Bond indices

Retail Bonds can provide safe yields during this crisis

Christopher Ng
Christopher Ng

As the COVID-19 crisis deepens, Singapore businesses find themselves in circuit breaker mode, and we are almost 100% assured of entering into a recession. A trough economy where a nation experiences negative GDP growth is not entirely bad for investors. The retail bond asset class has emerged as a means to preserve value during these troubled times.

The problem with retail bonds is that they often lack liquidity and there isn’t sufficient varieties available on SGX, so readers may wish to purchase a bond ETF instead.

For retail investors who wish to invest in individual retails bonds, one attractive counter I have recently added into my margin account is Astrea IV as well as Batch 12 of the Early Retirement Masterclass.

Astrea IV bonds are private equity bonds with cash flow backed from a portfolio of private equity investments. Astrea IV is a wholly-owned subsidiary of Azalea Asset Management that is indirectly but wholly owned by Temasek holdings. It has a Fitch rating of A+(sf). While the probability of default of such a bond is non-zero, I assess this number to be low, below 1% over 5 years.

Retail investors can use a quick and dirty way to assess the value of the bond. I constructed a table using Excel to do this:

Step 1 – Know the outgoing cash flow.

At the time of writing, you can get a unit of Astrea IV by paying $1,025 on the stock exchange. I created a row on Excel to reflect the outgoing cash flow on cell B2.

Step 2 – Know the incoming coupons

A unit of Astrea IV pays $21.75 every six months in May and November until it matures or gets recalled.

The exchange lists the bond to mature in 2028, but a particular clause allows Astrea to recall the bond in June 2023 and pay back investors their capital. As we believe that interest rates will remain low, the odds of a bond recall is high. So we simply assume the worst-case scenario that coupons will stop in 2023, and you get your money earlier.

We populate row 3 with expected coupon payments for the year.

Step 3 – Know the return of principal

Remember that we will not get back the price we paid for the bond at $1,025. We will only receive $1,000 in 2023.  There is a possibility that Astrea IV bonds will trigger a special a $5 bonus be given to investors when this happens. So in cell E4, we expect to receive $1,005.

Step 4 – Calculate the Yield-To-Maturity

After populating the numbers, it is time to estimate the Yield-to-Maturity (YTM) of Astrea IV that determines our returns if we hold the bond to June 2023. We use the IRR() function in Excel over the summary of incoming and outgoing cash flows to figure out what YTM is. 

With a yield to maturity of 4.489%, Astrea IV fits a conservative portfolio of blue-chip counters and REITs and can assist a rookie investor in allowing a margin collateral to withstand a severe beatdown of REITs that may happen over the next few months. We can even inject this into a leveraged account as YTM exceeding margin interest rates.

Leveraging Retail Bonds

My current leverage rate is approximately x1.25.  At a YTM of 4.489% and brokerage margin interest rate of 3.3%, my leveraged YTM is 1.25 x 4.489% – 0.25 * 3.3% or 4.78%.

But think twice before leveraging retail bonds in this crisis. Lehman Bonds and collateralized debt obligations were responsible for much angst in the investment community in the last recession, and they too had a decent rating from agencies before they tanked.

In all cases, to maximize your chances of survival, please diversify broadly.

[Note: This article presents a very rough way of calculating YTM of a retail bond. Investment Professionals will go one step further and breakdown cashflows in months to get a more precise value. Please don’t use this template in your professional life !]

Christopher Ng
Christopher Ng
    Juris Doctor(Cum Laude) Bachelor in Engineering from NUS (1st Class Honours) Masters in Applied Finance also from NUS. CAIA, FRM qualifications and passed all three CFA examinations. I have recently completed my Juris Doctor and have been called to the Singapore Bar. For the past 15 years I was an IT manager and I have worked in multinationals, financial exchanges, trade unions and even a government agency. I started my career as an AS/400 administrator and moved on to manage IT projects and operations. Through my personal savings and investments, I earned my financial independence at age 39 after my investment income started to exceed my monthly take home pay. One of my first acts upon retirement is to go back to Law School to reinvent myself as a legal professional. I am likely to be in the practice of corporate litigation. My three books on Personal Finance explain the processes by which I attained my financial independence. Growing your Tree of Prosperity was a local Straits Times bestseller in 2005. I was featured in Me and My Money sections in the Sunday Times twice. I also play the role of a husband and a father.
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