Thursday, 14 June 2018

Understanding credit co-operatives – could they be an alternative to banks?


What is a credit co-operative? Unless you’re in one, most Singaporeans do not know of them nor the important role they play in society. More importantly, you may not be aware that there are plenty of benefits you can get from being a member of a credit co-op.

Co-ops are basically regulated social enterprises. They are organised on a voluntary basis, democratically controlled and member-owned, to achieve the common social or economic aim that benefits their members and/or society at large. In fact, co-ops are founded on values of self-help, mutual assistance, equality, care for community and co-operation. 

As its name suggests, credit co-ops provide financial services to their members, and as I mentioned earlier, there are plenty of benefits you can get from being a member of a credit co-op – including access to savings with attractive interest rates, loans at competitive interest rates, and more. They help you grow your savings/nest egg for the future and/or if you need to take loans, you won’t be saddled with a huge debt.

You might not be familiar with the term credit co-op, but surely you’ve seen some of these brands before! Take a look:



Some co-ops are profession-based in the sense that only individuals belonging to certain professions can join as members. For instance, a teaching staff or full-time employee of a school, you can join the Singapore Teachers’ Co-Operative Society Ltd. Whilst staff from the Ministry of Home Affairs, Corrupt Practices Investigation Bureau, Certis CISCO, AETOS etc. can join the Singapore Police Co-Operative Society. There are also credit co-ops that are open to public membership e.g. TCC Credit Co-Operative. There’s a really great introductory article that you can read here for more information on some other co-ops in Singapore.

Saving Options with Credit Co-Ops

One good example is that of the Singapore Teachers’ Co-Operative Society Ltd, which gives an interest rate of up to 3.08% per annum on its bonus savings account upon maturity. This is relatively higher than similar products offered by financial institutions.

The Singapore Government Staff Credit Co-Operative Society Ltd is another good example. It is a co-op for public service officers looking to build financial resilience. If you are employed in the Singapore Civil Service, Statutory Boards and Government-linked Companies, you are eligible to join them as a member.

Their member benefits include:

·      Maximise financial growth through savings
·      Receive FD for better returns
·      Loans at reasonable interest rates
·      Hospitalisation benefits
·      Educational awards
·      Free insurance coverage
·      Loyalty benefits
·      Funeral fund grants
·      Birthday gift
·      Provision of family membership and other privileges such as highly subsidised overseas tours and annual gala dinner

Avoid Taking a Loan? 
Here on this blog, I’ve always advocated avoiding loans if you can help it (with some exceptions to the rule, such as a housing loan) and paying them off as soon as you can before you spiral down the path of bad debt.
I’ve also mentioned numerous times at my talks that credit card debt is something you should fear and be wary of. The interest rate on your credit card (if you don’t pay off in time every month) is much higher than most people think. It is easy to fall into the cycle of simply paying the minimum $50 payment each month, but many people forget that there are plenty of other rollover charges, not to mention an exorbitant interest rate. That is how credit card debts can so quickly spiral out of control! UOB and DBS charges 25.9% per annum whereas OCBC charges slightly higher interest of 25.92% on all outstanding amounts owed.

Borrowing from a moneylender, especially an unlicensed one (like loan sharks), can be even more detrimental. If you’re not careful, your debt can easily snowball into an avalanche that you may not be able to pay off even if you sold all your assets.

But what about if one REALLY is cash-strapped and needs a loan?

Well, you can consider options like a credit co-op. They're an alternate means of seeking out financial solutions, and since they're less profit driven than most commercial enterprises, credit co-ops tend to be more willing to go the extra mile for their members. This includes extending loans to lower-income members or even rescheduling members' loans, and they can even work out a debt restructuring plan with you to help clear it off.

AUPE Credit Co-Operative Limited, for instance, offers financial assistance to its members for the purpose of:
·      Children’s educational needs
·      Medical expenses
·      House renovation
Members of co-ops can take short to medium term loans as the interest rate is relatively lower according to their websites. This is a HUGE difference if you compare to the interest charged by credit cards and moneylenders and are often even more competitive than personal loans offered by commercial banks.


So if you ever need to take a loan (although I sure hope you’ll never have to, but I understand life has a funny way of throwing us unexpected surprises sometimes), do weigh your options rather than the usual credit card loans or seeking out moneylenders which many people resort to.
If this has piqued your interest, and you’re keen to learn more about the various co-operatives in Singapore, head over to SNCF’s website to find out more!

Disclaimer: This is a sponsored post written for the Singapore National Co-operative Federation to promote greater awareness of credit co-operatives in Singapore in conjunction with the World Credit Union Conference which is being held in Singapore for the first time. All opinions are that of my own.

Saturday, 9 June 2018

IPO Analysis: Is Astrea IV Private Equity Class A-1 bond worth a BUY?

Astrea IV Class A-1 bonds are the talk of the town right now, and I've received so many DMs about this so I'm finally sitting down to evaluate and write this.




