I was off.
I expected the recent bond IPO — Frasers Property 4.49% Green Bonds to have a much larger subscription rate.
Remember 2018? Everyone went wild for Astrea IV bonds — a 7.4x subscription. The following year, Astrea V bonds was 4.5x subscribed. Last year, Astrea VI bonds was 3.1x subscribed.
I mean, Frasers Property is a pretty solid developer.
Some stats for the new Frasers Property Bonds:
- Retail IPO, S$300 million issue size: 1.48x subscribed
- Private Placement (to institutions), S$120 million issue size: 2.04x
- Overall subscription (including upsize), S$500 million issue size: 1.64x.
That’s a far lower subscription than all the Astrea bonds.
Let’s break it down.
Frasers Property green bond’s subscriptions — good or bad?
I mean, Temasek said they wouldn’t guarantee Astrea bonds. But who are they kidding?
On the other hand, Frasers Property is a regular corporate bond – a bond that has what I call, default risk.
You see, companies like Frasers Property can go bust if they can’t pay back principal and interest. But that doesn’t explain Frasers Property’s lower subscription.
Here’s two real reasons why subscription was lower. First, rising rates. The Fed, earlier last Wed, said interest rates will go up by another 0.75%.
Source: Board of Governors of the Federal Reserve System (US)
And I doubt the Fed will stop there anytime soon. This is intended to bring inflation down, which is running near its highest peak since the 1980s.
Generally, this is bad for bonds. Because rates go up, bond price drops. Many investors would rather wait for new bond issues in a rising rate environment.
What I’ll argue is, even though rates go up, but don’t forget, the good thing about bonds is no matter whether the price goes up, or goes down, you collect your 4.49% coupons.
Plus, at the end of a bond’s maturity, you get paid your money back — unlike stocks.
Frasers Property — potential technical default last time?
The second, and I thought this is interesting, was the fact that in 2013, F&N tried to pull a stun.
Of the two, I think this could have undermined investors’ confidence on Frasers Property.
Back in 2013, F&N needed to get bondholders’ approval before they spin-off the F&N’s property assets (which is now part of Frasers Property).
And if bond holders failed to agree to the approval, and the spin-off proceeds, this becomes a technical default. What did F&N do?
They decided to add a call option to buy the old F&N bonds back at a lower price from the current market price.
Otherwise, F&N will have no choice but to still go ahead with the spin-off, with or without bondholders’ consent.
This left a bad taste for many of F&N’s bondholders then.
I doubt this would happen again, considering Frasers Property is a frequent bond issuer. And the bond market is still a good source of funding for the Singapore developer.
Frasers Property’s financial position — healthy
Plus, Frasers Property has about S$4 billion of cash.
Source: Frasers Property 1HFY2022 Financial Statements
What’s more, Frasers Property has about S$1.2 billion of industrial & logistics property projects to be developed till early next year.
Source: Frasers Property 3QFY2022 Financial Statements
More importantly, you’ll realize that Frasers Property, unlike many other developers, owns REITs – Frasers Centrepoint Trust, Frasers Hospitality Trust, and Frasers Logistics & Commercial Trust — can readily buy properties from Frasers Property, providing capital to pay down debt.
Do I still like Frasers Property’s green bonds?
Honestly, I think it’s a safer bet than the counterpart – Frasers Property shares.
And what’s more interesting is, 4.49% actually more than compensates for the yield in this environment.
I mean, where else are you going to get this yield today and especially when there aren’t a lot of retail bonds in Singapore.
Despite the Fed’s aggressive hike, the new Frasers Property green bond prices are still rock solid at $100.20.
IPO subscription tells us the emotions of the market, but what it often overlooks is the financial health of a business.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
