolio - Trade #8

I bought SGD1 million notional of Unicredit SPA 5.5% SGD 2023 as my eighth trade. This is an IPO.

At a client price of 100, it works out to:
YTM = 5.5%
YTC (first call date 30th July 2018) = 5.5%

I will be using a combination of SGD cash and loans to fund the purchase.

Assuming this bond is fully supported by SGD loans up till the approved lending ratio, the projected Net leveraged yields are:
Leveraged YTM = 14.81%
Leveraged YTC = 14.81%

Rationale for purchase:
High coupon SGD bonds by investment grade issuers are very rare. Given I am a Singapore resident where bulk of my expenses are in SGD, the SGD coupons received from this SGD bond could be easily used for my day to day expenditure if required.
This SGD 10 year bond pays 5.55% till 2018 and then resets to 5 year rate + 4.47% from 2018 if not called then.

Unicredit SPA is the largest bank in Italy and I believe that it is too big to fail. It has a current Market Capitalisation of EUR23 billion. The bank remains profitable in the current challenging European banking environment. The coupon structure is very favourable as it resets to buffer for future interest rate hikes.

I expect this bond to be very popular among fund managers who invest in SGD denominated bonds as such high quality/coupon SGD bonds are very rare. To hit this level of coupons for investment grade SGD bonds, they are typically perpetuals and this is a 10 year bond, callable at year 5.

Newbie's bond portfolio - Trade #7

I bought USD100k notional of Cloverie PLC 8.25% USD Perp (Secured by bonds issued by Zurich Insurance) as my seventh trade.

At a client price of 116.15, it works out to:
YTM = 7.01%
YTC (first call date 18th January 2018) = 4.60%

I will be using USD loans to fully fund the purchase.

Assuming this bond is fully supported by USD loans up till the approved lending ratio, the projected Net leveraged yields are:
Leveraged YTM = 29.03%
Leveraged YTC = 16.97%

Rationale for purchase:
The recent run-up of bonds is astounding, yet I cannot leave my portfolio idle waiting. Time is money and waiting means missing out on earning yield. I examined a list of reputable issuers that launched perpetuals from 2012 till now, specifically hunting for one that had a price relatively stable in recent weeks (versus most whose prices have gone up 3-4% in recent weeks).
Cloverie 8.25% Perp stood out as the idle candidate. It was extremely oversubscribed when launched in January 2012 (in fact I had applied for it then, but failed to get any). It opened on Day 1 in the region of 103 based on my memory and slowly crept up to the current price levels over a period of 1 year. Its price had been stable in the 115 region in the past weeks.
This USD perpetual pays 8.25% till 2018 and then resets to 6 year swap rate + 6.84% from 2018-2024 and 6 year swap rate + 6.84% + 1% thereafter.

Zurich Insurance is one of the largest insurers in the world and I believe that it is too big to fail. It has a current Market Capitalisation of CHF38 billion. The coupon structure is very favourable as it resets to buffer for future interest rate hikes. Given Zurich Insurance is subject to Basel/Solvency rules, I believe there is a high chance that this perpetual bond will be called back by Zurich Insurance at par on the first call date.

Newbie's bond portfolio - Trades #5 and #6

I bought USD50k notional of Prudential PLC 7.75% USD Perpetual and USD100k notional of Standard Chartered Bank 9.5% Perpetual as my fifth and sixth trades respectively.

Prudential PLC 7.75%
At a client price of 108.65, it works out to:
YTM = 7.08%
YTC (first call date 23rd June 2016) = 5.00%

Standard Chartered Bank 9.5%
At a client price of 110.90, it works out to:
YTM = 8.53%
YTC (first call date 24th December 2014) = 3.66%

I will be using USD loans to fully fund both purchases.

