Wednesday, October 19, 2011

Betting On The Bank

Temasek is sitting on a paper loss. Their hoarding of 430 million of Stanchart shares (18.2% estimated at £5.9 bn) started with the purchase of a 11.5 % stake from Khoo Teck Puat's estate in 2006. Then Stanchart shares were trading at £15.24, when the exchange rate was S$2.90 to £1.

Stanchart shares are currently trading at £13.73 (yesterday's quote); the highest level reached during last year was £19.75. The British £ has also taken a pounding, diving from S$2.90 to S$2 yesterday, a stomach churning plunge of 30%. Yahoo! Finance indicates today's range will be £1.9907 - £1.9937.

So what fool (as in "fool me, hah?') would bet that the Stanchart share price would go up 27% in 3 years' time? That's a tantalising return of 9% per annum, assuming the pound-euro correlation doesn't get any worse. Reuters is reporting a sterling drop, as latest UK data adds to the gloomy outlook.

That's the premise of Temasek's of bond offer. The zero coupon bonds which mature in 2014 can be exchanged for Stanchart shares at £36.29 S$36.29 per share during a 3 year holding period, a 27% premium over Monday's price of £14.29 on the London Stock Exchange. Or get your cash back 3 years later with zero payout. That's worse than the pathetic rate of return for FDs at local banks. What Temasek gets in return is an opportunity to offload its bad investment to a bunch of daft investors.

A remisier friend said the stock market is founded on the greater fool theory - one fool buys, and hopes for another fool to come along and pay a higher price. After the debacle of the Lehman shabby deals, is this type of business still legal? Bank of America Merrill Lynch is the lead manager and sole book runner for the bond offer.

18 comments:

  1. To put it simply : They want to borrow money without paying any interest but let investors gamble with SCB share price & pound forex rate.

    Looks like they are just operating another kind of gambling den but using the public taxpayers' monies as stake. Yes, investors may have min risks but the risks of Temasek losing out are real risks if the SCB share prices exceed the conversion price.

    So is that how a responsible govt-owned investment firm operate ? Why is Temasek so desperate to borrow the monies ?

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  2. Only Ho Ching can do it! The loss is PRETTY MASSIVE! Around 4 billion sing dollar paper loss. I am amazed she wasn't sacked. Are we going to see more losses? The deal certainly smells like Minibond. Haha, who will be the greater fool? Fool Me Har?

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  3. I knew something was up when the release came out. They always never ever tell you the truth until you dig and research the seemingly harmless news. That's the kind of crap I hate about out SWF..lies to the people and hide behind "stability" & "security" veil. Quite honestly I'm just about done with their irresponsibility and unaccountability to the public. A serious Occupation calling for HoChing resignation is way overdue than the SMRT honcho.

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  4. Temasek recently announced interest to finance and buy out Yahoo stake from China firm Alibaba that worth's 1.6billion. Are they catching a falling knife when the company is now leaderless, with Jack Ma in retreat for time out in US, openly declaring if anything goes wrong during his absence, his people are responsible, not him. The future of this company has been going downhill and unknown yet what's their intent for this piece of business? Is Temasek trying to own a piece of Yahoo news so they can start online domination now, like part of a SPH controlled business?

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  5. Why are they borrowing money to "invest"? They are running it like a hedge fund, not a pension fund. Even Paulson is not having any luck these days. If they lose money on the borrowed funds, the Singapore taxpayers will end up picking up the bills. Is anyone in charge in this country?

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  6. Ho Jinx will never be sacked, they tried retiring her once but when the incoming CEO found out about the mess and wanted to make it public less he be blamed, he was given a few million and told to take a walk. Jinx was mad and got her job back so she continues playing monopoly with the people's money

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  7. Wow, if our money is treated like Monopoly, give me a million then. I also want to play.

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  8. Its all one big happy family guys ! Its all one big happy family !

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  9. We have to see how are the fools that buys.

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  10. Eh.... I haven't had the time to look at the terms of this particular bond issue, but most zero coupon bonds are issued at a discount to par. I.e. investors for example pay 60cents now and get back 1dollar at maturity. So the interest for the bond is the 40cents over the 3 years (which only gets paid at maturity). The option to buy StandChart shares is just a out-of-the-money option embedded into the bond to sweeten the deal so as to lower the cost of borrowing for StandChart.

    Are you sure you fully understand the feature of this bond?

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  11. Eh.... I take back what I said previously. Went to have a read of the terms in Business Times and discovered that the bond is issued at par. Seems like a "fancy" way of borrowing money by Temasek. Wonder why they need to borrow in such a manner when they are already AAA-rated. How much savings can they derive over 3 years? 2% per annum of S$650mil? I think the potential downside cost to Temasek seems higher (8.29% per annum if I am not wrong). Hope they are not sucker-ed into it by their investment banker, i.e. BoA Merrill Lynch. Just end up paying investment banks fees for arranging this deal...

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  12. Funny, funny, funny! Foo Mee Har = "fool me, hah?" Frankly, fool or not, she is one hot looking ex-M'sian mama!

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  13. She sure she hot? She looks ugly to me.

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  14. Sorry to point out that the currency you used for the SCB shares in the penultimate para is incorrect. It is S$36.2912 per share, not £. Your maths and logic was however spot on. I am surprised that it was snapped up in full. Temasek must have twisted fund managers arms real bad.

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  15. Already in USA there is a movement demanding that the Federal Reserves open up their books for transparency to the nation people.

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  16. Suppose, just suppose, someone with ill-gotten funds buys in. 3 years later, he gets a check for the same amount from TH. Will this become "clean" money?

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  17. Check out the analysis in the nytimes link below (after Olympus) -

    http://www.nytimes.com/2011/10/20/business/olympus-faces-credibility-gap.html

    "Other than demonstrating its financial prowess, Temasek doesn’t have much to show for its wizardry."

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  18. President Tony Tan has all the knowledge to deal with financial management of Sin. Be reminded that he becomes Sin President to volunteer his expertise in financial matter.

    patriot

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