Frasers Property green retail bonds – Why we’re staying away

TL;DR

• The Frasers Property 5-year green note is Singapore’s first corporate green retail note. It offers an interest rate of 4.49% per annum with semi-annual payments.
• Frasers Property develops, owns and manages an integrated portfolio of properties. Singapore is its largest exposure at 34% of assets, followed by Australia (28%) and Europe (21%). 
• Frasers Property's balance sheet is healthy as of June 2022, but it has a higher net gearing and lower interest coverage compared to CapitaLand Investment. 
• Frasers Property green note's interest rate of 4.49% is just 1.50 percentage points above the Singapore government bond despite the higher risks. With interest rates going up, we would consider putting our spare cash in the 6-month Singapore Treasury bill and await potentially better yields. 

What happened?

This week, we received quite several questions from our Telegram community on the Frasers Property 5-year retail green bond. 

It seems like interest in retail bonds remains high, with the lack of new issuances after the Astrea 7 bond issuance in May.

The question that you'd probably have is - Is the Frasers Property green retail bond more attractive than the Astrea 7 bond? 

What’s the Frasers Property green note?

The Frasers Property green note is Singapore’s first corporate green retail note. 

Earlier, we saw Singapore’s first public offer of green bonds when the 50-year Green SGS (Infra) bond was issued. 

Response to the 50-year Green SGS (Infra) bond was lukewarm, with only 1,749 applications totalling S$52.9 million from retail investors for the S$50 million public offering.  

Taking cue from the issuance, Frasers Property will be issuing up to S$420 million of green notes to finance or refinance eligible green projects. 

Here’s what you need to know about the green note:

• The five-year notes mature in September 2027
• They carry a fixed interest rate of 4.49% per annum with semi-annual payments
• S$300 million will be offered to retail investors, and another S$120 million will be offered to institutional and other investors
• The total offer size can be increased to S$650 million in the event of oversubscription

What you need to know about Frasers Property

Some of you may not be familiar with Frasers Property, so let’s start by doing a quick introduction on the property company. 

Frasers Property develops, owns and manages an integrated portfolio of properties. This would include residential, retail, commercial, business parks, industrial and logistics assets. 

Of its S$34.3 billion of property assets as of March 2022, industrial and logistics assets make up 32% of assets. Commercial and business parks contribute another 20% of assets. 

These assets are located across a number of geographies. Singapore is its largest exposure at 34% of assets, followed by Australia (28%) and Europe (21%). 

If you follow the property market closely, then you might be aware that its recent project Sky Eden@Bedok sold about 75% of residential units on the launch day. 

It is the sponsor the a number of REITs that you might have heard of, such as Frasers Centrepoint Trust (FCT) and Frasers Logistics & Commercial Trust (FLCT).

More recently, it announced the privatization of Frasers Hospitality Trust which was called “a playbook for how sponsor groups should reposition a failing REIT.”

Is the Frasers Property green note safe?

As an investor into a corporate bond, we’d need to dig deeper into the company’s balance sheet to make sure that it would be able to repay its borrowing. 

Frasers Property has total net debt (total debt less total cash) of S$13.2 billion as of June 2022. 

This represents about 70.5% of its total equity, having come down from 73.7% as of September 2021. 

This is a decent level compared to other property companies. For example, City Development’s net gearing was 83% as of June 2022. Capitaland Investment has a lower net gearing of 51%. 

Frasers Property has a net interest cover of 3x as of 30 June 2022. This means that it is generating enough operating profit (excluding certain items such as depreciation) to cover its interest payments by 3x. 

This is once again not as good as Capitaland Investment’s interest coverage ratio of 4.9x as of June 2022. 

So it seems like Frasers Property’s balance sheet is healthy, but it’s not the best. 

If you’re new to the retail bond market, it might be useful to know that this is Frasers Property’s second retail bond offering. The first retail bonds matured in May 2022 with full payment made on the maturity date. 

Would we subscribe to the Frasers Property green bond? 

If you are comfortable with Fraser Property’s business fundamentals and balance sheet, the next question to ask is whether the 4.49% annual yield is good enough.

This is where we think the interest rate on the Frasers Property green note does not look very attractive. 

The best comparison is the Singapore government 5-year bond yield, which is now offering an interest rate of 2.98%. 

What you get for the additional risks investing in the Frasers Property green bond is an additional interest rate of about 1.50 percentage points (150 basis points).

There are a few other factors you’d need to consider when subscribing to the Frasers Property green bond.

Firstly, the US Federal Reserve has been raising interest rates aggressively to combat inflation. 

The majority of economists are expecting that the Fed will raise interest rates by another 1.50 percentage points by the end of the year. 

The question we would be asking is – would you want to lock up the interest rate you are getting over the next 5 years, when you could be getting a higher interest rate 6 months down the road?

This was the same question we had earlier this year when the Astrea 7 bond was issued. 

The 5-year Singapore government bond was offering an interest rate of 2.57% then. It is now at 2.98% just less than 4 months later. 

You might be thinking that you can sell the Frasers Bond in a few months time when a more attractive offering comes along. 

However, you might incur some capital loss in doing that as the price of your bond might go down if interest rates continue to go up.

Also, there might not be much liquidity in the Frasers Property bond when you want to sell, as we have seen for other corporate retail bonds. 

What are the alternatives?

For those who prefer to sleep well at night and not worry about a recession, we have been highlighting that the Singapore Savings Bond is a safe place to park your spare cash. This is issued by the Singapore government, which is lower risk than Frasers Property. 

The Singapore Savings Bond is now offering an average return per year of 2.64% if you hold it for 5 years. 

If you are looking at a place to park your cash for the short term before deploying when interest rates go up further, then it might be worth looking at the 6-month Singapore Treasury Bill.

Our guest contributor also explains why the Singapore Treasury Bill is a better than fixed deposits here. 

How to apply if you are interested in applying for the Frasers Property Green Notes

The Public Offer will open for subscription on 9 September 2022 at 9:00 a.m., and close on 14 September 2022 at 12 noon. 

Retail applications for the Public Offer may be made through the ATMs of DBS Bank (including POSB), OCBC Bank and UOB, their internet banking websites, or the mobile banking interfaces of DBS Bank (including POSB) and UOB. 

The minimum investment amount under the Public Offer is S$1,000, with further amounts in integral multiples of S$1,000.