Hello frens,

RM pushing to sell me a bank bond, leave out the name as still unannounced,
and documents say internal circulation only.

Indicative coupon rate 6% pa, considered good .
perpetual, call option 5th year, ok.
Rating A1 (RAM) not bad though previous one AA and AA2.

On 1 sheet it says Tier -2 Bond
on Risk statement it says "Additional Tier -1" Bond
Tier 2 ="Additional Tier-1"??
My prev bond straight forward Tier 1 type.

Actually i dont quite get the Tier 1 and Tier-2 difference in terms of "seniority',
Does it mean if bank kaput, Tier -1 Bond gets paid first before Tier-2 Bond?

The key risk (attached) is disturbing.
Need some insight from you guys.

Write Down event-
BNM says there is nonviable event (?what is this), the bond can be written off just like that?
And if the bank's Equity Tier-1 drops below 5.12% - what does it mean actually?,
again bond holder will kena?

Discretionary Coupon -
Bank can simply decide not to pay interest??
yet not considered default - seems abit outrageous right?

While waiting for my RM to find out, might as well i ask here.

Oh yes, the product says "Moderately High Risk" -
A1 rating can be moderately high risk kah? Junk bond CCC high risk i know la.
Thanks for your input.

how much the min to invest??

looks like an offer for priority customers

Think min is rm250k for most bonds

Actually i dont quite get the Tier 1 and Tier-2 difference in terms of "seniority',
Does it mean if bank kaput, Tier -1 Bond gets paid first before Tier-2 Bond? : Sounds abt tight. The more senior the tranche the higher you rank for payout in the event the bank is liquidated. Its stated in the picture that Tier 1 rank higher only to shareholders. So you rank near the btm in terms of claims.


Write Down event-
BNM says there is nonviable event (?what is this), the bond can be written off just like that?
And if the bank's Equity Tier-1 drops below 5.12% - what does it mean actually?: Banks have to hold a certain amt of capital and they have their way of calculating based on the risk level of their assets. From the picture, it means bond holders will be wiped out if equity tier 1 is below a certain percentage. I would find out from your RM what is the current tier 1 capital of the bank and see how much buffer you have.

Discretionary Coupon -
Bank can simply decide not to pay interest??
yet not considered default - seems abit outrageous right?: Yes. Typically, coupons should accrue if they are not paid but if you see the picture you attached, it also means the bank cannot pay dividends to shareholders if they dont pay coupon to bond holders. I would find out which bank it is and see whether they have been paying out dividends every year. If they have, its unlikely they wont pay the coupon as it also means they cant pay dividends, which looks very bad for a listed company.

Oh yes, the product says "Moderately High Risk" -
A1 rating can be moderately high risk kah? Junk bond CCC high risk i know la.
Thanks for your input: Its moderately high risk as there are more restrictive conditions with regards to payout. however, its likely mitigated by the financial strength of the bank in question so thats why an A1 rating is assigned.

This post has been edited by Homersimpson79: Apr 28 2016, 08:31 AM

Thanks, just realised i cant get holistic comment without more info.
Here is the attachment,
need some familiar in this funny Bond to give comments.

It seems this is not the "true Bond", but some kind of hybrid (?bond+equity type, so like Equity, whether they want to pay us Coupon(=Dividend), is their privilege.
They dont want to pay, we have no say.

Some kind of Additional Tier 1 (AT1 Product), me pening liao...

Between ASX and this, dont know how to choose, if not for wanting to diversify,put all in ASX better.

Hope can decide after listening to more views here.

Can help summon some like gark here to comment? Thanks



ps:edited to cut out source.

This post has been edited by guy3288: Apr 28 2016, 09:18 AM

Bro, my personal investment preference : when you don't understand a product, don't invest

Yes, this bond is a bond subordinate to its other higher ranked bonds. Ie. if the bank go kaput, then this bondholders will get any residual money almost last, just above unsecured creditors and shareholders

But CIMB is the 5th largest bank in SEA. The credit ratings are good. So chances of going kaput and those terms exercised (don't pay coupon, even write offs) is low. But you never know. Banks can go into trouble like Sime Bank last time.

The biggest shareholder of CIMB is still the government. So the government has all their interest not to let CIMB go kaput. If CIMB go kaput, then malaysia will go kaput as well. And your other investment in malaysia will almost certainly be affected as well. So my view is only on a very bad macroeconomic scenario will this bond be written off. And when that happens, even if you choose not to invest here, your other investment in malaysia will be affected as well.

But for 6% coupon, I am not keen for the risk level. There are better investment elsewhere now which give better returns. Even IGBreits is close to 5+% net dividend (now price high could be slightly below 5%). FD is above 4% "risk free". SGX valuation is low now and you can get DY above 6% at S$. Some Sreit is 9% some more.

Weigh your options. There could be better investment elsewhere. Just my 2 cents

LOL, the bank name also don't know, already want to push it to clients?

Without the "name", one never know the risk of it, disregard what is the rating.
Mind that rating can changed overnight, current rating mean nothing for the future.

Indicative coupon rate at 6%, when after deducting the potential admin fee, sales charges or whatever, it may mean the actual yield may be around 5.x%.

