You will be able to check one real corporate bond against a short credit checklist and decide whether the yield is worth it.
To reach a yes, no or not yet on one Singapore dollar corporate bond or perpetual, answer six questions about it on one page, using official documents and published figures for every answer. Allow about 25 minutes.
The exercise uses what you learned in this module to make one decision, and you need a reason for that decision that you can defend. Pick one real Singapore dollar corporate bond or perpetual that is open to retail investors. Further down, Kelvin works through a made-up bond so you can see the method, and every figure in his example is made up.
Write each question at the top of its own section, all on one page:
Who is the issuer, what does it do, and how does it earn the cash to pay you? Is the bond rated, by whom, and when did the rating last change? Where does it rank (senior secured, senior unsecured or subordinated), and is it secured? What is the maturity date, if there is one, what is every call date, and are there any deferral terms? What is the credit spread? How much would you put in, what percentage of your investments is that, and what is your dollar loss in the worst case?
Under each answer, name the official source or published figure you took it from.
Answer the issuer question in one paragraph, in your own words. If you can't explain where the coupon money comes from, stop there.
Lesson 6.2, "Credit ratings: useful, late and not a guarantee", explains how to read the rating answer, including what to do when the bond has no rating. The ranking question uses the queue from Lesson 6.1, "What happens when a borrower cannot pay". Lesson 6.3 covers the maturity, call and deferral terms you need for the fourth question.
For the fifth question, the credit spread is the bond's yield to maturity minus the yield on an SGS bond with a similar remaining term. If a call looks likely, use the bond's yield to the first call date instead. MAS publishes SGS yields on its website. Write both yields on your page, not just the difference.
For the sixth question, take the worst case to be the bond paying back nothing. Write that loss in dollars, next to the amount and the percentage.
People tend to skip the first and sixth questions. The first takes reading about the business, which is slower than copying a number off a factsheet. The sixth makes you picture the bad outcome, and most bond buyers would rather not.
Kelvin's relationship manager offered him a company bond. He has read the product highlights sheet and understands more than he did a week ago, but he hasn't decided. It's a five-year senior unsecured bond from a property developer, yielding 4.2% to maturity at today's price.
Issuer: the developer builds and sells homes, and it owns a few office buildings that it rents out. Rental income and sales pay the coupon. Sales go up and down from year to year, and rental income is the steadier part.
Rating: none of the three agencies rates the bond. He writes that he will rely on the company's published accounts instead. He checks them to make sure its debt hasn't grown faster than its rental income over the last few years.
Ranking: senior unsecured. The bond ranks ahead of subordinated debt and shareholders, and behind the banks that lent against the developer's buildings.
Terms: it matures in five years, with no call dates and no deferral clause. That means the repayment timetable is only as firm as the company.
Spread: he uses a five-year SGS yield of 2.8%, also made up. 4.2% minus 2.8% is 1.4 percentage points. On S$10,000, that comes to about S$140 a year more than the government bond pays.
Size: he is thinking of putting S$10,000 out of S$80,000 in total investments, which is 12.5%. If the bond pays back nothing, he loses S$10,000, about an eighth of his investments.
Read all six answers together before you decide. Then ask one question: is the extra yield enough payment for what could go wrong, at the size you're considering?
Kelvin's answers point both ways. In the bond's favour, the terms are clean and the ranking is ordinary. Against it, the bond is unrated, the developer's income is uneven, and S$140 a year is small next to a possible S$10,000 loss on one holding worth an eighth of his investments. He writes "not yet". He judges that a 1.4-point spread isn't enough for an unrated developer at 12.5% of his portfolio. He would look at it again at half the size, or if he could spread the same money across many issuers through a fund.
Yes, no and not yet are all reasonable answers, as long as your six sections support them. A sound decision rests on all six written answers. The coupon alone isn't enough, and neither is the relationship manager's description.
A finished checklist fits on one page and has six short sections. Each answer comes from an official source or a published figure, and the source is named. The spread calculation shows both yields, and the size is given in dollars and as a percentage. At the bottom is one word, yes, no or not yet, followed by one or two sentences explaining it.
Pick your bond and work through the six questions now.
Fill in the six-question credit checklist for one real Singapore dollar corporate bond. Then write yes, no or not yet, with your reason.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).