You will check one real corporate bond against a short credit checklist before deciding if the yield is worth it.
Kelvin has read the product highlights sheet for the company bond his relationship manager offered. He understands more than he did a week ago. What he does not have yet is a decision. This exercise gives you a short checklist that turns what you learned in this module into a yes, a no or a not yet, with a reason you can defend. Allow about 25 minutes, and use one real Singapore dollar corporate bond or perpetual that is open to retail investors.
The worked example uses a made-up bond so the method is clear. Every figure in it is made up.
Write each question at the top of a section on one page, and answer it from the official documents and published figures.
Question 1. Who is the issuer, what does it do, and how does it earn the cash to pay you? One paragraph, in your own words. If you cannot explain where the coupon money comes from, stop here.
Question 2. Is the bond rated, by whom, and when did the rating last change? Lesson 6.2, Credit ratings: useful, late and not a guarantee, explains what to read into the answer, including what to do when there is no rating.
Question 3. Where does the bond rank, and is it secured? Senior secured, senior unsecured or subordinated, from the queue in lesson 6.1, What happens when a borrower cannot pay.
Question 4. What are the maturity, call and deferral terms? The maturity date, if there is one, every call date, and whether payments can be deferred, from lesson 6.3.
Question 5. What is the credit spread over a Singapore Government bond of a similar term? Take the bond's yield to maturity, or its yield to the first call date if a call looks likely, and subtract the yield on an SGS bond with a similar remaining term. MAS publishes SGS yields on its website.
Question 6. How much of your portfolio would this bond be, and what would you lose if it paid back nothing? Write the amount, the percentage of your investments and the dollar loss in the worst case.
Questions 1 and 6 are the ones people skip. The first needs reading, not just copying a number. The last asks you to imagine the bad outcome, and most people buying a bond would rather not.
Kelvin's made-up bond is a five-year, senior unsecured bond from a property developer. It yields 4.2% to maturity at today's price. Here are his answers.
Issuer: a developer that builds and sells homes and holds a few office buildings it rents out. The coupon is paid from rental income and sales. Sales are uneven from year to year, and rental income is the steadier part.
Rating: none from any of the three agencies. He notes that he will rely on the company's published accounts instead, and checks that its debt has not grown faster than its rental income over the last few years.
Ranking: senior unsecured. Ahead of subordinated debt and shareholders, behind the banks that have lent against its buildings.
Terms: maturity in five years, with no call dates and no deferral clause. The timetable is as firm as the company.
Spread: a five-year SGS bond yields a made-up 2.8%. The spread is 4.2% minus 2.8%, which is 1.4 percentage points. On S$10,000, that is about S$140 a year more than the government bond would pay.
Size: Kelvin's investments total S$80,000. A S$10,000 holding would be 12.5% of them. If the company paid back nothing, he would lose S$10,000, about an eighth of his investments.
Now read the six answers together and decide. The test is simple to state: is the extra yield enough payment for what could go wrong, at the size you are considering?
Kelvin's answers point both ways. The terms are clean and the ranking is ordinary. But the bond is unrated, the developer's income is uneven, and the extra S$140 a year is small next to a possible S$10,000 loss on one holding that would be an eighth of his investments.
He writes: "Not yet. The spread of 1.4 points does not seem enough to me for an unrated developer at 12.5% of my portfolio. I would reconsider at half the size, or if I could spread the same money across many issuers through a fund."
A yes is a reasonable answer too, if your own six sections support it. So is a no. What makes the decision sound is that it rests on all six answers written down, not on the coupon or a relationship manager's description.
A finished checklist is one page with six short sections, each answered from an official source or a published figure, with the source named. The spread is calculated with both yields shown. The size is in dollars and as a percentage. At the bottom is a single word, yes, no or not yet, and a sentence or two explaining it. Pick your bond and work through the six questions now.
Complete the six-question credit checklist for one real Singapore dollar corporate bond and write a yes, no or not yet decision with your reason.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).