At 5.x% vs 4.5% FD, with extra risk involved (moderate high risk vs almost no risk), it seems not an attractive investment for individual, somemore it is a perpetual bond...

At 5.x%, it may be attractive for fund or big money, but not attractive for individual.

If really keen on bond investment, Bond fund/UT may be a better option as you get more diversify through the fund, instead of one lump sum into one bond.

Anyway not meant to discourage, just my personal pov.

It may be called a bond; but its feature and risk is similar to Preference share.

Let's recap:

I) Perpetual coupon but not guaranteed similar to preference share's dividend payout. I.e., the dividend is known in advance but not guaranteed.

II) Issuer can miss coupon payment without suffering penalty, similar to preference share. But if dividend is to be declared, the bond holder will have first priority.

Hence, Guy3288, you should look at this instrument as similar risk to a preference share. If it is similar risk, then you should expect the coupon payout to be similar to the dividend rate of preference share in the market. Use them as a benchmark.

A good stock-broker should be able to advise you.

Xuzen

thanx for all the comments,

indeed this product is quite different from the usual bank bond i know. still waiting for my RM to clarify why so many clauses against potential buyer, why the bank is given so much upper hand.........?

the only positive here is CIMB unlikely go kaput so easily..............so they wont use their upper hand to whack us?

This post has been edited by guy3288: Apr 28 2016, 02:04 PM

Basic investing 101, clauses too complicated until have difficulty to understand fully, there is no need to commit.
There are lot of investment option out there nowadays.
or you have a "soft spot" for the RM? Just joking.

I don't see how it is a "retail" based bond, it is more like for sophisticated institutional investors with plenty of clauses and understanding needed.

This instrument is a new class of hybrid securities. A hybrid between debt and equity. Its features, particularly the conversion to equity or write down clause, are requirement by Basel III and are to be implemented by Central Banks globally. The purpose of this new hybrid securities is in theory, to reduce the need of a tax payers bailout when a systemically important financial institution fails. Think Lehman Brothers, Ireland and Icelandic banks.

They are globally known as Contingent Convertibles or CoCos. Please Google for more details as it can get really technical.

Tier 1 CoCos ranks BELOW Tier 2, not the other way around. Tier 1 will suffer losses before Tier 2 do. Hence the relatively high coupon and low credit rating for the securities. In fact, Tier 1 securities are designed to be the first in line to absorb losses when things go south. When a bank goes under, the intended creditor order of priority is- depositors, senior bond holders, subordinated bond holders which are Tier 2, then Tier 1 followed lastly by equity or shareholders.

Having said that, the trigger level for a write off is quite far now, given that CIMB's Tier 1 capital ratio is quite high. It would take a 97 crisis meltdown before this trigger event were to occur.

So far, this write off feature has not been tested globally as it was only introduced in 2013.

For BNM's guidelines on Basel III implementation with regards to Additional Tier 1 instruments, refer to the following:

http://www.bnm.gov.my/guidelines/01_bankin...0Components.pdf

Page 16/61 Section 15

This post has been edited by Havoc Knightmare: Apr 28 2016, 10:47 PM

Often time i see can make money,
dont care how it works inside..... have some shares i dont even know
what business they are doing...... names also keep changing..


Thanks for the detailed explanation.
Hope u dont mind some questioning......

Its features, particularly the conversion to equity or write down clause, are requirement by Basel III
this is somewhat reassuring but what does it mean by write down our bond??

So Tier 2 is actually better than Tier 1 ?
i have 2 Tier 1 bonds, PBB NIT-1 and CIMB IT-1(see attachment)
Indeed my 2 bond papers stated the same, if shareholders not paid dividends, they can cancel my coupons!
No difference from this Hybrid!!! So much for investing without knowing..

at least it says capital protected if held to 1st call date.
So far the prices always above cost and coupons paid.
RM advising me to sell, she said bank will call back at Year 10, by then i get PAR value only...
True or not?

Question is once it is over the 1st call dates, assuming
the banks dont call back, i wonder if prices would dip since no more cap protected??
Would you also advise sell before call dates?

Why Hybrid Bonds cant give "Capital protected till 1st call" clause,
since Tier 2 ranks higher ??

What is "Additional Tier 1" ? Is it = Tier 2??

Compare the 3, this hybrid bond , PBB NIT-1 and CIMB IT-1,
how would u rank them in terms of safety for investors.
Thanks

Those PBB and CIMB IT-1 bonds fall under the previous regime known as Basel II (subordinated debt issued pre 2014) and will no longer be available in the market once the banks call these bonds back.

Basel II bonds are "safer" than Basel III bonds because it lacks the "write down" clause. The "write down" clause means exactly that- if the bank's capital ratios fall below the trigger level, your bond will be written off, you lose your investment. And this can happen without the bank failing, just if the bank suffers from excessive losses from bad debts and other causes.

And no, Additional Tier 1 is not Tier 2.

Tier 2 bonds are safer than Tier 1, as Tier 2 bonds do not have the "discretionary coupon" feature found in Tier 1 bonds and are ranked higher than Tier 1. However, it has the "write down" feature, since all bonds issued under this Basel III regime must include this feature.

