UOB Perpetual bond at 4.75%....good buy?

[lifeafter41]

Got a friend who is going 55 in Nov, around 500k all in CPF.
He reckon whether to go for ERS or just go for FRS and withdraw the rest to buy the above.

Problem is it’s 250k minimum.
Anyway, he’s asking how to buy too.
Any advice is appreciated.

 

[Gitaro]

Go for ERS.
Invest the rest into various instuments.
Key is - diversification.

 

[BBCWatcher]

Got a friend who is going 55 in Nov, around 500k all in CPF.
He reckon whether to go for ERS or just go for FRS and withdraw the rest to buy the above.

Problem is it’s 250k minimum.
Anyway, he’s asking how to buy too.
Any advice is appreciated.

I have an easy answer: no. From your description, he simply won’t be able to buy this bond even if he wants to, even if it were a good idea (it’s not). The Monetary Authority of Singapore requires all buyers of such bonds to have a minimum net worth of $2 million, and it doesn’t seem like he meets that requirement. In my view his net worth should be at least $5 million before even considering an individual issue $250,000 bond.

OK, now let’s briefly turn to why it’s a bad idea. I assume you’re referring to the UOB bond with the issue code SG58I7998534. The 4.75% is the coupon rate, not the yield. Since that bond is a low investment grade bond, he would have to pay a premium, above face value, to obtain a bond paying 4.75% coupons. The “Yield to Worst” — which is a reasonble way to evaluate this bond — is below 3%, which is a lot less than 4.75%. I suspect he saw 4.75% and thought, gee, that doesn’t sound so bad. And it doesn’t, except that that bond isn’t yielding 4.75%. It’s yielding less than 3% (if he were able to buy it).

Oh, but it gets worse. He probably also saw “perpetual” and thought, gee, that doesn’t sound so bad. I can get a stream of coupons forever from a moderately distinguished bank headquartered in Singapore. That’d be OK for retirement, wouldn’t it? And it would if it were true, but it’s not true. That bond is callable, meaning that, under certain terms, UOB can call off the deal. It’s perpetual only in the sense that UOB can, if it wishes, keep the bond running as long as UOB wants. But that doesn’t mean the bond runs as long as you might want.

And, on top of all that, that bond can have its coupons reset, based on a formula tied to the SOR. And of course UOB would do that, in a heartbeat, if the formula results in a lower coupon.

I agree with Gitaro. The best thing he can do, by far, is to zoom his CPF LIFE to the Enhanced Retirement Sum on his 55th birthday. (He may wish to explore raising a CPF Special Account “shield” just before his 55th birthday.) If he has a spouse or partner, then it’d be prudent to zoom his/her CPF Special Account (or Retirement Account) up, too. That’ll nail down future, reliable retirment income from age 65 (or as late as age 70 if deferred), preferably the Escalating Plan in my view.

Then, if he has used the CPF shielding technique and has most of his leftover CPF funds in the 4% Special Account (and Medisave Account), that’s exactly where they should stay. That certainly beats a higher risk corporate bond yielding less than 3%, even if he were able to get that bond.

If he has some other savings inflow from continued work, we can talk about where he might invest that. I’d suggest a modest allocation to stocks (in a 50:50 split between local and global, and I’m assuming he’s retiring in Singapore) and the bulk of his additional savings in bonds, such as Singapore Savings Bonds and the Nikko AM bond fund MBH. He could plow dollars into a Supplementary Retirement Scheme (SRS) account and save some money on his income tax, then deploy the SRS funds into appropriate vehicles. But more information is required to know for sure.

 

[lifeafter41]

I have an easy answer: no. From your description, he simply won’t be able to buy this bond even if he wants to, even if it were a good idea (it’s not). The Monetary Authority of Singapore requires all buyers of such bonds to have a minimum net worth of $2 million, and it doesn’t seem like he meets that requirement. In my view his net worth should be at least $5 million before even considering an individual issue $250,000 bond.

OK, now let’s briefly turn to why it’s a bad idea. I assume you’re referring to the UOB bond with the issue code SG58I7998534. The 4.75% is the coupon rate, not the yield. Since that bond is a low investment grade bond, he would have to pay a premium, above face value, to obtain a bond paying 4.75% coupons. The “Yield to Worst” — which is a reasonble way to evaluate this bond — is below 3%, which is a lot less than 4.75%. I suspect he saw 4.75% and thought, gee, that doesn’t sound so bad. And it doesn’t, except that that bond isn’t yielding 4.75%. It’s yielding less than 3% (if he were able to buy it).

