The SIA 3.03% Bond: The Bedokian’s Take

Another corporate bond is coming to town, and yes, it is the Singapore Airlines (SIA) 3.03% bonds. A few financial blogs had articles on it, so I shall just concentrate my post from a Bedokian Portfolio investor’s point of view.

Let us run through this bond using my conservative selection guidelines stated in my ebook¹:

• Bond is priced at par or discount: If you are applying for the bond at this stage and got it, it is considered as getting it at par (well almost. There is this $2 application fee which makes it slightly above par, but we will just let it be).
• At least five years to bond maturity date: Pass, since the bond tenure is exactly five years.
• Credit rating of “investment grade”: This is the gripe. According to the product highlights sheet², it was stated that the issuer (i.e. SIA) and the bonds are not rated by any credit agency. We shall look at this later.

In conjunction with the selection guidelines, we still need to conduct a full fundamental analysis (FA), using the Bedokian Portfolio’s three-level FA approach, on SIA. However, we shall only highlight some of the important points from our own analysis as well as from other sources.

Company Level

First up we will look at SIA from an equity investor’s perspective. Key indicators pertaining to bonds (a.k.a. debts) will be the debt-to-equity (D/E) and current ratios, which are (from Yahoo Finance)³ is 40.03 and 0.5 respectively. Going by The Bedokian Portfolio’s equity selection guidelines⁴, that is not so good.

SIA, being in the airline industry, having a high D/E is the norm due to the capital-intensive nature (in fact, the issuance of these bonds are meant for the purchase of aircraft and aircraft related payments⁵). In the case of having high leverage, a strong cash flow is very important for the company.

Kyith from Investment Moats had detailed SIA’s financial information and cash flow, and concluded: “Their financial position looks strong enough to pay the coupon payment”. He also highlighted that the non-current liabilities were mostly past bond issues and very little bank loans⁶.

Environmental Factors Level

The airline industry is very competitive and price-sensitive, period. A rise in air ticket prices will send customers to another airline that offers lower ones, ceteris paribus. This means for an airline that is not so cheap, it has to offer some other value-added services or experiences, which in other words, qualitative advantages.

SIA got the world’s best airline title, as well as best first class, best first class airline seat and best airline in Asia, as ranked by research firm Skytrax in the priod Aug 2017 to May 2018⁷. Such awards are important as SIA can be seen as a premium in terms of quality, thus it may appeal to customers who does not only see price in choosing an airline. 

Still, SIA has an answer to price-only customers, in the form of their subsidiary Scoot.

Economic Conditions Level

Air travel has become part and parcel of travellers wanting to go overseas, or to go from one part to another part in a large country efficiently.  The same goes to air freight and the transportation of cargo and goods.

During an economic downturn, demand for discretionary travel and goods tend to fall as consumers would want to ride out the storm and save, thus there is some positive correlation between airlines and the state of the economy. To prove this point, the annual growth rate in global air traffic passenger fell from 7.9% to 2.4%, and then to -1.2%, in the years 2007, 2008 and 2009 respectively, the latter two being the Global Financial Crisis years⁸.

No Ratings and Not Secured

I guessed I may have got carried away with my FA. Now back to the bond. Remember that this bond is not rated? Then there is only one other thing that you have to rely on, and that is faith.

On another related note, the product highlights sheet mentioned that the bonds are not secured⁹, meaning the bonds are not tied to any collateral except for the good faith of the company. Hence in the event of SIA’s winding up before the bonds mature:

“…the Bondholders will not have recourse to any specific assets of the Issuer and its subsidiaries and/or associated companies (if any) as security for outstanding payment or other obligations under the Bonds and/or Coupons owed to the Bondholders and there can be no assurance that there would be sufficient value in the assets of the Issuer after meeting all claims ranking ahead of the Bonds, to discharge all outstanding payment and other obligations under the Bonds and/or Coupons owed to the Bondholders.” 

Sounds morbid? Well in any investment, we have to consider all risks, and this will depend on how you view those risks. It is up to you how to judge the probability of those risks.

