Tan Kin Lian's Blog: Temasek Convertible Bond

Wednesday, October 19, 2011

Temasek Convertible Bond - Standard Chartered Bank

Temasek Holdings offers a 3 year zero-coupon bond that can be exchanged into shares of Standard Chartered Bank at a premium of 27%. Is this a good investment? Here is my view.

Here is another person's view.

9 comments:

yujuan said...: Oh boy, Temasek now wants to offload the risk of the Chartered share price and Sterling movements onto other investors, to mitigate some of their own losses in Chartered, bought at the top of the market just before the Lehman collapse.
Right from day one, investors will lose 27% of the share price.
With this group of bungling State investors at the helm, makes one wonder when they would really start making money for us.
They survive only by pulling profits from monopolistic domestic businesses to plug the hole of losses sustained from bungling overseas investments.; October 19, 2011 2:20 PM
syeds said...: Its good to know that Temasek Holdings as an investment powerhouse in Asia will own just over 5% of the group.

Termination letters; October 19, 2011 2:59 PM
yujuan said...: Buy straight into Chartered on the exchange if you believe in this stock, at least you dun have to wait three years to sell should the price rise, would not want my moneys to be used by Temasek free of charge for 3 long years. The Internet Age now shortens each economic cycle within only one year, 3 years are tooooo long.; October 19, 2011 3:09 PM
Anonymous said...: It looks like minibond, HN5 and pinnacle notes. You take all the risk and they take the profit. Except that this is capital protected assuming Temasek will not go belly up for the next 3 years.; October 19, 2011 3:20 PM
Anonymous said...: Maybe Temasek is anticipating 12% of return of equity for the next 3 years.

Base on that local banks which have Price to Book ratio of 1-1.2 are at bargain price.

But again, Temasek should give investors better return since it is their money at risk.; October 19, 2011 4:21 PM
Anonymous said...: Anyone know why Temasek need to raise this fund? They are running out of money?; October 19, 2011 4:33 PM
Koh Lip Wee said...: I have yet to study this deal in great details but would like to share a few interesting pointers:

1.
Superficially, this seems a 'steep' out-of-money convertibles / option to investors at inception.
Temasek (T) plays the role of 'covered call option writer', offering strike price at '27% above predetermined price (P + 27%)'.

2.
Obviously immediate upside for T is to secure massive funding at zero cost over next 3 years (another major acquisition deal is on T's card??)
Downside for T is that they potentially cap their SCB divestment value at P+27%.

3.
Investors pay an 'option premium' (in the form of interest forgone next 3 years), in exchange for potential equity upside (i.e. in excess of P+27%, which seems a high barrier?).
This presumably comes with capital preservation, unless T goes belly-up (which is highly unlikely at this juncture).

4.
I would like to believe that T is a fair and professional institutional player.

Ceteris paribus, commercial intent from T's perspective need to be comprehended in order to ascertain whether this is a good deal.

T might be looking to divest its SCB stake. Possible reasons might include:

- under-performance of its current share price (or not up to T's expectation)
- its growth and profitability might have already past its peak
- capital requirements for banks might become stringent in future (in view of recent financial turmoil), which T might not willing to commit fresh capital into a past-peak business
- it does not fit into T's overall investment / portfolio strategy going forward (as T might portfolio re-balance to reduce its financial stocks exposure and up its commodities or clean energy weightage etc)

5.
With the complex dynamics in (4) above, from retail investors' perspective, I would prefer a simpler approach by allocating my investable funds via
a) x% into ETFs (i.e. at market performance, but to minus off modest transaction fees)
b) y% directly into equity (individual stock picks based on my 'EIC' and 'PLOG' principles)

6.
My approach obviously does not come with capital protection features (as compared T's offer), but obviously there is no free lunch in the world of investment.

Caveat Emptor : )

Lip Wee; October 19, 2011 6:58 PM
Anonymous said...: This type of investments violates one of my investment principles;

"Anything good, the Singapore elites will not offer to me, a Singaporean citizen".; October 19, 2011 9:28 PM
Anonymous said...: If I believe that chartered bank is a good investment, why don't I just buy now which is 27% cheaper at least nd why give the money to temsek for what? Alamak; October 20, 2011 3:27 PM