Temasek Recently Launched a 5-Year Bond: Should You Invest in It?

·4-min read
Bonds - Wooden Blocks
Bonds - Wooden Blocks

If you’re looking for a wider spread of investment choices, you’re in luck.

Temasek Holdings has announced its second bond offering to retail investors as part of its S$5 billion Guaranteed Medium Term Note Programme.

As a recap, Temasek is an investment firm with a portfolio valued at S$381 billion as of 31 March 2021 (FY2021).

The bulk of its investments are in Singapore and China, and the company periodically raises funds from bonds issues, bank borrowings or divestments.

That’s what makes Temasek’s latest bond offering noteworthy.

The allure of fixed income is that it yields a steady return to the investor as long as the issuer is reputable and of good credit standing.

It also offers a way to diversify your investment holdings across different asset classes other than equities.

Should investors buy into Temasek’s latest bond offering?

Salient features

Temasek’s latest bond offers a 1.8% coupon and has a five-year tenure, maturing on 23 November 2026.

The coupon is paid semi-annually and the total offering of S$350 million is divided into two tranches.

The placement tranche of S$250 million is offered to accredited investors and institutions while the remaining S$100 million is offered to retail investors.

The issue price of each bond is S$1,000 and it will be offered in denominations of S$1,000.

The bonds will be listed on the Singapore Exchange and cleared through the Central Depository Pte Ltd (CDP).

Unfortunately, CPF and SRS Funds cannot be used to apply for the bonds’ public offer, but SRS investors can purchase the bonds through the secondary market by contacting their respective banks.

Excellent credit metrics

A quick look at Temasek’s credit metrics shows that the investment firm boasts robust numbers.

The investment firm’s total debt to net portfolio value is just 5% for FY2021 and has remained at such levels over the last three fiscal years.

For interest coverage, Temasek’s total interest expense is only 4% of its dividend income and just 1% of its total recurring income.

These financial metrics demonstrate that Temasek can service its loans and that the firm has a very low default risk.

A comparison of alternatives

That said, the question remains: is a 1.8% per annum yield attractive enough?

Let’s compare this return to a few other asset classes.

The latest Singapore Savings Bond (SSB) offers a 10-year tenure with an average return per year of 1.71%.

This return is fairly close to what Temasek’s bond is offering, but the SSB needs to be held to maturity for the investor to receive this yield.

If the investor holds the bond for five years, his or her annual return falls to 1.15%.

And then, there is the matter of alternatives to Temasek’s bond.

Investing in blue-chip shares such as DBS Group (SGX: D05) or Singapore Exchange Limited (SGX: S68), or SGX, can also provide you with a steady stream of passive income.

DBS offers a forward dividend yield of around 4.1% while SGX’s shares sport a 3.4% trailing yield.

While these yields may look significantly higher than Temasek’s bond offering, investors should note that dividends are not a sure thing and may be either reduced or eliminated when a downturn hits.

Inflation looms

With higher inflation coming next year, another question that investors should ask themselves is whether their investments can keep pace.

Global inflation rates have hovered around 2% to 3% over the last five years, and Singapore’s core inflation of 1.1% looks set to rise to this range soon.

At a 1.8% coupon rate, Temasek’s bond may not be sufficient to cover inflation at the lower end of this scale.

Investors who want to enjoy a return higher than inflation need to seek out different avenues for parking their money and manage their risks accordingly.

Get Smart: Invest for diversification

The verdict is in.

Temasek’s bond offers a great way to diversify your investment holdings, while the investment firm is also well-known for its sterling reputation and credit quality.

However, the truth is that its bond yield is still below that of the long-term inflation rate.

Still, it’s much better than parking your money in bank deposits which typically pay less than 1% per annum in interest.

Deploying some capital to purchase Temasek’s bond is a good diversification method, but if you are trying to beat inflation, then you should consider purchasing either shares or REITs.

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Disclaimer: Royston Yang owns shares of DBS Group and Singapore Exchange Limited.

The post Temasek Recently Launched a 5-Year Bond: Should You Invest in It? appeared first on The Smart Investor.

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