Thursday, January 10, 2013

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.

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