[SINGAPORE] Market prices on callable bonds sold by Singapore's biggest property developer suggest some investors aren't fully aware of risks associated with the notes' structure, according to fund researcher iFast Corp.
CapitaLand Ltd's S$400 million of securities due in 2022, which the issuer has an option to pay off early at par value on Jan 12, traded at 102.1 US cents on the US dollar on Sept 8, according to Singapore exchange data.
That makes the yield to call, which measures projected gains or losses for investors purchasing the securities now if the firm opts to buy them back in January, minus 0.55 per cent.
The bond coupon will rise to 4.5 per cent from 3.8 per cent if the notes aren't redeemed on Jan 12, compared with CapitaLand's average borrowing cost of 3.4 per cent in the first six months this year.
As the firm can redeem or refinance the notes at a cheaper cost, the risk of losses for individual investors is high, according to Terence Lin, an assistant director of bonds and portfolio management at iFast in Singapore.
"It's a risky bet because CapitaLand has the incentive to redeem the bonds due to the expensive cost of servicing them,'' Mr Lin said. "The only logical explanation is that some investors are betting the bonds won't be called so as to get the juicy coupon for another year.''
CapitaLand had S$4.6 billion of cash and unused lines as of June 30 to support its refinancing and working capital needs, the company said in an e-mailed reply to questions. It will finalise funding options related to the bonds "only nearer to date of redemption or repayment," it said.
"The investing public are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions."
The last time another local-currency bond faced a similar situation was some three years ago, when perpetual debt issued by Oversea-Chinese Banking Corp traded at a negative yield before the lender exercised an option to call it in July 2013, according to iFast's Mr Lin.
CapitaLand's 2022 callable notes were issued by a unit called CapitaLand Mall Asia Ltd in January 2012. CapitaLand took full control of the unit in July 2014 via a S$3.18 billion takeover offer.
Besides the 2022 securities, the unit also has S$350 million of bonds maturing in August 2017, according to Bloomberg data.