Assuming both bonds are fully supported by USD loans up till the approved lending ratio, the projected Net leveraged yields are:
Prudential PLC 7.75%
Leveraged YTM = 20.08%
Leveraged YTC = 13.13%

Standard Chartered Bank 9.5%
Leveraged YTM = 36.61%
Leveraged YTC = 12.12%

Rationale for purchases:
With a number of perpetuals already in my portfolio, I adopted a new strategy of hunting for high quality perpetuals with near dated first calls. I specifically looked at reputable Issuers where they would have a very high chance of calling back the perpetual securities at par on the first call date due to both reputation risk as well as complying with Basel/Solvency capital calculations.
Even in the case where these perpetual securities do not get called back, I will continue to enjoy the high YTM. The Prudential perp is fixed at 7.75% forever (doesn't reset, hence I didn't buy much) while the SCB perp pays 9.5% till December 2014 and resets to a 5 year swap rate + 6.78% from 2014-2019 and thereafter to an astounding 5 year swap rate + 10.17%.
It is truely a case of being happy under both scenarios:
Called back = deemed as a short tenor bonds with cash yield 3.6% - 5% p.a.
Not called back = deemed as perpetual bonds with cash yield 7% - 8.5%  p.a.

I don't need to discuss too much about the 2 Issuers. Both are World Class MNCs. Prudential is one of the world's largest Insurers while SCB is one of the world's largest and safest Banks.

Tongue-in-cheek comment: I bet verb's bird that SCB will call back their 9.5% perp on 24th December 2014.

Bonds leveraging - Q&A with Interactive Brokers

Just to share some of the Q&A which were posted by one of my visitors. Thanks to him for sharing them to me.

Q: Am I able to deposit funds in SGD and as use them as collateral to borrow USD to buy USD bonds? 

A:  If you open a RegT Margin account, you can deposit funds in SGD and trade USD denominated products by borrowing USD from us. This borrowing is not allowed with Cash account, but available with margin account. If you hold negative cash balance in USD or any other currencies as a result of borrowing or trade loss, there will be interests accrued for the negative cash amount. For more details on interests, please visit our website and select Costs -> Interest & Financing -> Interest Charged to You.

Q: How do I buy USD$200,000 worth of listed speculative grade bond denoted in USD currency?

A:  Based on the assumption that you are holding a RegT Margin account, you can borrow USD100,000 using your SGD cash as collateral to buy USD200,000. However, in actual case, you need to fund a bit more cash in your account to hold the bond position with borrowed money due to the following reasons.

1. Interests will be accrued for the borrowed USD100,000

2. 2.5% margin is required for the negative cash balance in USD. (please check Forex tab on Margin Requirements page) 

Q: Can you illustrate an example showing how the 2.5% margin requirement for negative cash balance in USD comes about?

A:  Please find an example (forex rate used: USD1=SGD1.3) as follows.

1. Before you trade

Cash: SGD150,000

Available Funds for trading is USD115,385 (Cash)

2. When you buy USD200,000 worth of speculative grade bond

Cash: SGD150,000/ -USD200,000

Position: USD 200,000 worth bond

Margin Requirements: USD100,000 (50% of bond value) + USD5,000 (2.5% of USD negative cash balance) = USD105,000

Available Funds for trading: USD10,385 (Cash + Position Value - Margin Requirements)

My stocks portfolio - Dec 2012

My holding period return was 2.75% in the month of December 2012. Since the beginning of the year 2010, my overall holding period returns translate to 9.20% in annualised return. The year 2012 generated returns of 31.67% including dividends compared to 20.38% and -17.85% in the year of 2010 and 2011 respectively.

There were 3 transactions in the month of December 2012.

Sold partial Sarin, at 14.66% gain (excluding dividends)

Bought Nam Cheong, average price at $0.245

Bought Frasers Commercial Trust, average price at $1.325

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2010	-1.75%	1.36%	2.98%	4.36%	-7.12%	4.40%	4.49%	-1.38%	6.76%	3.09%	-1.61%	3.93%	20.38%
2011	-0.03%	-4.77%	2.07%	1.29%	-0.32%	-2.39	-0.33%	-8.34%	-6.53%	7.52%	-7.05%	0.52%	-17.85%
2012	9.41%	5.52%	2.62%	-0.22%	-3.13%	2.55%	2.84%	1.99%	4.27%	-0.34%	0.11%	2.75%	31.67%
Annualised Return = 9.20%

