Saturday 31 October 2015

Does Oxley's 5% Bond Have Sufficient Margin of Safety?

Bonds are typically boring investment with very little news. However, for the past week, it seems that the market could not get enough of news about bonds. First, there was the start of trading of Perennial's 4.65% bond on the SGX. Next, the second tranche of Singapore Savings Bonds closed with barely more than 20% of the total amount subscribed. Following that, OCBC announced that it would be redeeming its 4.2% preference shares listed on the SGX. Finally, we also have Oxley launching its 4-year, 5% bonds for subscription. Does Oxley's 5% bond have sufficient margin of safety according Benjamin Graham's criteria of minimum earnings coverage and minimum stock value ratio as described in The Lost Art of Bond Investment? Below are the ratios computed based on Oxley's latest financial statements in Jun 2015.

Earnings Coverage

Profit before tax = $142.7M
Adjusted for:
- Add: Non-recurring loss (forex, revaluation, impairment) = $23.3M
- Add: Finance cost = $41.0M
Total earnings available for covering fixed charges = $207.0M

Current finance cost = $41.0M
Add: Interest of proposed bond = 5.00% x $125.0M

= $6.25M
Total finance cost = $47.3M

Earnings Coverage = $207.0M / $47.3M

= 4.38

The earnings coverage of 4.38 times is above the minimum average earnings coverage of 3 times for industrial companies.

Stock Value Ratio

No. of shares = 2,9448.2M
Share price = $0.42
Market value of shares = $1,238.3M

Current amount of borrowings = $2,406.0M
- Add: Loan advances = $81.9M
- Add: Proposed bond size = $125.0M
Total bond value = $2,612.9M

Stock value ratio = $1,238.3M / $2,612.9M

= 0.474

The stock value ratio of 0.474 is lower than the minimum stock value ratio of 1 for industrial companies.

Thus, Oxley's bond meets the earnings coverage criterion but does not meet the stock value ratio criterion. Based on Benjamin Graham's criteria, Oxley's 4-year, 5% bond does not have sufficient margin of safety. Having said that, this does not mean that Oxley will definitely default on this bond, it just means that the risk is higher.


  1. Hi, just want to know where you get your values from? Also, under total earnings available for covering fixed charges, how do you know what to adjust for? Sry newbie here, thanks!

    1. Hi, the values are from the latest financial statement for the Financial Year ended Jun 2015. You can get the financial statement from the SGX website, under the Company Info -> Company Announcements page.

      As for what to adjust for, there is a bit of judgment involved. Generally, all non-recurring items should be removed so that they reflect the underlying earnings.

  2. Is Oxley 5% a bond or a perpetual?

  3. how about principal? how do they repay? to issue new bond? a bit of worrying about.

    1. As Oxley is a property developer, it will be able to generate cash when the property is completed and sold. However, property developers tend to start new projects to replace completed projects. The more likely avenue for raising cash is either issuing a new bond or getting a bank loan.

      Generally speaking, if the business is still good, it should have no problems raising cash in the bond market or getting a new bank loan.