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J#33:   What’s in A Name When A Bond Delivers You a SAFE 12.5% yield?

We are investing in bonds! The recommendation comes from my business partner, Tim Staermose.  Tim, is based in Tanzania.  It pays to have boots on the ground and the bond issuer is an investment holding in Tim’s African Lions Fund.  The bond’s details are:

  1. The bond is issued by NMB Bank. See below for more information on NMB Bank.
  2. It is listed on the Dar es Salaam (Tanzania) Stock Exchange. It is not a bond traded on the OTC markets.
  3. The bond has:
    • a par value of 100;
    • a coupon of 10% p.a. paid quarterly; and
    • matures on 22/7/2022 (i.e., a duration of 560 days from 01 January 2021).

The bond is not a liquid security as the Tanzanian bond market is small.  That said, the Tanzanian broker I use, Orbit Securities, is able to find supply.  With a short duration of 560 days, we have a “buy and hold to maturity” strategy.  We are therefore not concerned about finding a buyer should we decide to sell.  The challenge for us is if we can find a seller to sell to us.

Although difficult to find, sellers are available. A line for 90,000,000 bonds is for sale at a price of 95.  The screenshot of my conversation below with my Tanzanian broker, Orbit Securities, confirmed approximately USD 37,000 (.95 * 90,000,000 = TZS 85,500,000) is for sale.  If you are interested in a larger order size, Orbit Securities will search for more sellers of this investment gem.

What is the math of the Bond’s returns?

Three scenarios are mapped out in the table above for the NMB bonds.  The scenarios illustrate purchase prices of 98, 95, and 90.  From my latest correspondence with Orbit, a price of 95 is currently being offered for sale.

These three scenarios would yield an annualised yield-to-maturity of 10.2%, 12.5%, and 16.5% per annum, respectively.  This is net of withholding taxes paid on the coupons.  These returns qualify for our fund as they are double-digit returns and from a safe investment (see below).

Unlike dividend yields, bonds provide a predictable and periodical return.  A bond’s coupon payments are fixed and frequent (usually quarterly or biannual).  Whereas a company’s dividend is usually an annual payment based on what a company may decide to pay each year.  Bonds also offer certainty as to your capital gain if you hold it until maturity — you know your purchase price, and the price you receive when the bond matures. 

Bonds, such as this being offered by NMB Bank, therefore provide certainty of returns (subject to their credit risk).  They have a place in any income fund, and ours is not an exception.

Are these NMB Bank Bonds Safe Investments?

A sound method to analyse the risk profile of banks is to compare their Tier 1 Capital Adequacy and their Total Capital Adequacy ratios.  These ratios measure a bank’s cushion to absorb losses before it becomes insolvent.

The ratios are standardised by the Basel Committee on Banking Supervision and therefore comparisons between banks are possible.  The higher the ratio number, the safer the bank.  The table below provides a comparison of NMB to one US, two European, and one Singaporean bank.

BankReporting DateTier 1 RatioTotal Capital Ratio

NMB

13-Jan-21

12.3%

14.3%

Citigroup30-Sep-2012.2%15.3%
Deutsche Bank30-Sep-2013.3%17.6%
DBS Bank (Singapore)30-Sep-2013.7%16.9%
HSBC30-Sep-2018.4%21.2%

NMB has strong and comparable capital adequacy ratios compared to other well-known international banks. 

49% of the bank is owned by the Arise Foundation.  The Foundation is a JV between Rabobank, the Dutch development bank FMO, and Norfund, the development arm of the Norwegian government.  NMB is a retail bank, as opposed to an investment bank, such as Goldman Sachs, that depend on the riskier method of trading its proprietary book.  NMB has a traditional banking model that takes retail deposits and loans monies to business and individuals that pass their credit approval process.

I visited NMB and spoke with their investor relations and senior management team in early 2019 (as shown in the photo).  There were no ‘red flags’ that surfaced during my meeting with them. 

NMB is a solid bank to invest in.  Their bonds are certainly not sub-prime junk.  Its double-digit yield to maturity of 12.5% pa (16.5% if you can buy it for 90) makes it a ‘BUY’ for our Fund. 