Judging from the past performance (though it is not an indicator of future returns), SIA had returned positive net profits and good cash flow, so in my opinion, the “no-ratings” and the unsecured bond issues would be on a low.

The Coupon Rate

At 3.03%, this coupon rate is considered low among corporate bonds. Taking a 5-year Singapore Government bond that was issued recently on 1 Feb 2019 (at 2% coupon rate, which I use it as the risk-free rate) for comparison¹⁰, the risk premium is 1.03% (3.03% – 2.00% = 1.03%). Meaning for that extra 1.03%, assuming holding the bonds till maturity, you will have to worry whatever bad points that were said in the above sections. 

Seedly had compared the coupon rate with other investment instruments with different tenures, like CPF, fixed deposit rates, etc¹¹.

Finally, The Bedokian’s Take

And the anti-climatic answer is: it boils down on the individual’s comfort level and risk tolerance. If you are interested, do remember that diversification is paramount in an investment portfolio, and adhere to the 12% limit rule.

You have until 26 Mar 2019, 12:00 pm to decide, so take this weekend to have a thought-out.

1 – The Bedokian Portfolio, p100-101

2, 5, 9 – Product Highlights Sheet. 19 Mar 2019. https://www.singaporeair.com/saar5/pdf/Investor-Relations/SIA-Retail-Bond/product-highlights-sheet-19March2019.pdf (accessed 22 Mar 2019)

3 – Singapore Airlines Limited. Yahoo Finance. https://sg.finance.yahoo.com/quote/C6L.SI/key-statistics?p=C6L.SI (accessed 22 Mar 2019)

4 – The Bedokian Portfolio, p96-97

6 – Singapore Airlines SIA issues a Safe 5 Year 3.03% Retail Bond – My Take. Investment Moats. 19 Mar 2019. http://investmentmoats.com/money/singapore-airlines-sia-5-year-3-03-retail-bond/ (accessed 22 Mar 2019)

7 – Kaur, Karamjit. SIA bags world’s best airline title. The Straits Times. 18 Jul 2018. https://www.straitstimes.com/singapore/transport/sia-bags-worlds-best-airline-title (accessed 22 Mar 2019)

8 – Statista. Annual growth in global air traffic passenger demand from 2006 to 2019. https://www.statista.com/statistics/193533/growth-of-global-air-traffic-passenger-demand/ (accessed 22 Mar 2019)

10 - The Monetary Authority of Singapore. Results of auction of taxable book-entry Singapore Government Bonds to be issued on 01 February 2019. 29 Jan 2019. http://www.sgs.gov.sg/~/media/SGS/SGS%20Announcements%20pdf/Bonds%20PDF/2019/N519100A%20Result.pdf (accessed 22 Mar 2019)

11 – Tan, Cherie. SIA Retail Bond 2019 – The Good, The Bad and Everything You Should Know. Seedly. 21 Mar 2019. https://blog.seedly.sg/sia-retail-bond-everything-you-should-know/ (accessed 22 Mar 2019)

The Rise of The Tech Conglomerates

The moment we see the word “conglomerate”, we began to associate it with companies that have multiple business divisions doing all sorts of stuff. General Electric, Siemens and Keppel are some examples of conglomerates. Most of these known conglomerates have a very long history. Jardine Matheson started off in the 1830s as a trading company in the Far East; Philips was founded in the late 19th century manufacturing lamps. 

Over the years the name of these companies became great intangible assets. Think “Mitsubishi” and the things that pop out of our heads will be cars, air conditioners and the WW2 Zero fighter planes. Or when we talk about Samsung, smart phones, televisions and shipbuilding will come to mind.

While these conglomerates took a long time to become what they are now (so-called traditional), there is a new breed coming up fast and hard, and from a sector that we did not expect it; technology. Recently we are seeing some tech firms rapidly becoming conglomerates, doing (or about to do) things that are not what they were in their beginnings.

Amazon came about as an online bookstore in 1995, but now they have become a huge e-commerce powerhouse and ventured into traditional sectors such as supermarkets (through their acquisition of Whole Foods). Grab originated as a taxi-hailing app in 2012. Today, besides being a ride-hailing company, Grab also has a food delivery network, a payment platform and is about to offer loans to companies¹. What are the main factors for their rapid rise to conglomerate status as compared to their traditional counterparts? Three reasons: platform, data and network, and they work in synergy with one another.

