In May 2008 before the world was to witness the global financial crisis of 2008/09 and before the collapse of Lehman Brothers Inc in September 2008, we were introduced to an investment product sold by DBS Bank known as Credit-linked Notes Series 01 (in Singapore dollar denomination).
This Credit-linked Notes (CLN) was intended for investors who can understand the risks involved in the product. It carried a warning that the investment can be wiped out in a worst case scenario.
Details of the CLN Series 01 (SGD):
Issuer of CLN is DBS Bank
Minimum investment amount is S$200,000
Interest rate is 2.20% per year (payable semi-annually)
Maturity of CLN is 3 years
Principal sum is unsecured and not protected
Reference Entity is United Overseas Bank Limited (UOB)
Reference obligation is UOB 5.375% Sub Notes due 3 Sep 2019
Investors of DBS Bank’s CLN are seeking enhanced yield (2.2% p.a.) by gaining exposure to UOB and its specific debt obligation (UOB 5.375% Sub Notes).
In an event when a Credit Event occurred in relation to the Reference Entity (ie UOB), CLN will terminate and redemption of the notes will take place with substantial reduction in repaying the principal sum. Such an event includes when UOB goes into bankruptcy, UOB failure to pay their debt obligations, restructuring of UOB through merger, de-merger or spin-off.
The second risk includes the credit standing of DBS Bank, the issuer of CLN, who may not be able to pay CLN when it was to fold.
For three years to maturity, no credit event has occurred. But this is not to say that there is no anxiety felt as we witnessed the global financial crisis unfold before our eyes.
Recently, this CLN matured and redemption was made in full of the principal sum. Total interest was received.
What have I learned? We will not put so much money into a single investment. There was a similar CLN Series 01, but this one was denominated in US dollars. On maturity three years later, the US dollar had lost so much value when compared to Singapore dollar. The loss on foreign currency conversion to Singapore dollar must be substantial. At 2.2% interest rate per year, it is not worth the risk taken on this product. The only consolation is that both UOB and DBS Bank have a strong credit standing to weather the financial storm of 2008/09.
Copyright © 2011, limkimtong for Living Investment
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