Most readers would be aware by now that the broker I use in the Dar es Salaam Stock Exchange is Orbit Securities.  https://www.orbit.co.tz/.  They are the largest security broker in Tanzania.  Should you wish to open an account with them so that you may purchase NMB bonds and other Tanzanian securities, you can contact the Head of Research, Imani Muhingo (imani@orbit.co.tz).  Please tell him I referred you. You can place your orders via phone, email, or the way I do it: by WhatsApp.

THE FUND’S MANDATE & WHAT’S IN A NAME?

I grappled last week with Shakespeare’s quote to in his Romeo and Juliet play:

“What’s in a name? That which we call a rose by any other name would smell as sweet.”

You see, I was completing the Investment Objectives section of the Summary Information Sheet and the question arose in my mind — can and should our Fund’s portfolio include fixed income products such as NMB’s corporate bond?

I grappled with the question, as our name “Double Digit Dividends” implies we are a “Dividend Fund”. 

Safe double-digit yielding income is just that — safe double-digit income.  That is ultimately what we are after – safe income returns.  As Shakespeare alluded, a name is just a name, and the Fund should not be restricted to investing purely in dividend-paying stocks.

For that reason, for the readers who have requested the Fund’s Summary Information Sheet and Private Placement Memorandum, the Fund’s Investment Objectives you will note it now states:

“To build a portfolio of investments that can deliver sustainable income above 10% per annum net of withholding taxes, excluding long-term capital appreciation.

Underpinning these yields are dividends from high-quality companies with long-term capital appreciation potential via earnings growth and cheap valuations on purchase.  The Fund may also invest in Fixed Income securities that meet our strict evaluation criteria.”

FUND UPDATE:

The Summary Information Sheet and the Private Placement Memorandum (‘PPM’) for Double Digit Dividends (‘the Offering Documents’) have been emailed to those who requested a copy.  For ease of reference, you can also download the documents from the Double Digit Dividend’s Fund page here.  It is only accessible to those who have updated their account to Level 2 authority.

The financial regulator of the British Virgin Islands, the Financial Services Commission, has confirmed that the Fund’s PPM application is already approved.  We should receive the official approval letter and certificate shortly and I shall post it to the Double Digit Dividend’s Fund page.

For those who missed it, to receive a copy of the Offering Documents please upgrade your Double Digit Dividend account to a Level 2 authority, you need to apply using this input table.

Log in to Upgrade to Level 2

Subscription documents for those who would like to invest will be provided closer to the Fund’s launch date, on 1 April 2021.  I will also likely hold a video conference with you prior to the launch to address any questions you may have.  In the meantime, should you require more information kindly email me at: petertan@double-digit-dividends.com

A Message for My Children

Indeed, “What’s in a name?” as Shakespeare posed the question.

Your father often found it difficult to label (i.e., name) what I do precisely.  I used to be heavily involved with the Australian universities with a presence in Singapore, and especially my alma mater where I graduated from, Murdoch University. I recall once telling the Australian High Commissioner to Singapore, who was active in supporting Australian Universities in Singapore, that I was a “House Husband”, and more “House” than “Husband” at that time as I was in the process of getting a divorce.  It was just too hard to explain to him what I did for income and for my family.

Peter Tan with the Australian High Commissioner, et. al., to announce their collaboration with Australian Alumni Singapore (AAS)
Your father, with the Australian High Commissioner and the Vice Chancellors and
Deans of various Australian Universities at a ceremony to announce their collaboration
with the Australian Alumni Singapore (AAS). Circa 2016, Singapore.

People and society place a great deal of emphasis on “labels”, names and titles.  It helps them “pigeon hole” people into their thinking framework.   

I came across this great piece of writing by Ian Cassel when he wrote the foreword to Guy Thomas’s “Free Capital – How 12 private investors made millions in the stock market”.  I say “great” as I totally could relate to it.  I laughed and smiled when Cassel took 6 months to explain to his girlfriend what exactly he does.  Cassel’s foreword is not just about investing and having financial independence; he writes about a different philosophy, outlook and mentality that is hard to explain by any job title or  name you wish to give.

Cassel’s foreword can be read here.

Indeed, what’s in a name?  In a nutshell, my message for my children is: it is important to be the captain of your soul and life, and play less importance on the label you and society uses.  Carpe diem, my two children — substance over form, always!