HSBC has recently launched a home loan package that is linked to an equity index, the Morgan Stanley Capital International Singapore Free Index. The Singapore Free Index tracks 27 heavy weight stocks in Singapore.

Under this new package, customers are charged an interest rate of SIBOR + 1.1% throughout the loan tenure.

With the special equity-linked feature, the customer will get a cash rebate of 0.25% (of the current loan outstanding amount) if the Singapore Free Index manages to appreciate 30% from its original price (known as barrier level). This 30% appreciation check is done once every quarter over a period of two years.

Thus, it is possible for a customer to get a maximum rebate of slightly less than 2% of the original loan amount. Practically, the amount of rebate will not hit the maximum possible as there is no guarantee the Singapore stock market can rally 30% from current levels in the near future.

A minimum loan size of $200,000 is required and the package is currently only available to new and existing HSBC Premier customers.

HSBC’s new home loan offer is available until Nov 30. To qualify for HSBC Premier, customers must maintain a total relationship balance of at least $200,000 with the bank.

While this is indeed an innovative idea by HSBC, I am not so sure whether consumers in Singapore are ready for it at this present moment, especially when people are been hurt in the past year by so many structured products that have gone wrong. I am not so sure whether there is a prospectus for this, but I don’t think anyone is about to start reading through a 100-page prospectus for taking up a home loan?

In the past few months, we have seen a number of single premium non-participating insurance plans being launched by different life insurance companies: AIA, NTUC, Prudential, HSBC and TM Asia Life.

The plans are either 2 or 5 year terms offering yields of between 1.4% to 2.75% p.a.

• AIA Wealth Accumulator
• HSBC Guaranteed Saver Plus
• PruInvestor Guaranteed Plus
• TM NestEgg (SP Guaranteed)
• NTUC Capital Plus

The recent trend sees the yield getting lower compared to the series that were launched earlier in the year. For example, HSBC’s current Guaranteed Saver Plus gives a yield of 1.8% to 2.0% p.a. for  a 5-year term, compared to an earlier 2.25% to 2.75%.

However, the take-up rate for these plans remains tremendous. With the plans being of “limited size”, consumers have been quick to take up the plans. The latest offering by TM Asia Life took less than a week to be fully subscribed.

Looks like this is the hot product in our market now. The liquidity fueling these products  is likely to be funds being transferred from banks.

There were some questions on the annualised yield figure that I provided in my previous post on the HSBC Guaranteed Saver Plus.

That figure is based on compound interest and is the most relevant indicator (annualised yield or annualised returns) for you to compare against other similar lump sum investments.

Let’s say you put $1000 in a bank for a year at 2% interest. Assuming the interest doesn’t change at all, after the end of each year, you will have:

1000*1.02=1020

1020*1.02=1040.4

1040.4*1.02=1061.208

1040.4*1.02=1082.43

1040.4*1.02=1104.08

As all your interest in reinvested, your actual annualised yield is also 2%.

1000*1.02*1.02*1.02*1.02*1.02=1104.08

Suppose you use the $1000 to buy a bond that pays you 2% in coupon every year and the principal is returned at the end of 5 years.

After 5 years, you will end up with $1000+20+20+20+20+20=1100.

Even though you are paid an interest of 2% on your bond, your annualised return actually works out to be only 1.92%. This is because your coupons are not reinvested at the same interest rate of 2%.

1000*1.0192*1.0192*1.0192*1.0192*1.0192=1100

For the HSBC Guaranteed Saver Plus product, the annualised yield is obtained by comparing your initial investment and the final maturity value. There is no coupon or yearly payment.