Details:
- The bond is launched by Astrea IV Pte. Ltd, which is an indirect subsidiary of Temasek 
- 4.35% interest rate offered
- IPO applications close at 12 noon on 12 June 2018
- You can apply through ATM or online banking via DBS, POSB, OCBC or UOB
- Minimum subscription amount: S$2,000
- You CANNOT use your CPF or SRS funds to apply for this bond.
- Bond starts trading on SGX-ST on 18 June 2018



What are you really buying into?

Now, don't get misled by the above headline published in The Business Times last week - this is NOT a Temasek bond. Rather, it is a bond issued by one of their subsidiaries.

This is a really new and unique asset class because they're neither government-backed nor corporate bonds. Instead, they're private equity bonds. This is the 4th private equity bond that is being issued by Astrea, and the first one that is being opened up to retail investors. 


These Astrea IV Class A-1 bonds ("Astrea bonds") will then be used to invest across 36 private equity funds, which are invested into 596 underlying companies. Traditionally, I would dig up details about the investment assets, but since there's 36 funds and almost 600 companies, that's an almost impossible task because much information isn't available about these private companies, and neither does anyone have that much time anyway to scour through all.

The 36 PE funds. 

If you're unfamiliar with private equity, what they basically do is to invest in distressed or promising companies, go in with their expertise and restructure or turn the business around (usually making operational or financial improvements), with the final aim (usually) being to sell it off for a profit. As a result, the returns on such investments (when successful) can be tremendous - think 2 to 3 digit percentage figures at least. 


So in this case, when you buy these Astrea bonds, you're pooling your cash which will then be used to invest into these funds and underlying companies. The profits will then be used to pay the interest on your bond (4.35%) and finally return you your capital after 5 years.

Given the sheer number of funds and underlying companies, coupled with the fact that the exposure to a single partner / company / sector is quite low (even Blackstone Capital Partners, which is the largest, is merely 10.6% of NAV), the risk here is quite minimal even if one or some fold.



(There's a step-up interest portion in these Astrea IV bonds if they're not reclaimed after 5 years i.e. on 14 June 2023, but I'm not going to go into that because I've no intention to hold it for any longer than that, due largely to opportunity cost. There may be a bonus payment of up to 0.5% at redemption if performance condition is met.

For those of you who are keen on a longer-time holding period, there will be a 1% per year interest step-up rate if the bond is not yet redeemed after 2023.)


Who's behind the bond?

Okay, so now that you know this is NOT a Temasek bond...then who exactly is behind it? That's Azalea Investment Management, which was set up in 2016 and is a wholly-owned subsidiary of Azalea Asset Management, which is then owned by Temasek Holdings.

Although they're relatively new as an entity, Azalea's management team apparently has extensive experience and institutional knowledge in the private equity space. The senior management team comprises of PE veterans and is led by Ms. Margaret Lui-Chan, who has been with Temasek since 1985.

Temasek and its affiliates have also launched 3 Astrea investment vehicles prior to this. 
Check out this really informative Fitch report for more information.



Why is the yield so high?

That was the first question that came to my mind when I read about the bonds being launched. Compare this to the Singapore Savings Bonds which is pretty much 100% risk-free (since it is backed by the Singapore government) and yields 2.63% for this month's issuance. Now contrast this to a riskier corporate bond such as Aspial's bonds, which were launched for 5.25% previously.



If this is from (albeit indirectly) Temasek, the next financial juggernaut in Singapore, then why is the yield so high?! Wouldn't it make more sense to price it at about 3+% yield, since the brand name Temasek alone would warrant some sort of a premium and perceived safety net?

According to Ho Ching, she says the main aim of this bond is largely to help retail investors in Singapore supplement their retirement income

Why is the yield so low?

You didn't read that wrong :P for investors who truly understand the huge kind of returns that are seen in private equity (remember, 2 or even 3 percentage digits can be fairly common, if they spot the right gems / get lucky on the sale), why is the yield being offered to A1 bondholders here so low at just 4.35%?



This can be easily explained using high risk, high returns; low risk, low returns.

Firstly, the minimum investment amount to participate in Class A-1 bonds is just S$2,000, in contrast to Class A-2 and B (US$ 200k each).

The risks in Astrea IV Class A-1 bonds in terms of default are also significantly lower than the other bonds issued in this exercise, as Class A-1 bonds will be redeemed first in any event before A-2 or B. This means that even if Astrea faces liquidity or financial problems, A-1 bondholders will be paid first.

Since the risk undertaken by class A-2 and B bondholders are higher (they only get paid after A-1), they're compensated with a higher yield in order to incentivise them to buy these bonds. Unfortunately, you don't get to buy them as they're not open to the public and have already been fully subscribed anyway.




Are my returns guaranteed?

No. You MUST understand this point.

However, the risk of default is pretty low, in my opinion, due to how this has been structured. In the event of a shortfall, Astrea IV also has a 10-year committed capital call facility with DBS which will step in to cover the payments :)

When can I get back my money?

