Monday, 23 May 2011

Portfolio Buy: Standard Chartered Perpetual Corporate Bond ESC6 8.103%

As I described in a previous post, I was looking for a new high-yield investment to reinvest some of the income I have received from dividend and corporate bond coupon payments.

As the sum to invest was not huge (a couple of thousand pounds), the options were:
  • government bond (perpetual): yield 4.9%
  • corporate bond (perpetual): yield 6.9%+ 
  • high-yield shares: 6%+
  • ETFs: yields 4.4% (corporate bonds - non-financial); 4.5% (HYP)

In the end I opted for the juiciest yield I could find - Standard Chartered Perpetual Corporate Bond (ESC6) with an interest rate of 8.103% - its full title is "8.103% Step-Up Callable Perpetual Preferred Security" with the 'tap' (top-up) prospectus here - which states that the rate will be reviewed in 2016.  The purchase price of £1.0975 plus dealing costs gave me a yield of 7.6%.

I don't hold any other Standard Chartered securities, so this gives me some more diversification in the 'financials'. However, I do hold a lot of bank corporate bonds, so I would be exposed if there were another financial crash. Then again, high yield does not come without some risk.

All the Sterling-denominated perpetual bonds available on the London Stock Exchange are related to bank funding, so they can be called in if the banks decide to change their financing mix. In this case the redemption yield would be 6.08% - still quite an acceptable return. The yields on all these perpetuals are still quite high - probably due to the uncertainties over the financial system and the risk of default by some Euro Member States, particularly Greece.

The Motley Fool Forum notes that this is 'Tier 1' debt, which is more subordinated than Tier 2. In the event of the issuer hitting hard times, the coupon payment on certain classes of subordinated debt may be waived. Also, if the issuing company is forced into liquidation, subordinated debtholders would only be paid out once senior debt has been repaid, although they would rank ahead of equity holders.

I have paid a premium price for this security (nearly 10% over the 'par' value) - but I intend to hold this for a long time, so the value of the future coupons more than offsets this price premium (in my mind, at least!).

This type of investment in corporate bonds comes at the top of the DIY Income Investor Income Pyramid - Level 7 and should only be done if you have gained some experience in investing as well as having sufficient other financial resources to fall back on.


Update 28/10/12: This security, although called 'perpetual' is callable at par from 2016. The rate may also be reset to 4.27% over the 5yr Gilt rate. Given the current low interest rate environment, you should assume the worst - i.e. that you will be getting the 'cover price' back in 2016 - and base your buy/sell decision on this.


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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