23-06-2013, 01:21 PM
(23-06-2013, 11:15 AM)Greenrookie Wrote: [ -> ]Hi d.o.g and guys,
Tactician from Nextinsight has post:
The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.
She felt the bond was expensive, as did I (as mentioned earlier).
The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).
The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.
Please read the terms and conditions again. Interest payment is SEPARATE from principal accrual. There is both cash interest (12.5% per year, paid quarterly in 8 installments, total 25%) and imputed interest (deferred until maturity, 25% lump sum). Maybe there is confusion because the total amount of interest paid amounts to 25% on each side.
Page 2 of the announcement on SGX clearly states:
Principal = RMB 134m
Subscription Price of Bonds+Warrants = RMB 100.5m
Interest Rate = 12.5% based on principal, payable quarterly in arrears
Maturity = 2 years from issue
Again, to make things clear:
Issue proceeds = RMB 100.5m
Amount due at maturity = RMB 134m
Imputed interest rate from discount at issue = (134/100.5)^(1/2) = 15.47%
The imputed interest is what you earn from capital gains by buying at RMB 100.5m and redeeming at RMB 134m, without collecting a cent in interest coupons. So capital gains are 15.5% per year on a compounded basis.
Interest rate = 12.5% of RMB 134m
Annual payment = RMB 16.75m
Actual interest rate = 16.75 / 100.5 = 16.67%
The actual interest rate is your effective yield based on your cost. You pay RMB 100.5m and collect RMB 16.75m in interest, so your yield is 16.7%.
Effective interest rate = 15.5% + 16.7% = ~32% p.a.
This is BEFORE we take into account the cost of the warrants (which are out of the money but not worthless). Remember Olam's rights issue of bonds + warrants? The warrants had value so the cost of the bonds was higher than the reported coupon rate.
In Olam's case the bonds were also issued at a discount (95% of par) so the effective yield was over 7% despite the coupon rate being 6.75%. There was an extra 5% at maturity in 5 years' time, effectively 1% per year in principal accrual, which increased the bondholder's return to 8%.
In the case of Eratat perhaps the confusion arises because the returns to the bondholders appear so large. But the analysis is the same. And the conclusion is the same - if Olam was in fact in trouble and needed money, that goes double (or triple) for Eratat.