The B.I.T.C.H

Image from tradehaven.net

What is it?

Frasers Centrepoint Ltd (SGX: TQ5) will be issuing a total of S$200 million worth of bonds to institutional and retail investors (i.e. individual investors). FCL listed Frasers Hospitality Trust on the Singapore Exchange in July last year. It has also deepened its presence in Australia with the acquisition of Australand Property Group in October 2014. The bonds will be issued in the name of FCL Treasury Pte Ltd with Frasers Centrepoint Ltd as the guarantor.

Why is it making news?

The 7-year bonds will carry a fixed interest rate of 3.65 per cent a year. Up to S$150 million worth of bonds will be offered to the public and another S$50 million will be made available to institutional and other investors. The bonds are meant for general corporate purposes(i.e. refinancing existing borrowings, financing investments and general working capital).

Why I am giving it a miss?

1) Callable nature of the bonds
Callable bonds can be redeemed at the discretion of the issuer before they mature.
Frasers Centrepoint’s bonds in this case are callable in nature which means they can also redeem all of those bonds on various interest payment dates at a slight premium to the principal amount, possibly when there are cheaper sources of debt, in order to save on interest. This meant hidden opportunity costs.

2) Risks of Capital Losses
Bonds are supposedly less risky financial asset when compared to shares as the bond holders get a claim on a company’s assets before the shareholder does. Bondholders may not be repaid in full when the company goes burst. Frasers Centrepoint’s current gearing (total debt over total assets) of only 45% as of 31 March 2015 so its still generally safe. However, bonds usually lose money in an interest raising environment thus Frasers Centrepoint’s bond price may fall and bond holders will suffer a loss when they choose to sell, unless they hold onto the bonds until Frasers Centrepoint redeems them.

3) Long duration
7 years is a pretty darn long time. The upcoming Singapore Government Bonds offer more liquidity.  In addition, the raising interest means that more Banks are compelled to offer attractive rates.

5) Better options to Choose from?
It is mentioned in tradehaven that this isn't exactly a fabulous deal.