atans1

Temasek’s StanChart bonds: No losers?

In Banks, Temasek on 24/10/2011 at 6:59 am

Despite the following and other rants, ‘Temasek’s S$650m issue of bonds exchangeable into StanChart shares was oversubscribed.”The order was $1.25 bn,” it was reported. I was not surprised.

Singapore Notes ranted, Stanchart shares are currently trading at £13.73 (yesterday’s quote); the highest level reached during last year was £19.75. The British £ has also taken a pounding, diving from S$2.90 to S$2 yesterday, a stomach churning plunge of 30%. Yahoo! Finance indicates today’s range will be £1.9907 – £1.9937.

So what fool (as in “fool me, hah?’) would bet that the Stanchart share price would go up 27% in 3 years’ time? That’s a tantalising return of 9% per annum, assuming the pound-euro correlation doesn’t get any worse. Reuters is reporting a sterling drop, as latest UK data adds to the gloomy outlook.

Juz look at the volatility of the share price. In the last 12 months, it has been up to £19.75. More than 27% from current prices. And in November 2008 it was trading around £8. Investors buying the bonds are betting that StanChart’s share price recovers within three years. Not an unreasonable bet, given the volatility of StanChart’s (and other banks’) share price in recent years. Interesting chart.

At worse, they lose their funding costs (if they borrow money to buy the bond) or opportunity costs (if they invest in cash or bonds) for three years. Their upside is 27%++.

To quote Reuters Breakviews, One part would be a zero-yield bond, with a face value of S$36. Assume lenders to triple-A rated Temasek normally demand a 1.8 per cent annual return, and the bond is worth around S$34.50 today.

The other part is a call option on Stanchart shares.

Plug the lender’s current price, its forecast 3.5 per cent dividend yield, and the implied volatility of Stanchart’s stock into an options calculator, and it looks to be worth S$4.50.

Put together, the two bits of paper have a total value of S$39 – some 8 per cent more than investors paid. Taz why the issue was oversubscribed.

Unlike me, the writer thinks it ain’t such a gd deal, But it’s probably not such a sweet deal. The value of the call option is inflated because Stanchart’s shares are twice as volatile as they were before the summer.

If the shares return to their steadier state, the option is worth closer to S$1, leaving the value of the whole package a little below the sticker price. I think volatility will persist.

‘The writer goes on to talk about the deal’s advantages for Temasek, For Temasek, there are obvious attractions. Even if all the bonds are exchanged for shares, it will retain a 17 per cent stake in Stanchart.

And if the shares don’t rise much, the fund will have borrowed S$650 million interest free.

But for all that, the savings are small. Say Temasek had simply borrowed directly from the bond markets. Over three years, its total interest bill would be less than S$40 million.

Moreover, the bond issue triggered a mini-rout in Stanchart shares, leaving Temasek with a paper loss on its remaining stake 10 times the size of the interest costs it saved.

Other than demonstrating its financial prowess, Temasek doesn’t have much to show for its wizardry. True but given the jitteriness of the markets, the shares would have fallen for other reasons. Banks are not the flavour of the month.

About these ads
  1. Given that some big banks are starting to charge (not pay!) interest on deposits, Temasek’s deal works for these cash investors who just want to preserve their capitals.

    Seriously, why is no one questioning about the borrowing? Why does Temasek need additional leverage given their recent (below sub-par) track record?

  2. I think that the MOF has probably signaled to GIC and Temasek that there will not be any fund transfers to their coffers for management in the next 5 years, cuz gahmen announced they gonna spend S$10bn to upgrade infrastructures to buy future votes (Hooray! Thanks 40% of GE 2011 voters!).

    So…. Temasek tot of “clever” way to borrow money at potentially zero interest for next 3 years. Furthermore, the only cash outflow (repayment) will only be in 3 years’ time. Temasek probably has a negative view on bank stocks and the GBP based on the conditions set. The program is initially S$650mil, but can be increased another S$300mil at BoA’s option. That is almost S$1bil of borrowings at 0% interest.

    IMHO, I do not think they are “clever”. Why not issued at straight 3 year zero-coupon bond? Since they are AAA and closely-linked to Singapore govt, and SG 5-year govvie yield is now 0.57%, they can probably borrow at 1% or less for the same period. Make more sense then trying to save 1%, but potentially paying more than 8%……

    Ultimately, the real winners are BoA, the underwriting investment bank, for successfully selling this idea to Temasek.

  3. Of course, investment banks are like lawyers…hahah

    No matter how the outcome (court case or fund-raising exercise), they will benefit the most…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 206 other followers

%d bloggers like this: