Phillip Model Bond Portfolio – Review 21 September 2020 September 21, 2020 225

The Phillip Model Bond Portfolio total return outperformed the benchmark Thomson Reuters/iEdge SFI Corporate Index by 0.05% for the month. Given the potential risk of bear steepening as inflation expectations rise, we take comfort that the portfolio is relatively short dated with bonds maturing/calling within 2 to 6 years. Many issuers have strong backers allowing for ease of access to funding should the need arise. We maintain the holdings in the portfolio for the month.

Portfolio commentary: Issuers are diversified across various industries including healthcare, real estate management, logistics and e-commerce, real estate development, retail and industrial REITs, commodity, and banking. All issuers are listed entities except for ARA Asset Management; a private company previously delisted from the Singapore Exchange. There is a balanced mix of 5 bullet bonds and 5 perpetual bonds. We identify with investor wariness on perpetual bonds after the non-call event by Ascott Residence Trust, which was in response to the lower reset rates caused by the lower interest rate environment. However, given record low interest rates currently, and the perpetual bonds in our portfolio with call dates around 2 years away, we argue that there are opportunities for perpetual bonds now with a longer term view that interest rates rise as the economy recovers from the pandemic over the next 2 years.

 

Bond feature definitions

Change of Control Call/Put. With a Change of Control Call, in the event that certain “Change of Control Events” occur, the issuer is obliged to immediately re-pay the bondholders their nominal amount invested. With a Change of Control Put, the bondholder has the option to oblige the issuer to redeem the bond in a “Change of Control Event”. The change of control clause is designed to protect investors from the bond issuing company being taken over by another person or entity during the life-time of the bond, thus changing the overall risk profile that the original bond investors signed up for.

Cumulative and Non-cumulative Deferral. If coupon payments are deferred or unpaid by the issuer, bondholders are entitled to all outstanding arrears if the bond has a Cumulative Deferral clause, whereas coupons payment are foregone if there is a Non-cumulative Deferral clause.

Dividend Stopper. The issuer and its subsidiaries shall not declare or pay any dividends if they opt to defer or not pay coupon payments to bondholders. Dividend Pusher. A trigger where the bond coupon must be paid as a consequence of a decision made by the general shareholders’ meeting to pay share dividends. The look-back period determines how far back accrued interest payments will be made to bondholders, which in some way counteracts the Cumulative Deferral clause.

Optional Payment. An option given to the issuer to, at its discretion, elect not to pay a distribution.

Loss Absorption. A common feature for bank bonds where the issuer can write-down a bond’s face value (your principal) either temporarily or permanently upon a trigger event, usually if its CET ratio falls below a certain level.

Cessation Put. Should the issuer’s shares cease to be traded on the exchange or are suspended for a certain period, the issuer is obligated to redeem the bond with interest accrued.

Make Whole Call. A provision allowing the issuer to redeem the bond early.

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Timothy Ang
Research Analyst
Phillip Securities Research

Timothy covers credit analysis of local and foreign bonds. Previously an equity dealer, he handled equity trade execution and portfolio management. He has presented seminars for organisations such as SIAS, SPH and IRAS, commentated live market updates for 93.8FM, and authored investment articles for the Business Times newspaper. He graduated with a Bachelor of Commerce in Accounting & Finance from the University of Western Australia.

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