Aspial Retail Bonds - 5.25% 5 years

Aspial announced that it is offering 75m worth of bonds with the following terms:

• Interest rate: 5.25% per annum
• Tenure: 5 years
• Maturity : August 2020
• Amount for retail investors: Originally $50m, reduced to $25m but can be upsized to $100m if retail demand is strong. (See announcement here)
• Minimum subscription for retail: $2,000
• Amount for institutional investors: Originally $25m but upsized to $50m (See report here and the subsequent clarification by Company)
• Minimum subscription for placement: $100,000
• Interest payable on: 28 Feb and 28 Aug each year
• Closing: 26 August 2015 - 12pm
• CPF: Cannot apply or invest after listing
• SRS: Cannot apply but may invest after listing
• Listing date: 31 August 2015

The product highlight sheet is here. I would strongly recommend that you read through the product highlight sheet and this was mandated by MAS in recent years, knowing how investors do not read the prospectus or offering circular. iFast has also done a write up here. Do read it.

The time table of key events is listed below for your information. Key date will be 26 August 12pm where the public offer will close. 

Time Table of Key Events

Sponsor and Issuer Corporate Structure

This is the corporate structure of Aspial and Aspial Corporation is guaranteeing the obligations.

As you can see for the structure, there are a few main business - property development, jewelry retail, pawn broking and the acquisition of LCD development.

In deciding whether to apply for the corporate bonds bearing 5.25%, it is important to analyze the financial performance and balance sheet of Aspial, hoping that it will not fail!

Financial Performance

One of my concerns was the poor 1H performance of Aspial Corporation. This was explained in the first half performance review. The first half results is enclosed for your reference.

I would say that the first half results is horrible. Aspial explained that they would have made a profit if not for the following costs amounting to S$16.7 million for HY2015:

• foreign exchange loss of S$6.5 million (largely unrealised) due to the decline in Australian and Malaysian currencies;
• sales and marketing expenditure of S$8.9 million for the global launch of Australia 108 and Avant in Melbourne and the building of a sales gallery and the preparation of marketing materials for the Nova 8 project in Cairns, and marketing expenditure for Waterfront@Faber and City Gate in Singapore; and
• a one-off cost of about S$1.3 million relating to the voluntary conditional cash offer for the shares in LCD through its 50 per cent.-owned joint venture company, AF Global Pte. Ltd. ("AFG").

Excluding the above costs, the Guarantor Group's profit before tax would have been S$18.3 million in HY2015. Given the major issuance of debt is to fund the real estate business, let's look at the prospect of the real estate business.

Real Estate and Business Prospects

The real estate business is the biggest revenue driver and the key reason for the high leverage of the Company. It is expected to contribute significantly to the revenue and profitability for the following reasons:

• based on the units sold in its property development projects as at 6 August 2015, the Guarantor Group has locked in total revenue of about S$620 million in Singapore which will be progressively recognised using the percentage of completion method. 
• the Guarantor Group has locked in more than A$1,050 million of sales revenue from the Australia 108 and Avant projects as at 6 August 2015. The revenue will be recognised upon the completion of the projects. 
• at current market prices, the potential sales revenue from the Guarantor Group's remaining local and overseas property development projects is estimated to be in excess of S$2.0 billion as at 6 August 2015. 

For the above reasons, i am cautiously optimistic that the Company will be able meet its obligations when they fall due. I have looked at the different debt ratios but felt that given the lumpiness of the revenue and profit, it may not paint a full and meaningful picture.

Existing obligations
The list below is the unsecured obligations under the MTN (medium term notes) programme. You can see that the interest range from 4.5% to 5.5%. The retail bond is likely to be the Series 5 notes due 2020.

Net Asset Value

The picture below is the balance sheets as of 1H 2015.

Based on the balance sheet as of 30 June 2015, there is a "equity buffer" of S$183m for the bond holders given that it is ranked higher than equity holders. However, this does not take away the fact that the balance sheet is highly geared.

How existing bonds of Aspial are trading?

My bond prices are a bit dated at 28 July 2015 (sorry i have deleted the latest copy) but it shows that the existing bonds of Aspial are still trading well but it may make sense of accredited investors to compare the 5.5% bond that expires in Nov 2018 against this issuance to see which bond offers better value. For retail investors, there is no choice for you as the above bonds are traded in tranches of $250,000.

Who is suited to buy Aspial bonds?

Please note that bond investment is not for everyone, and especially not appropriate for investors who have short term liquidity needs. You should only buy bonds with your spare cash and better still, if you intend to hold it till maturity.

Mr IPO's views

While i do have concerns of the Company's balance sheet being overstretched, the Company has been launching interesting property projects in Singapore and Australia - such as Citigate and Australia 108. The likely listing of the overseas property arm on Catalist will also ease concerns on it being over levered as it can then raise new equity

I like the Aspial bonds for the following reasons:

• Good demand from Institutions and accredited investors at 3x subscribed. This should spur the demand from the retail tranche.
• 5.25% is a decent yield and will provide a good buffer against future rate increases
• 5 year is a "just about right" and you can reinvest the proceeds should interest rate rise in future
• This is not a first time issuance and it is good that the Company has expanded its pool of investors to retail

Although the bonds are unrated, i believe it is worth having an allocation in my portfolio as it provides regular income stream for the next 5 years. I will apply for some and do note that I intend to hold till maturity.