And your RM is right, banks will call the bonds at par. However, this is the nature of the bond market because interest rates in the market have declined. If you keep your bond which is priced at a premium right now, you continue to enjoy your high coupons, but it will be reflected in the bond price declining towards par as the call date approaches (assuming that interest rates stay low). Consider it from another angle, you can sell your current bonds and get your capital back at a premium, but can you find a similar bond with similar returns now? Chances are, no. It's a result of interest rates and bond yields falling globally, thanks to central banks and their money printing.

From an investor's perspective, the old bonds (PBB NIT-1 and CIMB IT-1) are definitely safer than this new bond, but the old bonds are on their way out. All new subordinated bonds issued by banks going forward will be like this CIMB hybrid. And thanks to easy monetary policy by central banks, investors have to bear more risk and get paid less in return. Look at European and Japanese bonds trading at negative yields.

However, it is important to remember that banks will not just refuse to pay you a coupon or "write down" your bonds just on a whim. These major banks have their reputation and credibility at stake, and if they were to do anything "funny" with these bonds, it will result in a major loss of investor confidence. Like I mentioned earlier, the write down will most likely be triggered in a the event of a major financial crisis. So the risk that you will essentially be taking is that of whether CIMB will be badly impacted in a crisis. For the record, the Malaysian banking system weathered through 2009 relatively well. The bottomline is, with this new hybrid bonds, you do risk losing ALL your investment if the bank comes close to failing (what BNM deems as "non-viability").

This post has been edited by Havoc Knightmare: Apr 29 2016, 12:02 AM

thanks alot, it is much clearer now.

Havoc,

Thank you. Learn something new today. IMO, such technical products are not for lay investors. They are too technical!

Xuzen

fuh so much terms which is new to me.

needed to read few time to understand what's going on.

thanks for the valuable info & explanation.

it's not for noobie & normal investors for sure..

Glad to be of some help.. IMO, BNM should provide more education to retail investors if they want to permit retail investors to buy these instruments. Because this is not a one-off niche product. Other local banks will be following suit in issuing such hybrid bonds so it will be more common.

Sadly to say, the "educational" part of local investment industry is still pretty weak.

We still see many RM or sales person in investment field who promote saving plan as FD already signaled there is a big gap need to fill up.

This hybrid bond definitely need more Q&A, FAQ to educate investors.

But, as always, personally I do wary/concern about new product in investment field.
As previously, bond defaulted generally already means bank goes under, but with the new hybrid bond, the bond may be defaulted without the bank goes under.

This is a huge different.
Mind that although Malaysia banks did weather the 2008 crisis well, because of 1997 crisis lesson.
If hybrid bond does exist during 1997, then there might be plenty of default that could result like what had happened on Lehman mini bond.

Just hope it doesn't repeat the history of "new product" in financial world, like MGS, minibond (that happened in subprime mess), SPAC (in stock market)

Anyway, appreciated the valuable explanation given, this hybrid bond definitely will be mushrooming in the near future.
But I still do not agree it should be marketed as "retail" based.

Yes, this is ridiculous!!!
How can banks be allowed to default bond payment and still not declared bankrupt??

In future who wanna buy bank bonds, who is going to lend money to banks??
Why in the world Financial regulators adopt this lopsided policy?.

If banks with so many experts in them are doing losing business it should be punished -go close shop!
Why at the expense of investors who only provide capitals and have no say in how they run their business?

Thanks to you for starting this thread and havoc's explanation, we now know the risks and rewards of this type of bond. But there are many more non-savvy retail investors who might fall into this without knowing the greater risks for a small incremental rewards. I presume your RM will have a cut since she is pushing hard to sell you this bond??

hah, i know some of these words.gif when coco bond was mentioned
afaik in europe these coco bonds are somewhat junk now, ecb was planning to buy them because some of these troubled banks has (i assume) massive credit exposure to o&g sectors because of crude oil prices

Just to add a little more details:- banks are issuing these bonds to meet regulatory requirements under Basel III rather than to screw investors. Given a choice, banks would rather not issue such debt because it is expensive (6% in this case). It is supposed to make banks "safer", but results in generally lower profitability.

Given the recent interest in Cocos, I will consider writing a guide on this asset class

This post has been edited by Havoc Knightmare: Apr 30 2016, 12:35 PM

I can see you contribute in ASx thread as well, and you are also the investor in properties, as well as retail bonds.

My personal opinion is with most of the taikors here, i.e.,

Asx or Bond funds/UT are still better. As both pay above 6%. For Bond funds, there are some bond funds in the market which can pay above 6-7% p.a. with 10 years track records. Moreover, bond funds are lower risk, minimal fees (no upfront charges), and offer liquidity you can cash out anytime.

Relationship manager is still a relationship manager, their job is in selling, they make a small commission from the products you buy. Most RM are young, in their late 20s to early 30s and just an employee, you can ask if any of them made their first RM500K from the investment?.

My logic is : do not get the financial advice (referring to RM) who is 1000x poorer than you. Get advice from someone richer than you.