Why Are GLP Perpetual Bonds Selling Like Hot Cakes?

Global Logistics Properties (GLP), the largest integrated logistics property developer in Asia, aims to raise about $500m via the issue of perpetual capital securities to fund its operations. This comes with guidance that the notes will be priced to yield "mid- to high-5 percent", certainly a boost to investors who are seeking for a higher return in the low yield and inflationary environment.

Perpetual bonds have no maturity and issuer will continue to pay the coupons indefinitely, though they reserve the right to redeem the bonds.

Is that the only reason for the perpetual to sell like hot cakes? We suspect not. GLP has a strong business presence in its core markets of China and Japan. Their earnings are expected to grow on the back of a strong China market and gradual recovery of the Japan market. Moreover, it counts Singapore sovereign wealth fund, GIC, as its major shareholder (51%).

Currently, GLP is trading at a 20% discount to RNAV and at more attractive multiples than its logistics peers, with catalysts from higher rents, accretive capital deployment and potential asset spin-offs. The cash flows derived from a policy-friendly logistics property sector render it a more desirable investment than residential developers at this moment.

S&P Downgrades Banks, What's Next?

Ratings agency Standard & Poor's has downgraded the long-term credit grades of 37 financial institutions worldwide. Among those who suffered the cut are Wall Street titans such as Bank of America, Goldman Sachs, JP Morgan and Morgan Stanley. Alongside are other established names like London-based Barclays, HSBC, and UBS.

S&P said its move reflects new criteria for banks, based on changes in market trends and government support. It evaluates banks based on economic and industry risks, bank-specific strengths and weaknesses, as well as "likelihood of external government or group support."

Downgrade is damaging for the banks as it can increase their borrowing costs and put further pressure on their shaky finances. BOA shares has dropped to a new low on concerns of its financial stability to withstand another downturn in the U.S. economy or further trouble in Europe. We are also concerned whether this will lead to another credit crunch as banks brace themselves for another round of recession.

Dim Sum Bonds Gaining Popularity

China XLX Fertiliser, one of the largest and most cost efficient coal-based urea producers in China, has issued a tranche of five-year Renminbi-denominated convertible bonds at face-value. They carry an annual coupon rate of 4.5% and interests will be paid on each anniversary of the original issue date of the bonds. Conversion price of the bond is fixed at RMB1.84 per share, representing a hefty premium over today’s share price at both Hong Kong and Singapore Stock Exchange.

These Renminbi-denominated bonds are called dim sum bonds in Hong Kong, named after the favourite Chinese cuisine there. These bonds are fast gaining popularity thanks to the escalating awareness and appetite of the foreign investors, who wish to gain exposure to Renminbi-denominated assets but at the same time, are restricted by the capital control policy in China.

With the uncertainty surrounding the Eurozone and US, Renminbi has strengthened 3.6 percent versus the dollar this year, and is tipped to replace US$ as the reserve currency of the world. While this remains to be seen, the demand for dim sum bond cannot be overlooked.

MAS Introduces New Regulations to Safeguard Investors

Come 1 Jan 2012, intermediaries have to formally assess a retail customer's investment knowledge and experience before selling certain products. This is to comply with the new regulations from The Monetary Authority of Singapore (MAS). Advisers who sell Specified Investment Products (SIPs) will also have to pass additional examinations on product knowledge and analysis.

The affected investment products are:

1.    Excluded Investment Products (EIP) such as shares, unit trust and insurance

      2.    Listed SIPs such as exchange-traded fund (ETF) and futures; and
      3.    Unlisted SIPs such as investment-linked insurance policies

Therefore, if a client wants to invest in any unlisted SIP, he will have to pass the Customer Knowledge Assessment (CKA) to ascertain that he has the relevant knowledge or experience to understand the risks and features of the product. On the contrary, if he decides to invest in listed SIPs, he will have to pass the Customer Account Review (CAR) to ensure he understands the risk of complex structures or derivatives before he is allowed to trade such products.

A client is not allowed to trade the specified product if he fails to pass the test. However, if he insists to go ahead with a transaction, the financial planner must offer advice to them. In such cases, the MAS will not allow "execution only" services.

Over the long run, this will benefit the community as more awareness is being created. While the financial industry welcomes any measures to safeguard the interests of the investors, MAS must also exercise caution not to hamper our competitiveness as a financial hub.

Just How Bad is the European Debt Crisis?

Poland has appealed to Germany, the European Union's most powerful economy, to show leadership and avert the collapse of the euro zone. He said the euro zone's sovereign debt crisis now posed the biggest threat to the prosperity and stability of Poland, which is outside the common currency but still hopes one day to join (Reuters).

"I demand of Germany that, for your own sake and for ours, you help it (the euro zone) survive and prosper. You know full well that nobody else can do it," said Sikorski, Poland’s Foreign Minister. 

Berlin has also come under heavy international pressure to allow the European Central Bank to embark on unrestricted purchases of stricken euro zone countries' sovereign debt through quantitative easing. Germany has so far strongly opposed both Eurobonds and a more active role for the ECB, citing fears that indebted countries would no longer have an incentive to reform their economies and also concerns about reigniting inflation. 

On the other hand, France’s credit rating may be put on negative watch just weeks after S&P published an erroneous message on France's AAA credit rating.  A French newspaper says the country's rating "might" soon be put on review for a potential downgrade by the firm (DJ).

It seems like the only good news for now is hope.

Two-Thirds Of Investors Expect Europe Recession - Barclays Capital

According to the results of a recent survey of nearly 1,000 investors conducted by Barclays Capital, "two thirds of investors think that Europe could slump into a recession in 2012 without either the U.S. or China accompanying it." Only 3.0% of those surveyed think the U.S. or China could slide into recession without Europe, "evidence that the majority of investors view recession fears in 2012 to be connected to Europe."

Most of the pessimism about Europe stems from concerns about the euro area sovereign-debt crisis, with concerns about elections and politics in advanced economies marking the second largest area of concern the survey shows. Barclays says "almost 50% of respondents expect at least one country to leave the euro area in 2012, with 35% of investors expecting the breakup to be limited to Greece only, and 1 in 20 expecting all five "peripheral" economies to exit next year."
 

Is Eurozone Already into Recession?

The situation in the Euro Area has taken a serious turn for the worse in the past month. The economy has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality further. Policy makers are floundering to deal with this situation, amid very challenging economic and political constraints. The rest of the world looks on anxiously. Managing the global fallout from abrupt shrinkage in European bank balance sheets will be critical if an untimely re-tightening in global credit conditions is to be avoided.

Source: Institute of International Finance, Inc