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10 top tips for assessing bonds

Elizabeth Moran  |  29 Sep 2014Text size  Decrease  Increase  |  
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Elizabeth Moran is director of client education and research at FIIG Securities.


This month, Glencore, a diversified multinational commodity trading and mining company, issued a bond in the domestic market for the first time. The company has a market capitalisation of around $50 billion and is the nation's largest coal producer through its Australian subsidiary, Glencore Xstrata.

The bond is a senior unsecured fixed-rate bond that has a five-year term and matures in September 2019. The fixed rate of interest at first issue was 4.75 per cent.

This article will concentrate on how to assess a bond, using the Glencore bond as an example.

1Assess the "survivability" of the company. Do you think the company will be able to survive for the term of the bond and thus pay you interest and return face value at maturity? A company the size of Glencore, with its significant assets, would likely mean survivability for the five-year bond term is high.

2) Understand where the bond sits within the capital structure. This bond is senior unsecured, which means it sits at the senior debt level, and in the case of a wind up, means that subordinated debt, hybrids (if there are any) and shares that rank below must be wiped out completely before you would incur a loss. This gives investors some comfort and Glencore's large market capitalisation provides an excellent equity buffer against loss should the company default on one of its payments.

3) Check if the bond is fixed, floating or inflation-linked. The Glencore bond is a fixed-rate bond and the interest payments to you will not change over the life of the bond. Interest payments are half-yearly. Are you looking to add to the fixed-rate component of your portfolio or is your allocation high enough? If your allocation is full, you'll need to consider selling other fixed-rate assets or perhaps wait until a term deposit matures before you invest.

Floating-rate bonds pay variable interest linked to a benchmark, such as the bank bill swap rate (BBSW). Most inflation-linked bonds also pay a fixed rate of interest but on an increasing capital value that rises with inflation.

4) Check the term to maturity. There is a large secondary market where bonds are traded, but if you are a hold-to-maturity investor, you'll need to make sure the maturity date suits your portfolio.

5) Decide if you can buy the bond. The vast majority of bonds are traded in the over-the-counter market and you need to find a bond broker to trade on your behalf. Over-the-counter bonds are available to retail and wholesale investors. But wholesale investors have a greater range of bonds to choose from.

The Glencore bond was issued in the wholesale over-the-counter market and was only available to wholesale investors through a bond broker.

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