Clico bonds: Shopping for value

Having received their documentation, most holders of Clico bonds from the executive flexible premium annuity (EFPA) policies would be actively considering the many different ways that they can maximise the benefits of these instruments, especially bonds with maturities for years one to ten. The table shows two columns, one for an individual with $200,000 of the one-ten-year bonds and the other with $1.5 million with the same maturity profile. This corresponds to ten bonds of $20,000 or ten bonds of $150,000, respectively.

Institution    Rate for $200k    Rate for $1.5 million
First Citizens    0.80 (avg)    0.80 (avg)
Unit Trust Corporation    0.81 (avg)    0.81 (avg)
ANSA Merchant Bank **    0.82/0.83    
Bourse Brokers**    0.83    0.835
RBC Royal Bank *    0.83    0.83 / 0.8325 (may be)
Scotiabank    0.82    0.82
Guardian Asset Management*    0.82    0.82 (may be higher)

The table also gives an indication of the cents per dollar that some institutions are prepared to pay for these bonds, if sold all at once. Naturally, the bondholder is not compelled to do this and has the option to decide in what sequence he wants to liquidate his holdings. He could, for example, sell bonds that mature in years one to three and, of course, obtain a higher percentage payout.

Bondholders’ options
In almost all cases, the total amount of bonds that would be tendered did not affect the price that the institution was willing to buy. The sole exception to this was Bourse Brokers, which increased its price from 83 cents to 83.5 cents for the higher-valued bonds. This stockbroker also organised seminars at which it provided some detailed information and additional options to bondholders for their consideration. In another variation, ANSA Merchant Bank, while offering 82 cents for immediate payouts, agreed to settle at 83 cents for the funds that were left in its TT$ Income Fund. This fund pays annual interest of at least three per cent and, in 2011, earned 5.7 per cent.

In the case of the Unit Trust Corporation, when asked to work out the payment that would be received from each option presented, the numbers derived were $161,389.76 for the $200,000 figure and $1,210,423.20 for the $1,500,000 portion. In both cases, these figures represent a settlement ratio of 0.80695. Although close to the average advertised rate of 81 per cent, it still denotes a marginal loss (or haircut) to the investor. First Citizens was inflexible on its 80 cents offer and did not seem much concerned that higher offers were fairly widely available. A similar comment could also be made for Scotiabank’s 82 cents price. On the other hand, both RBC Royal Bank and Guardian Asset Management seemed more flexible and willing to go up a notch, presumably once all documentation was presented and found to be in order. Naturally, all individuals want to maximise the settlement value on their bonds. This is especially so when one factors in the significant amount of interest lost on the original capital invested. The most pressing factor would be each individual’s need for cash, either to settle outstanding medical bills or unplanned personal loans.

Such individuals would definitely need to immediately get the maximum percentage payout for their funds; consequently, the need to shop around before committing to any particular institution. Unfortunately, some individuals might have simply dealt with an institution that was familiar to them or one that was recommended to them by a friend or family member. Meanwhile, the future benefit from the 11-20-year bonds, in the form of a trust or other marketable investment vehicle, is still some months away from being realised. Having allowed themselves to become, either by presumptive accident or human frailty, so utterly dependent on one institution for their financial well-being, they should now resolve to make a concerted effort to manage their financial affairs more responsibly.

Erosion of purchasing power

Of course, not all individuals have an immediate need for cash. More likely than not, they may have other investments or were not unduly dependent on the interest income to maintain their regular lifestyle. Thus, they were able to weather the three-year period of uncertainty reasonably well and adjusted to the new controls that external circumstances placed on them. They can now take a more leisurely look at the options being offered and more soberly decide on a considered course of action. Such individuals, who may very well be in the minority, might even be in the fortunate position of theoretically being able to redeem their bonds on an annual basis. Even if that were possible, the natural erosion of purchasing power caused by inflation, should prompt these individuals to take a more proactive and responsible approach to their financial affairs. At the very least, they should investigate ways to convert these bonds to an instrument or combination of instruments that would at least pay some reasonable interest or that have the potential to increase in value over the medium-to longer-term.

To help achieve these diverse objectives, while also considering the individual’s age, unique personal and family cashflow needs, appetite for risk, health and other variables, is typically the forte of an independent financial planner. Let’s resolve to do better the next time: as sure as night follows day, there will be a next crisis! Hopefully, at that time, there will be fewer participants and lesser damage to our national psyche and economy. We have seen that the relentless pursuit of gain has brought us and huge sections of the world economy a whole lot of trouble. Earlier this year, the almost paranoid pursuit of safety has caused Germany to issue bonds with a negative interest rate. Hopefully, looking at the current trend in treasury bills, this would not be repeated locally. After all, we can only achieve growth if we assume some level of risk and we cannot get very far, individually or as a nation, if we all want “safe” investments.