Reason #1: Platform

A platform (in my definition for tech) is an integrated system that encompasses backend processes, front-end interface by consumers and any supporting components in between that make it work. The key attributes of the platform are that it should be scalable and adaptable to suit different situations and business needs.

Apple’s platform (or ecosystem as most called it) allows seamless integration between one’s computer, mobile device, entertainment and even exercise regime. The Grab app now includes looking for a ride, topping up your electronic wallet and scan QR codes to pay for your purchases (and earn some points). 

Reason #2: Data

In the 21st century, data is the new gold. Why is this so? Sieving through data carefully, you will get information. Digesting that information, you will gain useful knowledge. Now you know why data analytics is so “in” now.

Tech firms, through their platforms, have amassed tons of data from consumers. With this and through data analytics, they can roughly estimate the “5 Ws and 1 H” (what, where, when, why, who and how) of customers. With these outcomes, they could provide new products and services, and/or improve on existing ones.

Amazon, by using data collected from customers buying from its website, would further recommend products that they think the customers may be interested in.

Reason #3: Network

“Network” here means a slew of things, ranging from collaboration with other firms to the outright buyover of companies. Big businesses, both traditional and technological, carry out the “networking” to venture into a new sector and/or to gain some product, service and/or expertise to synergise with their operations.

The earlier cited example of Amazon buying over Whole Foods is one aspect of “network”. In 2002, eBay acquired PayPal to better integrate the latter’s online payment service to the former’s e-commerce operations.

So What Do All These Mean?

As an investor, these things present opportunities for your investment portfolio, although I must say it is not so simple as it seems. Admittedly I did not foresee Grab’s move into the online payment sphere, even though I had mentioned that payment solutions are trending in the days to come. Though I had written on looking for the next big thing, these only provide some partial guesstimates and half-baked clairvoyance into the future.

Then on the political front we have an American politician wanting to break up big technology companies. Just a few days ago, Elizabeth Warren, a senator who may be running for the United States Presidential Elections next year, was quoted in an interview²:

"Amazon operates this platform. That's cool. I'm for that. But Amazon does a second thing. They suck up information from every single transaction — information about buyer, information about the seller. And they then can use that information to make a decision to enter the marketplace themselves."

And this was directed at Reason #2 above.

In the meantime, disruptions are still ongoing, and who knows we may see a “network” between traditional and technological conglomerates working together.

1 – Cheng Wei, Aw. Grab offers firms loans of up to $100,000. The Straits Times. 14 Mar 2019. https://www.straitstimes.com/business/grab-offers-firms-loans-of-up-to-100000 (accessed 17 Mar 2019)

2 – Taylor, Jessica. Sen. Elizabeth Warren Blasts Big Tech, Advocates Taxing Rich In 2020 Race. www.npr.org. 15 Mar 2019. https://www.npr.org/2019/03/15/702707734/sen-elizabeth-warren-takes-longtime-fight-for-a-level-playing-field-to-2020-race (accessed 17 Mar 2019)

Which Bedokian Portfolio Combination Is Suitable For You?

In my eBook I had touched on three different Bedokian Portfolio variations¹, each broadly suited for investors of different age groups and/or risk profiles. Let us revisit what are the three:

• Young investor aged 21-35 / Aggressive investor: 40% equities, 40% REITs, 10% bonds, 5% commodities, 5% cash (we call this Portfolio 1).
• Middle-aged investor aged 36-55 / Moderate investor: 35% equities, 35% REITs, 20% bonds, 5% commodities, 5% cash (also known as the balanced Bedokian Portfolio, which I use most of the time as an example)(Portfolio 2).
• Retiree investor aged 56 and above / Conservative investor: 20% equities, 20% REITs, 40% bonds, 10% commodities, 10% cash (Portfolio 3).