Oh, but it gets worse. He probably also saw “perpetual” and thought, gee, that doesn’t sound so bad. I can get a stream of coupons forever from a moderately distinguished bank headquartered in Singapore. That’d be OK for retirement, wouldn’t it? And it would if it were true, but it’s not true. That bond is callable, meaning that, under certain terms, UOB can call off the deal. It’s perpetual only in the sense that UOB can, if it wishes, keep the bond running as long as UOB wants. But that doesn’t mean the bond runs as long as you might want.

And, on top of all that, that bond can have its coupons reset, based on a formula tied to the SOR. And of course UOB would do that, in a heartbeat, if the formula results in a lower coupon.

I agree with Gitaro. The best thing he can do, by far, is to zoom his CPF LIFE to the Enhanced Retirement Sum on his 55th birthday. (He may wish to explore raising a CPF Special Account “shield” just before his 55th birthday.) If he has a spouse or partner, then it’d be prudent to zoom his/her CPF Special Account (or Retirement Account) up, too. That’ll nail down future, reliable retirment income from age 65 (or as late as age 70 if deferred), preferably the Escalating Plan in my view.

Then, if he has used the CPF shielding technique and has most of his leftover CPF funds in the 4% Special Account (and Medisave Account), that’s exactly where they should stay. That certainly beats a higher risk corporate bond yielding less than 3%, even if he were able to get that bond.

If he has some other savings inflow from continued work, we can talk about where he might invest that. I’d suggest a modest allocation to stocks (in a 50:50 split between local and global, and I’m assuming he’s retiring in Singapore) and the bulk of his additional savings in bonds, such as Singapore Savings Bonds and the Nikko AM bond fund MBH. He could plow dollars into a Supplementary Retirement Scheme (SRS) account and save some money on his income tax, then deploy the SRS funds into appropriate vehicles. But more information is required to know for sure.

Thanks BBC for the advice.
Just to further elaborate, their HDB flat is fully paid and kid expenses for Uni already taken care of. Savings, not much, my guess is less than 100k, in those FD.

As for investment, he’s not really into it as he’s not even sure how to go about doing it.

That’s the reason why he’s looking for steady income instead.
The good news is that he’s still gainfully employed. But till when is anybody’s guess.

But I did not know you need certain threshold of net worth to buy these bonds.
Not so sure about the yield though.

Yes, you are correct he was assuming the coupon rate is 4.75% and that’s what he will get.

I guess the question here is steady income/passive income for him.

 

[henrylbh]

Got a friend who is going 55 in Nov, around 500k all in CPF.
He reckon whether to go for ERS or just go for FRS and withdraw the rest to buy the above.

Problem is it’s 250k minimum.
Anyway, he’s asking how to buy too.
Any advice is appreciated.

If he is not accredited investor, cannot buy.

He will need to cough out more than 250k to buy as that was the issued price when launched in 2013. The coupon rate of 4.75% is only for x years and floating rate thereafter. Besides, the PS is illiquid.

 

[Kixon9]

If he is not accredited investor, cannot buy.

He will need to cough out more than 250k to buy as that was the issued price when launched in 2013. The coupon rate of 4.75% is only for x years and floating rate thereafter. Besides, the PS is illiquid.

I checked that it is available at FSM. And I have FSM account, also cannot buy?

 

[BBCWatcher]

Yes, you are correct he was assuming the coupon rate is 4.75% and that’s what he will get.

So let's just cross this one off the list, OK? There's a fair bit of risk in it (if UOB were ever to have financial trouble, it'd probably be the first UOB security to get wiped out), it's not yielding anywhere near 4.75% (more like below 3%, on a yield to worst basis), and UOB can call the whole deal off fairly soon or at points thereafter -- it's perpetual only if UOB wants it to be. And it's unobtainable, because yes, you need to be accredited to buy it. Accreditation requires a much higher net worth than this individual likely has, and even then the regulatory minimum doesn't mean it's a prudent thing to do.

I guess the question here is steady income/passive income for him.

OK, and here are some ideas, in no particular order:

1. The 15 year government bond is coming to auction this month (September, 2018), issue code NZ13100V. It should yield about 2.75% -- rather close to that UOB bond (on a Yield to Worst basis) but a LOT safer -- and the coupon is 3.375%. There are zero costs to place a non-competitive bid at this auction and to hold the bond to maturity.

