Perpetual Bonds

It is not uncommon to see companies dishing out bonds that are sliced into very small denominations to attract retail investors. During the past three months or so, we see at least 2-3 per month. These bonds are certainly not short of subscribers. With a bond rate of 5%-6%, it is certainly very attractive given that the fixed deposit (FD) rate of about 2.0% at the very most. The expectation of impending interest rate hikes certainly push companies, especially those that are in need of funds, to dangle out bonds as quickly as possible to beef up their war chests. In particular, perpetual bonds are special type of bonds that do not have maturity date, and that is where the term perpetual is derived.

While a lot of focus has often been placed on the expected returns, investors often forgot about the terms, especially, the risks that come along with it. First and foremost, when there is no maturity date, theoretically it means that it is up to the company to decide when to redeem back the bond, or not at all. It is unlike a conventional bond that a company has to take pain to ensure that the exact capital is paid back to bondholders at maturity. In other words, a bond holder is in no position to get back his capital unless he sells the bond in the open market, which is very often very illiquid and may have to sell at a discount if one needs the money urgently. Of course, if a bondholder is prepared mentally that that could be the situation in future, then at least the first part of the hurdle is solved.

Given that bondholders do not have much control over the maturity, we should assume that we would not get back our capital at all to be very conservative. That means that we have to rely on coupons distributed by the company quarterly, semi-annually or annually, whatever declared, to generate the returns that we need. This also put the issue of irrevocability a point of contention here. If the bond is irrevocable, it also means that the company is not obligated to make good the coupons that were missed out. While this may affect the company’s credit-worthiness, it also means that retail investors have no recourse on the missed out coupons should such as situations occur. This literally means that the pay-back against the initial investment is stretched even further. Of course, I do not mean that companies would purposely want to do that as they definitely would want to continue to be in the good books of the banks and the investing public, but that term gives them a huge protection should such a crunch occurs. Personally, I would believe that companies would time and again review their account books to assess if they could redeem back those bonds given that interest premium over the prevailing bank interest rate is not a trivial amount in terms of the quantum that they need to pay the bondholders.

That brings me to the last point on why, in the first place, the companies want to raise bonds at a higher interest rate instead of borrowing from the banks. In all likelihood, before the companies carry out such an exercise, they have already had discussions with their banks. Generally, banks lend to companies via secured lending, which means that companies have to present some collaterals as a form of guarantee against the borrowing. That enables the banks to lend at a lower interest rate. However, it may be a situation that most of the company assets have already been pledged to banks, and the banks find the risks too high to swallow, and the company has to turn to the investing public for funds. This means that retail investors are taking on a higher risk as such lending are generally unsecured, and, of course, in the event of liquidation, it is almost certain that bondholders would lose at least part of their capital. Needless to say, this would also affect the common stockholders as well. And that is why share price usually falls whenever a bond, be it a conventional or perpetual bond, is issued.

Perhaps, when we enter a perpetual bond, our mind is never to have it redeemed. In other words, our intention is to continue to have a passive income, hopefully forever. Before you do that, maybe you may wish to review the table in the link to really know your breakeven point of your investment. For investing public like us, the best way to measure it is to assess in terms of number of years required for us to re-cope our initial investments.. This table applies to perpetual bonds, REITs or any investment that you wish to keep till perpetuity. Think about it, if the bond is irrevocable, then the payback gets even longer. Further, with the impending interest rate hikes, it is almost certain that bond prices (or even REIT prices) will fall. That will further discourage us from selling the bonds and shift us into holding the bonds longer. The point is does it worth to keep our investment till perpetuity?

Breakeven table at various coupon and discount rates

So, look at the risks as well, not simply just the expected returns.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Comfort Delgro

I remember I had informed students in the Facebook closed group in mid-2015 that Comfort-Delgro (CD) has probably plateau after pricing all the good news. Recently, I repeated once more on 13 April 2015 when the share price hit $2.91. On the very day, the STI moved up 75 points and following an announcement on additional requirements for rental cars, such as Uber and Grab-taxi. In the long run, rental car services can pose a direct threat to CD’s taxi business.


In retrospect, crossing $3.00 per share had been a great feat in view that it was an essential service stock. The share price was only around $1.50 per share 4 years ago. Up until 2015, it had been increasing year after year for 4 years running. Prior to that, the share price had been quite sluggish, for it was an ‘old-economy’ unexciting stock. The SMRT, on the other hand, seemed to be enjoying a greater fanfare as new lines were built. (However, that cannot be said of SMRT share price during that time.) Fundamentally, Comfort-Delgro is rock-solid compared to the SMRT. I like the stock very much. Just based purely on its cash hoard in 2014/2015, it could have paid out all its long- & short-term loans fully without incurring a cent of debt, making it a debt-free company, and yet maintaining a status of one of the largest (if not the largest) transport company by asset in the world. On the other hand, SMRT was struggling even to this very day to make profit out of its core business, ie rail operations. SMRT managed to keep itself in the black were through advertising and rental businesses, which are not their core business.

As the business grew quarters after quarters due to its increasing presence overseas such as China, Australia and UK, so was the share price of CD. Along with this growth story were a spat of good news in the past 2-3 years such falling oil price and the land transport sector under-going complete overhaul into a asset-light regime. This has led many analysts to become more optimistic in their approach. Some even set their target price to as high as $3.46. By the mid-2015, there were at least three analysts with target prices above $3.40, and quite a number of them projected it to be at least $3.00 per share. In the best of my memory, I was not sure if any analyst offered a ‘sell’ call as the general outlook looked rosy. Perhaps, all these analyses were based on the assumption that the existing assets will be sold to the government, and the ‘windfall’ from the sale of the assets is to be returned to the shareholders in the form of special dividends.

Taking a leaf from the lesson learnt in OSIM’s case that too much good news that feed into ever-increasing share price can make a sad ending to even a fairy tale story, I decide that I should go against the tide to sell at least some shareholding of my CD stocks. Having doubled my investments over the years, I should have a more than 50% buffer, even if the stock price kept coming down gradually. In other words, I need not sell them hurriedly. After all, it is a fairly liquid stock and good news was still feeding into the share price. It was even touted to be the best performing stock at that time. I started scaling down my CD shares in mid-2015, each time taking advantage of its short-term high. By today, it is 11 months since I made the first sell of my CD shares.


In the meantime, the oil price continued to sink and it did not bottom until February of 2016. However this had already been reflected in the share price. Perhaps, the decreasing oil price had helped CD share price to bleep slightly above $3.00 per share. Meanwhile, the news of rental cars, like Uber and Grab-taxi, was probably beginning to bite even though the CD management seemed to brush it off initially. Taxi operation in Singapore is the most lucrative business for Comfort-Delgro, and if Comfort-Delgro were to lose its market-share, its bottom line is likely get hit. That probably explained why Comfort Delgro share price hardly crossed $3.00 per share in the last two months.

Given the additional threat, even the share price of companies that provide essential services can still come under pressure, albeit a bit slower compare to high-growth stocks. That said, Comfort-Delgro is still a great company in view of its deep pockets and the management’s ability to generate multiple sources of income. When the time is right, and of course when the price is right, perhaps, it is time to take comfort again. I will not catch a falling knife for the moment.


  1. This article is not a recommendation or an advice to buy/sell the mentioned stocks. It is just a pure sharing with the readers of this blog.
  2. Note that the share price of the mentioned stock could change abruptly upwards or downwards if there are sudden changes, especially in asset-light arrangements with the transport authority. The author does not have any privy information on these developments. For that matter, the author does not have any privy information of the company or its related matters other than those released by the company publicly.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.