What would be the performance of these three portfolio combinations? Using U.S. market data from the Portfolio Visualizer (www.portfoliovisualizer.com), let us assume a U.S. Bedokian Portfolio investor with an initial amount of USD 10,000 and does annual rebalancing. Since the site’s earliest data on REITs was from 1994, we shall use the period of 1994-2018, a 25-year span. We will also include the S&P500 ETF as a benchmark, since this roughly represents the U.S. equity market as a whole.  

Fig.1 – Portfolio returns, table view, 1994-2018. Inflation is not factored in.

Fig.2 – Portfolio returns, graphical view, 1994-2018. Inflation is not factored in.

Let Us Compare

Looking at the whole thing, it is no doubt that investing in the S&P500 for 25 years will trump every Bedokian Portfolio combination out there, even the most aggressive one (Portfolio 1). Yes, the results are there and I do not dispute it. However, this just highlights the fallacy that most investors would tend to fall for, and that is looking at just the returns.

If we run a similar test, but making 2009 as the end year, the results would be vastly different:

Fig.3 – Portfolio returns, table view, 1994-2009. Inflation is not factored in.

Fig.4 – Portfolio returns, graphical view, 1994-2009. Inflation is not factored in.

And in 2009, naturally the returns-only investor would proclaim that the aggressive Bedokian Portfolio was the best.

Returns are very subjective and will change from time to time, depending on what you are invested in and when you are looking at your investments. A well-known way to have good returns all of the time would be tactical asset allocation, where you adjust the weightage of the asset classes, sectors and/or individual companies to capture the best returns. Problem is, this meant a very sound grasp of what is coming, and I can say not even the best investor or fund manager can do it 100% of the time.

Risk And Returns

There are two ‘Rs’ in investing, one is returns and the other is risk, specifically market risk. These two attributes form the very basic premise of the Modern Portfolio Theory (MPT), where investors build portfolios to optimize returns based on a given level of risk, and it also advocates the advantages of diversification.

There are a few ways to measure risk. One is to use standard deviation, which measures the past volatility of an asset class or security. The higher the standard deviation, the more volatile the asset class/security is (and thus, more risky). Another is the Sharpe ratio, where it is the measure of the excess returns above the risk-free rate over the standard deviation. The higher the Sharpe ratio, the better it is.

Lastly we have the Sortino ratio, which is similar to the Sharpe ratio, but it uses only the downside standard deviation instead. Like the Sharpe ratio, the higher the Sortino ratio, the better it is.

Let Us Compare Again

Reevaluating the numbers in Fig.1 and Fig.3, taking risk and returns in mind, Portfolio 3 stood out as the best with a lower standard deviation, and higher Sharpe and Sortino ratios. This concludes the suitability of Portfolio 3 for the conservative and/or retiree Bedokian Portfolio investor.

The results also highlight a common adage in investing; higher returns typically require higher risks. In Fig.1, the S&P500 ETF gave the highest returns, but also the highest risk based on the three risk measurements. But in Fig.3, Portfolios 1 and 2 gave the higher returns with lower risk than the S&P500 ETF (hence my bold on the word ‘typically’). This reinforces the importance of diversification at the asset class level, where risk is tapered and correlation may bring higher positive returns and lower losses.

Still, I acknowledge every person’s personality and characteristics are different, and so is the respective person’s risk appetite and investment style. The usual disclaimer applies and of course, the phrase: "past performance does not indicate future returns".

1 – The Bedokian Portfolio, p72.

Assumptions on Portfolio Visualizer Data

Asset class representations used in the data: Equities = U.S. Stock Market; Bonds = Total U.S. Bond Market; REITs = REIT, Commodities = Gold; Cash = 1-month Treasury Bills. All dividends are reinvested and transaction costs (e.g. commissions) are not included.

Results

To see the results in its entirety for the 1994-2018 period in Portfolio Visualizer, click here.

To see the results in its entirety for the 1994-2009 period in Portfolio Visualizer, click here.

References

Standard Deviation – https://www.investopedia.com/terms/s/standarddeviation.asp

Sharpe Ratio – https://www.investopedia.com/terms/s/sharperatio.asp

Sortino Ratio – https://www.investopedia.com/terms/s/sortinoratio.asp