KrisEnergy Preferential Offer – Measured Risk Taking

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After raising money back in 2005, KrisEnergy is back at the deal table due to their upcoming notes this year. Seems that it was a pretty good deal for the shareholders, as the zero coupon bonds that were issued are secured. However, instead of a vanilla zero coupon bond mechanism, they moved the discount on the zero coupon bonds to the free warrants attached to the bonds. Pretty cleverly designed – I guess the apple doesn’t fall far from the tree (Keppel).

Personally I didn’t like the way bondholders were treating KrisEnergy, as the noteholders were most likely to believe that it is a “low risk, high returns” instrument, and they would be ranked first in the case of a default – never mind if the company fails, as long as they get their money back. Sadly, in the mad chase for “low risk, high returns” securities, it would seem that not understanding what kind of risks the investor is taking on, even in the bond market, is the number one cause of money being lost – at least in the local markets. Perhaps this is why our local stock market has been so lacklustre, because the big players are all into bonds since the global and the european financial crisis. My view is that wholesale bonds are more riskier than stocks itself, since the capital required is no small amount, and for the amount you cough up, it would have made a lot more sense to just buy the local equity, local bond and global equity indexes, adjust the weightage according to one’s age, and net you a decent yield with very minimal risk involved.

Coming back to my portfolio, since I was already in the red despite the rights issue 2 years back, by virtue of applying for this bond offer, I am now in the green by way of the price of the warrants being traded now (currently traded at $0.09 to $0.10). Further more, the bonds have a possibility of being recalled early, as the prospectus for the bonds stated that KrisEnergy would have to redeem the bonds first before paying out any dividends.

Finally, as the bonds are currently being traded slightly under it’s “fair price”, I am considering to add a little bit more by buying their zero coupon bonds off-market, as I am literally paying less than $0.50 for a $1! With that said of course, I still have to be watchful of developments in the oil and gas exploration and production sector, as it is a cyclical industry, and any sudden movement of oil prices will affect KrisEnergy’s profitability.

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