INVESTMENT SPOTLIGHT
PERSONAL FINANCE 101
Got this from yesterday's issue of the Philippine Daily Inquirer. Thanks to Sam for the heads up: you’re turning out be a very reliable partner in looking for the best investment deals out there.
Okay, so what's this? All we see is financial gobbledygook that seems to make little sense. Which is what I'm here for--to try to make sense of things like this, things that matter, things that we should understand.
1. What is it?
In a nutshell, what it is is debt. Yes, for whatever reason, East West Bank (EWB) needs additional financing, 1.5 billion pesos worth, and it decides to raise this by borrowing from you, the investing public.
2. 7.5% p.a.?
If ever you decide to get in on the action, you’ll receive 7.5% of your investment or principal every year (“p.a.” stands for per annum or per year) as interest. That means if you buy 1 million pesos of this “note” or “bond” (or lend EWB 1 million pesos, same banana), you’ll receive 75,000 pesos interest per year, or 37,500 pesos every six months.
3. Unsecured?
It means that this debt is not secured by collateral—which is an asset provided by the borrower that the lender can claim when the former is unable to pay its financial obligations on time, or not at all. Secured debt—or loans or debt with collateral—thus tend to be safer than the unsecured kind, and should feature a relatively lower interest rate. Housing loans, car loans, even pawning a piece of jewelry, are all examples of secured debt.
4. Subordinated notes?
This means as a creditor or lender of EWB, you’re not top honcho, some other creditor is more important than you, and you’ll have to wait in line in case the shit hits the fan and the firm becomes insolvent or unable to pay its debt obligations, or if it enters bankruptcy.
5. Lower Tier II Capital?
This one’s a bit trickier than the other features, and it’s specific to banks.
Banks have two levels of capital: Tier I and Tier II. Tier I consists of money from the pockets of the owners (equity capital), money from the bank’s operations (retained earnings), and some kinds of preferred stock. Tier II capital comes from everyone else, like the bank’s depositors and creditors. The qualifier “lower” just means you have a lower claim than the banks depositors, meaning they’ll get paid first in case the bank gets into financial trouble. But of course, as a creditor, you still have higher priority than the bank’s owners and preferred stockholders.
6. Due 2021?
This means the note will mature in 2021, some 11 years from now (if I count my years right); on that date, you’ll get back your entire principal as the note is retired or redeemed. So in all, if you buy 1 million pesos worth of the note and hold on to it until the due date, you’ll get a total of 11 x 75,000 pesos or 825,000 in interest payments and 1 million pesos lump sum at the end of 11 years.
7. Callable?
It means the issuer, EWB in this case, has an option to “call” or buy back the note anytime from 2016 until the note matures in 2021. Why the hell would EWB want to do that? Well, if interest rates fall in that period to a level below 7.5%, it’s to the borrower’s benefit to buy back the note and issue another one at a lower interest rate. So what’s in it for you, the lender? Why the hell would you want to buy something with a feature that benefits the issuer? Well, compared to similar notes without this call feature, EWB’s note should have a relatively higher interest rate. And if ever EWB does decide to exercise its option, it will pay you back a higher amount, something equal to the principal plus an extra called the call premium.
8. With Step-Up in 2016?
No, this has nothing to do with your favorite street dance movie (“If you wanna be with someone who doesn't appreciate what a good thing he's got that's 100% your business. I just thought you'd be smart enough to know you deserve better.”). What this feature means is that EWB promises to increase the interest rate from 7.5% starting 2016 up to 2021. The exact schedule and amount of the increases should be detailed by the selling agents. Sounds good, right? But remember, the bond is callable. So there’s a chance EWB will retire the debt even before the first round of interest rate increase.
9. Should you buy into the issue?
Well, Sam wouldn’t. She’s turned off by the 11-year tenor, the call feature, and the “low” interest rate (which is already net of taxes, according to one of the selling agents).
One other important factor that you should consider is the reputation of the issuer, East West Bank. Unlike other, bigger banks that are awash with depositors’ money, EWB has to rely on other financing sources. What are the chances that EWB will default? To answer that question, you’ll have to try to know the firm better, maybe take a look at its financials, if you can.
If you’re not too impressed by EWB, maybe you can just wait and park your money in a temporary vehicle like a 30-day time deposit, like what Sam did. I’m sure a better deal is just around the corner.
By the way, I almost forgot: if you're interested in buying the notes, you have to make up your mind soon because the deadline is tomorrow. Just contact any one of the two mentioned selling agents in the ad to subscribe.
