atans1

DBS no can lose on preference share issue

In Banks on 15/11/2010 at 5:21 am

But investors can lose possibly serious money. The reasons?

The DBS  4.7% preference shares are perpetual. This means you will not be able to get yr principal back unless the bank exercises a call option in 2020. The call option means that if in 2020, interest rates are lower than today’s pathetic rates, DBS can repay investors and borrow at a lower rate.

BUT if interest rates are say 10% (they are on average 0.6% today)  and rising, DBS will not redeem the shares. Holders are then stuck forever (but getting the 4.7%  per annum interest) unless they sell in the market.

When one sells in the stock market, the amount paid will reflect the prevailing interest rate and the creditworthiness of DBS. If interest rates have risen from the 0.6% average, you will lose part of yr principal. If interest rates are around 10%, one could possibly easily lose 10% of the face-value of the amount bought.

By buying this preference share, investors are betting that for the next 10 yrs, interest rates will trend lower. DBS is betting that interest rates will rise.

And remember DBS has form in selling a product that loses investors money. Investors in its HN5 Notes lost everything while investors in Lehman’s minibonds at least recovered 50% of their investments. And Lehman went bust!

BTW potential investors may want to recall what DBS did to investors of its HN5 notes http://atans1.wordpress.com/2010/08/06/what-abt-high-notes-sm-goh/

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  1. Can explain further “If interest rates have risen from the 0.6% average, you will lose part of yr principal”, thanks. Also, it is correct that DBS can not skip over this class of share but pay dividend to other class of shares ? ie is pay all or nothing right ?

  2. It behaves like a bond. When interest rates rise, the value of the bond or pref share falls so that the next buyer gets the same interest rate. So when you sell, you get back less than yr principal.

    Om second pt, I don’t know. I didn’t read the prospectus as I have no plans to buy this.

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