Before the current promotion, this is how the initial investment, maturity value and annualised yield looks like for the different categories:

$25k, $27943, 2.25% (25k*1.0225*1.0225*1.0225*1.0225*1.0225=27943)

$50k, $55885, 2.25%

$75k, $83828, 2.25%

$100k, $113143, 2.5% (100k*1.025*1.025*1.025*1.025*1.025=113143)

With the premium discount that is offered by HSCB, you do not need to fork out the full investment amount upfront. Taking into account the discount, this is how the numbers will look like:

$25k (no discount), $27943, 2.25% (25k*1.0225*1.0225*1.0225*1.0225*1.0225=27943)

$49.4k (1.2% discount), $55885, 2.50% (49.4k*1.025*1.025*1.025*1.025*1.025=55885)

$73.2k (2.4% discount), $83828, 2.75% (73.2k*1.0275*1.0275*1.0275*1.0275*1.0275=83828)

$98.8k (1.2% discount), $113143, 2.75% (98.8k*1.0275*1.0275*1.0275*1.0275*1.0275=113143)

Hope this makes it clear.

P.S. I have been working on too much excel sheets. The * in the posts actually means x (or multiply).

HSBC is currently having a promotion on their existing Guaranteed Saver Plus plan which is a fixed 5 year term single premium non-participating endowment plan.

With the premium discount campaign, the annualised yield could go up to as high as 2.75%. The yield is guaranteed and not a projection.

The discount for various investment amounts is as follows:

20k-49,999 : No discount

50k-74,999: 1.2% discount

75k-97,999: 2.4% discount

>=98k: 1.2% discount

How the discount works is that you only have to put in the premium net of discount. For eg, if you are investing $100k, you will need to fork out $98.8k.

Applying the discount, the annualised yield works out to be:

20k-49,999 : 2.25% p.a.

50k-74,999: 2.5% p.a.

75k-97,999: 2.75% p.a

>=98k: 2.75% p.a.

If you are confused by the discount, you can read an explanation here:

What I Meant by Annualised Yield

This premium discount campaign is only effective from 1st June 09 to 30th June 09.

There is no medical underwriting required for this plan and is available on a first-come-first-served basis.

Many people have been asking why their Minibond capital is affected by the bankruptcy of Lehman Brothers when it is not one of the reference entities. I think a picture would explain this relationship very clearly.

The layman explanation of how it works is this:

1. You provide the capital.
2. It is used by Minibond Limited to purchase a basket of AA rated credit-linked notes (often termed as synthetic collateralised debt obligations). This is called the underlying securities. You have exposure against credit default of the underlying securities.
3. The coupons from the notes are paid to the swap counterparty. In return, the swap counterparty pays you the promised quarterly coupon payouts.
4. Premiums are paid by the swap counterparty to insure themselves against default of the reference entities. These are the 5 or 6 companies you are told about when you bought the minibonds. In the event of a default by any of these companies, the swap counterparty will take over the underlying securities and pay you what’s left of the defaulted bonds of the reference entities minus costs, etc.
5. If nothing happens up to maturity, the proceeds from the underlying securities would enable Minibond to pay back your original capital.

For a more detailed explanation, you can refer to the original pricing statement. Below is the pricing statement of series 2 for your reference.

Minibond Series 2 pricing statement

At this point, things are very unclear. Lehman Brother Holdings (they have a role of swap guarantor) have filed for bankruptcy. We do not yet know the fate of the swap counterparty, Lehman Brother Special Financing and whether Barclays have taken over any of this.

If the entire minibond arrangement is terminated, the underlying securities have to be liquidated to pay back the capital of the noteholders (minus the costs of unwinding all the positions). The problem with this is that the current market value of the underlying securities is likely to be less (and could even be much lesser) than the total obligations due to the noteholders. The cost of unwinding all of the swap positions is also unknown.

You can refer to page 50 of the base propectus to see how this is structured legally and the rights of the various parties. A bit complicated with many issues and no doubt this will take time to be worked out.

Minibond Limited base prospectus

I have spoken to HSBC Institutional Trust again and this is what they have told me is happening:

1. They are in the process of working out the value of the underlying securities.
2. At the current moment, they are going to treat the Minibond arrangement as still in place.
3. In the event of a default by the swap counterparty on the quarterly coupon payments, HSBC will then exercise their right on the underlying securities in the best interest of the noteholders.
4. This will happen when either Lehman informs HSBC explictly that they will not be paying the coupons, or the coupon payment date comes (different dates will apply depending on which series you are holding) and HSBC does not receive the money.
5. If there is any update, they will inform all the noteholders accordingly. They have the contacts from CDP.

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