Let's suppose the best auction price is $1076.90 per $1000 face value, which would translate into a 2.75% yield. And let's suppose he places an order for $100,000 (face value) of this particular bond. He would have to pay $115,000 to place that bid, but a few days later (after the auction) he'd be refunded $7,310, resulting in a purchase price of $107,690. (This is an example; the exact price will be determined at auction, and by placing a non-competitive bid he gets the lowest bond price/highest yield that anybody gets.) He would then get $1,687.50 paid every 6 months (the 3.375% coupons) for 15 years, plus $100,000 (face value) when the bond matures 15 years from now.

This is the safest place to park Singapore dollar funds.

2. Did I mention I agree with Gitaro? I agree with Gitaro: more CPF LIFE, up to the Enhanced Retirement Sum (ERS). Spouse/partner, too.

3. If either/both of them have room below the CPF Annual Limit, then they can voluntarily top up "all three" CPF accounts. That'll yield a blended rate of >2.5%.

4. Singapore Savings Bonds.

5. MBH, the new Singapore dollar denominated bond fund.

6. After boosting CPF LIFE to the ERS, a life annuity from NTUC Income, Manulife, or Tokio Marine (the three sellers of life annuities in Singapore).

 

[lifeafter41]

So let's just cross this one off the list, OK? There's a fair bit of risk in it (if UOB were ever to have financial trouble, it'd probably be the first UOB security to get wiped out), it's not yielding anywhere near 4.75% (more like below 3%, on a yield to worst basis), and UOB can call the whole deal off fairly soon or at points thereafter -- it's perpetual only if UOB wants it to be. And it's unobtainable, because yes, you need to be accredited to buy it. Accreditation requires a much higher net worth than this individual likely has, and even then the regulatory minimum doesn't mean it's a prudent thing to do.


OK, and here are some ideas, in no particular order:

1. The 15 year government bond is coming to auction this month (September, 2018), issue code NZ13100V. It should yield about 2.75% -- rather close to that UOB bond (on a Yield to Worst basis) but a LOT safer -- and the coupon is 3.375%. There are zero costs to place a non-competitive bid at this auction and to hold the bond to maturity.

Let's suppose the best auction price is $1076.90 per $1000 face value, which would translate into a 2.75% yield. And let's suppose he places an order for $100,000 (face value) of this particular bond. He would have to pay $115,000 to place that bid, but a few days later (after the auction) he'd be refunded $7,310, resulting in a purchase price of $107,690. (This is an example; the exact price will be determined at auction, and by placing a non-competitive bid he gets the lowest bond price/highest yield that anybody gets.) He would then get $1,687.50 paid every 6 months (the 3.375% coupons) for 15 years, plus $100,000 (face value) when the bond matures 15 years from now.

This is the safest place to park Singapore dollar funds.

2. Did I mention I agree with Gitaro? I agree with Gitaro: more CPF LIFE, up to the Enhanced Retirement Sum (ERS). Spouse/partner, too.

3. If either/both of them have room below the CPF Annual Limit, then they can voluntarily top up "all three" CPF accounts. That'll yield a blended rate of >2.5%.

4. Singapore Savings Bonds.

5. MBH, the new Singapore dollar denominated bond fund.

6. After boosting CPF LIFE to the ERS, a life annuity from NTUC Income, Manulife, or Tokio Marine (the three sellers of life annuities in Singapore).

Question BBC, how do one go about buying the bond?
Can we do it on the online platform like POEMS?

Thanks!!

 

[BBCWatcher]

Question BBC, how do one go about buying the bond?

Singapore Government Securities, such as that 15 year government bond, can be purchased directly at auction, and without any fee(*), using ordinary domestic Singapore dollar funds at DBS, POSB, UOB, or OCBC -- and using Internet banking or ATMs. You will also need a CDP account to hold your bond. Answers to other FAQs are available here.

There are lots and lots of discussions about how to do this, so please review other threads such as the Singapore Savings Bond thread if you're still not clear.

(*) Except for Singapore Savings Bonds, which have a flat transaction fee of $2.

 

[lifeafter41]

Singapore Government Securities, such as that 15 year government bond, can be purchased directly at auction, and without any fee(*), using ordinary domestic Singapore dollar funds at DBS, POSB, UOB, or OCBC -- and using Internet banking or ATMs. You will also need a CDP account to hold your bond. Answers to other FAQs are available here.

There are lots and lots of discussions about how to do this, so please review other threads such as the Singapore Savings Bond thread if you're still not clear.

(*) Except for Singapore Savings Bonds, which have a flat transaction fee of $2.

Hi BBC, thanks for the link.
Will look it up.