You can sell the bonds anytime after 18 June 2018 on SGX, just like how you would with ordinary stocks. Otherwise, you can also choose to hold the bonds until its call date on 14 June 2023, or even longer if you want to be entitled to the step-up interest (provided the bonds aren't fully redeemed by then).

Is there a chance that I'll lose my money? Will Temasek save us if anything happens to Astrea?

The direct risks to bondholders which you should be aware of are:

- the bond price might fall below its issued price on the bond market
- the Manager might not be able to fulfil its interest repayments
- the Manager might not be able to reclaim the bonds and pay back the original capital sum to bondholders

Now, it is important to note that Temasek Holdings is not guaranteeing these bonds. This is even explicitly mentioned in the prospectus, that is, if you bothered to read through (all 306 pages of) it. Therefore, if the bond manager fails to repay the bonds and/or interest, there is no guarantee that Temasek will step in to save bondholders.


Are they capable of repaying the bond interest and capital? 

As with all bonds, you should always evaluate the financial health of the investment manager before you decide whether to buy or stay out. Remember, that's the main reason why I said I was staying away from Aspial and Hyflux bonds back then?

Since Astrea's financials are not entirely public and we can only rely on the numbers presented in their prospectus covering a limited timeframe of August 2017 - March 2018, a few figures to highlight are:
- USD 48.6 million of profits generated
- USD 342.5 million was used for their investing activities



That doesn't really tell us much, especially when there's no year-on-year comparison to gauge how they've fared. Therefore, we can only look to their Loan-to-Value below, where you'll see that Class A-1 bonds have a LTV of 16.5%, which is relatively low, and thus the chances of default should also be quite low since only $181 million in the reserve account is needed to fully redeem Class A-1 bonds.

Sounds good, but what's the catch?!

I'm a huge skeptic, so this deal honestly sounded too good to be true to me. But after scouring through the prospectus and various bloggers / investment houses' take on this bond IPO, I struggle to find anything realllllly negative about it.

Initially, I thought, is this some conspiracy?! Why would Temasek issue a bond with such a high yield?! Can't they get institutional or corporate loans for this? I bet companies would be scrambling just to subscribe! Or just get the private banks to issue it to their high-net-worth customers? Then I thought, or maybe they're in financial trouble, that's why they're raising this money from us mortals? But then I realised that the total sum of S$242 million raised really doesn't count for much, considering Astrea's access and connections to Temasek Holdings.

My cousin attended the talk on this bond yesterday and I got her to ask them this question on my behalf. The answer by their CEO, Ms. Margaret Lui-Chan was that their vision is to open to retail investors. Lol.

So I can only say, looks like Ho Ching might be right after all, and this bond truly is being created to help retail investors? You can be the judge.

Disclaimer: I am NOT sponsored, nor do I have any connections nor payment from Temasek or Astrea or anyone, for that matter, in exchange for this post.




TLDR Summary
This is probably the longest IPO analysis I've ever written for a single product, so if you got bored halfway, I don't blame you. Here's a quick breakdown of my view towards Astrea IV Class A-1 Bonds:


Pros
- This is one of the safest bonds I've seen in a long time, especially given the A-rating by two reputable rating agencies (Fitch and S&P), not to mention Ho Ching putting her own personal name behind this (I assume, since she didn't correct the BT article nor ask them to apologise / correct / take it down).
- Long track record since this is already the 4th Astrea bond being launched, with the first in 2006.
- There are some quality PE managers in the 36 funds listed above, including Blackstone and KKR. Private equity folks should recognise these names ;)
- The Sponsor owns 55% equity interest, so they do have their skin in the game and are less likely to want to see this fail.
- Their marketing is rock solid and has definitely generated the hype needed for this to become over-subscribed. Talk about FOMO!
- The first few pages of their IPO prospectus is just lovely! Kudos to whoever designed it :D

Cons
- It is not easy to understand, and is the first of its kind for retail investors.
- It was slightly mis-marketed (in my opinion) since there was so much emphasis and hype on their connections to Temasek, leading many investors to think this is essentially a Temasek Holdings bond.

You can also watch this short (marketing) video explaining the bonds here:





So Budget Babe, are you subscribing?!

Considering the hype and 4.35% yield, I'll be subscribing to these bonds and leave it as part of my bond portfolio (together with my CPF). After all, I'm the biggest skeptic of most corporate bonds, but this is one in recent years that actually managed to get my attention.

With their connection to Temasek, I doubt that Astrea will default on the bond interest payments, and I don't think their bond prices will fluctuate too much on the open market either.

But please don't follow me - do your own homework! Here's the full 306-pages of the bond IPO prospectus as well as the Fitch report for you to read before you make your next move. Nonetheless, I'm betting this is going to be oversubscribed, and can only hope that I get some allocation from my application!

With love,
Dawn