Trinidad Petroleum Bond and You

Earlier this month, Heritage Petroleum (Formerly known as Trinidad Petroleum Holdings Limited “TPHLTT”) announced it would offer to repurchase its 9.75% 2026 bond from investors at a price of 102.563 on May 12^th 2022 (or 107.563 for investors responding and agreeing to the tender by May 10^th). This means that in addition to the interest earned for the period, bondholders will receive US$107.563 for every US$100 of face value invested. Investors loved the high coupon and the quarterly payments of this bond. What options are available to you now?

What should you do with the proceeds of your TPHLTT tender?

It is a great time to have access to liquidity. Bond yields are higher than they have been in a few years. However, the challenge is that yields could continue to go higher (i.e. prices could fall) as monetary policy tightens and if economic activity slows. There are two strategies available to an investor:

1. Accept a slightly lower yield in the short term and stay short (i.e. stick to a 2023-2025 maturity or call) so that you can reinvest the proceeds when there is more clarity around the economic outlook
2. Take advantage of the recent sell-off and lock in an attractive yield on a longer dated security (i.e. 5-7 years).

Due to the recent sell off in short-dated US Treasuries, there are attractively priced short-dated notes issued by investment grade rated institutions available to investors. In fact, these are also a great alternative to investors on 1- or 2-year repurchase agreements (“repos”) that don’t need immediate access to their funds. You can earn anywhere from 4.5% to just under 6% on 1- to 3-year notes. Going this route will allow investors to reinvest their funds closer to the end of the interest rate hiking cycle and hopefully when there is more clarity on the economic outlook.

Alternatively, if the yields available on the 5- or 7-year securities are catching your fancy and you don’t mind some price volatility, you can lock the yield in now and enjoy it until maturity or call. Investors pursuing this option may wish to leave some funds liquid for other opportunities that may arise in the next 12 -24 months. You can lock in yields as high as 8% or 9% on bonds that are rated the same or higher than Heritage Petroleum Company Limited. 

How to replace the income

Investors should note that they do not need to find a bond with 9.75% coupon to replace the income. If you can buy a bond at a slightly lower premium than you paid for the TPHLTT bond, you can get more face value with the same principal, thereby earning potentially more coupon income.

Questions to ask your broker

1. What spread are you charging me on the sale of the bond? With short-dated bonds, the yield is very sensitive to small changes in price. In other words, a small change in price can result in a meaningful change in your yield. Your broker’s spread could erode the attractiveness of the trade. Make sure you are getting a price as close as possible to market to preserve your yield.
2. Am I being sufficiently compensated for the credit risk I am taking? Can I get better credit quality bonds at the same or better yield? Will I be able to exit my holdings with reasonable ease if I choose to do so?

Asking these questions can help to ensure that you are given proper guidance and fair compensation when reinvesting your Trinidad Petroleum tender proceeds and when doing other investments in the future.

Marian Ross-Ammar is Vice President, Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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