We have invested in Malaysian stocks for more than a year and have noticed some uniqueness about them. One of which is the use of the Convertible Unsecured Loan Stock (CULS) in some Malaysian stocks.
‘Bond’ First, Stock Later
CULS is like a bond, which offers a fixed interest coupon payment to the holders. It also has the feature of a convertible bond, which allow the holder to convert the CULS into the company stock at maturity date, at a predetermined conversion rate and price.
It would be easier to explain with an example.
Advance Synergy Berhad issued a 10-year Irredeemable Convertible Unsecured Loan Stocks (will explain the ‘Irredeemable’ later).
The interest coupon is 2% of the nominal amount of your investment and the interest is paid annually.
The issue date was 31 Jan 2008 and the maturity date was set at 26 Jan 2018 (~10 years).
The issue price of these ICULS was RM0.15, which may be converted into new ordinary shares in Advance Synergy Berhad at RM0.30 on the maturity date.
The ICULS were also listed on Bursa Malaysia under the symbol 1481LA, and you could buy or sell it like a stock. You can see from Chart 1 that the ICULS are currently trading below the issue price of RM0.15. This means the current yield has gone up from 2% to around 5% at the price of RM0.06.
The reason for the decline in the price of the ICULS could be the poor business outlook of Advance Synergy Berhad. The prices between Advance Synergy Berhad and her ICULS should move in tandem. You noticed the ‘spikes’ on the the Chart 1 and Chart 2 are similar and happened at the same periods.
There are two types of CULS, Irredeemable and Redeemable.
Irredeemable CULS (ICULS)
A holder must convert his ICULS to the underlying shares at the predetermined amount by the maturity date.
Advance Synergy ICULS has a clause which allow the holder to convert ICULS into shares before the maturity date.
Redeemable CULS (RCULS)
RCULS is the most bond-like. Besides converting the RCULS into shares, the holder can choose to get his principal back as cash at maturity.
Given this, RCULS is better than ICULS as it gives the investor more options.
So… Is it a bond or a stock?
We can roughly estimate where CULS stood at the hierarchy of claims. I am no corporate lawyer so don’t take everything I say as the reality. My understanding is that CULS are stocks. They just have bond-like features. Hence, they are likely to rank low on the hierarchy of claims, even an unsecured loan should rank higher than CULS.
Ultimately, bonds or stocks do not matter much because I have seen bond holders lose their capital despite being ranked ‘higher’ on the hierarchy of claims. Bonds may not be safer than stocks as perpetuated by many. What is more important is that we must have an edge in our investments, no matter in what form.
