Monday, March 5, 2012

Loans & Liabilities

How I make use of assets to buy more assets.
There is possibility to loan at Sibor + %spread (commonly around 1%).
All you need is for the bank to recognise your assets(cash, property, etc) under the bank management.

For private banks(eg, UBS, CreditSuisse, DBS Pte bank, SCB Pte Bank), it is called a credit facility and they charged sibor+%spread. Currently, it is around 1.3-1.5% pa. What we do is we pay only the interest, not the principal and the term of the facility can be renewable weekly, monthly, yearly etc. For the retail investors, I believed anyone with access to priority banking, my friend is using CIMB  offers that.  
So for a sgd bond, you can borrow 1.5% sgd loan and buy 5.5% corporate bond to yield 4% spread. The risk therefore would be the rising interest rate and a perpetual would actually be a bad investment. This strategy would be better using short duration bonds like 3-5yrs.
If you are buying USD bond, it will be the same. Borrow USD fund at 1+% and buy the 5+% usd bond. No exchange risk as far as I know. Apart from when you take the income in USD and you need to convert to SGD, but that is income that is earned from the spread and you could always continue holding onto the USD or use the USD to buy US stocks or usd gold/silver .

Of course, you are not restricted to buying bonds. You can also buy blue-chip dividend paying stock paying >5% and paying the 1.5% interest cost.

Have you ever wondered why some property agents will tell you a buyer paid a million dollar property in full CASH. One possibility would be he was using a credit facility as he is expecting to FLIP the property(during the flippant days). He can hold for 1-3yrs for the TOP too and nett off the proceeds. No need to apply for bank mortgage loan. Or have you seen the buyer who paid cash again for that ferrari or the mercedes.. One possiblity is again using the credit facility. But in most cases, they will pay back very soon (within the year) since their passive income can generate that much cashflow to fund the purchase, but they want the car NOW instead of 12mths later. Possibilities are endless, but whether you dare to do it. I am not too daring..hehe.. 

Disclaimer : Not much leverage here as I still feel more comfortable leveraging for tangible assets. Prudent use of leverage is recommended. For most HNWs, they have at least $1 in asset to back up their $1 in loan. So they can pay back and take a lost(if any). So if you are retail and intends to do this, I think it's also better to be this "safe' and not depend on the value-at-risk model to determine your leverage.

For liabilities like cars, holidays, I will use the cashflow generated from my portfolio to fund the loans (as long as it make sense in terms of interest rate spread). My motto for liabilities , "Never touch the capital, always use the cashflow".

For cash-generating properties, I am very comfortable leveraging 80% as they are essentially self-paying assets. Make good use of the debt option available to you.