Stock	Mode	Unrealised P/L (SGD)	Stock	Mode	Unrealised P/L (SGD)
ARA	CASH	16.81%	RIVERSTONE	CASH	-3.64%
BH GLOBAL	CASH	-12.38%	ROXY PACIFIC	CASH	85.86%
BIOSENSORS	CASH	-2.45%	SABANA REIT	CASH	18.46%
CAPITAMALL TRUST	CASH	23.52%	SARIN	CASH	11.65%
CDL HOSPITALITY	CASH	17.06%	SGX	CASH	4.71%
CHINA MILK *	CASH	-100.00%	SIA ENGG	CASH	19.31%
FIBRECHEM *	CASH	-100.00%	SILVERLAKE AXIS	CASH	21.64%
FAR EAST HOSPITALITY	CASH	1.86%	SPDR GOLD	CASH	-5.32%
FIRST REIT	CASH	31.44%	STARHUB	CASH	46.05%
FRASERS CENTREPOINT	CASH	21.35%	ST ENGINEERING	CASH	7.63%
FRASERS COMMERCIAL	CASH	-0.63%	STX OSV	CASH	-14.97%
GENTING SINGAPORE	CASH	-0.54%	TAI SIN	CASH	-10.58%
GMG	CASH	-20.19%	TAT HONG	CASH	0.81%
GUTHRIE	CASH	45.05%	TECK WAH	CASH	20.73%
KEPPELCORP	CASH	212.77%	UOB-KAY HIAN	CASH	-13.29%
KINGSMEN CREATIVES	CASH	2.34%	VALUETRONICS	CASH	-23.32%
LIPPO MALLS	CASH	22.19%	BH GLOBAL	CPF	-40.84%
NAM CHEONG	CASH	7.89%	CAPITAMALL TRUST	CPF	10.66%
NOBLE GROUP	CASH	-21.65%	PARKWAY LIFE	CPF	8.17%
OKP	CASH	-12.29%	SIA ENGG	CPF	-7.54%
PARKWAY LIFE	CASH	13.49%	SPDR GOLD	CPF	0.01%
RAFFLES MEDICAL	CASH	12.64%

Newbie's bond portfolio performance - Dec 2012

Initial Capital (14th December 2012) = USD338,663.77 (including a SGD80k cheque which will be cleared 31st December 2012)
End 2012 December Net Portfolio Value = USD338,484.84 (including a SGD80k cheque which will be cleared 31st December 2012)

Portfolio performance = -0.05%

Gross coupons received in the month = NIL
Gross coupons received YTD 2012 = NIL

Projected net leveraged coupon yield = 6.12% p.a.*

* I am aware that the projected net leveraged coupon yield does not factor in the losses I would suffer in the event my premium bonds are called or redeemed (conversely, gains on discount bonds are not included as well). This is just a projection of my Net Coupons received annually.

Comments for the month
My portfolio started on 14th December 2012 and it has not had the time to run and earn meaningful coupons yet. The small negative performance currently is due to bond purchase commissions as well as the fact that the valuation system of banks typically use the Mid Price for bond prices and I had bought closer to the Ask Price.

Newbie's bond portfolio - Trade #4

I bought 3,590 shares of ING 7.375% USD Perpetual Capital Securities (Ticker: IDG) as my fourth trade.

At a client price of 25.05, it works out to:
YTM = 7.36%
YTC (next possible call date 15th April 2013, and every coupon date thereafter) = 6.64%

I will be using USD loans to fully fund the purchase.

Assuming this bond is fully supported by USD loans up till the approved lending ratio, the projected Net leveraged yields are:
Leveraged YTM = 21.01%
Leveraged YTC = 18.60%

Rationale for purchase:
Many debt securities have rallied in recent months to all-time highs. I needed to find a debt security that still returned relatively "value for risk" returns. This security has a split investment/junk rating of BBB-/Ba1, and thankfully the Financial Institution I am holding this new portfolio with has deemed this as Investment Grade.
This security has a relatively high coupon of 7.375% and having bought it near par, I would not be susceptible to any losses should the Issuer decide to call it at any coupon date.
This USD preferred security pays 7.375% fixed forever.

ING is one of the largest Deposit Taking instutitions in Netherlands. Given its huge importance to Netherlands, I believe that the Dutch governent would step it to help ING should it need help (and it did in 2008). The high coupon of over 7% is sufficient to buffer for future interest rate hikes in my opinion. Given ING is subject to Basel/Solvency rules, I believe there is a high chance that this preferred security will be called back by ING at par at or around 2015.